Archive for the ‘Paul Volcker’ Category
There seems to be a rather fundamental lack of understanding regarding what happened in Greece and what is going on in Cyprus right now.
Unfortunately that lack of understanding is intentional. See, the debt merchants of the world, despite publishing voluminous statistics that prove their schemes are unsustainable and foolish, continue to prattle on about how we must have “shared sacrifice” and such similar pablum in order to “save” people from what are claimed to be “accidents.”
People like Bernanke, LaGarde, Merkel and the other merry merchants of economic destruction must be praying every night that you do not bother to sit down with a calculator and sheet of graph paper, or worse a computer that replaces both (and makes the job easier), because if you do, whether here in the United States or in any other nation you will instantly see what has been done over the last 30 years — and what has to be done now.
That is the day in which these people fear for their political if not literal necks, because once a critical mass of the population understands what has been done they will also understand that (1) it was not an accident and (2) what is being done now cannot possibly work.
About 30 years ago, if you remember, we had a nasty inflationary problem that was stoked by an oil shock. But the problem did not originate there — it came from a wage-price spiral that was initiated by those who believed that extracting ever-larger pieces of the economic pie to redistribute to others could be “absorbed” in some form or fashion. As the people’s real purchasing power declined they demanded larger wages, and at the time there was sufficient union negotiating power to force those wages upward.
But that didn’t work out because for virtually every business the largest component of cost in the goods and services it provides is found in labor. As a result those demands for higher wages were met but they immediately translated into higher prices, which resulted (once again!) in lower purchasing power in real terms. That is, the goal to be able to buy more eggs or gallons of milk with an hour’s labor failed.
So once again the workers threatened strikes, and once again wages went up. And so did prices. Oops.
There is a common misconception that Volcker “choked off” this cycle. He did no such thing. The market discerned that due to spiral of destruction in purchasing power credit had to be priced far higher than it was, and interest rates — especially time-sensitive ones — went much higher. Volcker followed that rather than fighting it, making all sorts of noise about how he was “in charge.”
You are wrong if you believe the narrative that he was in charge. He was not able to overcome the market — nobody is, not even a Fed chairman.
Notice that the red line, the MARKET rate for 13 week T-bills, moves ahead of the FOMC in most instances. Volcker was not in control — the market was.
This alarmed him. It alarmed the “monetary authorities.” But worse, at that time there was a serious problem brewing overseas that was about to ensnare our banks — the Latin American debt crisis.
Citibank, along with others, had made a lot of loans to nations south of our border. They had performed little diligence on the ability of their economies to pay back the money owed, and in fact they couldn’t pay. As this became apparent it threatened to collapse our largest banks.
The decision was taken to intentionally ignore the fact that these bonds, which our banks owned and which were not going to be repaid as agreed, were impaired. That is, our banks were given explicit permission to lie for an extended period of time about their solvency with the expectation that they could “earn” through the imposition of outrageous fees and costs on others, enough to return themselves to solvency over time.
This was the beginning of the modern financial scam that has been run serially since by governments around the world, which now threatens to blow up the EU, and which if we do not stop it will eventually blow up the United States.
At its core this premise is a fraud — that one can pretend to be able to pay tomorrow for something you have today, and it’s perfectly ok as a consequence tolie about your credit quality.
THAT is Volcker’s true legacy – explicit and intentional support of financial frauds.
Thus began this age in America:
This graph is very simple. It represents, from Fed Z1 and BEA GDP data, the gross amount of change, in dollars, for each quarter in both debt outstanding across all sectors of the economy and the gross change in domestic output. You will notice that for each quarter up until the crash there was never a change in output for even one three month period that was not simply bought on a credit card.
That is, the real change is negative becasue otherwise you are counting a given dollar twice!
That green line is the actual quarterly changed in domestic output created by economic surplus – that is, not borrowed with a claim that you’ll pay tomorrow.
We have created a 30 year long deficit in this regard and the debt that we created in order to do so remains.
The reason there is no economic growth to speak of is that the convergence point is in fact right near zero! As you can see post 2007 when the crash occurred every time you try to start spiking credit creation upward again the economy turns south in nominal terms. You saw it in 2010 and now you’re seeing it again as the early 2012 credit spike has led to a collapse in nominal GDP.
The monetary and fiscal authorities are trying to restart what they did from the 1980s through 2007 but it is not working. It is not working because it cannot work; the consumer is debt-saturated and either unwilling or unable to lever up while making the payments, even temporarily, and every time this is attempted the economy responds by contracting.
We now have five years of empirical evidence in the form of hard data that what I claimed back in 2007 — that this model would not work because it could not work — is correct.
Greece and now Cyrus also refused to abandon this “business model” even though they had the same data available to them that I have here. They continued to press the issue until it enveloped their governments. They were egged on and in fact defrauded by multiple actors including those who proclaimed that their banks were “healthy” and “passed” stress tests despite having knowledge that the collateral they were posting was trash and almost-certain to become worth less — or worthless entirely.
When the known-in-advance event occurred those same entities proclaimed that these governments now had to cede sovereignty despite being the very entities that took the collateral knowing it was junk and did not haircut it nor throw it back.
This is very much like having someone come into your gas station asking for a gallon of gasoline to commit arson with, giving it to them and then claiming innocence when they burn down a nightclub and murder 80 people.
You might be able to get away with that if you had no knowledge of what was going on but when you willfully and intentionally accepted and continued to accept garbage as “good collateral” this excuse is knowingly false.
There is no path forward for Cyprus (or Greece), or for that matter any other nation with a debt addiction that resides in any other path than repudiating the excessive debt. Yes, that means defaulting. It means that people must lose their money, and the people who lose should be those who bought or took as collateral blown debt instruments. In the case of Cyprus this means the ECB and European banks who bought and are holding the crap paper that was known impaired at the time of posting and remains so. If the ECB and European Banks refuse to accept these facts then their members must be indicted, tried, convicted and hung for their act of knowing and intentional gross fraud that was intended to and now has led to the looting of the public.
In the case of the United States we still have a monstrous amount of debt that must be removed from the system. We cannot “earn out way out of the hole”because the economy is not capable of generating sufficient organic growth to do so; it has all been debt-financed!
If we do not stop expanding the size of the Federal Government we will wind up in exactly the same place that Greece and Cyprus are, except that there is no “sugar daddy” in the form of the ECB and Germany to “dictate terms.” Only disorderly collapse awaits us if we do not cut this crap out, and do it now. We cannot slow the rate of expansion we must stop it – here, now and today.
We are far more fortunate than Cyprus, at least at present. Our imbalance is almost-entirely centered around health expense. We can take apart the medical monopolies and schemes simply by restoring the rule of law to those entities where they are currently exempt, restoring open competition, demanding level and published pricing and let the market work. The medical system’s share of the economy will collapse by 75% or more overnight. This will result in much short-term pain but it will be over almost as fast as it began as those resources will get redeployed in other areas of the economy — our competitiveness globally will skyrocket as that parasitic drain on our productivity will evaportate.
If we do not act, however, and further institutionalize the imbalance that is choking us to death then we will have the same thing happen here that is occurring in Cyprus. The medical industry is to our nation what the offshore banking industry is to Cyprus, and it uses the same sort of subterfuge and legal privilege granted to those banksters in collusion with the ECB. That is, just as the Cyprus banks posted collateral with the ECB and other Target2 institutions that both knew was impaired and yet did not force it back on the holders (thus putting a stop to the spiral before it gained critical mass and trashed their economy and nation) if we do not stop our medical firms from pulling the same crap, charging people $39,000 for a vial of antivenom that they paid $4,000 for, and which cost $100 in Mexico at the manufacturer — or charging one person $1,700 for an MRI scan that another pays $250 — we will meet the fate of Greece and Cyprus because the net impact of these policies is to drive government expansion well beyond the economy’s size and that will result in the destruction of our economic system.
There are those who have argued with my economic analysis over the last five or so years and said that we’d manage to get through this without having to take the leverage out of the system and that “it will all be ok if we just rescue X.”
The data is now in — the old model from the 1980s of using debt leverage to “generate” economic growth no longer works as it has been run to exhaustion, exactly as I put forward more than five years ago, and despite five full years of refusal to accept this and reform the system the facts are now on the table that even with all sorts of “extraordinary policy” such as QE and zero interest rates a restart of the debt-leverage system has repeatedly failed and every attempt to do so is quickly met with a decline in nominal GDP, not an advance.
WE MUST STOP NOW WHILE THERE IS STILL TIME TO DO SO.
Oh look here, someone who can balance a checkbook!
In a speech Wednesday that Volcker himself said was intended to be “a little provocative,” he challenged U.S. leaders to go further in raising taxes and cutting spending than suggestions laid out by bipartisan deficit-cutting commissions and panels.
“The problem is the United States can no longer claim unchallenged leadership over the world economy,” Volcker said at the Economy Summit sponsored by The Atlantic. “We have to do better . . . only a strong economy can ensure our political strength and national security.”
Yeah well, there’s a problem with that Paul, and you know damn well what it is. We’ve got a GDP that doesn’t represent actual demand. Instead, it’s been “goosed” for the last four years sequentially borrowing more and more money, sending false demand signals.
There’s a difference between a short-term rescue and structural spending as well. Unfortunately our structural deficit games go back to 2001 post-9/11 and encompass both Democrats and Republicans.
Structural deficit spending is a massive problem and it is how Greece got in trouble. It’s also how virtually every other nation that has found itself in the middle of a debt crisis got there. When false demand signals become embedded in the economy they then become politically impossible to remove, as the entire compounded effect of them over time will immediately come off.
Economic advisers thus strongly recommend that politicians do no such thing, as they are well-aware that withdrawal of the false demand will lead to an instant economic Depression and that, of course, leads to immediate loss of power (through electoral defeat.)
In short you have a bunch of lawmakers that are drunk on power and are willing to wantonly, recklessly and intentionally violate their oath of office along with violating the people for their own personal aggrandizement and power.
Am I surprised? No.
But can this sort of thing avoid the inevitable — that which awaits all who try to abuse compound growth functions? Nope.
I expect Volcker to be ignored for the same reason that everyone else is ignored in this regard, right up until the math forces contraction in government services, increased taxes or both — Volcker is well-aware that every dollar of tax increase is a dollar that doesn’t get spent in the economy, since deficit reduction through tax increases is a net GDP negative on a dollar-for-dollar basis.
He’s right, but he’s also being disingenuous in that Tall Paul is not putting numbers to paper and pointing out exactly how much government must contract or taxes must rise (or some combination of the two) to restore balance.
That’s probably because we’re talking about a doubling of taxes or a 50% reduction — or more — in federal spending.
Best of luck with the path we’re on folks.
U.S. banking regulators are exploring whether they can exempt sovereign debt from the Dodd-Frank ban on proprietary trading after foreign governments complained that the rule could raise borrowing costs and impede the flow of capital, a person familiar with the talks said.
Five regulatory agencies are taking public comments on a proposed version of the so-called Volcker rule, which was included in the 2010 financial regulatory overhaul to ban deposit-taking banks from trading with their own money.
The reason for the squawking is that the rule does not bar this trading for United States debt.
Well, it should. Banks should not be able to trade (“speculate”) on any sovereign credit — or any other sort of credit at all! There should be no exemptions, not more exemptions.
While foreign government bonds would fall under the rule as proposed, U.S. government debt would be exempt. Officials from Canada, Japan, and the United Kingdom have sent letters to the Treasury Department and regulators saying the measure would harm their ability to raise money.
“It will be difficult for regulators to ignore a sizable number of the G-20 countries, which will all be saying something similar — which is the Volcker rule’s extraterritorial reach will hinder these countries’ sovereign debt markets,” said Douglas Landy, a Washington partner in law firm Allen & Overy LLP who represents Canadian banks.
There’s no problem with raising money if the offered security is correctly priced. What’s being squawked about is a decrease in the ability to hawk things and play games in the market, thereby depressing the coupon that sovereigns have to pay and as such enabling irresponsible deficit spending.
The amount of “offered” debt in the markets for a sovereign, absent exigent circumstance (e.g. war) should be zero! Governments must see the light on this as there’s no other way out of the mess we’re in — you can only spend on services what you can tax from the citizens — period!
Of course this “distresses” various nations, including ours. My view is that this is just too damn bad, but you can bet the screaming harpies will find some way to blunt the impact of what was a perfectly-reasonably (and in fact nowhere near stringent enough!) addition to the “rulebook.”
Posted by Karl Denninger
A proposal by former Federal Reserve Chairman Paul Volcker to limit bank’s proprietary trading will be either be dropped or significantly modified in the Senate, lawmakers and staffers told dealReporter.
Senate Banking Committee ranking member Richard Shelby (R-AL) said he opposes the so-called Volcker rule and the Obama administration’s call to levy a USD 90bn tax on banks.
A Dodd staffer said the senator is likely to quietly drop or modify many of the recommendations in the Volcker rule to ensure Republican support for regulatory reform.
Well it ain’t gonna be quiet no more!
These goons on Wall Street think they can keep this up. They might want to pay attention to the fact that there’s this thing called “an Election” coming in November, and the people are pissed, as noted in this Bloomberg article:
Feb. 1 (Bloomberg) — Politicians under pressure from angry voters to show progress on financial reform are losing patience with bankers waiting to reach global harmony on new rules.
The people are still short of endorsing clanedestine neck tie parties, but I suspect it’s not by much. When President Obama said that he was “all that was standing between the banksters and people with pitchforks and torches” he wasn’t kidding.
The idea that the people of this nation will simply sit still while the looting continues is somewhat of a fantasy on the part of those on Wall Street. Thus far the retaliatory actions have been both peaceful and lawful – mostly – such as “Move Your Money” and the like.
But there’s no guarantee that will remain the case, and the simple reality is that much of what went on during the 2000s was not “an error” or “bad judgment”, it was a blatant heist, and the people are wising up to what really happened.
Where the line resides is not something I can accurately predict. I can only note our Founding Fathers seemed to have a good grasp of things in The Declaration:
…all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed.
Indeed we have tolerated far more than we probably should have. But then The Founders warned….
But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.
Where and when does that line get crossed? How many people get thrown out of their homes, have 30% credit card interest rates, watch the banksters literally grab over a trillion dollars in printed money and claim “profits” for themselves of over $100 billion in bonuses, evade mandates on long-term holding of those bonuses in the form of stock to prevent cashing out before the sustainability of their practices can be proved up and more?
I do not know where the line is.
I only know that history says that it exists, that no man, no bankster and no government knows exactly where it is, but that once crossed it cannot be “un-crossed” just as an egg cannot be unscrambled.
We need solid, real financial reform. We must renounce “bubble-nomincs.” We must shut down the fraud-laced “securitization” machine permanently, prosecute those who have unlawfully concealed risks and lied about asset quality and return our economy to stable, productive output instead of financial speculation.
The Banksters all claim that if we were to do this that society would collapse and that our economy could not survive.
They’re wrong, just as Henry Paulson was wrong when he said he had “no choice” when, allegedly (according to his book) the Chinese and Russians threatened to collapse Fannie and Freddie.
Hank had a choice, assuming he’s not lying of course. He could have told the Russians and Chinese to bite him – on national television, with George Bush at his side. He could have told them that if they tried it that the United States Treasury would, by executive order, declare their Treasury Holdings worthless.
Yes, that would have stopped the “gravy train” of being able to spend more than we make in the government. Yes, this would have forced immediate austerity and facing of the truth.
Is that bad?
What have we done since? Added what – $2 trillion+ to the national debt – more debt we don’t have and can’t pay? Emitted another budget proposal, just today, to add $1.6 trillion more? Built yet another artifice – another fraud – on top of the previous ones? Written more “Option ARMs” on our children and grandchildren’s backs to prop up a cabal of banksters on Wall Street who then fawn all over The Senate with their “campaign contributions” so they can keep skimming off huge parts of our economic structure for a few thousand residing on Wall Street?
How’s that going to work out folks?
How will we settle up and ultimately pay this debt load down?
We won’t, of course. Neither will anyone else. Greece, Spain, the UK – all are lessons for us, if we choose to learn them before we get to live them.
Watch those nations. If you think this is just about Greece you’re nuts. The public employee pensions there are ridiculous. Guess what – they’re ridiculous here too. In the closest “little city” to here there are many retired police officers and firemen who have pensions north of $100,000/year. There are many places where six-figure pensions are considered “normal” or “reasonable” – for public safety workers and teachers. We don’t have the money, we can’t afford to gold-plate the steering wheels of the cop cars and despite all the bleating the fact remains that the primary function of the police department is to write traffic tickets and take a report after you are burglarized, raped or robbed.
Are these functions important? Yes. Do they call for better than a middle-class wage? Nope. Is a middle-class wage $100,000 a year? Nope. The 2008 Median Household income for California is $61,021. For Florida, $47,778. For New York, $56,033.
So why are we paying out pensions of double that to what should be middle-class employees in retirement?
Let’s face the facts folks – we can either stop the plundering across society – by both banksters and public employees – or we will face a crisis similar to what Greece is dealing with now.
It will be more pleasant for us to take our medicine voluntarily rather than having it forced down our gullet, but doing so starts with chaining the banksters and their penchant for offloading risk to others and, for those who refuse, jailing them outright, lest the public get ahold of them and not bother with the pleasantries (and constitutional right) of a trial by jury before handing up a sentence.
At the same time we must fix the public employee entitlement mentality, by firing them and replacing them with unemployed Americans if necessary. We have 1 in 5 working-age men between 25 and 54 out of work - there is no shortage of available people to take these jobs.
It is time to pay the check folks, before we are literally forced to eat it.
Posted by Karl Denninger
So President Obama is going to put forward some sort of proposal to limit bank risk tomorrow eh?
Mr. Obama’s proposal is expected to include new scale restrictions on the size of the country’s largest financial institutions. The goal would be to deter banks from becoming so large they put the broader economy at risk and to also prevent banks from becoming so large they distort normal competitive forces. It couldn’t be learned what precise limits the White House will endorse, or whether Mr. Obama will spell out the exact limits on Thursday.
Mr. Obama is also expected to endorse, for the first time publicly, measures pushed by former Federal Reserve Chairman Paul Volcker, which would place restrictions on the proprietary trading done by commercial banks, essentially limiting the way banks bet with their own capital. Administration officials say they want to place “firewalls” between different divisions of financial companies to ensure banks don’t indirectly subsidize “speculative” trading through other subsidiaries that hold federally insured deposits.
Firewalls eh? Oh, you mean like the “chinese walls” that were supposed to prevent things like banks shorting things they’re securitizing and selling to customers?
If the proposal took effect it would reshape Wall Street. Big banks would be forced to break off their investing banking units—which trade and underwrite securities and make their own bets on markets—from traditional businesses, which make loans and take deposits.
Oh, you mean that banks would not be able to use their access to sovereign credit to speculate and then shove off their losses on the taxpayer?
How about the massive fraud – you know, claiming that securities are “money good” when they’re really used dog food?
I’m sorry, but a year into this, and having watched Paul Volcker be ignored for that entire year, I’m not impressed by words any more.
I might be impressed by action, and as soon as there’s an actual concrete proposal I’ll write again on it.
But for now, I will simply note that the President Obama promised not to play banker stooge during the campaign, but in fact voted for TARP (the primary act of banking stoogery), had Timmy Geithner put an unlimited guarantee on Fannie and Freddie, and has done exactly nothing about investigating and prosecuting the massive and pervasive fraud that underlay the entirety of the housing bubble.
I will also point out that a big part of the Massachusetts loss of the former Kennedy Senate Seat was due to “Bailout Nation” – where the citizens got screwed every time and the banksters make off with billions in bonuses.
We the people are done being nice about this, and unless we see action – not words – YOU’RE FIRED will be the mantra that rings out in November.
And no, you don’t have until then to show us you mean what you say.
We expect to see results – and actions - NOW – if those in the House and Senate would like to keep their jobs.
STOP THE LOOTING AND START PROSECUTING!