UCAPAN OLEH
YABHG TUN DR MAHATHIR BIN MOHAMAD
DI PERHIMPUNAN DAN SIDANG KEMUNCAK PRIBUMI PERKASA NEGARA
DI KOMPLEKS SUKAN TNB, JALAN BANGSAR,
KUALA LUMPUR
PADA HARI AHAD, 22 MAC 2009
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1. Terlebih dahulu saya ucap terima kasih kepada penganjur perhimpunan ini kerana menjemput saya dan memberi peluang kepada saya untuk berucap kepada hadirin.
2. Saya yakin ramai daripada kita yang hadir, terutamanya orang Melayu dan bumiputra lain, hadir kerana kita berasa kita berada dalam keadaan cemas, keadaan yang merbahaya, keadaan terancam.
3. Kenapa tidak? Kita kini diserang berkali-kali oleh berbagai pihak.
4. Ramai daripada orang lain berkata Melayu adalah kaum pendatang.
5. Melayu mengamalkan apartheid ala kulit putih Afrika Selatan.
6. Melayu tidak adil, suka menidakkan hak kaum-kaum lain.
7. Melayu sudah cukup kaya dan tidak perlu dasar Ekonomi Baru lagi.
8. Semua peluang perniagaan dan pelajaran diberi hanya kepada orang Melayu.
9. Kuasa politik dibolot oleh orang Melayu dan lain-lain.
10. Berhadapan dengan tuduhan dan tohmahan ini Melayu sekarang tidak boleh mempertahankan diri, bahkan tidak boleh bercakap berkenaan dengan bangsa mereka tanpa dituduh sebagai racist. Mereka harus terima sahaja semua tuduhan/tohmahan ini dan berdiam diri atau bersetuju sahaja. Mereka juga boleh tambah tokok kepada kecaman ini dan mereka ini akan dianggap liberal dan disanjung tinggi oleh orang lain. Sebenarnya orang Melayu sekarang berada dalam ketakutan, tidak mempunyai pemimpin yang sanggup pertahankan mereka. Sebaliknya pemimpin mereka mengerohkan lagi keadaan dengan memohon maaf walaupun kesalahan dilaku oleh orang lain.
11. Demikianlah situasi yang mereka hadapi sehingga mereka berasa mereka bersalah, tergamam dan tak dapat berkata apa-apa.
12. Keadaan hari ini lebih merbahaya daripada keadaan semasa British merancang untuk menakluk negeri-negeri Melayu dengan perancangan Malayan Union. Pada masa itu kita boleh cakap berkenaan Melayu dan tidak ada sesiapa yang akan tuduh kita sebagai racist. British pun tidak panggil kita racist. Mereka akui memang pun hak orang Melayu menuntut negeri-negeri Melayu sebagai hak orang Melayu. Semua perjanjian berkenaan dengan negeri-negeri di semenanjung mesti dibuat dengan Raja-Raja Melayu. Tidak ada siapa dari kaum laim yang berhak membuat apa-apa perjanjian.
13. Sekarang orang Melayu tidak pun boleh berkata negeri ini negeri Melayu, tidak boleh sebut negeri ini dikenali sebagai Tanah Melayu. Negeri Jepun boleh dikatakan negeri orang Jepun, negeri Korea – negeri orang Korea, negeri China – negeri orang Cina, negeri India – negeri orang India. Tetapi negeri Melayu – bukan negeri orang Melayu. Dahulu mungkin. Tetapi tidak sekarang. Sekarang Malaysia, hak orang Malaysia dan bukan hak orang Melayu. Kesanggupan dan kerelaan orang Melayu berkongsi milik negara ini tidak sedikit pun dihargai. Pemberian satu juta kerakyatan oleh Tunku Abdul Rahman Putra kepada kaum lain tidak dihargai bahkan tidak diingati, dilupakan dengan begitu sahaja.
14. Orang Melayu dikatakan kaum pendatang di negaranya sendiri. Dan kaum pendatang lain tidak boleh dipanggil kaum pendatang. Jika sesiapa berbuat demikian, mereka mesti minta maaf. Tidak perlu sesiapa minta maaf jika berkata Melayu kaum pendatang.
15. Namun saya memberanikan diri untuk bercakap sedikit berkenaan orang Melayu di Malaysia walaupun akan dituduh sebagai racist. Saya beranikan diri kerana sesungguhnya orang Melayu berada dalam keadaan cemas, dilanda oleh bermacam-macam masalah dan ancaman. Jika orang Melayu tidak dibenar bercakap berkenaan masalah mereka, maka mereka mungkin jadi kaum yang terlucut hak (dispossessed) di negara mereka sendiri. Bahaya ini benar kerana kita sudah lihat tekanan dan kehinaan terhadap bangsa kita apabila mereka dijadikan bangsa minoriti di wilayah yang dahulu adalah sebahagian daripada negeri-negeri Melayu.
16. Keadaan ini boleh berlaku kepada orang Melayu bukan sahaja kerana orang lain tetapi kerana orang Melayu sendiri. Mereka suka membinasakan diri mereka.
17. Mereka tidak mahu merebut peluang yang disedia bagi mereka. Tempat di universiti tidak diambil. Peluang perniagaan diselewengkan. Belia Melayu tidak ingin belajar, lebih berminat dengan melepak atau jadi Mat Rempit.
18. Majoriti daripada rakyat Malaysia yang terlibat dengan dadah terdiri daripada orang Melayu, yang mendapat penyakit HIV Aids kebanyakan adalah Melayu, kes rogol dan jenayah lain juga ramai orang Melayu.
19. Yang gagal dalam perniagaan juga Melayu, tidak bayar hutang Melayu, tak selesaikan kontrak juga Melayu.
20. Gejala jualan AP pun melibatkan Melayu.
21. Kita tak suka dengar semua ini. Kita malu. Tetapi jika tidak disuarakan masalah tidak akan hilang dengan sendirinya. Orang lain tahu juga. Lebih baik malu jika kita dapat sedarkan beberapa kerat daripada kita dan mereka mengubah tabiat supaya tidak melakukan yang salah lagi. Yang lain tak malu tak mengapa. Tak mungkin kita dapat sedarkan semua. Yang kena akan terus kena.
22. Dasar Ekonomi Baru dibentuk supaya dalam jangkamasa 20 tahun kita akan dapat bahagian kita sebanyak 30%. Tetapi sekarang sudah hampir 40 tahun. 20% yang dikatakan kita dapat pun dapat kerana badan-badan yang mewakili Melayu, bukan orang Melayu sendiri. Kita hendak supaya DEB diteruskan. Apa gunanya jika kita tidak mahu guna peluang yang diwujudkan? Apakah kita mahu DEB kerana nak jual AP, kontrak, lesen dan sebagainya? Lebih baik DEB tidak diteruskan dan kita tidak dapat selewengkannya. Sekurang-kurangnya kita tak akan malu kerana pelbagai ejekan yang akan dibuat kepada kita.
23. Kita bernasib baik kerana dalam bidang politk kita cekap, kita kuat, kita dapat menguasai Kerajaan selama 50 tahun. Walaupun Melayu berpecah kepada beberapa parti, bermusuh sesama sendiri, tetapi majoriti Melayu masih dapat kekalkan kuasa mereka. Mereka dihormati dan disegani.
24. Tetapi itu pun sudah terlepas daripada genggaman kita. Sekarang kita tidak kuat lagi. Parti Melayu yang terkenal sudah kalah dalam Pilihanraya Umum ke-12. Parti Melayu yang menangpun berada dalam ketakutan jika parti rakan mereka menolak mereka. Sekarang orang tidak lagi hormat kita. Apa sahaja yang dituntut orang lain, baik yang menang, baik yang kalah akan kita layan. Kita yang perlu hormati orang lain. Tersilap sikit kita minta maaf bagi pihak semua bangsa Melayu.
25. Sesungguhnya pemimpin kita yang perjuangkan kemerdekaan, yang menebus maruah kita sudah kita khianati. Mereka berjuang bermati-matian supaya kita hidup bahagia. Mereka korbankan apa sahaja yang ada pada mereka. Pemimpin Melayu hari ini, pengikut –pengikut mereka tidak tahu mengenang budi. Mereka khianati pejuang-pejuang dahulu dengan melupakan perjuangan asal kerana utamakan kepentingan diri sendiri. Biar bangsa hancur asalkan dapat kemenangan bagi diri sendiri, dapat jadi Menteri, Perdana Menteri, dapat kontrak, dapat duit.
26. Kononnya nak jadi Perdana Menteri termuda. Bukan nak majukan bangsa dan negara, hanya jawatan tertinggi untuk diri sendiri seawal mungkin. Dengan apa cara sekalipun, halal atau haram, tak mengapa asalkan boleh jadi Perdana Menteri termuda.
27. Jika kita sudah sanggup jual bangsa kita, kita jual untuk dapat duit sedikit, untuk jawatan kecil dan besar, untuk isi temolok kita, alamatnya apa? Yang dikejar tidak akan dapat, yang dikilik akan berciciran. Lepas itu kita tidak ada apa-apa yang boleh diraih lagi. Semuanya akan dikuasai orang. Pada masa itu kita jadi hamba sahaja, kita akan meminta-minta sepanjang masa.
28. Ada pula yang dibawah bertanya, orang yang mereka sokong dapat jadi Perdana Menteri, Menteri, Menteri Besar – dapat kereta, dipanggil Yang Berhormat, elaun besar, terbang sana, terbang sini.
29. Kita dapat apa? Duduk di takuk tu juga. Lebih baik kita ambil sedikit bagi diri kita, sementara ada peluang.
30. Salahkah kalau kita terima duit sedikit? Mungkin kita tidak undi orang yang menyogok. Dia bukan tahu. Tetapi Tuhan tahu. Kamu membuat sesuatu yang haram. Kamu bukan sahaja jual bangsa. Kamu menolak agama kamu yang melarang, yang mengharamkan perbuatan kamu. Kamu berdosa.
31. Tapi tak mengapa. Masih muda, tak akan mati lagi. Bila dekat nak mati pakai kopiah putih dan sembahyang kuat-kuat.
32. Tetapi yang haram, haram juga. Kalau makan daging bibi haram, makan duit rasuah lebih haram, kerana ia akan binasakan bukan kita sahaja, tetapi kaum bangsa kita yang semuanya beragama Islam.
33. Pengundi salah, samada undi penyogok atau tidak. Salah kerana sudah terima jenayah rasuah sebagai budaya kamu. Apabila rasuah dibudayakan, percayalah bangsa dan negara mungkin dijajah oleh penyogok secara langsung atau tidak langsung. Bangsa akan dihina oleh dunia, akan dipandang rendah, akan dipermainkan orang. Akhirnya yang makan suap, mereka sendiri akan jadi mangsa, mereka sendiri akan terpaksa hulur untuk mendapat apa yang sebenarnya hak mereka. Inilah nasib bangsa yang menjadikan rasuah sebagai budaya biasa.
34. Sesungguhnya Melayu mudah lupa. Kita lupa betapa kita dijajah dahulu, kita terpaksa panggil tuan orang yang menjajah kita, orang yang menghina kita. Tak boleh cakap berkenaan ketuanan Melayu. Kamu jadi hamba dahulu, bukan Tuan, layak hanya untuk tanam padi, tangkap ikan, jadi kuli orang, bawa kereta orang, tukang masak orang.
35. Selama 450 tahun kita dijajah, hidup sebagai hamba, dianggap tidak layak mentadbir negara sendiri, tidak layak merdeka.
36. Kita terpaksa letak diri kita dibawah naungan negara-negara jiran yang lebih kuat.
37. Tiap tahun kita usung bunga emas dan perak untuk dipersembahkan kepada negara penaung-penaung kita.
38. Kadang-kadang Raja kita pun pergi bersama, untuk membukti kesetiaan diri dan negeri kepada negara penanung.
39. Kata orang Kedah “Terkerempun-kerempun” apabila berhadapan dengan orang asing. Mungkin ramai yang tidak faham. Tanyalah orang Kedah. Itulah “body language” kita dahulu walaupun hari ini ada juga, tetapi pada Raja yang tak bertakhta.
40. Saya biasa lihat seorang orang tua Melayu berbasikal di tendang jatuh oleh askar Siam semasa Kedah diberi kepada Siam oleh Jepun. Kesalahan orang tua ini ialah kerana tidak berhenti dan menghormati lagu kebangsaan Siam.
41. Saya biasa lihat orang Melayu ditempeleng dan disuruh panjat pohon kelapa seperti kera oleh Jepun. Inilah nasib orang yang tidak merdeka, tidak memerintah negara sendiri. Boleh ditendang, boleh ditempeleng.
42. Dan yang lihat diam sahaja, tak dapat buat apa-apa, termasuk saya. Dalam kehinaan ini muncul kesedaran dan semangat untuk menebus balik maruah bangsa. Dan bergabunglah orang Melayu untuk menangkis rancangan Malayan Union British, untuk mengekalkan perhambaan orang Melayu. Tidak siapa yang bertanya “apa yang saya akan dapat bagi diri saya” pada ketika itu. Yang kita tumpukan ialah untuk membebaskan bangsa dan negara daripada dijajah dan dihina. Kalau dalam proses ini kita terkorban, atau kita berada seperti biasa, itu tidak mengapa. Yang kita utamakan ialah maruah bangsa kita, tidak lagi akan ditendang, tidak lagi akan ditempeleng – tetapi akan dihormati oleh kawan dan lawan.
43. Sekarang kita merdeka. Perjuangan pengasas negara telah berjaya. Kita tidak akan ditendang dan ditempeleng lagi. Kita bebas daripada kehinaan. Memang pun keadaan terhormat ini sudah menjadi perkara biasa bagi kita. Bagi ramai dari kita ia datang bergolek. Ia datang melayang. Ia tidak akan dipisah dari kita.
44. Perjuangan orang dahulu adalah perkara lama, tidak perlu diingati. Yang jelas kita sudah merdeka, dapat pelajaran dan kaya sedikit. Soal tendang, tempeleng, itu cerita lama. Pepatah Melayu berkata sekali merdeka, selama-lamanya merdeka. Apa pun kita buat merdeka tetap merdeka. Sekarang ialah masa untuk kita “enjoy”. Kita kecap sepenuhnya nikmat yang ada pada kita.
45. Apa dianya semangat ke-Melayuan? Apa relevannya? Bukankah kita sudah berjaya? Hendak semangat buat apa lagi? Masuk parti untuk apa? Perjuangan sudah selesai dengan jayanya.
46. Tidak bermakna masuk parti jika tidak dapat sesuatu bagi diri sendiri. Kita sokong orang dapat jadi Yang Berhormat, jadi Menteri, dapat peluang raih duit kerajaan dan lain-lain. Kita tak bolehkah dapat sikit bagi diri kita?
47. Tetapi benarkah kita akan merdeka selama-lamanya? Memang benar. Walaupun kita tidak buat apa-apa untuk mengekalkan kemerdekaan, bukankah sudah 50 tahun kita merdeka? Apa yang hendak dikhuatirkan? Lima puluh tahun, 100 tahun lagi pun kita akan merdeka walau apa pun kita lakukan. Takkanlah kerana kita ambil 100 Ringgit duit sogokan maka akan hilanglah kemerdekaan kita? Kita boleh sembahyang hajat dan terima 100 Ringgit lagi. Orang lain terima lebih daripada kita., katanya satu juta. Masih kita merdeka. Tidak benar kerana sedikit rasuah kemerdekaan akan hilang.
48. Tetapi ingatlah penjajahan tidak selalu berbentuk penaklukan secara langsung. Penjajahan boleh berlaku walaupun kita miliki pemerintahan sendiri. Ia boleh berlaku apabila pemerintah kita yang dipilih dan diberi kuasa oleh kita sudah menjual diri mereka kepada orang lain, samada dari dalam negeri atau dari luar. Atau takut jiran marah.
49. Pemerintah yang mengikut telunjuk orang lain bukan bebas lagi. Pemerintah yang menjadi pemerintah melalui rasuah akan benar diri mereka disogok kerana perlu mendapat kewangan yang cukup untuk membeli sokongan lagi supaya kedudukan mereka sebagai pemerintah akan kekal.
50. Untuk mendapat sogokan yang cukup mereka akan sanggup ikut arahan penyogok. Dengan perkataan lain mereka akan jadi alat pada penyogok.
51. Kepentingan penyogok tidak sama dengan kepentingan kita, atau kepentingan bangsa dan negara.
52. Kita sudah lihat hanya kerana hendak kekal sebagai pemerintah, ada yang sanggup layan apa sahaja arahan, tuntutan, desakan oleh pihak yang menentukan jawatan bagi kita. Kalau pun apa yang dituntut merugikan orang Melayu, itu tidak mengapa asalkan kita dapat jawatan, walaupun sebagai “figurehead”, patung sahaja, tidak berkuasa pun.
53. Jika kita terjemah keadaan ini kepada jawatan yang didapati kerana disogok apakah yang tidak sanggup kita buat? Jual bangsa, jual negara pun kita sanggup.
54. Apabila kita sudah jual bangsa dan negara apakah kita merdeka lagi? Sudah tentu tidak.
55. Justeru itu tidak benar kepercayaan kita bahawa sekali merdeka selama-lamanya merdeka. Pada permukaannya kita merdeka tetapi pada hakikatnya kita sudah kembali dijajah. Apabila kita kembali dijajah maka kita sudah khianati pejuang-pejuang kemerdekaan kita dahulu.
56. Itulah kenyataan yang sebenar.
57. Melayu mudah lupa. Kata seorang ahli falsafah; “Mereka yang lupa akan sejarah mereka akan didera dengan mengulangi kesalahan mereka berkali-kali”.
58. Inilah hasil daripada mudah lupa. Kita lupa bahkan kita tidak suka diperingati akan sejarah kita. Apa kena-mengena peristiwa 50 tahun dahulu? Apa kena-mengena dengan kita akan kemiskinan Melayu, dengan kedaifan mereka dalam bidang ilmu dan profesyen di masa dahulu? Itu dahulu, ini sekarang. Sudah tentu sejarah penjajahan kita dahulu tidak ada kena mengena dengan keadaan kita sekarang. Tidak ada pelajaran yang akan kita dapati daripada sejarah 100, 500 tahun dahulu. Itu semua cerita dongeng.
59. Apa yang kita lakukan sekarang, kita lakukan kerana kita sudah merdeka dan selamat. Buatlah apa pun kita tetap selamat, tetap merdeka.
60. Jadi penagih dadah, jadi pelepak, jadi “Mat Rempit”, jadi penjenayah pun tak mengapa.
61. Bukankah kita yang memilih dan membentuk Kerajaan? Kerajaan perlu bertanggungjawab terhadap kita. Jika kerana amalan buruk kita, sesuatu yang tidak baik menimpa kita, bukankah menjadi tanggungjawab Kerajaan pilihan kita untuk menyelamatkan kita?
62. Jika kita diserang orang bukankah menjadi tanggungjawab Kerajaan yang kita pilih untuk menangkis serangan ini?
63. Jika kerana Kerajaan yang kita pilih terdiri daripada orang yang sogok duit pada kita dan mereka pula disogok oleh orang lain dan mereka berasa lebih terikat kepada yang menyogok mereka dan kurang bertanggungjawab kepada kita kerana sokongan kita mereka dapati kerana kita terima sogokan, apakah yang dapat kita buat? Tak banyak. Hanya menerima sahaja.
64. Akan menjadi lebih buruklah nasib kita sepanjang masa.
65. Hakikat yang sebenar ialah sokongan kita, undi kita yang kita jual tidak lagi mengikat mereka yang kita pilih untuk jadi Kerajaan.
66. Mereka akan anggap balasan kepada sokongan kita sudah pun dibuat melalui wang sogokan daripada mereka.
67. Sesungguhnya nasib kita ada di tangan kita. Jika nasib ini tidak baik kitalah yang harus berusaha untuk memperbaikinya. Ingatlah, Tuhan telah berfirman yang Dia tidak akan mengubah nasib sesuatu kaum melainkan kaum itu sendiri berusaha mengubah nasibnya.
68. Apakah kita sedang berusaha untuk memperbaiki nasib kita? Tidak ternampak satu pun usaha ke arah ini. Yang kita lihat ialah perbuatan merosakkan lagi keadaan nasib yang sudah buruk ini.
69. Kita tahu yang kita lakukan bukan untuk memperbaiki keadaan. Tetapi kita lakukan juga untuk kepentingan semasa kita. Masa depan soal lain.
70. Pejuang-pejuang kemerdekaan telah pilih demokrasi sebagai cara kita memerintah. Kenapa?
71. Sebabnya ialah kerana mereka percaya majoriti daripada rakyat tentulah bijak dalam amalan mereka, tentulah tahu antara yang baik dengan yang buruk, tentulah bijak semasa membuat pilihan.
72. Pengasas kemerdekaan percaya majorti akan tahu pilih apa yang baik bagi mereka. Sudah tentu mereka akan menolak orang yang hanya bergantung kepada sogokan untuk dipilih.
73. Tetapi mereka tidak sangka pewaris mereka, sebilangan yang tidak kecil akan tolak kebaikan dan mengutamakan sogokan untuk menentukan siapa akan memerintah mereka.
74. Pejuang kemerdekaan yang sedar betapa sukarnya bagi orang Melayu mendapat peluang dan bantuan dahulu dan dengan kerana itu Melayu tidak berjaya.
75. Dengan kesedaran ini mereka merangka untuk mengadakan lebih banyak peluang dan sokongan kepada bangsa mereka supaya bangsa mereka boleh berdiri sama tinggi dan duduk sama rendah dengan kaum-kaum lain, bahkan dengan bangsa-bangsa lain di dunia. Mereka percaya semua peluang dan sokongan akan direbut oleh pewaris daripada bangsa mereka.
76. Ya, mereka ini kebanyakan sudah tidak ada, sudah tinggal kita. Tetapi jika mereka ada apakah perasaan mereka? Tentulah mereka akan kecewa dan hampa amat sangat kerana segala-gala yang mereka ilhamkan sudah dipermainkan oleh pewaris mereka, tidak dihargai oleh pewaris mereka.
77. Mereka melihat bagaimana peluang dan bantuan disalahgunakan atau ditolak dengan begitu sahaja. Sepatutnya dengan peluang belajar di semua peringkat bangsa mereka sudah jadi bangsa yang berilmu. Dengan peluang berniaga mereka sudah jadi kaya, atau sekurang-kurangnya tidak miskin.
78. Tetapi tidak. Peluang bukan sahaja tidak direbut tetapi peluang digunakan secara yang boleh merosakkan bangsa. Mereka lepak, mereka jadi Mat Rempit, yang lakukan jenayah yang kadang-kadang menyebabkan kematian mangsa mereka.
79. Diberi peluang berniaga, diberi modal, diberi latihan tetapi kerana ingin kaya cepat mereka memperdagangkan peluang, kontrak, lesen, permit dan sebagainya.
80. Modal mereka guna untuk belanja bagi memenuhi nafsu, hutang mereka tidak dibayar. Kerana kelakuan beberapa daripada mereka, bangsa mereka dicap sebagai bangsa yang tidak beramanah, dan tidak boleh dilayan, tidak boleh diharap dengan duit ringgit.
81. Dan banyaklah lagi perbuatan mereka yang tetap mengecewakan pejuang bangsa dahulu.
82. Kata mereka, jangan buka pekong di dada.
83. Malu kata mereka.
84. Tetapi tidakkah lebih malu apabila mereka lakukan apa yang telah saya sebutkan. Tak buka pekong pun busuk juga. Biarlah pekong di dada dibuka supaya kerana bau terlalu busuk kita akan cuba melepaskan diri daripadanya. Jika tidak ia akan menjadi lebih busuk di dalam dan akan bunuh kita.
85. Semua yang disebut ini menjadi pengkhianatan kepada pejuang bangsa dahulu. Kerosakan kerana ini lambat laun akan merosakkan masa depan kita
86. Tetapi yang terdahsyat diantara amalan buruk kita ialah rasuah, terutama rasuah politik. Politiklah yang dapat memberi kuasa walaupun pada yang lemah dan miskin. Politik kita sewaktu perjuangan untuk kemerdekaan berjaya memberi kekuatan kepada Melayu sehingga mereka yang daif ini dapat mengalahkan kuasa besar dunia. Hanya dengan bersatu dan bertindak bersama, hanya dengan pendirian yang tegas kelemahan dapat diatasi dan kejayaan dicapai. Sesungguhnya kuasa politik kuasa ajaib.
87. Selagi ada kuasa ini kepada kita, percayalah kita akan dapat pulih segala-galanya, kita akan dapat mengatasi kelemahan kita, kita akan dapat tentukan masa depan kita.
88. Tidakkah kita lihat bagaimana daripada bangsa yang dijajah dan dihina, kuasa politik sudah mengubah nasib kita demikian sehingga kita dianggap sebagai contoh kepada bangsa-bangsa lain di dunia.
89. Bandingkan negara kita 50 tahun dahulu di waktu kita mencapai kemerdekaan dan negara kita sekarang. Negara dagang yang ke-17 terbesar di dunia. Kemiskinan dikurangkan daripada 70 peratus kepada lima peratus. Bandar sebesar bandar di negara maju, penuh dengan pencakar langit. Bekalan air, api dan kenderaan yang terkini.
90. Pendapatan per kapita yang 20 kali lebih tinggi dari 50 tahun dahulu dan lain-lain.
91. Semua ini adalah hasil kuasa politik semata-mata. Kerana kuasa politik, negara berbilang kaum, ugama, budaya dan bahasa dapat distabilkan. Dan sesungguhnya kita sudah dapat berdiri hampir sama tinggi dengan kaum-kaum lain dan bangsa-bangsa lain.
92. Tetapi sekarang kita lakukan perbuatan untuk menghakis dan menghapus kuasa politik kita.
93. Kerana wang yang sedikit, kerana 100-200 Ringgit kita jual kuasa politik, kita serah nasib kita kepada perasuah, perasuah yang akan jual bangsa dan negara.
94. Apakah akan jadi kepada kita apabila kuasa politik terlucut daripada kita? Apakah kita akan terus merdeka? Saya fikir tidak.
Tuan-Tuan dan Puan-Puan,
95. Perhimpunan Melayu hari ini memang menjadi hak bagi kita kerana kita menghadapi masalah-masalah yang besar-besar, bukan satu tetapi banyak masalah.
96. Kita semua berasa cemas. Di mana-mana sahaja orang Melayu sedang berhimpun untuk membincang masalah mereka, kecemasan yang mereka rasai.
97. Jika pada hari ini kita dapat menyedarkan akan musibah yang sedang dan akan timpa keatas kita, jika kesedaran ini akan menyebabkan kita bertindak keras terhadap mereka diantara kita yang mencetuskan masalah ini, jika kita dapat bandingkan gejala rasuah yang menjadi ancaman terhadap kita yang terbesar sekali, maka ralatlah perhimpunan ini, berjayalah perhimpunan ini.
98. Saya tak salahkan orang lain. Saya salahkan kita sendiri. Tak mungkin orang lain menguasai kita jika kita tegas dan tidak membenarkan mereka.
99. Maju mundurnya bangsa kita terpulanglah kepada kita. Ingatlah Tuhan tidak akan ubah nasib kita melainkan kita berusaha mengubah nasib kita sendiri.
100. Oleh itu berusahalah mengubah nasib diri sendiri setelah kita berhimpun di sini untuk membincang masalah yang kita hadapi. Saya percaya perbincangan kita akan membuahkan pemikiran dan tindakan yang boleh menyelamatkan kita.
Wassalamu’alaikum warahmatullahi wabarakatuh.
Terima kasih.
[Baca]
New York Times columnist Nicholas D. Kristof - like many of his American colleagues - is applauding the International Criminal Court's arrest order against Sudanese President Omar Hassan al-Bashir for his role in the Darfur conflict that has claimed tens of thousands of lives.
In his Thursday column, Kristof describes the plight of an eight-year-old boy named Bakit who blew off his hands picking up a grenade that Kristof suspects was left behind by Bashir's forces operating on the Chad side of the border with Sudan.
"Bakit became, inadvertently, one more casualty of the havoc and brutality that President Bashir has unleashed in Sudan and surrounding countries," Kristof wrote. "So let's applaud the I.C.C.'s arrest warrant, on behalf of children like Bakit who can't."
By all accounts, Kristof is a well-meaning journalist who travels to dangerous parts of the world, like Darfur, to report on human rights crimes. However, he also could be a case study of what's wrong with American journalism.
While Kristof writes movingly about atrocities that can be blamed on Third World despots like Bashir, he won't hold U.S. officials to the same standards.
Most notably, Kristof doesn't call for prosecuting former President George W. Bush for war crimes, despite hundreds of thousands of Iraqis who have died as a result of Bush's illegal invasion of their country. Many Iraqi children also don't have hands - or legs or homes or parents.
But no one in a position of power in American journalism is demanding that former President Bush join President Bashir in the dock at The Hague.
Tortured Commission
As for the unpleasant reality that Bush and his top aides authorized torture of "war on terror" detainees, Kristof suggests only a Republican-dominated commission, including people with close ties to the Bush Family and to Bush's first national security adviser Condoleezza Rice.
"It could be co-chaired by Brent Scowcroft and John McCain, with its conclusions written by Philip Zelikow, a former aide to Condoleezza Rice who wrote the best-selling report of the 9/11 commission," Kristof wrote in a Jan. 29 column entitled
"Putting Torture Behind Us ."
"If the three most prominent members were all Republicans, no one on the Right could denounce it as a witch hunt - and its criticisms would have far more credibility," Kristof wrote.
"Democrats might begrudge the heavy Republican presence on such a commission, but surely any panel is better than where we're headed: which is no investigation at all. ...
"My bet, based on my conversations with military and intelligence experts, is that such a commission would issue a stinging repudiation of torture that no one could lightly dismiss."
In an earlier formulation of this plan, Kristof suggested that the truth commission be run, in part, by Bush's first Secretary of State Colin Powell.
One of the obvious problems with Kristof's timid proposal is that Rice and Powell were among the senior Bush officials who allegedly sat in on meetings of the Principals Committee that choreographed the abuse and torture of specific detainees.
Zelikow remained a close associate of Rice even after she replaced Powell as Secretary of State. And Scowcroft was President George H.W. Bush's national security adviser and one of Rice's key mentors.
It's also not true that any investigation is always better than no investigation. I have witnessed cover-up investigations that not only failed to get anywhere near the truth but tried to discredit and destroy whistleblowers who came forward with important evidence.
In other words, bogus and self-interested investigations can advance bogus and self-interested history, which only emboldens corrupt officials to commit similar crimes again.
No Other Context
Kristof's vision of having President Bush's friends, allies and even co-conspirators handle the investigation of Bush's crimes would be considered laughable if placed in any other context.
But Kristof's cockeyed scheme passes almost as conventional wisdom in today's Washington.
On Wednesday, the Washington Post assigned its satirical writer, Dana Milbank, to cover - and mock - Sen. Patrick Leahy's Judiciary Committee hearing on his own plan for a truth commission to examine Bush-era abuses.
Milbank's clever article opened with the knee-slapping observation: "Let's be truthful about it. Things aren't looking so good for the Truth Commission."
The derisive tone of the article also came as no surprise. Milbank has made a cottage industry out of ridiculing anyone who dares think that President Bush should be held accountable for his crimes.
In 2005, when the Democrats were in the minority and the Republicans gave Rep. John Conyers only a Capitol Hill basement room for a hearing on the Downing Street Memo's disclosures about "fixed" intelligence to justify the Iraq War, Milbank's column dripped with sarcasm.
"In the Capitol basement yesterday, long-suffering House Democrats took a trip to the land of make-believe," Milbank wrote. "They pretended a small conference room was the Judiciary Committee hearing room, draping white linens over folding tables to make them look like witness tables and bringing in cardboard name tags and extra flags to make the whole thing look official."
And the insults - especially aimed at Conyers - kept on coming. The Michigan Democrat "banged a large wooden gavel and got the other lawmakers to call him ‘Mr. Chairman,'" Milbank wrote snidely.
Then, last July, Milbank ridiculed a regular House Judiciary Committee hearing on Bush's abuses of presidential power. The column ignored the strong case for believing that Bush had violated a number of international and domestic laws, the U.S. Constitution, and honorable American traditions, like George Washington's prohibition against torture.
Instead, it was time to laugh at the peaceniks. Milbank opened by agreeing with a put-down from Rep. Lamar Smith, R-Texas, calling the session "an anger management class." Milbank wrote: "House Democrats had called the session ... to allow the left wing to vent its collective spleen."
Milbank then insulted Rep. Dennis Kucinich, who had introduced impeachment resolutions against Bush, by calling the Ohio Democrat "diminutive" and noting that Kucinich's wife is "much taller" than he is.
What Kucinich's height had to do with an issue as serious as abuses of presidential power was never made clear. What Milbank did make clear, through his derisive tone and repeated insults, was that the Washington Establishment takes none of Bush's crimes seriously.
So, Milbank's mocking of Leahy's latest initiative fits with this pattern of the past eight years - protecting Bush from the "nut cases" who think international law and war-crimes tribunals should apply to leaders of big countries as well as small ones.
The pattern of "American exceptionalism" also can be seen in Kristof cheering the application of international law against an African tyrant but suggesting that Bush's offenses should be handled discreetly by his friends.
Journalist Murray Waas often used the saying, "all power is proximate." I never quite understood what he meant, but my best guess was that Waas was saying that careerists - whether journalists or from other professions - might have the guts to take on someone far away or who lacked power, while ignoring or excusing similar actions by someone close by with the power to hurt them.
That seems to be especially true about Washington and its current cast of "respected" journalists. They can be very tough on President Bashir but only make excuses for President Bush
[Baca]
March 4, 2009 Information Clearing House
Freedom is being lost in Britain. The land of Magna Carta is now the land of secret gagging orders, secret trials and imprisonment. The government will soon know about every phone call, every email, every text message. Police can wilfully shoot to death an innocent man, lie and expect to get away with it. Whole communities now fear the state. The foreign secretary routinely covers up allegations of torture; the justice secretary routinely prevents the release of critical cabinet minutes taken when Iraq was illegally invaded. The litany is cursory; there is much more.
Indeed, there is so much more that the erosion of liberal freedoms is symptomatic of an evolved criminal state. The haven for Russian oligarchs, together with corruption of the tax and banking systems and of once-admired public services such as the Post Office, is one side of the coin; the other is the invisible carnage of failed colonial wars. Historically, the pattern is familiar. As the colonial crimes in Algeria, Vietnam and Afghanistan blew back to their perpetrators, France, the United States and the Soviet Union, so the cancerous effects of Britain’s cynicism in Iraq and Afghanistan have come home.
The most obvious example is the bombing atrocities in London on 7 July 2005; no one in the British intelligence mandarinate doubts these were a gift of Blair. “Terrorism” describes only the few acts of individuals and groups, not the constant, industrial violence of great powers. Suppressing this truth is left to the credible media. On 27 February, the Guardian’s Washington correspondent, Ewen MacAskill, in reporting President Obama’s statement that America was finally leaving Iraq, as if it were fact, wrote: “For Iraq, the death toll is unknown, in the tens of thousands, victims of the war, a nationalist uprising, sectarian in-fighting and jihadists attracted by the US presence.” Thus, the Anglo-American invaders are merely a “presence” and not directly responsible for the “unknown” number of Iraqi deaths. Such contortion of intellect is impressive.
In January last year, a report by the respected Opinion Research Business (ORB) revised an earlier assessment of deaths in Iraq to 1,033,000. This followed an exhaustive, peer-reviewed study in 2006 by the world-renowned John Hopkins School of Public Health in the US, published in The Lancet, which found that 655,000 Iraqis had died as a result of the invasion. US and British officialks immediately dismissed the report as “flawed” – a deliberate deception. Foreign Office papers obtained under Freedom of Information disclose a memo written by the government’s chief scientific adviser, Sir Roy Anderson, in which he praised The Lancet report, describing it as “robust and employs methods that are regarded as close to ‘best practice’ given [the conditions] in Iraq.” An adviser to the prime minister commented: “The survey methodology used here cannot be rubbished, it is a tried and tested way of measuring mortality in conflict zones”. Speaking a few days later, a Foreign Office minister, Lord Triesman, said, “The way in which data are extrapolated from samples to a general outcome is a matter of deep concern.”
The episode exemplifies the scale and deception of this state crime. Les Roberts, co-author of the Lancet study, has since argued that Britain and America might have caused in Iraq “an episode more deadly than the Rwandan genocide”. This is not news. Neither is it a critical reference in the freedoms campaign organised by the Observer columnist Henry Porter. At a conference in London on 28 February, Lord Goldsmith, Blair’s attorney-general, who notoriously changed his mind and advised the government the invasion was legal, when it wasn’t, was a speaker for freedom. So was Timothy Garton Ash, a “liberal interventionist”. On 9 April, 2003, shortly after the slaughter had begun in Iraq, a euphoric Garton Ash wrote in the Guardian: “America has never been the Great Satan. It has sometimes been the Great Gatsby: ‘They were careless people, Tom and Daisy – they smashed up things...'. One of Britain’s jobs “is to keep reminding Tom and Daisy that they now have promises to keep”. Less frivolously, he lauded Blair for his “strong Gladstonian instincts for humanitarian intervention” and repeated the government’s propaganda about Saddam Hussein. In 2006, he wrote: “Now we face the next big test of the west after Iraq: Iran.” (I have italicized we). This also adheres precisely to the propaganda; David Milliband has declared Iran a “threat” in preparation for possibly the next war.
Like so many of New Labour’s Tonier-than-thou squad, Henry Porter celebrated Blair as an almost mystical politician who “presents himself as a harmoniser for all the opposing interests in British life, a conciliator of class differences and tribal antipathies, synthesiser of opposing beliefs”. Porter dismissed as “demonic nonsense” all analysis of the 9/11 attacks that suggested there were specific causes: the consequences of violent actions taken by the powerful in the Middle East. Such thinking, he wrote, “exactly matches the views of Osma bin Laden... with America’s haters, that’s all there is – hatred”. This, of course, was Blair’s view.
Freedoms are being lost in Britain because of the rapid growth of the “national security state”. This form of militarism was imported from the United States by New Labour. Totalitarian in essence, it relies upon fear mongering to entrench the executive with venal legal mechanisms that progressively diminish democracy and justice. “Security” is all, as is propaganda promoting rapacious colonial wars, even as honest mistakes. Take away this propaganda, and the wars are exposed for what they are, and fear evaporates. Take away the obeisance of many in Britain’s liberal elite to American power and you demote a profound colonial and crusader mentality that covers for epic criminals like Blair. Prosecute these criminals and change the system that breeds them and you have freedom.
www.johnpilger.com
[Baca]
President Obama received a lesson in international gamesmanship last week, when his secret offer to trade the deployment of a controversial missile defense system in Eastern Europe for Russian assistance in getting Iran to back down from its nuclear program was publicly rebuffed. The lesson? You don't get something for nothing, especially when the something you're looking for is, itself, nothing.
If the members of the Obama administration would bother to take a stroll down memory lane, they might recall that once upon a time there was a document called the anti-ballistic missile treaty, signed in 1972 between the United States and the former Soviet Union, which recognized that anti-missile defense shields were inherently destabilizing, and as such should not be deployed. The ABM treaty represented the foundational agreement for a series of strategic arms limitation and arms reduction agreements that followed. President Obama was 10 years old when that treaty was signed. He was 40 years old when President George W. Bush withdrew from it, in December 2001, and set in motion a series of events which saw arms control between the U.S. and Russia completely unravel. The proposed U.S. missile defense shield, to be deployed in Poland and the Czech Republic, had the Russians talking about scrapping the INF treaty (which eliminated two classes of nuclear-armed ballistic missiles that threatened Europe) and deploying highly accurate SS-21 "Iskander" missiles within striking range of the proposed Polish interceptor site.
Russia did not create the missile defense system crisis. The United States did, and, as such, cannot expect to suddenly receive diplomatic credit when it puts this controversial program on the foreign policy gaming table as if it were a legitimate chip to be bargained away.
Russia has always, correctly, claimed that any missile defense system deployed in Eastern Europe can only be directed at Russia. While both the Bush and Obama administrations denied that was the case, Poland has all but admitted its concerns are not about missiles coming from Tehran, but rather missiles coming from Moscow. The American "sweetener" for a potential Polish loss of a missile shield is to offer Poland advanced Patriot surface-to-air missiles, whose intended target is clearly not a Persian missile which cannot reach Polish soil, but rather Russian missiles and aircraft which can.
There are three basic facts that the Obama administration needs to address, but as of yet has not: First, missile defense systems are inherently destabilizing and only contribute to the acquisition of offensive counters designed to defeat those defenses. Second, the rapid expansion of NATO in the past decade has in fact threatened Russia. And third, the Iranian missile "threat" to Europe has always been illusory.
The proposed U.S. missile defense shield in Eastern Europe has been a highly flawed concept from its very inception. Although it used unproven technology, it was sold as a means of protecting Europe from a threat that did not exist (Iranian missiles), while creating the conditions for exposing Europe to a real threat that the missile defense shield was incapable of defeating (Russian missiles). The fact that Obama would put the missile defense shield up for trade as part of a "Grand Bargain" with Russia on Iran only underscores how little value the system has to begin with. It is a big zero, both from a military and diplomacy perspective. Obama, in making it part of his bargain, was trying to give it value it lacked, and the Russians weren't buying.
The Iranian situation is far too real, but not in terms of the dangers posed by anything Iran itself is doing. The United States has not helped matters by hyping the threat posed by nonexistent Iranian missiles targeting Europe and capable of carrying nonexistent nuclear warheads. Russia has expressed a desire to work with the United States to better control Iran's program of uranium enrichment, which Iran and the nuclear watchdog, the International Atomic Energy Agency (IAEA), state has been clearly demonstrated as part of a peaceful nuclear energy program. For Russia to buy into Obama's "deal," it would have to buy into a threat from Iran's missile and nuclear programs, a threat Russia does not believe to exist.
Obama would do well to call in his national security team and have it lay out the intelligence information used to assert the Iranian threat. There must be such a foundational document, since Secretary of State Hillary Clinton, Secretary of Defense Robert Gates, Chairman of the Joint Chiefs of Staff Adm. Michael Mullen and the president himself all have repeatedly referred to the "threat" posed by Iran's "nuclear weapons" ambitions. It is important to distinguish between what we know and what we think we know. For instance, we know that Iran does not have any highly enriched uranium, the kind needed to produce a nuclear weapon. Just ask Admiral Dennis Blair, the Director of National Intelligence. This is what he told the U.S. Senate Armed Services Committee this week in testimony on Iran. And yet many in the U.S. intelligence community continue to state unequivocally that Iran is on the verge of possessing a nuclear weapon.
Obama should take each assertion put forward about Iran's nuclear ambition and then reverse-engineer the underlying factual basis for making that assertion. If he did so, he would quickly find that he and his advisers know less about Iran than they think they do. The entire U.S. case against Iran is built on supposition and speculation. If the president disassembled the speculative assertions, he would find them cobbled together from an ideologically motivated methodology designed more to justify a policy of containing and undermining Iran's theocracy than understanding its nuclear ambitions.
Obama ought to reacquaint himself with the 1972 ABM treaty and the case of the CIA versus "Team B." This chapter of America's failed arms control policy unfolded from 1975-1976, during the administration of Gerald Ford. Once upon a time, there was a Soviet Union, and a Cold War between the Soviet Union and the United States. In an effort to prevent the Cold War from becoming a "hot war," the two powers launched arms control initiatives, packaged as part of a larger East-West détente, to better manage the escalation of an arms race derived from Cold War tensions. It was critical in this effort to have an accurate understanding of not only the physical reality of Soviet strategic weapons programs, but also their intent. The CIA produced a national intelligence estimate that addressed these issues, National Intelligence Estimate (NIE) 11-3/8-74, "Soviet Forces for Intercontinental Conflict Through 1985."
The benign picture painted by the CIA's estimate of Soviet strategic capability clashed with ideologues in and out of government who were pushing for U.S. defense programs that could not be justified if the CIA's estimates were allowed to stand. Rather than confront the facts of the CIA's estimates, these ideologues instead assaulted the methodology used to determine them. Political pressure was brought to bear on President Ford by conservative opponents of détente to prepare a "Team B" of analysts (outside ideologues) who would challenge the conclusions put forward in the CIA estimate by "Team A" (the CIA's own staff). "Team B" didn't produce better facts (indeed, every one of its assertions was proved to be wrong), but it did produce better fear. Its claims about Soviet intentions and capabilities, highly inflated and inaccurate, were political dynamite which could not be ignored, especially in the politically charged presidential election year of 1976. "Team B" won out over "Team A," and the foundation was set for not only the dismantling of U.S.-Soviet détente, but also for the biggest arms race in modern history, culminating in the destruction of the very agreements designed to constrain such an escalation.
Obama should acquaint himself with the story of "Team B," because "Team B" exists today, propagating myths about an Iranian "threat" that are analogous to those employed by the team that sold the fable of the Soviet "threat." The new president was critical of the Iraq war, and the sad tale of misinformation and deception that has since been repackaged as an "intelligence failure." There was no "failure" because there was no "intelligence." "Team B" doesn't produce intelligence, but rather ideological assertions used as justification for policy. The same "Team B"-based methodologies which gave us the Iraq assertions about WMD programs are in play today in the Iran "intelligence" used by President Obama and his national security team.
Obama might be surprised that one of the programs being sold by "Team B" in its assault on truth was a missile defense shield to counter the team's perception of a Soviet missile threat. The falsehoods and fabrications sold by "Team B" back in the 1970s set America on the path toward the withdrawal from the ABM treaty in 2001, and the proposed deployment of the very missile defense shield Obama is trying to bargain away to get Russia to help confront an Iranian "threat" manufactured by none other than "Team B."
Secretary of State Clinton impressed many when she spoke of the need for America to embrace "smart power." The implication of her words was that the United States, under President Obama, would use all the tools available, especially diplomacy, in seeking to solve the myriad problems it faces around the world in the post-Bush era, including the problem of Iran. But one cannot begin to solve a problem unless one first accurately defines the problem, for without that definition the "solution" would in fact solve nothing. Any solution to the problem of Iran must be derived from an accurate intelligence picture of what is transpiring inside the country today, one drawn more from fact than ideologically based fiction. Obama is advised to challenge the totality of the current U.S. intelligence used to define Iran as a threat, and purge once and for all the corrupting ideological "Team B" holdovers who still reside within the structure of the American intelligence community. Intelligence is never about hearing what you want to hear, but rather about learning what you need to know.
Obama needs to learn the truth about Iran, and about the proposed missile defense system in Europe. This truth would be inconvenient, but it would also liberate him to develop meaningful solutions to serious problems in a manner which avoids a repeat of his embarrassing "Grand Bargain" gambit with Russia, trying to trade nothing for nothing in an effort to certify something for nothing. There are a lot of "zero sums" in that equation, which pretty much sums up Obama's Iran and Russia policies to date.
Scott Ritter was a Marine Corps intelligence officer from 1984 to 1991 and a United Nations weapons inspector in Iraq from 1991 to 1998. He is the author of numerous books, including "Iraq Confidential " (Nation Books, 2005) , "Target Iran " (Nation Books, 2006) and his latest, "Waging Peace: The Art of War for the Antiwar Movement " (Nation Books, April 2007).
[Baca]
Introduction
The French government's decision to rejoin the integrated military command structure of the North Atlantic Treaty Organization (NATO) formalizes a decade-long rethink of French military strategy and foreign policy. Under President Charles de Gaulle, who perceived the alliance as dominated by the United States and Britain, France pulled its forces out of NATO in 1966 to pursue more independent policies. The 2009 reversal, championed by French President Nicolas Sarkozy, has broad support in the French policymaking community and the military, though some dissent from traditional Gaullists persists. The full reintegration of French forces into NATO's structure reflects France's view of a changed world in which domestic security will rely on the ability to coordinate with allies abroad. The move also acknowledges a diminished French ability to mount significant expeditionary operations abroad without logistical and other support from its closest allies, including the United States. In effect, the era of "French exceptionalism" in conventional military affairs is over.
Roots of the Policy Shift
The decision to rejoin NATO's military command structure is part of a larger shift following publication of a white paper on French defense and security policy in 2008. It reverses decades of French security policy, which has focused on a Cold War-style invasion scenario as the nation's primary challenge. Instead, the paper highlights counterterrorism and intelligence, reintegrates France with NATO for purposes of European security, and arguably draws Paris closer to Washington, in doctrinal terms, than any time since liberation.
Strategically, the changes echo moves that have been recommended (if not wholly undertaken) by U.S. and British defense policymakers since the end of the Cold War. Mobility--and in France's case, the ability to deploy and sustain up to thirty thousand troops in a far-off land--is a key goal.
"France's own strategic approach stresses that its forces must adapt further to the new dimensions of military operations overseas and to asymmetric warfare," writes France's former NATO Ambassador Benoît d'Aboville in the Guardian. "French forces will maintain a robust capacity for overseas military operations within the framework of Nato-led operations, but not exclusively so," he adds.
To achieve this, resources are shifting away from French formations and weapons systems designed for the Cold War environment of state-to-state warfare. This means slimming down armored units, artillery, and infantry divisions, along with some elements of the French navy and air force designed primarily for defense against conventional attack. The decision on whether to construct a second nuclear aircraft carrier, for instance, has been put off for five years, while the construction of more nuclear submarines continues.
The size of the uniformed component of the French army, now the largest in the European Union, is in line to drop by 24 percent over the next several years, a continuation of a trend which began at the end of the Cold War and picked up pace when France ended its national draft in 2001.
Since 1989, according to Defense Ministry figures, the army has decreased from nearly 500,000 to just about 250,000 today (including reserves), and will fall to 225,000 under the new plan. The combat-ready force will shrink to 88,000. This force will be organized into smaller, more rapidly deployable ground units--again, a reform the U.S. and British militaries already have made. New investments are planned in human espionage efforts, spy satellites, and homeland security efforts. The "slimming" of the current force will also alleviate readiness and reliability problems, which have become serious. An internal defense document described appalling maintenance problems across all services in 2008.
Foreign Policy Implications
The new French military posture, as outlined in the 2008 white paper, reinforces previous hints that France intends to reorient its geopolitical thinking to put Asia, rather than North Africa and the Levant, more squarely on its security agenda (World Politics Review). In line with public statements by Sarkozy and senior foreign policy officials, the doctrine puts greater emphasis on cooperation with the United States in countering Iran's growing influence, tracking nuclear proliferation, and expanding NATO's ability to act outside Europe, even as a separate EU defense capability matures. For instance, France announced in early 2008 its decision to add troops to NATO's Afghanistan mission. By early 2009, about three thousand French troops were deployed in and around Afghanistan. The new strategy also reflects the tempering of France's traditionally Arabist approach to the Middle East. Indeed, the same week the white paper was published, the European Union announced it had agreed to upgrade ties with Israel, a move long resisted by previous French governments.
Abroad, the French president has pledged to renegotiate colonial-era mutual defense agreements with many African states. As this Backgrounder discusses, some nine thousand French troops are deployed in Senegal, the Ivory Coast, Gabon, Djibouti, and the Central African Republic.
Yet Sarkozy has insisted the new doctrine represents a reorientation rather than a curbing of French ambition. The doctrine makes clear France's nuclear arsenal will be maintained and kept solely under French command. Sarkozy has shown no signs of abandoning France's African patch, either. When Sudanese rebels threatened to overthrow Chad's pro-Paris leader in 2008, France made it clear it was willing to intervene (Spiegel). Nor has Paris signaled an intention to give up on power projection. France operates Europe's only real fixed-wing aircraft carrier, the Charles De Gaulle, and even though a decision on a second has been postponed, talks with Britain continue on a proposed jointly built class of super carriers (PDF). Sarkozy in June 2008 told German officials he foresees eventual formation of a European naval strike force (Spiegel) with British and French carriers at its core, and Germany, Italy, Spain, and a host of other nations contributing frigates, submarines, and support vessels. Perhaps with Iran in mind, Sarkozy announced that France would build a new navy base in the United Arab Emirates, and it has also ratcheted up efforts to sell its weapons (NPR) in the region.
Francois Heisbourg, a member of the presidential commission that wrote the white paper and a former head of the International Institute for Strategic Studies in London, said "we're planning for one war and a half." In Heisbourg's view, that means the ability to project up to sixty thousand troops, seventy combat aircraft, and a full naval group, as part of a multinational deployment anywhere in "the arc of crisis." The white paper defines that arc as ranging from the North Atlantic to the Indian Ocean. Heisbourg notes that the Indian Ocean has taken on new significance for France, and that the new base in Abu Dhabi, combined with existing facilities in Djibouti and Reunion, gives the French military a "string of pearls" with which to influence events in the region.
Opposition Gathers
The breadth of these changes, not to mention Sarkozy's personal style, has kicked up significant domestic opposition (he announced the reintegration with NATO in June 2008 alongside U.S. President George W. Bush, who was deeply unpopular in France). Senior French military commanders reacted with a scathing open letter bemoaning the force level cuts and the NATO decision. "France will from now on be playing in the same division as Italy," they wrote in the June 18 edition of the conservative daily Le Figaro. "There is no point in denying it."
France regards its status as a major military power with great pride, and suggestions that the new doctrine will relegate the country to second-tier status rankle well beyond military circles. Sarkozy's Socialist Party opponents kicked up a storm of protest, and across France, towns adjacent to the fifty military bases slated for closure expressed strong concern (BBC). For the French security establishment, the debate over closer ties to NATO, often seen as a proxy for an Anglo-American agenda, runs right up against decades of exceptionalist policies instituted by de Gaulle with the express purpose of preventing such intimacy. In common with other European countries diminished by the rise of the Cold War superpowers in the 1950s, France struggled to adjust to the realities of its new position, fighting bloody and unsuccessful rearguard actions to retain colonies in Southeast Asia and Algeria.
Still, Paris insisted on maintaining its place as one of three European military forces (the other two are Britain and Russia) that can operate independently on far-flung missions. Similarly, France resisted the post-Cold War trend toward downsizing and reorienting its forces, in part due to its insistence on "independence" from the United States. France continued to conscript soldiers, for instance, right through the 1990s, long after most major militaries went to an "all volunteer" system. The white paper concluded that the size and capabilities of the French military no longer reflected the likely missions it would undertake in the future. "There is no risk of an invasion today ... but on the other hand we need to be able deploy forces to participate in the stabilization of regions or zones in crisis," Sarkozy said.
Sarkozy has consistently disarmed his opponents by inviting some into his government and ignoring others. Most recently, he appointed former Socialist foreign minister Hubert Vedrine, who coined the term "hyperpower" to describe the United States in the late 1990s, to lead a commission on the proper role of France in a globalized world.
Comparing France and Britain
France, to date, had charted a very different course from Britain (BBC). While the British, too, have insisted on "punching above their weight," since 1956 at least, closeness with America has underpinned their geopolitical thinking--"a bond forged through the blood spilled together in the sands of Iraq and Afghanistan"--as Britain's senior military officer, Gen. Sir Richard Dannatt, put it in a June 2008 speech. Laying out his own country's future military vision (PDF), he declared "we must focus on operating with the United States, and not necessarily as the United States." The implied criticism of France's more independent stance would not have been lost on his audience.
In contrast, France defined its military role more independently, often summing up its posture with the ambiguous phrase "friend, ally, non-aligned." U.S.-France ties often appeared strained, as in the run-up to the Iraq war, though practical cooperation remained quite close. Still, France opted out of the Iraq war, and aside from a period just after 9/11 when French special forces operated in Afghanistan, largely avoided that conflict, too.
Has France now come around to the British view? "The French are realizing that not even they are able to go it alone, and [Sarkozy] is putting the French military back in the business of dealing with threats that really matter," Tomas Valasek of the Center for European Reform told Newsweek. Certainly, many French senior officers fear otherwise. "We are abandoning European military leadership to the British, when we know their particular relationship with the United States," they wrote in Le Figaro. As such, the first battle involving France's new defense doctrine looks likely to take place on French soil.
[Baca]
WASHINGTON - Advanced reports on the Barack Obama administration's strategy to "peel off" a majority of insurgent commanders from the "hard core" of Taliban suggest that it will be presented as a political route to victory in Afghanistan that would not require U.S. and NATO troops to win militarily.
But experts warn that the strategy is unlikely to work. And by appearing to provide a political route to victory, the strategy is luring the administration into a renewed commitment to war in Afghanistan and diverting it away from a deal with the Taliban leadership aimed at keeping al Qaeda from having a presence there.
News reports this past week have raised the possibility of negotiations by Afghan, Saudi and Pakistani officials with the Taliban leadership that could result in an agreement not to allow an al Qaeda presence on Afghan territory in return for U.S. and NATO withdrawal and assurances that they will not intervene in the country as long as al Qaeda is kept out.
The strategy of splitting off "reconcilable" insurgents may make commitment to an indefinite continuation of the U.S. military effort more palatable to key U.S. officials, including Obama himself, who know that the war cannot be won through military efforts.
The new administration strategy was reported last week after briefings of Congressional leaders by Gen. David Petraeus, head of CENTCOM, and Ambassador Richard Holbrooke, the State Department special envoy for Afghanistan and Pakistan.
Petraeus has been a strong supporter of the strategy of trying to divide the Afghan insurgency by offering money and jobs to those willing to accept the government in Kabul. He has said that his strategy of outreach to what he has described as "reconcilables" among the insurgents in Iraq might be applicable in Afghanistan as well.
The premise of the plan being advanced by administration officials, at least for public consumption, was articulated by Vice President Joseph Biden in a speech in Brussels last week. Biden said only 100 to 1,000 Taliban or al Qaeda members - representing about 5 percent of the Taliban insurgency - are "incorrigible", and that at least 70 percent were involved in the insurgency only because they are "getting paid".
Biden was reflecting the view of the insurgency held by senior military officials at the NATO regional headquarters in Kandahar. Officials there see the insurgency in the south as made up largely of "young freelance fighters who are motivated more by money than religious zealotry," according to a report by Rajiv Chandrasekaran in the Washington Post Sunday.
But that extraordinarily optimistic assumption is not shared by most experts on the insurgency in Afghanistan. A report by Carlotta Gall in the New York Times last Wednesday quotes "several Western diplomats and officials in Afghanistan, including those already in contact with the Taliban" as saying that attempts to split off individual commanders or groups from the Taliban leadership "would not work."
The reason, according to those officials, is that the plan would require those commanders to surrender and accept an Afghan government and a foreign military presence in which they have no trust.
Jonathan Landay of McClatchy newspapers reported from Kabul Sunday that experts on the Taliban express "serious doubts" about the splitting strategy, because insurgent leaders believe they are winning and the Hamid Karzai government is growing weaker.
In contrast to the reported premise that most insurgents are motivated by material gain, most specialists on the insurgency emphasised the dominant role of Pashtun anger at foreign military operations in their locality killing members of their family or tribe.
An alternative strategy of seeking a deal with the Taliban aimed at separating them from al Qaeda was first raised by New York University Afghanistan specialist Barnett Rubin and Pakistani journalist Ahmed Rashid in an article in Foreign Affairs magazine last December. The article proposed that NATO offer to end military action in Afghanistan if the Taliban agrees "to prohibit the use of Afghan (or Pakistani) territory for international terrorism."
Rubin and Rashid have been hired by Holbrooke as adviser and short-term consultant, respectively, according to a report by national security correspondent Laura Rozen at Foreign Policy.
The option proposed by Rubin and Rashid has now been given new credibility by reports that Saudi Arabia is engaged in an effort to persuade the Taliban to separate itself clearly from al Qaeda.
The London Times published a report by Christina Lamb Sunday that Prince Muqrin bin Abdul Aziz, the Saudi intelligence chief, visited Islamabad, Delhi and Kabul in January to talk to both Taliban and Afghan government officials.
Lamb also reported that Taliban Chief Mullah Omar had given his approval to peace talks with the Afghan government for the first time, citing a "mediator" with the Taliban, Algerian former Mujahideen fighter in Afghanistan Abdullah Anas and an Afghan government official involved in the negotiations as the sources.
The Afghan government negotiator told Lamb that government officials "have been in contact both with Mullah Omar's direct representatives and commanders from the front line."
Asked for a comment on this development, Rubin, the Columbia University expert, told IPS in an e-mail that the Lamb story "is accurate".
A report published by Strategic Forecasting (Stratfor) last week by director of Middle East analysis Kamran Bokhari and Scott Stewart also noted the Saudi intelligence chief's trip to Pakistan and Afghanistan. In meetings with actual Taliban commanders in both countries, the Saudis have offered financial support if the Taliban agrees to divorce itself completely from al Qaeda, according to the report.
Bokhari, a Pakistani specialist on Islamist groups, has had extensive contacts with high-ranking Pakistani and Saudi officials in the past.
The Saudi regime, once reluctant to crack down on al Qaeda, has pursued a very successful political strategy against al Qaeda within Saudi Arabia since 2003. Saudi Arabia has credibility with the Taliban leadership because of shared religious beliefs and because it is one of the few foreign governments that continued to recognise the Taliban after 9/11.
The Taliban chief, Mullah Omar, had rejected U.S. and Saudi pressures to expel Osama bin Laden from Afghanistan prior to the 9/11 attacks. But the question of ties between the Taliban and al Qaeda have been far less clear since the expulsion of both organisations from Afghanistan in late 2001.
Amin Tarzi, director of the Middle East Studies Program at the Marine Corps University in Quantico, Virginia, wrote in an essay for the 2007 book "Taliban and the Crisis in Afghanistan" that there was "no evidence of concerted cooperation" between what he called the "neo- Taliban" and al Qaeda in southern Afghanistan.
Some factions in the north and northeast, however, had "resurrected old ties with al Qaeda" to obtain funds, recruits and technical support, according to Tarzi.
Tarzi cited a comment by Taliban spokesman Mohammad Hanif to an Italian newspaper in March 2006 that the movement had "no operational ties" to al Qaeda, but that they had "tactical alliances based given circumstances and territorial situations".
As suggested in the Rubin-Rashid proposal, any deal with the Taliban will have to include a date for withdrawal of all U.S. and NATO forces. In October 2007, The Guardian reported that senior Taliban commanders in Helmand province had sent a list of demands to the Karzai government through intermediaries that included control of 10 southern provinces, a timetable for withdrawal of foreign troops and the release of all Taliban prisoners within six months.
Gareth Porter is an investigative historian and journalist specialising in U.S. national security policy. The paperback edition of his latest book, "Perils of Dominance: Imbalance of Power and the Road to War in Vietnam ", was published in 2006.
[Baca]
It's hard to imagine now, but in 1944, six years after Kristallnacht, Lessing J. Rosenwald, president of the American Council for Judaism, felt comfortable equating the Zionist ideal of Jewish statehood with "the concept of a racial state -- the Hitlerian concept." For most of the last century, a principled opposition to Zionism was a mainstream stance within American Judaism.
Even after the foundation of Israel, anti-Zionism was not a particularly heretical position. Assimilated Reform Jews like Rosenwald believed that Judaism should remain a matter of religious rather than political allegiance; the ultra-Orthodox saw Jewish statehood as an impious attempt to "push the hand of God"; and Marxist Jews -- my grandparents among them -- tended to see Zionism, and all nationalisms, as a distraction from the more essential struggle between classes.
To be Jewish, I was raised to believe, meant understanding oneself as a member of a tribe that over and over had been cast out, mistreated, slaughtered. Millenniums of oppression that preceded it did not entitle us to a homeland or a right to self-defense that superseded anyone else's. If they offered us anything exceptional, it was a perspective on oppression and an obligation born of the prophetic tradition: to act on behalf of the oppressed and to cry out at the oppressor.
For the last several decades, though, it has been all but impossible to cry out against the Israeli state without being smeared as an anti-Semite, or worse. To question not just Israel's actions, but the Zionist tenets on which the state is founded, has for too long been regarded an almost unspeakable blasphemy.
Yet it is no longer possible to believe with an honest conscience that the deplorable conditions in which Palestinians live and die in Gaza and the West Bank come as the result of specific policies, leaders or parties on either side of the impasse. The problem is fundamental: Founding a modern state on a single ethnic or religious identity in a territory that is ethnically and religiously diverse leads inexorably either to politics of exclusion (think of the 139-square-mile prison camp that Gaza has become) or to wholesale ethnic cleansing. Put simply, the problem is Zionism.
It has been argued that Zionism is an anachronism, a leftover ideology from the era of 19th century romantic nationalisms wedged uncomfortably into 21st century geopolitics. But Zionism is not merely outdated. Even before 1948, one of its basic oversights was readily apparent: the presence of Palestinians in Palestine. That led some of the most prominent Jewish thinkers of the last century, many of them Zionists, to balk at the idea of Jewish statehood. The Brit Shalom movement -- founded in 1925 and supported at various times by Martin Buber, Hannah Arendt and Gershom Scholem -- argued for a secular, binational state in Palestine in which Jews and Arabs would be accorded equal status. Their concerns were both moral and pragmatic. The establishment of a Jewish state, Buber feared, would mean "premeditated national suicide."
The fate Buber foresaw is upon us: a nation that has lived in a state of war for decades, a quarter-million Arab citizens with second-class status and more than 5 million Palestinians deprived of the most basic political and human rights. If two decades ago comparisons to the South African apartheid system felt like hyperbole, they now feel charitable. The white South African regime, for all its crimes, never attacked the Bantustans with anything like the destructive power Israel visited on Gaza in December and January, when nearly1,300 Palestinians were killed, one-third of them children.
Israeli policies have rendered the once apparently inevitable two-state solution less and less feasible. Years of Israeli settlement construction in the West Bank and East Jerusalem have methodically diminished the viability of a Palestinian state. Israel's new prime minister, Benjamin Netanyahu, has even refused to endorse the idea of an independent Palestinian state, which suggests an immediate future of more of the same: more settlements, more punitive assaults.
All of this has led to a revival of the Brit Shalom idea of a single, secular binational state in which Jews and Arabs have equal political rights. The obstacles are, of course, enormous. They include not just a powerful Israeli attachment to the idea of an exclusively Jewish state, but its Palestinian analogue: Hamas' ideal of Islamic rule. Both sides would have to find assurance that their security was guaranteed. What precise shape such a state would take -- a strict, vote-by-vote democracy or a more complex federalist system -- would involve years of painful negotiation, wiser leaders than now exist and an uncompromising commitment from the rest of the world, particularly from the United States.
Meanwhile, the characterization of anti-Zionism as an "epidemic" more dangerous than anti-Semitism reveals only the unsustainability of the position into which Israel's apologists have been forced. Faced with international condemnation, they seek to limit the discourse, to erect walls that delineate what can and can't be said.
It's not working. Opposing Zionism is neither anti-Semitic nor particularly radical. It requires only that we take our own values seriously and no longer, as the book of Amos has it, "turn justice into wormwood and hurl righteousness to the ground."
Establishing a secular, pluralist, democratic government in Israel and Palestine would of course mean the abandonment of the Zionist dream. It might also mean the only salvation for the Jewish ideals of justice that date back to Jeremiah
[Baca]
When Barack Obama announced his champion to rescue the world from economic ruin, it was the first time most Americans had ever heard the name Tim Geithner.
The initial impression was good. The stockmarket surged and the pundits swooned. "Exactly a decade ago, he was Uncle Sam's golden-boy emissary sent into the stormy centre of what was then the world's worst financial crisis [the Asian crisis]," reported The New York Post.
The paper gushed: "Just 36 at the time, he'd been raised in Asia and knew the culture so intimately he scored successes and won confidences that other diplomats couldn't match. Geithner earned widespread plaudits for pulling together quarrelling Asian finance ministers into a $US200 billion rescue of their economies."
"A fantastic choice," said a Bank of Tokyo-Mitsubishi analyst, Chris Rupkey, as the Dow rose by nearly 6 per cent. Even one of Obama's political rivals, the hard-bitten Republican senator Richard Shelby, agreed Geithner was "up to the challenge".
If anyone in the US media had thought to ask a former Australian prime minister for his assessment, they would have heard a different view. And they would not have been so surprised at Geithner's performance since.
In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.
"In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.
Geithner thought Asia's problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts.
The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment.
But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans - Thailand, South Korea and Indonesia - all had sound public finances.
The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind.
But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.
Keating continued: "Soeharto's government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power."
Exactly who was the "gigantic fool"? It was, obviously, the man who wrote the program, Geithner, although Keating is prepared to put the then managing director of the IMF, the Frenchman Michel Camdessus, in the same category.
Worse, Keating argued, Geithner's misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences: "The IMF is the gun that can't shoot straight. They've been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose."
China, in particular, drew hard conclusions from the IMF's mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.
Keating continued: "This has all been noted inside the State Council of China and by the Politburo. And it's one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it's why through a series of exchange-rate interventions each day that they've built these massive reserves.
"These reserves are so large at $US2 trillion as to equal $US2000 for every Chinese person, and when your consider that the average income of Chinese people is $US4000 to $US5000, it's 50 per cent of their annual income. It's a huge thing for a developing country to not spend its wealth on its own development."
Is this some flight of Keatingesque fancy? The former deputy governor of the Reserve Bank of Australia, Stephen Grenville, doesn't think so: "After the Asian crisis, the countries of east Asia decided that they would never go to the IMF again. The IMF is taboo in east Asia. Look at the evidence. The revealed preference of the region is that no one has gone to the IMF since, even when they needed the money."
And Asian capitals know that they have no real influence over the IMF - while European governments enjoy 40 per cent of the voting power on the IMF, Japan, China and the rest of east Asia put together have only about 16 per cent. This is an artefact of the immediate postwar power structure, when the IMF was set up.
Keating urges that the fund should be decapitated, with control passing to the governments of the Group of 20 countries whose leaders are to meet in London on April 2. The summit, which is to include China, India and Indonesia as well as Australia, is meeting to consider solutions to the global crisis.
As for The New York Post's claim that Geithner was the hero who cajoled those quarrelsome Asians into agreeing to a $US200 billion rescue, the key fact burned into the minds of Asian elites is that the US was deaf to requests for funds. Washington did not contribute a cent of its own money to any of the emergency packages. Japan and Australia were the only nations that made loans to all three of the stricken Asian countries.
Keating went on to argue that, by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy.
China invested most of its reserves in US debt markets. Keating again: "So we have this massive recycling of funds into the system by [the former US Federal Reserve chairman Alan] Greenspan's monetary policy so even if you are greedy Dick Fuld [the former head of the collapsed investment bank Lehman Brothers] or you are hopeless Charles Prince at Citibank, you're being told there's an endless supply of money at a low interest rate and no inflation. So of course the system geared up to spend it.
"That is the fundamental cause of the problem - the imbalance is the fundamental cause."
If Keating's opinion of Geithner had circulated in the US, the Americans would not have been so surprised and disappointed with their new Treasury Secretary. They quickly learned that he had failed to pay $43,000 in taxes owing.
Then, when he announced his much-anticipated plan to rescue the US banking system, share prices slumped by 4 per cent immediately and a new round of weakness in the financial sector began. The pundits turned savagely against him: "So much for the saviour-based economy," wrote Maureen Dowd of The New York Times. Senator Shelby changed his mind: "Aggravating economic problems by contributing to marketplace uncertainty about what steps the Government will take - is that what this is?" he fumed.
US bank stocks weakened so much that nationalisation seems to be the only remaining option to put them quickly out of their misery.
Australia's banks, by contrast, are strong, said Keating, because of his decision as Treasurer to create the "Four Pillars" policy. This requires that the four big banks remain separate, barred from taking each other over. This prevented them "cannibalising each other", in Keating's words. As protected species, they had no need to mount risky takeovers to bulk themselves up defensively.
Their strength certainly wasn't due to the brilliance of their managers, whom Keating described as "counterhopping clerks" who had managed to work their way up the bank hierarchies. A further source of the soundness of the Australian banks, he said, was that they had learned well the lessons of risky speculative lending as a result of "the recession we truly did have to have".
In sum, Tim Geithner is a gigantic fool, the IMF the gun that can't shoot straight, Alan Greenspan a bungler. The big US banks were run by the greedy and the hopeless, the Australian banks by counter-hopping clerks. It's a world of many villains. And only one hero.
[Baca]
The G-20 nations met on March 14, 2009 in Horsham, Engand to discuss the global economic situation prior to their London Summit in early April.
We, the G20 Finance Ministers and Central Bank Governors, met today to prepare for the Leaders’ London Summit. We agreed further action to restore global growth and support lending, and reforms to strengthen the global financial system.
Restoring Global Growth
1. We have taken decisive, coordinated and comprehensive action to boost demand and jobs, and are prepared to take whatever action is necessary until growth is restored. We commit to fight all forms of protectionism and maintain open trade and investment.
2. Our key priority now is to restore lending by tackling, where needed, problems in the financial system head on, through continued liquidity support, bank recapitalisation and dealing with impaired assets, through a common framework (attached). We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions.
3. Fiscal expansion is providing vital support for growth and jobs. Acting together strengthens the impact and the exceptional policy actions announced so far must be implemented without delay. We are committed to deliver the scale of sustained effort necessary to restore growth, and call on the International Monetary Fund (IMF) to assess the actions taken and the actions required. We will ensure the restoration of growth and long-run fiscal sustainability.
4. Interest rates have been cut aggressively in most countries, and G20 central banks will maintain expansionary policies as long as needed, using the full range of monetary policy instruments, including unconventional policy instruments, consistent with price stability.
5. We are committed to helping emerging and developing economies to cope with the reversal in international capital flows. We recognise the urgent need to pursue all options for mobilising International Financial Institution (IFI) resources and liquidity to finance countercyclical spending, bank recapitalisation, infrastructure, trade finance, rollover risk and social support. We agreed on the urgent need to increase IMF resources very substantially. This could include further bilateral support, a significantly expanded and increased New Arrangements to Borrow (NAB), and an accelerated quota review. We should also ensure that all Multilateral Development Banks have the capital they need, beginning with a substantial capital increase for the Asian Development Bank, and put it to best use to help the world’s poorest. We welcomed the progress by the IMF and World Bank in introducing new and enhanced instruments, including the development of a new high-access, quick-disbursing precautionary facility.
Strengthening the Financial System
6. To further strengthen the global financial system we have completed the immediate steps in the Washington Action Plan and we welcome the Financial Stability Forum’s (FSF) expansion to all G20 members. We remain focused on the medium term actions, and make recommendations to the London Summit to ensure:
• all systemically important financial institutions, markets and instruments are subject to an appropriate degree of regulation and oversight, and that hedge funds or their managers are registered and disclose appropriate information to assess the risks they pose;
• stronger regulation is reinforced by strengthened macro-prudential oversight to prevent the build-up of systemic risk;
• financial regulations dampen rather than amplify economic cycles, including by building buffers of resources during the good times and measures to constrain leverage; but it is vital that capital requirements remain unchanged until recovery is assured; and,
• strengthened international cooperation to prevent and resolve crises, including through supervisory colleges, institutional reinforcement of the FSF, and the launch of an IMF/FSF Early Warning Exercise.
7. We have also agreed to: regulatory oversight, including registration, of all Credit Rating Agencies whose ratings are used for regulatory purposes, and compliance with the International Organisation of Securities Commissions (IOSCO) code; full transparency of exposures to off balance sheet vehicles; the need for improvements in accounting standards, including for provisioning and valuation uncertainty; greater standardisation and resilience of credit derivatives markets; the FSF’s sound practice principles for compensation; and the relevant international bodies identify non-cooperative jurisdictions and to develop a tool box of effective counter measures.
8. To strengthen the effectiveness and legitimacy of the IFIs we must enhance their governance and ensure they fully reflect changes in the world economy. Emerging and developing economies, including the poorest, should have greater voice and representation and the next review of IMF quotas should be concluded by January 2011. The package of quota and voice measure decided in April 2008 should be swiftly implemented. World Bank reforms should be completed by the Spring Meetings 2010. The heads of the IFIs should be appointed through open, merit based selection processes.
[Baca]
There is a huge sense of outrage in our country today at what Wall Street has done through greed, recklessness and, likely, illegal behavior. The “Masters of the Universe” have plunged our nation, and much of the world, into a deep recession which has caused millions of Americans to lose their jobs, their homes, their savings and their hope for the future. In order to fully understand the cause of this fiasco, I have introduced legislation calling for a thorough investigation of the financial meltdown and the prosecution of those CEOs who might be guilty of illegal behavior. The culture of greed, fraud and excessive speculation must come to an end.
As I talk to Vermonters about this crisis one of the great frustrations that I hear is that while taxpayers are spending hundreds of billions of dollars bailing out major financial institutions, and while these big banks are getting near-zero interest rate loans from the Fed, these very same financial institutions are now charging Americans 20 percent or 30 percent interest rates on their credit cards. In fact, one-third of all credit card holders in this country are now paying interest rates above 20 percent and as high as 41 percent – more than double what they paid in interest in 1990. Recently, some major institutions, such as Bank of America, have informed responsible cardholders that their interest rates would be doubled to as high as 28 percent, without offering any explanation or excuse why the increase was taking place.
Let’s be clear. What Wall Street and credit card companies are doing is really not much different from what gangsters and loan sharks do who make predatory loans. While the bankers wear three-piece suits and don’t break the knee caps of those who can’t pay back, they still are destroying people's lives.
The Bible has a term for this practice. It’s called usury. And in The Divine Comedy, Dante Alighieri’s epic poem, there was a special place reserved in the Seventh Circle of Hell for sinners who charged people usurious interest rates.
Today, we don’t need the hellfire and pitch forks, we don’t need the rivers of boiling blood, but we do need a national usury law.
We need a national law because state laws no longer work. States used to protect consumers from predatory lenders, but strong state usury laws were obliterated by a 1978 U.S. Supreme Court decision. Justices allowed national banks to charge whatever interest rate they wanted if they moved to a state without an interest rate cap. So major credit card issuers moved to places like South Dakota and Delaware that don’t have usury laws.
That is why I have introduced legislation to require any lender in this country to cap all interest rates on consumer loans at 15 percent, including credit cards. Why did I select 15 percent as the appropriate rate to deal with the usury which is going on in this country? The reason is that 15 percent is the maximum that Congress imposed on credit union loans almost 30 years ago when it amended the Federal Credit Union Act. That approach has worked! Under current law, credit unions are allowed to charge higher interest rates only if their regulator, the National Credit Union Administration (NCUA), determines that it is necessary to maintain the safety and soundness of these institutions and when money market interest rates have risen over the preceding six months. Right now, while most credit unions charge lower rates, the NCUA allows credit unions to charge an interest rate as high as 18 percent.
Unlike their counterparts at the big banks, credit unions are not lining up for hundreds of billions in bailouts. In fact, they're doing quite well. They are responding to the credit needs of the small businesses in their communities and to individuals. They have not only survived this regulation, they are functioning exactly the way they are supposed to function. In my view, the rules that have worked well for credit unions for decades can work for all financial institutions.
Former Senator Al D’Amato in 1991 offered an amendment to cap credit card interest rates at 14 percent. The amendment passed the Senate by a vote of 74 to 19, but never became law. Now is the time to return to that debate. Now is the time to protect a struggling middle class and pass legislation to put a cap on interest rates.
Author's Bio: Bernie Sanders is the independent U.S. Senator from Vermont. He is the longest serving independent member of Congress in American history. He is a member of the Senate's Budget, Veterans, Environment, Energy, and H.E.L.P. (Health, Education, Labor, and Pensions) committees.
[Baca]
The Invisible One Quadrillion Dollar Equation -- Asymmetric Leverage and Systemic Risk
According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland -- the central bankers' bank -- the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:
1. Listed credit derivatives stood at USD 548 trillion;
2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:
a. Interest Rate Derivatives at about USD 393+ trillion;
b. Credit Default Swaps at about USD 58+ trillion;
c. Foreign Exchange Derivatives at about USD 56+ trillion;
d. Commodity Derivatives at about USD 9 trillion;
e. Equity Linked Derivatives at about USD 8.5 trillion; and
f. Unallocated Derivatives at about USD 71+ trillion.
Quadrillion? That is a number only super computing engineers and astronomers used to use, not economists and bankers! For example, the North star is "just" a couple of quadrillion miles away, ie, a few thousand trillion miles. The new "Roadrunner" supercomputer built by IBM for the US Department of Energy's Los Alamos National Laboratory has achieved a peak performance of 1.026 Peta Flop per second -- becoming the first supercomputer ever to reach this milestone. One Quadrillion Floating Point Operations (Flops) per second is 1 Peta Flop/s, ie, 1,000 Trillion Flops per second. It is estimated that all the data found on all the websites and stored on computers across the world totals more than One Exa byte of memory, ie, 1,000 Quadrillion bytes of data.
Whilst outstanding derivatives are notional amounts until they are crystallised, actual exposure is measured by the net credit equivalent. This is normally a lower figure unless many variables plot a locus in the wrong direction simultaneously. This could be because of catastrophic unpredictable events, ie, "Black Swans", such as cascades of bankruptcies and nationalisations, when the net exposure can balloon and become considerably larger or indeed because some extremely dislocating geo-political or geo-physical events take place simultaneously. Also, the notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. This means that no large OTC derivative house can be allowed to go broke without falling into the arms of another. Whatever funds within reason are required to rescue failing international investment banks, deposit banks and financial entities ought to be provided on a case by case basis. This is the asymmetric nature of derivatives and here lies the potential for systemic risk to the global economic system and financial markets if nothing is done.
Let us think about the invisible USD 1.144 quadrillion equation with black swan variables -- ie, 1,144 trillion dollars in terms of outstanding derivatives, global Gross Domestic Product (GDP), real estate, world stock and bond markets coupled with unknown unknowns or "Black Swans". What would be the relative positioning of USD 1.144 quadrillion for outstanding derivatives, ie, what is their scale:
1. The entire GDP of the US is about USD 14 trillion.
2. The entire US money supply is also about USD 15 trillion.
3. The GDP of the entire world is USD 50 trillion. USD 1,144 trillion is 22 times the GDP of the whole world.
4. The real estate of the entire world is valued at about USD 75 trillion.
5. The world stock and bond markets are valued at about USD 100 trillion.
6. The big banks alone own about USD 140 trillion in derivatives.
7. Bear Stearns had USD 13+ trillion in derivatives and went bankrupt in March. Freddie Mac, Fannie Mae, Lehman Brothers and AIG have all 'collapsed' because of complex securities and derivatives exposures in September.
8. The population of the whole planet is about 6 billion people. So the derivatives market alone represents about USD 190,000 per person on the planet.
The Impact of Derivatives
1. Derivatives are securities whose value depends on the underlying value of other basic securities and associated risks. Derivatives have exploded in use over the past two decades. We cannot even properly define many classes of derivatives because they are highly complex instruments and come in many shapes, sizes, colours and flavours and display different characteristics under different market conditions.
2. Derivatives are unregulated, not traded on any public exchange, without universal standards, dealt with by private agreement, not transparent, have no open bid/ask market, are unguaranteed, have no central clearing house, and are just not really tangible.
3. Derivatives include such well known instruments as futures and options which are actively traded on numerous exchanges as well as numerous over-the-counter instruments such as interest rate swaps, forward contracts in foreign exchange and interest rates, and various commodity and equity instruments.
4. Everyone from the large financial institutions, governments, corporations, mutual and pension funds, to hedge funds, and large and small speculators, uses derivatives. However, they have never existed in history with the overarching, exorbitant scale that they now do.
5. Derivatives are unravelling at a fast rate with the start of the "Great Unwind" of the global credit markets which began in July 2007 and particularly after the collapse of Freddie Mac and Fannie Mae in September this year.
6. When derivatives unravel significantly the entire world economy would be at peril, given the relatively smaller scale of the world economy by comparison.
7. The derivatives market collapse could make the housing and stock market collapses look incidental.
Three Historical Examples
1. The so-called rogue trader Nick Leeson who made a huge derivatives bet on the direction of the Japanese Nikkei index brought on the collapse of Barings Bank in 1995.
2. The collapse of Long Term Capital Management (LTCM), a hedge fund that had a former derivatives and bond dealer from Salomon Brothers and two Nobel Prize winners in Economics as principals, collapsed because of huge leveraged bets in currencies and bonds in 1998.
3. Finally, a lot of the problems of Enron in 2000 were brought on by leveraged derivatives and using derivatives to hide problems on the balance sheet.
The Pitfall
The single conceptual pitfall at the basis of the disorderly growth of the global derivatives market is the postulate of hedging and netting, which lies at the basis of each model and of the whole regulatory environment hyper structure. Perfect hedges and perfect netting require functioning markets. When one or more markets become dysfunctional, the whole deck of cards could collapse swiftly. To hope, as US Treasury Secretary Mr Henry Paulson does, that an accounting ruse such as transferring liabilities, however priced, from a private to a public agent will restore the functionality of markets implies a drastic jump in logic. Markets function only when:
1. There is a price level at which demand meets supply; and more importantly when
2. Both sides believe in each other's capacity to deliver.
Satisfying criterion 1. without satisfying criterion 2. which is essentially about trust, gets one nowhere in the long term, although in the short term, the markets may demonstrate momentary relief and euphoria.
Conclusion
In the context of the USD 700 billion rescue plan -- still being finalised in Washington, DC -- the following is worth considering step by step.
Decision makers are rightly concerned about alleviating immediate pressure points in the global financial system, such as, the mortgage crisis, decline in consumer spending and the looming loss of confidence in financial institutions. However, whilst these problems are grave, they are acting as a catalyst to another more massive challenge which may have to be tackled across many nation states simultaneously. As money flows slow down sharply, confidence levels would decline across the globe, and trust would be broken asymmetrically, ie, the time taken to repair it would be much longer. Unless there is government action in concert, this could ignite a chain-reaction which would swiftly purge trillions and trillions of dollars in over-leveraged risky bets.
Within the context of over-leverage, the biggest problem of all is to do with "Derivatives", of which CDSs are a minor subset. Warren Buffett has said the derivatives neutron bomb has the potential to destroy the entire world economy, and is a "disaster waiting to happen." He has also referred to derivatives as Weapons of Mass Destruction (WMD). Counting one dollar per second, it would take 32 million years to count to one Quadrillion.
The numbers we are dealing with are absolutely astronomical and from the realms of super computing we have stepped into global economics.
There is a sense of no sustainability and lack of longevity in the "Invisible One Quadrillion Dollar Equation" of the derivatives market especially with attendant Black Swan variables causing multiple implosions amongst financial institutions and counterparties! The only way out, albeit painful, is via discretionary case-by-case government intervention on an unprecedented scale. Securing the savings and assets of ordinary citizens ought to be the number one concern in directing such policy.
This article was originally published on the ATCA Open and Philanthropia Socratic Dialogue on Facebook. To reflect further on this, please respond within Facebook's ATCA Open discussion board.
The "ATCA Open" network on Facebook is for professionals interested in ATCA's original global aims, working with ATCA step-by-step across the world, or developing tools supporting ATCA's objectives to build a better world.
Asymmetric Threats Contingency Alliance (ATCA) is a philanthropic expert initiative founded in 2001 to resolve complex global challenges through collective Socratic dialogue and joint executive action to build a wisdom based global economy.
[Baca]
At the quantum level, the laws of classical physics alter in intriguing ways. In financial markets, at the derivative level, the rules of finance also operate differently.
The derivative industry’s indefatigable advocacy of credit default swaps (“CDS”) centers on the fact that contracts related to recent defaults settled and the overall net settlement amounts were small. Closer scrutiny suggests causes for caution.
The CDS contract is triggered by a “credit event”; broadly, default by the reference entity. CDS contracts on Freddie and Fannie were ‘technically’ triggered as a result of the conservatorship necessitating settlement of around $500 billion in CDS contracts with losses totaling $25 to $40 billion. Government actions were specifically designed to allow the firms to continue fully honouring their obligations. Triggering of these contracts poses questions on the effectiveness of CDS contracts in transferring risk of default.
Practical restrictions on settling CDS contracts has forced the use of “protocols” – where counterparties may substitute cash settlement for physical delivery. In cash settlement, the seller makes a payment to the buyer of protection to cover the loss suffered by the protection buyer based on the market price of defaulted bonds established through an “auction” system.
For the GSEs, the auction prices resulted in the following settlements by sellers of protection: Fannie Mae – around 8.49% for senior debt and 0.01% for subordinated debt. Freddie Mac – around 6.00% for senior debt and 2.00 % for subordinated debt.
Subordinated debt ranks behind senior debt and is expected to suffer larger losses in bankruptcy. The lower payout on subordinated debt probably resulted from subordinated protection buyers suffering in a short squeeze resulting in their contracts expiring virtually worthless. Differences in the payouts between the two entities are also puzzling given that they are both under identical “conservatorship” arrangements and the ultimate risk in both cases is the US government.
In other CDS settlements in 2008 and 2009, the payouts required from sellers of protection have been highly variable and large relative to historical default loss statistics. This may reflect poor economic conditions but are more likely driven by technical issues related to the CDS market.
For example, the Washington Mutual payout (around 43%) may have been affected by capital remaining at the holding company, Washington Mutual Inc. (estimated at $2.8 billion). More recently, the auction settlement of Lyondell (around 80-85%) reflected complication from the role of debtor in possession financing and complex collateral allocation mechanisms.
Skewed payouts do not assist confidence in CDS contracts as a mechanism for hedging. In addition, the large payouts are placing a material pressure on the price of underlying bonds and loans exacerbating broader credit problems.
Low overall net settlement amounts may also be misleading. In practice, there are actually two settlements. The ‘real’ settlement where genuine hedgers and investors deliver bonds under the physical settlement rules (i.e. those who actually own bonds and were hedging). The ‘auction’ where dealers who have both bought and sold protection and have small net positions settled via the auction.
In the case of Lehman Brothers, the net settlement figure of $6 billion that was quoted refers to the auction. Some banks and investors that had sold protection on Lehmans did not participate in the auction choosing to take delivery of defaulted Lehman debt resulting in losses of almost the entire face value.
CDS contracts can amplify losses in credit market. Lehman Brothers defaulted with around $600 billion in debt implying a maximum loss to creditors of that amount. In addition, according to market estimates, there were CDS contracts of around $400-500 billion where Lehmans was the reference entity.
Market estimates suggest that only around $150 billion of the CDS contracts were hedges. The remaining $250-350 billion of CDS contracts were not hedging underlying debt. The losses on these CDS contracts (in excess of $200-300 billion) are additional to the $600 billion. The CDS contracts amplified the losses as a result of the bankruptcy of Lehmans by (up to) approximately 50%.
The CDS market is also complicating restructuring of distressed loans as all lenders do not have the same interest in ensuring the survival of the firm. A lender with purchased protection may seek to use the restructuring to trigger its CDS contracts.
As the global economy slows and the risk of corporate default increases sharply, the identified issues with CDS contracts are likely to complicate the problems of credit markets and banks generally.
In October 2008, Alan Greenspan, the former Chairman of the Fed, acknowledged he was “partially” wrong to oppose regulation of CDS. “Credit default swaps, I think, have serious problems associated with them,” he admitted to a Congressional hearing.
Ludwig von Mises, the Austrian economist from the early part of the twentieth century, once noted: “It may be expedient for a man to heat the stove with his furniture; but he should not delude himself by believing that he has discovered a wonderful new method of heating his premises”.
Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall)
[Baca]
The BOE executed their first "QE" operation today.
The "bid to cover" was an astonishing 7.35.
This means that for every bond purchased 7.35 were tendered, or made available by willing sellers.
Back in January I posted a Ticker in which I made clear what was likely to happen if Bernanke actually attempted to do (as opposed to threatening) QE:
Bernanke bluffed and the bond market called it. He cannot monetize several trillion in new issue plus the entirety of the 10 and 30 year bonds out there to stop a bond market sell-off. In addition, the market no longer believes him, as evidenced by today's price action. A serious bond-market sell-off will ramp the cost of all credit, including mortgages and commercial loans. If he tries to monetize the result will be current bondholders tendering into his buying, forcing him to essentially "consume" the entire float. That stunt will cause the dollar to implode and we wind up exactly like Iceland. Overnight. Ben knows this; ergo, he is screaming like a petulant child while the market laughs at him just like the market forced Paulson to do what he said he wouldn't with Fannie and Freddie. Bernanke had better shut the hell up before he precipitates a bond market dislocation; traders can and will try to force him to make good on the threat.
Ding. The BOE now has seen exactly what happens when you promise as a government to overpay for something - everyone hits your bid immediately!
This is a form of crack that the government cannot afford to loose into the market - as soon as the buying pressure is removed rates will start to rise again, forcing yet another purchase.
Ultimately The Fed winds up owning all of its own government's bonds, having destroyed the private capital market for sovereign debt (just as it has done for other securitized debt by threatening to overpay for those issues!)
The difference is that if this happens for sovereign debt then deficit spending becomes impossible on an instant basis; this would in turn force a nearly 75% contraction of government spending.
The outcome of this event would be the immediate destruction of Social Security, Medicare, half the military budget and half of all other government programs.
PS: Bernanke knows this, which is why it hasn't happened yet. Let's hope he continues to remember it, because the destruction of our government is very, very un-funny, and this would likely precipitate exactly that in a "vast and fast" form.
[Baca]
The Federal Reserve made it clearer than ever Wednesday that it's willing to go for short-term gain at the risk of future pain.
Chairman Ben S. Bernanke and his peers at the central bank stunned financial markets by announcing two huge steps aimed at driving down long-term interest rates, including mortgage rates: The Fed said it would buy up to $300 billion of longer-term Treasury securities for its own portfolio and that it would expand its purchases of mortgage-backed bonds to $1.25 trillion from the previously announced $500 billion.
The announcements drove the yield on the benchmark 10-year Treasury note down by nearly a half-percentage-point, to 2.53%. That put it back to where it was in late January.
The stock market was thrilled. The Standard & Poor’s 500 index rallied 2.1% to 794.35. It’s now up 17.4% from its 12-year closing low reached March 9.
No question, the Fed’s moves should be a confidence-builder for the economy in the short run. Mortgage rates, already under 5%, are expected to slide further with the Fed’s help. And nearly everyone agrees that halting or slowing the hemorrhaging of the housing market is key to stabilizing the economy.
"We are not out of the woods yet, but the Fed is working overtime to come up with new approaches to tackling this credit freeze," said Chris Rupkey, economist at Bank of Tokyo-Mitsubishi in New York. "Our forecast of a second-half recovery is on much firmer ground today."
So, what’s the risk? As the Fed effectively pumps another $1 trillion-plus into the financial system, critics say it's setting a time bomb for a future surge in inflation -- the classic case of too much money chasing a limited supply of goods and services.
At the moment, however, that is hardly a worry. If anything, the world faces gluts of most goods and even some services (say, investment banking).
The Fed has said it plans to pull this money back once the economy is on solid footing. But some investors and traders don’t trust the Fed -- which, ostensibly, is why the dollar tumbled Wednesday against the euro, the yen and other major and minor currencies. The euro jumped to a two-month high of $1.342 from $1.301 on Tuesday.
"By continuing to print money at breakneck speed to fund these [bond] purchases, the Fed has guaranteed that the dollar will decline," said Peter Schiff, head of brokerage Euro Pacific Capital and a longtime Fed critic.
Yet it isn’t clear why other currencies should get a leg up on the dollar, with most of the planet in recession. What’s more, the central banks of Japan, Britain and other countries also are buying their own governments’ bonds. The Fed is following, not leading, in this case.
And if the Fed’s efforts manage to end the recession this year, that could help, not hurt, the dollar’s standing, notes John Lonski, economist at Moody’s Investors Service.
As for the long-term inflation risk -- and the risk to the Fed’s own credibility -- the central bank has little choice but to put those concerns aside for now and focus on saving the economy from a far worse collapse, says Tony Crescenzi, bond market strategist at Miller, Tabak & Co. in New York.
On inflation, he suggests, Bernanke can afford the Scarlett O’Hara approach: "I’ll think about that tomorrow
[Baca]
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
[Baca]
PART 1: Before the stampede
PART 2: The not-so-safe haven
There is mounting evidence that China's central bank is undertaking the process of divesting itself of longer-dated US Treasuries in favor of shorter-dated ones.
There is also mounting evidence that China's increasingly energetic new campaign of capitalizing on the global crisis by making resource buys across the globe may be (1) helping its central bank to decrease exposure to the dollar, while (2) simultaneously positioning China to make much greater profit on its investment of its reserves into hard assets whose prices are now greatly beaten down, while (3) also affording it greatly increased control of strategic resources and the geopolitical clout that goes with it. This is turning out to be a win-win-win situation for China as it capitalizes upon the important opportunities afforded it by the present global crisis.
The exact size and the precise composition of China's huge forex reserves, the exact degree of China's exposure to the dollar and its viable options, if any, in decreasing that exposure are matters of intense interest, because China's policies in this regard could have gargantuan implications for the US and the global financial systems and for the dollar.
One of the foremost experts who continues to research and track these matters is the highly respected Brad W Setser, a Fellow for Geoeconomics at the prestigious Council on Foreign Relations in New York. His work is providing significantly deeper insight into the size and composition of China's reserves and is affording the world a better view of that country's options in managing its reserves going forward and what the implications of those options might be.
Another expert whose ongoing work is also adding very important, deeper insight into such matters is the highly respected Rachel Ziemba, lead analyst on China and the oil exporting economies at the prestigious RGE Monitor, founded by Nouriel Roubini.
Drawing on the work of these two experts, let's examine the matter of the likely size and composition of China's forex reserves and its investment options going forward, and the probable implications of those options for the dollar.
The first issue is to determine the actual size of China's foreign exchange reserves. Its central bank officially confirms the current figure of about US$1.95 trillion. However, Setser's work reveals that China's actual reserves are significantly higher and may actually be as high as $2.4 trillion, according to his latest figures [1]. About $2.2 trillion of this total figure is easily identifiable, according to Setser, with the remaining $200 billion being his estimate of the amount currently held in China's state banks.
As for the issue of the composition of these reserves and its total exposure to the dollar, the most recent Treasury International Capital (TIC) report by the US Treasury has China's holdings of Treasuries at $696 billion as of the end of 2008. However, Setser's research indicates China's total holdings of US Treasuries is likely to be more than that figure, since some of the purchases of Treasuries by the UK and Hong Kong should actually be attributed to China's central bank. China also holds US government-sponsored agency debt (Fannie Mae and Freddie Mac paper) and corporate bonds, but the recent TIC reports indicate its central bank has been steadily divesting itself of these assets in favor of short-dated Treasuries.
As for China's purchases of Treasuries over the most recent three months (October - December of 2008), note this statement from Setser:
And over the past three months, almost all the growth in China's Treasury portfolio has come from its rapidly growing holdings of short-term bills not from purchases of longer-term notes.
Setser goes on to make the point that China's central bank is unquestionably divesting itself of the comparatively less-safe assets such as agency debt in favor of very short-dated Treasuries. The best estimates of the total exposure of China's central bank to dollar-denominated assets of all kinds is about 70%, or somewhere between $1.5 trillion and $1.7 trillion depending upon whether you use the $2.2 trillion figure or the $2.4 trillion figure for the total sum of China's reserves.
That uncomfortably high level of exposure to the dollar is what has been causing concern to flare in China most recently. A much more desirable figure, from China's standpoint, of its total exposure to the dollar would be 50% or less of its total reserves. A reserve composition of 50% dollars to 50% everything else is much safer because an excessive decline in the value of the dollar would tend to be offset by corresponding increases against the dollar in the value of the non-dollar assets comprising the rest of the reserves.
In order to get to that more desirable composition fairly quickly over the next several months, China would have to somehow divest itself of as much as $450 billion of its existing dollar-denominated assets, not purchase a significant amount of new dollar-denominated assets, and accomplish all this without triggering a global dollar panic. That's a very tall order indeed - but it is not by any means impossible. How so?
If we stand back to look at Setser's work from a distance, we see what appears to be a clear strategy on China's part that is potentially very compelling. The country has its official reserves, which it acknowledges now total about $1.95 trillion, and it also has its unofficial or secret reserves, which Setser estimates at about $450 billion at present.
Coincidentally (or perhaps not merely coincidentally) the secret reserves total about the same sum that China needs to divest itself of in order to reach the desired composition of its reserves noted in the previous paragraph - about $450 billion. At this point, recall the intriguing and potentially very important statement quoted earlier (see DOLLAR CRISIS IN THE MAKING, Part 2), a statement made by Fang Shangpu, deputy director of the State Administration of Foreign Exchange and reported by the Xinhua News Agency on February 18, 2009:
Fang Shangpu, deputy director of the State Administration of Foreign Exchange, noted Wednesday that the report released by the US Treasury of the amount of government bonds held by China included not only the investment from the reserves, but also from other financial institutions. It might be a hint that Chinese government is not holding as much US government bonds. [Italics added]
China is managing its foreign exchange reserves with a long-term and strategic view, Fang told a press briefing. "Whether China is to purchase, and to buy how much of the US government bonds will be decided according to China's need," Fang said. "We will make judgment based on the principle of ensuring safety and the value of the reserves," Fang said.
Is Fang Shangpu hinting that China has intentionally, as a deliberate strategy, divided its reserves into two general holdings, official and secret, and that SAFE (the State Administration of Foreign Exchange) has ensured that the composition of the official (government) holdings of the $1.95 trillion is such that its exposure to the dollar is not the roughly 70% assumed in the West, but rather something much closer to the desired target of 50%, while the secret reserves hold predominantly dollar-denominated assets?
If this is the case, then China could employ a number of schemes to clandestinely further reduce its total exposure to the dollar, using its secret reserves, all the while maintaining safety for the official reserves. Note Fang Shangpu's recent statement to the Wall Street Journal regarding how carefully, and with what foresight, China manages its reserve holdings:
"Since the subprime crisis evolved into the international financial crisis in September last year, we have executed the central authorities' plans to cope with the international financial crisis and launched the emergency response mechanism. We have closely followed developments, made timely adjustments to risk management, taken decisive and forward-looking measures to evaluate and remove risks ... "
Chinese officials have been painfully aware, for several years now, of the increasing risks of too great an exposure to the dollar. It simply isn't believable that their level of prudence and foresight in this regard was so low as to allow them to fail to formulate and execute strategies designed to limit that exposure to safer levels than is presently assumed in the West. But if China has indeed prudently and deliberately structured its official reserves (now totaling $1.95 trillion) to be much less exposed to the dollar than is assumed in the West, while off-loading the riskier, dollar-denominated assets into its secret reserves, how might it propose to use those secret reserves to further decrease its exposure to the dollar?
Conversion into resource reserves
Enter China's resource buys. Several Chinese experts have been saying that China needs to spend a significant portion of its dollar-denominated reserves on hard assets, thereby further reducing its exposure to the dollar. It certainly appears that China is embarking upon just such a strategy.
According to research by Rachel Ziemba of RGE Monitor, in the first two months of 2009 alone China has already confirmed such deals for hard assets worth a total of over $50 billion [2]. Clearly, China is just now opening its global strategy of pursuing such resource buys at a time when the prices of hard assets are extremely attractive and many more such buys are in the offing. This is made evident by the recent February 23, 2009 report by China Daily which stated the following:
As part of the National Energy Administration's three-year plan for the oil and gas industry, the government is considering setting up a fund to support firms in their pursuit of foreign mergers and acquisitions, the report said.
Fang Shangpu, deputy director of SAFE, the State Administration of Foreign Exchange, said earlier this week that more measures will be introduced to support firms seeking to expand overseas.
Veteran analyst Han Xiaoping said the time is now ripe for China to convert some of its capital reserves into resource reserves, as global oil prices have fallen 70% since last year, to about $40 a barrel. [Italics added]
"We shouldn't miss this opportunity to use our foreign exchange reserves to build up our oil stocks," he said.
Jiang Jiemin, chairman of PetroChina, said recently: "The low share prices of some global resource companies provide us with some fresh opportunities."
RGE Monitor's Ziemba says the resource buys are a smart move now because they decrease the role of increasingly uncertain financial assets such as Treasuries, which now carry little profit appeal and diminishing appeal as safe stores of wealth, and increase the role of hard assets, which now carry an ever greater profit potential and a mounting appeal as safe stores of wealth: "For China, these investments seem to be a relatively efficient way to use its financial resources given the likely long-term appreciation of resource prices and uncertainty about financial assets."
Ziemba, in response to questions e-mailed to her, also alerts us to watch for forthcoming details about the currencies employed in China's resource buys. If these deals are being transacted largely in dollars, then she notes that there will likely be no negative near-term effect upon the dollar's role as the world's reserve currency. But if they are arranged outside of the dollar, it might well serve to undermine the dollar's international role to some extent.
However, it should be noted that almost no matter what currencies these resource buys are being transacted in, there does exist a potential negative impact for the dollar itself further down this path. How so?
Obviously, with China's uncomfortably large present exposure to the dollar, it is in its interests to concentrate on converting much of the dollar-denominated portion of its secret reserves into resources reserves. In other words, China will undoubtedly spend dollars, whether directly or indirectly, to fund its resource buys. But it must do so in a largely opaque manner that leaves little, if any trace in official data such as the US Treasury's TIC report. It will also be likely to be a net buyer of Treasuries, though nowhere near its 2008 pace, or else refrain from selling significant amounts of Treasuries, while it clandestinely reduces its exposure to the dollar. Otherwise, its actions could spark a dollar panic.
Increased buying of Treasuries by US citizens and investors, and by various foreign investors other than China, as the global crisis rapidly deepens and increases risk aversion, may likely take significant pressure off of China to soak up the huge issuance of new sovereign US debt now getting underway. That will help to provide breathing room for China to address its problem of reducing exposure to the dollar.
Whether China will approach the problem with a scheme of swaps amongst its various state-controlled entities and wealthy private Chinese investors, or by some other nearly opaque means, probably cannot be determined with any certainty at present. But it has undoubtedly worked out the problem of clandestinely converting significant sums of its dollar-denominated financial assets into hard assets without dumping Treasuries and triggering a dollar panic.
It is most unlikely, therefore, that its actions in this regard will be sufficiently proved before it has already succeeded in accomplishing its goals. Furthermore, since resource prices are now very attractive, China will certainly expand and accelerate its resource buys while prices remain attractive, converting ever-larger sums of its dollar-denominated reserves into resource reserves.
If China averaged a conversion of only $35 billion per month from dollars into resources, it could convert the entire $450 billion in little more than 12 months' time. Hence, I predict that the next eight to 15 months will provide China with sufficient time to bring its total exposure to the dollar much more in line with its strategic goals.
What about the problem of dealing with any ongoing accumulation of dollars? A number of analysts note that China's trade surplus is worsening even in the global slowdown because, while China's exports are falling, its imports are falling much faster. However, Chinese officials have made clear that they will use their reserve holdings to bolster imports, and that measure should alleviate China's need to accumulate large sums of dollars and other currencies in order to keep the yuan stable.
China is extremely unlikely, therefore, to accumulate dollars at anywhere near the rate at which it did in 2008. China is also funding its domestic stimulus package designed to spur domestic consumption. All these measures denote a much wiser use of its huge reserves and a steadily decreasing focus on the dollar. All in all, China looks set to weather the storm quite well in spite of some significant hardships along the way.
Summarizing the escalating risks of a dollar crisis
The bubble in US Treasuries is getting increasingly massive and unstable with each week that passes. Deepening global risk aversion is keeping investors lined up, so far, to buy Treasuries - especially short-dated ones. And the deepening economic crisis in the US is moving its own citizens to join in the buying spree.
If the Treasuries bubble persists for much longer, and especially if it continues to mount, the massive and dangerous distortions in the global financial system and the Treasuries-induced strangulation of its credit markets will only become more severe, likely leading to a meltdown somewhere in the emerging markets, one of whose effects will almost certainly spread to engulf the severely weakened Western European and US financial sectors and plunge particularly the US economy into a deep depression, with potent negative effects upon the dollar.
Such an eventuality will tend to force global investors to evaluate the safe-haven appeal of the dollar based much more on the fundamentals of the US economy, and that will portend a stampede out of the dollar and a potentially chaotic bursting of the massive Treasuries bubble. Hence, even if the US finds buyers for its huge sums of new sovereign debt now beginning to flood the markets, the picture does not look good for the dollar beyond the short term.
Obviously, if the US reaches the point where it fails to find sufficient buyers for its new flood of Treasuries, that will also become a perilous situation for the dollar and for the huge Treasuries bubble, which will almost certainly burst as global investors seek better stores of wealth in hard assets, following the lead of China's central bank.
Either way, the US is engaged in the implementation of extremely risky and potent inflationary, dollar-debasing policies, making a loss of global confidence in the dollar in the short to medium term a virtual certainty. Even if the massive spending does restore economic growth, the US economy is likely to remain very weak for some time. That will make it extremely difficult for the US Federal Reserve to tighten monetary policy to fight off the inevitable and potent inflation that will result from today's shortsighted policies.
When the Fed attempts to tighten, the US economy will likely be plunged into a second-round recession or depression, with obviously awful effects upon the dollar. But if the Fed fails to tighten sufficiently and quickly, runaway inflation will ravage the currency anyway.
Prudent, forward-looking Chinese officials have clearly assessed the entire situation as one demanding careful but swift action to ensure that its huge reserves are not imperiled by what has obviously become an untenable global rush into an unstable and perilous dollar bubble.
Hence, China's central bank is enacting with a sense of urgency prudent measures, both explicit and clandestine, to significantly decrease exposure to the dollar. If the details of such measures should become sufficiently public and should attract undue global attention before China accomplishes its goals, a dollar panic might be triggered.
This risk, though perhaps not major, does exist nonetheless, and it is significantly increasing as China undertakes new measures that might attract undue and unwanted global attention. However, it is also likely that China will enjoy cover and gain breathing space to enact its prudent measures while much of the rest of the world continues to rush into the bubble.
Notes
1. See "China's Record Demand for Treasuries in 2008", by Brad Setser, The Council on Foreign Relations.
2. See "China's Resource Buys" by Rachel Ziemba, RGE Monitor.
W Joseph Stroupe is a strategic forecasting expert and editor of Global Events Magazine online at www.globaleventsmagazine.com
[Baca]
We have seen in Part 1 the profound risks of a dollar crisis being triggered if global demand for US Treasuries remains high and that the debt bubble persistently and destructively sucks all the air out of the global credit markets. However, if global demand for Treasuries is not sustained at a very high level, there exists an entirely different, yet equally destructive set of impending and mounting risks that a dollar crisis might be triggered.
Like it or not, the US dollar still constitutes the de facto central framework of the present global financial order - the dollar is its fundamental support structure, much like the steel framework that supported the Twin Towers in New York. The global crisis is sending shockwaves of ever increasing intensity throughout the present order. Few thought the shaking would reach its present intensity and scope, and no one really knows how powerful and destructive the shaking might get before the crisis is over.
The initial, knee-jerk reaction in this situation has been to reach out and grab tightly onto the framework with both hands (that is, in an exceptionally risk-averse reflex, flee into the dollar for relative safety) and hold on for dear life. This reaction of global investors is motivated partly by logic but also in large part by the strong psychological components of uncertainty, fear and even panic.
As China Banking Regulatory Commission deputy head Luo Ping stated on February 12, in his own reactive-style retort to the unfolding crisis, Treasuries are just about the only safe-haven option in perilous times. However, his clarification on the next day appeared a bit less knee-jerk and more rational, stating that gold and selected government bonds (but not those of the US) look more attractive to China from a risk assessment standpoint, because China rightly fears its dollar-denominated holdings will almost certainly be inflated away over time by the US policy of issuing huge new sums of dollar-denominated debt in the form of Treasuries.
This brings us to the crux of the matter of escalating risks for the dollar. In the current fiscal year alone, the US is expected to issue somewhere between US$2 trillion and $2.5 trillion in new debt. It could conceivably exceed that amount if the crisis worsens and more money than anticipated is required to rescue the financial and economic sectors from ruin, or if virtually the entire financial sector has to be nationalized to prevent a total collapse. That is a prospect that is swiftly becoming more and more likely. A running estimate by Bloomberg News recently put the total so far of all the new sums of dollars the US government has spent, lent and/or committed to spend due to this crisis at about $9.7 trillion and counting!
To deal with a crisis that fundamentally arose, at length, out of the escalating risks of shortsightedly spending in colossal sums of dollar-debasing debt, the US government is attempting to "solve" the crisis by frantically spending gigantic additional sums of new dollar-debasing debt. Before this crisis spending binge was undertaken, the dollar's strength had already been greatly undermined over the past four decades by a combination of shortsighted dollar-debasing government policies and the accumulation of huge sums of debt since the 1980s.
According to official calculations, it required $5.54 in 2008 to equal the purchasing power of just $1.00 in 1970. This comparison illustrates the potency of inflation in undermining the value of a mere fiat currency such as the dollar.
But now, the US government is risking setting in motion inflationary forces that are profoundly more potent and difficult to manage. Virtually every economist on the planet calls this situation one that has the real potential for seriously and permanently damaging the dollar by inflating away too much of its remaining value not very far down the road. They also warn that, specifically due to the extremely risky monetary and budgetary policies now being embarked upon, the timing will be absolutely crucial for future Fed watchfulness and actions aimed at preventing a catastrophic, uncontrolled rise in dollar inflation.
They further warn that the severely weakened US financial and economic systems will be very slow to recover strength and stability and will likely be unable to withstand the tightening measures that will be needed further down the road so as to keep inflation from running out of control. The US may therefore be condemning its own currency to collapse by enacting such shortsighted policies.
In spite of such warnings, extremely potent inflationary, dollar-debasing policies are being enacted anyway. Is this the picture of a fundamentally sound global financial and economic superpower worthy of international respect, confidence and trust, or the picture of an erstwhile global financial and economic empire that is even now falling over the threshold into collapse? This is absolutely a valid question to pose at this juncture. Why?
What's the salient point here? International trust and confidence in the monetary, financial and economic policies of the US government are far more crucial now, right in the midst of this deepening global crisis, than at any previous time in history because these policies will directly and indirectly affect the dollar, either for good or for bad. Since the dollar does still constitute the central framework of the present global financial order, and since the shaking of present order is only intensifying, international confidence and trust in the dollar as a safe store of wealth is absolutely essential.
If that trust and confidence in the dollar should be sufficiently undermined anytime soon by risky policy, then the present global crisis will almost certainly turn into a global catastrophe - the perfect storm against the dollar alluded to in the introduction of this article. The importance of international trust and confidence cannot be over-emphasized for the dollar, a mere fiat currency that is backed by no hard assets at all (such as gold), but only by the pledge of the US government to stand by it and not to default on its international debt.
The massive global rush into the dollar as a safe haven would appear to indicate that we don't have much to worry about respecting international trust and confidence in the dollar. That might well be true if it could be clearly established that such a global move has been strategic in nature and well thought-out and as such has come as a result of rationality, logic and reason much more than being merely a tactical move as a result of fear and panic. Some important questions must be posed here:
Are investors such as China, which likely holds 70% of its reserves in dollar-denominated assets, satisfied to remain in the dollar for the foreseeable future, and satisfied to increase exposure to the dollar, or do its central bank governors increasingly find themselves having to hold their noses, as it were, with respect to their exposure to the dollar? Is their concern flaring?
Are global doubts and fears mounting with respect to the appeal of the dollar as a safe store of wealth beyond the short term?
If the answer to the question above is yes, then is the appeal of the dollar being undermined mostly because of fears over the potential effects of the dollar-debasing policies that are now irreversibly being implemented in Washington?
Are key investors like China's central bank increasingly looking for ways to reduce exposure to the dollar?
Is the dollar facing significantly increasing competition from other safe haven stores of wealth, such as gold?
Gold's increasing appeal as a safe haven, demonstrated by its ongoing surge, adequately answers the last question. From the start of January 2009 until mid-February, gold has surged from around $800 per ounce to near $1,000 per ounce and is likely to rise further. This surge coincides with the raft of official data releases since the start of 2009 that demonstrate the US and global financial systems and economies are moving deeper into crisis. Investors increasingly see the value of investing in hard assets, and in times of uncertainty and crisis gold and other precious metals are usually the ultimate investment in that category.
As for the answers to the remaining questions posed above, even before Premier Wen Jiabao last week publicly warned the US of his government's concern about the safety of China's US holdings (see Wen puts US honor on the debt line, Asia Times Online, March 14, 2009) consider the recent comments of Luo Ping, China's Banking Regulatory Commission deputy head, referred to above:
"We hate you guys. Once you start issuing $1 trillion-$2 trillion ... we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."
Also note the recent comments of Yu Yongding, a prominent former advisor to China's central bank, as reported by Bloomberg News on February 11, 2009:
China should seek guarantees that its $682 billion holdings of US government debt won't be eroded by "reckless policies", said Yu Yongding, a former adviser to the central bank. The US "should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way," said Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences
Also, as reported by Bloomberg News on February 11, 2009:
China may voice its concerns over US government finances and the potential for a weaker dollar when Secretary of State Hillary Clinton visits China on February 20, according to He Zhicheng, an economist at Agricultural Bank of China, the nation's third-largest lender by assets. "In talks with Clinton, China will ask for a guarantee that the US will support the dollar's exchange rate and make sure China's dollar-denominated assets are safe," said He in Beijing. "That would be one of the prerequisites for more purchases."
Now, note the clarification offered by Luo Ping on the next day, as reported by Reuters News Service:
Buying US Treasury bonds is an option - but not the only option - for China, which is aware that huge debt issuance by Washington would reduce the value of China's existing portfolio, a banking regulator said in remarks published on Friday. In an elaboration of his remarks, the China News Service paraphrased Luo as saying: "Compared with gold or bonds issued by other countries and regions, US Treasury bonds are still an option (for China). But if the US government issues a large amount of Treasury bonds amid efforts to deal with the economic crisis, all investors who hold US Treasuries will suffer losses."
Now, note these statements made by Chinese officials, advisors and experts as reported by the official Xinhua News Agency on February 18, 2009:
"To rescue the ailing US economy by increasing government borrowing will create a record-high federal deficit," said Yu Zuyao, economist with the Chinese Academy of Social Sciences, a government think tank. "This can further lead to catastrophic consequences such as serious inflation and US dollar depreciation," he said Tuesday. China faced high depreciation risk to its foreign exchange reserves, US Treasury bonds and other US dollar-denominated assets, Yu said.
With regard to whether Chinese advisors and experts think the US government is creating a dangerous and unstable Treasuries bubble, note this statement:
"Buying US government bonds amid an economic downturn, [a purchase] that is not based on the sound performance of the US economy itself, indicates a huge bubble," said Zuo Xiaolei, chief economist of China Galaxy Securities. [italics added]
Chinese officials express mounting alarm at the likely negative near-to-medium term effects upon the dollar, and upon their huge reserves, of the spend-spend-spend policy emanating from Washington:
The huge deficit would not immediately lead to inflation, since banks were likely to curb lending as the financial system remained weak, Zuo said. "It might be two or three years before the huge deficit leads to serious inflation." Analysts noted that if the stimulus plan didn't accomplish its goal of restarting growth, the US government would have to ease its large fiscal burden by borrowing more and issuing more dollars, instead of relying on economic growth.
Huge Treasury bond issues would exacerbate the depreciation of the US dollar and world wealth. Such developments would be more catastrophic than the global financial crisis, according to Zhang Yansheng, head of the International Economic Research Institute under the National Development and Reform Commission, the chief economic planning body in China.
A weaker US dollar would hurt that currency's international status, he said, which would "not be in the interests of the United States and other countries and would exacerbate the crisis." Said Zuo: "US dollar depreciation is inevitable in the long run. China should prepare and reduce its holdings of US Treasuries to a proper size."
In a strong hint that China's central bank won't be adding to its holdings of Treasuries at anywhere near the rate it did in 2008, that it may already have clandestinely achieved more diversification out of the dollar than is widely known, and may well find ways to further decrease its holdings without explicitly telegraphing its moves, note this statement:
Fang Shangpu, deputy director of the State Administration of Foreign Exchange, noted Wednesday that the report released by the US Treasury of the amount of government bonds held by China included not only the investment from the reserves, but also from other financial institutions. It might be a hint that Chinese government is not holding as much US government bonds. [Italics added.]
China is managing its foreign exchange reserves with a long-term and strategic view, Fang told a press briefing. "Whether China is to purchase, and to buy how much of the US government bonds, will be decided according to China's need," Fang said. "We will make judgment based on the principle of ensuring safety and the value of the reserves," Fang said.
The foregoing quotes beg the following questions:
What about the widely held view, which is even at times recited by Chinese central bank officials themselves, that says China has no choice but to maintain its holdings of Treasuries and to keep buying more, lest any significant slowdown in its rate of purchases risk triggering a global dollar panic?
Is that view correct, or does China's central bank actually have other viable options, as Luo Ping and other officials insist that it does?
What might those other options be, are they really viable, and what might happen to the dollar if China's central bank began to exercise its professed "other options"?
What kind of scenario might prompt China's central bank to attempt to do so?
Could its enactment of "other options" be carried out in a way that would be difficult to trace, so that China would avoid triggering a dollar panic while it steadily reduced its exposure to the dollar over the coming months?
Saying "goodbye!" sooner, not later
With respect to whether China will continue to purchase Treasuries at anywhere near the same rate at which it has in the recent past, a new and fundamental problem is arising. Its significantly slowing economy is causing a rapid slowing of the rate of growth of its reserves, which makes much less new reserve accumulation available, and therefore also undermines the need for the purchase of Treasuries. Experts state that even if China's central bank uses all of its new accumulation of reserves each month to purchase Treasuries, the sums it would purchase would still fall.
Additionally, China must now fund its new $585 billion domestic stimulus package, and that will only further decrease funds available for the purchase of Treasuries. Therefore, its rate of purchase of Treasuries will almost certainly decline significantly from here forward.
This potentially potent new fundamental comes into play at the most inopportune time for the US, when it intends to sell perhaps as much as $2.5 trillion in Treasuries this fiscal year alone. The question that begs an answer, and that is increasingly being asked around the globe, is who's going to buy this huge new supply of debt? Certainly not Japan, for its exports are plunging, as is its new reserve accumulation, as it suffers a severe economic contraction at an annual rate of 12.7% according to the latest figures.
It certainly appears likely that as new Treasuries flood the market, the point could soon be reached where supply outstrips demand, causing yields to rise. The Fed is trying to keep yields as low as possible so as to attract big buyers that already have large holdings of Treasuries, such as China. For such holders of Treasuries, rising yields would ravage the value of their holdings, making the purchase of yet more Treasuries distinctly unattractive. Yet, lower yields tend to be less attractive for new buyers, except in the case where such a buyer is suffering from strong risk aversion and is looking, not so much for profit, but rather for a safe haven.
Therefore, minus the environment of extreme risk aversion that still plagues the markets, the US is caught between multiple contradictory interests. On the one hand, it wants to keep yields low so as to attract buyers such as China to purchase significantly more Treasuries. On the other hand, it needs higher yields to attract many new buyers because the big buyers are becoming much less able to keep up their purchases, let alone increase them. But those higher yields would almost certainly force investors such as China's central bank to begin to more quickly divest themselves of Treasuries - or risk seeing the value of the dollar-denominated portion of their reserves eaten away.
The biggest factor that has so far prevented a destructive collision of all these conflicting interests is the persistence of extreme risk aversion in the markets, causing a global rush into Treasuries as a safe haven.
If that extreme risk aversion were to subside, then investors holding Treasuries and prospective new buyers of Treasuries would be lured instead to investments that offer greater profit potential. The yields on Treasuries would have to rise in order to attract buyers, but that would undermine the value of investors' holdings of Treasuries, which would in turn drive them to sell out in favor of better safe stores of wealth. As yields rise rapidly, prospective buyers would likely stay on the sidelines to wait for the best deal rather than jump in too soon only to see their holding ravaged by yields that continue to rise.
The yields would rise yet further on the falling demand for Treasuries, and the downward spiral would feed into itself in a stampede out of Treasuries and the dollar. What I am describing here is a bursting of the Treasuries bubble. It would most likely be disorderly and chaotic.
But such a bubble burst for Treasuries could come about even if risk aversion persists, or perhaps intensifies, in this deepening global crisis. What if investors become more worried about the safety of Treasuries, fearing, as China's central bank increasingly does, that the flooding of the market with huge new sums of US debt will inevitably inflate away the value of their Treasury holdings? Or what if the costly new US stimulus package and bank rescue fail, and the US descends into a much deeper recession or a full-blown depression and is forced to nationalize virtually the entire financial sector, stoking fears that the US government may have no choice but to default on at least a portion of its gargantuan debt?
In that case there is a real threat that investors will begin to transfer their risk aversion strategy from focusing on Treasuries and the dollar to focusing on something else that is deemed much safer - perhaps including hard assets like gold and other precious metals and commodities. If US gross domestic product (GDP) deteriorates significantly further than it has already, the dollar will become much more vulnerable and will likely fall as investors begin to value the safe haven currency more in line with the fundamentals of the US economy. Then, the same self-reinforcing downward spiral described above would likely come into play, and the Treasuries bubble would burst in chaotic fashion in an investor stampede to havens safer than the shaky dollar.
One can begin to see how very tentative is the dollar's recent appeal as a safe haven in the mounting storm. In verification of that fact, investors have been piling into short-dated Treasuries for the most part, for two reasons. First, these assets are less vulnerable to the ravages of higher yields, which tend to hit the long-dated Treasuries earliest and hardest. Second, the short-dated assets facilitate a quick exit in the event that it is deemed justified. When taken together, these two factors are not a very solid vote of confidence in Treasuries and the dollar.
Next: China Inoculating Itself against a Dollar Collapse
W Joseph Stroupe is a strategic forecasting expert and editor of Global Events Magazine online at www.globaleventsmagazine.com
[Baca]
Increasingly ominous clouds are gathering in what could soon be the perfect storm against the United States dollar and against the present dollar-centric global financial order.
This is not shaping up to be a storm that anyone is trying to initiate, not even those who are actively driving for a new global financial order that is no longer centered on the dollar. Instead, it will result from a correlation of forces arising out of the deepening global financial and economic crises, coupled with recurring and conspicuous miscalculation on the part of some of the world's political, financial and economic leaders.
The storm has the potential to cause upheaval on a grand scale, opening the door to swift, and largely uncontrolled, fundamental transformation.
As is widely recognized, the present financial order that is inordinately reliant on the US dollar must some day give way to a new order that is more balanced, stable, resilient and reliable, one that is based on multiple currencies and that therefore won't be plagued by the extremely dangerous structural drawback of an increasingly worrisome elemental single point of failure (the dollar).
But if the current dollar-centric financial order should become more seriously shaken than it already has been, perhaps even suffering a collapse, as a casualty of the present deepening global crisis, then the transition to any new global financial order is most likely to be disorderly, disruptive and unmanageable rather than gradual and orderly.
We can hope - but cannot be at all confident - that world leaders and global investors will act coherently, cohesively and intelligently enough in this crisis so as to ensure that the policies and actions being undertaken will not put at further serious risk the fundamental structure of the current dollar-centric financial order, and that they will instead be effective in bolstering deteriorating global confidence in the present order and in the safety of the dollar, at least until we get through this crisis.
Unfortunately, we cannot be confident that world leaders know what they are doing in seeking to resolve the crisis. Are their measures attacking the heart of the problem, or only its periphery? Are they exacerbating the crisis, either by enacting certain misdirected measures, or by failing to enact certain required measures? Are they setting up conditions that make a dollar crisis and radically increased financial upheaval virtually inevitable, by blindly pushing ahead with a simplistic agenda of trying to spend their way out of the present crisis.
If the dollar is being put at significant short- and medium-term risk by such measures, then we're seriously risking plunging the global financial order into a depth and breadth of transition that we cannot adequately control.
Investment, finance and economics are a complex mix of at times downright illogical human psychology with the pure logic of mathematical science, introducing possibilities for potent wild-card factors that must be taken into consideration in any calculation.
History provides many unfortunate examples of how the psychological components of uncertainty, fear and panic can, at crucial times, trump the components of logic, reason, knowledge and discipline to give impetus to shortsighted and risky policies and actions that create a full-blown crisis. Humans simply don't always act in a rational and logical way that is in their best strategic interests. And institutions, regulatory agencies and governments, being composed of humans, don't always act rationally either.
All are subject to the potent influence of human psychology, which can at times be quite defensive, knee-jerk, irrational and somewhat unpredictable. In a crisis situation such as we presently find ourselves, the darker side of psychology's influence is often and unfortunately magnified.
Added to this is the fact that global investment, financial and economic systems have become increasingly complex and interrelated much faster than the ability of experts and leaders to adequately comprehend them. This makes it much easier to make mistakes of real consequence. This complexity also at times prevents governments and other institutions from taking requisite bold, comprehensive actions in the midst of crisis for fear that these may backfire by producing some unforeseen and intolerable effects and repercussions.
Further complicating matters, investment, finance and economics are nearly always deeply intertwined with politics, adding to potential uncertainty - especially so in a time of deepening global crisis, when individual governments invariably lean toward self-interest, nationalism, protectionism and self-preservation.
To illustrate the disturbing truthfulness of the foregoing, remember when experts and leaders confidently concluded that the free markets could mostly regulate themselves with success; when they concluded that no housing bubble existed in the US, but only some "regional froth"; when they insisted that complex new mortgage-backed securities, including high-risk mortgage paper, dispersed throughout the financial and investment system, would decrease default risk.
Empty reassurances
Remember when the present crisis broke in 2007, the reassurances that it would not spread beyond the confines of subprime; when it did spread, the forecasts that Wall Street banks' losses would amount only to a total of about US$200 billion. Remember when "experts" insisted no widespread credit crunch would result. Remember when they insisted that the crisis was unlikely to spread from Wall Street to the real economy on Main Street?
Remember when they said the hundreds of billions of dollars of liquidity thrown into the system would free up the credit seizure. Remember when they said the October 3, 2008, $700 billion stimulus package and the many more hundreds of billions of dollars in bank and corporate bailouts would move the system out of crisis. Where are all these pseudo-intellectual ideas, beliefs, ideologies, assessments and assurances now? On the trash heap, precisely where they belonged in the first place.
The record inspires little confidence in the ongoing efforts of governments to resolve the crisis, or even that they know how to resolve it. The damage and outright destruction inflicted on vital components of the present global investment, finance and economic orders just keeps piling up while governments keep trying their various "solutions".
As for the newly passed $787 billion stimulus package, and its accompanying sketchy bank rescue plan, economists and the markets widely doubt whether the two measures are potent enough and targeted accurately enough to come anywhere near accomplishing their stated aims.
The same is true of the perpetually disjointed and half-hearted efforts of the Group of Seven (G-7) leading industrialized nations, whose most recent confab in Rome ended with the customary whimper. In addition to its historic impotency, the G-7 is now being almost totally emasculated by the broader Group of 20 nations, to which has fallen the task of designing and constructing a new global order to replace the present broken one. If you concluded based on the hard facts that this crisis is spinning increasingly out of control in spite of, and in some important ways due to, the efforts of governments to resolve it, you would not be far wrong.
Investors, both private and official, around the globe have generally given in to a crisis reflex psychology of extreme risk aversion and have been clutching the US dollar ever more tightly, massively running into Treasuries as a refuge in the mounting storm. This fact would seem to imply that global confidence in the dollar is still fundamentally sound, despite the well-documented bruises it has received over the past few years.
The truth is that the potential for a global dollar panic is becoming greatly heightened, in spite of (and in part, actually because of) the dollar's recent significant gains as a refuge for investors, the bulk of whom continue to be distinctly risk-averse. Ironically, this massive piling onto the dollar opens yawning new vulnerabilities and risks that either did not exist before, or were at most very minimal.
For example, a number of experts warn that US Treasuries are increasingly taking on the characteristics of a bubble, and they remind us that bubbles inevitably deflate, and they rarely, if ever, do so in an orderly fashion. When this one deflates there could be uncontrolled, perhaps even chaotic, repercussions for the dollar.
Much discussion and debate is currently underway as to whether the US will find sufficient global demand for the more than $2 trillion in new Treasuries coming online this fiscal year alone. But the fundamental risks for the dollar aren't only arising out of that fear over whether demand for Treasuries will be sustained.
Serious risks for the dollar also arise if global demand for Treasuries is sustained. Why? Because that would only thrust the present Treasuries bubble to even more gigantic proportions, further warping the structure of the already severely deformed present global financial order, magnifying the dangerous distortions that already exist and increasing the likelihood of a massive second wave of damage and destruction in this present crisis, and an eventual burst in the Treasuries bubble.
The emerging markets and their banks and governments are suffering under increasingly tighter credit strangulation and mounting financial and economic losses, with skyrocketing risks of default, due to the tightening global credit seizure. And US and European commercial credit not explicitly backed by governments is also suffering likewise. As if that dangerous situation were not bad enough, the massive spending and debt issuance policies being embarked on by the US government only greatly exacerbate the increasingly unstable situation for all these players.
By facilitating and encouraging the massive global flight into Treasuries, and by issuing a huge new supply of US sovereign debt, emerging markets, their governments and banks, and US businesses are deeply suffering. As the US government sucks all the air out of the global credit markets via the unstemmed growth of its latest in a series of dangerous asset bubbles, namely the Treasuries bubble, these other entities find it extremely difficult to issue debt (obtain credit) at feasible costs, if at all. Investors are demanding very high yields to exit the relative "safety" of Treasuries to invest in corporate and government bonds in the emerging markets and in large swaths of the US and Western Europe as well.
These increasingly high yields demanded by investors translate into high costs and mounting losses by banks across the financial system. The situation is moving rapidly to a potential massive wave of bank, corporate and government defaults. Eastern Europe is on the very precipice as a result. If such already severely weakened emerging market governments, banks, businesses and US corporations do default, they will place enormous new pressures on European and US banks which are either heavily exposed, or not sufficiently immunized, to the risks.
The global credit markets and financial systems are deeply interconnected, meaning that contagion spreading from an Eastern Europe default to the rest of Europe and the US is virtually assured. So those pressures will be felt by the entire global financial order, and such new and profound stresses upon an already extremely shaky order won't likely be endured without a genuine meltdown of the entire system.
These huge and dangerous distortions in the global financial order are due largely to US government policies regarding Treasuries and the shortsighted willingness of global investors to participate in pumping up that profoundly harmful bubble. If the US succeeds in selling its greatly increased supply of Treasuries, then such distortions in the global order will only become more profound, their negative repercussions (credit strangulation) will only become much more potent, and the feared second wave will be virtually assured. And so far, demand for Treasuries has remained high, thereby ensuring the dangerous persistence of the credit strangulation referred to here.
That second wave, if it comes, will also carry profoundly negative repercussions for the Treasuries bubble itself, because the US and Europe will be plunged into undeniable, full-blown depression via a financial meltdown by the heavy burden of the cascading effects of default in Eastern Europe. That eventuality will force global investors to finally begin to evaluate the safety and appeal of Treasuries and the dollar based much more on the swiftly disintegrating fundamentals of the US economy and much less on a psychological reflex, driven by extreme risk aversion, that at present corrals investors into Treasuries for their supposed safe-haven benefits.
The stampede in the making Investors will begin to stampede out of financial assets such as Treasuries and into hard assets like precious metals and certain commodities whose price has been severely beaten down. These will offer comparatively much safer stores of wealth, ones with a real profit potential. China, via its resource buys, is already blazing the trail, going energetically into hard assets, rather than sustaining its 2008 rate of purchases of Treasuries and other financial assets.
Replay the recent histories of the chaotic housing and the commodities bubble bursts. Global investors, at the behest of enthusiastic governments, largely ignored the inevitable risks and piled into these assets on a grand scale, with the hottest interest coming just before the burst occurred. The environment of very low global interest rates and a massive global credit excess set the stage for enormous investor profits on these gigantic and mushrooming asset bubbles.
But when mounting inflation obliged the Fed to begin to steadily hike interest rates, the housing bubble began to burst in late 2006. As the dollar weakened under mounting inflation and loss of its appeal as a safe store of wealth, global investors piled ever faster into commodities for safety and for profit, inflating that bubble to gigantic proportions by the summer of 2008, when oil nearly reached $150 per barrel.
Then, when the global recession emerged later that summer, investors realized global demand and prices for commodities would plunge, so they stampeded out of commodities and into Treasuries, and the commodities bubble burst. Both bubble bursts left a great deal of wreckage in their wakes, with asset values collapsing, pulling businesses, banks and even governments into the abyss.
Though the present Treasuries bubble is more about safety than it is about profit, the fundamental risks associated with bubbles still apply to it. The bigger it gets, and the more reliant upon it as a safe store global investors become, the more unstable it turns out to be because it becomes more sensitive to various factors, both internal and external, both real and psychological.
The bigger and hotter any bubble gets, the more prepared its devotees become to speedily abandon it in favor of the next one. That explains why investors have mostly piled into very short term Treasuries - they know they may well have to sell out even faster than they bought in.
So, no one should assume that the present crisis will moderate or move toward resolution just because global demand for Treasuries might remain high in coming months. That would only signal that the Treasuries bubble is growing more massive, and that the distortions in the global financial order are only becoming more profound and dangerous, threatening to bring in a second wave of destruction, and that the bubble is therefore much nearer to bursting. This constitutes a potential perfect storm against the dollar and against the present global financial order that no one wants, but no one is seeking to prevent either.
W Joseph Stroupe is a strategic forecasting expert and editor of Global Events Magazine online at www.globaleventsmagazine.com
Copyright 2009 Global Events Magazine. All Rights Reserved.
[Baca]
For some reason, there are a lot of people out there who can't stand the gold standard. Maybe their hostility is in reaction to the large (and growing) number of gold bugs who think the worst day in history was August 15, 1971. But since I'm an economist, not a psychoanalyst, all I can really do is patiently explain how silly the antigold arguments are, rather than speculate on the motives of their authors. For today's article I will focus on a recent Bloomberg piece with the suggestive title, "Gold Standard Fans Yearn for Great Depression."
Gold Is Volatile?!
Early in his essay, the Bloomberg commentator Michael Sesit gives a rapid-fire sequence of flaws with the barbarous relic:
A return to the gold standard, where countries peg their currencies to a given quantity of the metal and thus to one another, is a bad idea. Gold-based monetary systems are overly rigid and restrictive, possess a deflationary bias and can be volatile. They make long-term inflation dependent on the pace of mining output in places such as China, South Africa and Russia.
Let's take these one at a time. To criticize a monetary system based on gold as "rigid" only makes sense if you believe that printing green pieces of paper makes a country richer. After all, the only rigidity enforced by the gold standard is on the central bank's use of the printing press. Requiring the government to maintain a fixed dollar/gold exchange rate is "restrictive" in the same way that the Bill of Rights limits the discretionary power of the feds.
"A fixed dollar/gold exchange rate is 'restrictive' in the same way that the Bill of Rights limits the discretionary power of the feds."
So yes, if Mr. Sesit thinks that the government does a good job centrally planning the economy with injections of new paper money, then I can see why he would consider the gold standard a bad idea. But let me ask you this: would you trust your next-door neighbor to use a legal-tender printing press "responsibly"? Now what about the people in DC? If we're going to be foolish enough to give them a printing press in the first place, don't you think it's a good idea to put some strict rules in place?
What's So Bad About Falling Prices?
Sesit's next point is that the gold standard has a "deflationary basis." So what? That's one of its virtues, that the purchasing power of the dollar doesn't fall or might actually increase over time. Even mainstream macroeconomists — whether neoclassical or New Keynesian — have come to realize over the last few decades that long-term predictability in monetary policy has definite advantages, and that in the long run, the best thing the monetary authorities can do is provide a currency with stable purchasing power.
So you tell me: looking at the graph below of the Consumer Price Index, when was the value of the dollar stable and predictable, and when was it really volatile? In which environment could businesses and investors confidently make long-term decisions? Remember that FDR took away private citizens' right to redeem dollars for gold in 1933, and then Nixon finally removed even the ability of central banks to do so in 1971.
As the chart above makes fairly clear, US prices (measured in dollars) exploded after Nixon formally closed the gold window. And what the chart above doesn't reveal — since it only goes back to 1913 — is how stable US prices were throughout its early history, compared to the 20th century. To get a sense, consider the following chart showing the price of gold (measured in US dollars per ounce) over a long stretch of time:
Remember, Mr. Sesit is warning us that under the gold standard, things were very volatile.
Let me deal with a possible objection: the opponent of the gold standard might look at the above chart and say, "Well of course the dollar-price of gold is stable under a gold standard; that's true by definition! The problem is that this enforced stability means that other parts of the economy get jerked around because of the arbitrary handcuffs placed on the central bank."
But the historical record does not support this (typical) claim. I always remind people who tout the stabilizing virtues of central banks that the Great Depression started fifteen years after the Federal Reserve opened its doors. Whether you subscribe to the Austrian theory (see this and this) that the Fed pumped up the stock market with artificial credit in the 1920s, or whether you subscribe to the Friedmanite theory that the Fed pushed on the brakes too hard in the late 1920s and then didn't inflate enough in the early 1930s, either way you are blaming the Great Depression on the botched policies of the Federal Reserve.
In contrast, throughout its previous 150 or so years, the American economy had managed to do just fine without the Federal Reserve "fine tuning" the money supply. Yes, there were occasional panics (the term they used before "depression") when the major economic powers adhered to the classical gold standard, but these business cycles paled in comparison to the Great Depression.
What About Those Foreign Gold Producers?
As for entrusting our money supply to gold miners in China, Russia, and South Africa, so what? When it comes to money, the great danger is a massive inflation. That's the only way you can really destroy an economy: through flooding it with more and more paper money so that prices start rising at runaway rates.
One of the prime virtues of using gold as money is that the annual output is a small fraction of the total world stockpile. We never need fear that prices — if they were expressed in terms of gold ounces — would rise at Zimbabwean rates. The absolute worst that could happen is that all of the major gold producers decide to stop operations in order to punish the United States. Note that they couldn't simply refrain from selling to American buyers: because gold is even more fungible than oil, the gold exporting countries would need to cut off all of their buyers if they wanted to punish Americans. Now how long could they afford to do that?
Unlike oil or other commodities intended for use in production, when gold is used as a money, a given amount can always "do the job." It's true that a sudden interruption in the growth of the world stock of mined gold would put downward pressure on prices, if those prices are quoted in gold ounces. But soon enough people would adjust, and would factor in the new trend to their expectations. There were plenty of long stretches in world history where genuine economic prosperity went hand in hand with gently falling prices. In any event, could those mischievous gold miners in Russia do anything like this to our money supply?
A Gold Standard Won't Work Because It Will Be Violated
Sesit concludes with an odd argument:
What's more, a gold standard isn't the panacea its advocates claim. A central bank's ability to adhere to it is only as strong as the population's willingness to endure the pain associated with enforcing the system.
Countries periodically abandoned the gold standard during times of war — Britain during World War I, for example — and free-spending Latin American countries were repeatedly forced to exit the system in the late 19th century. The Bretton Woods System collapsed in 1971 when the costs associated with fighting the Vietnam War forced President Richard Nixon to suspend the convertibility of dollars into gold.
If you don't have faith in central bankers or politicians to ride herd over inflation, why would you trust them to keep a country on a gold standard for more than a short period of time?
I'm not sure how to answer this. It's true, I don't trust central bankers to stick to a gold standard; that's why I think the government should get out of the money industry altogether. Suppose we were starting in an initial state of pure laissez-faire in money and banking, and someone said, "Hey I know! Let's give this Princeton professor — what was your name, sir, was it Ben? — a printing press, but be very stern that he can't overdo it and allow the gold price to rise more than 1 percent from the day he starts. Does that sound like a good idea?" In response, I would obviously say, "No, that seems rather risky. I think we should stick to the current system, where the market determines how much new money is brought into the economy through gold production."
But that's not where we're starting. If we're going to have a central bank, it makes a lot of sense to put in place rigid restrictions on it. Notice you could use Sesit's argument for any recommendation to restrain inflation. For example, Milton Friedman famously recommended that the central bank announce a fixed rate of growth in the money stock. Well gee whiz, Dr. Friedman, if you don't trust the central bank to responsibly exercise discretionary policy, how can you trust them to stick to a fixed rate of growth?
And the same thing applies to the Bill of Rights, too. If you can't trust the politicians to respect freedom of speech, why would they respect the First Amendment?
Conclusion
In closing, let me admit that a hardcore libertarian really could say that it is a waste of time to defend the gold standard, or even the Bill of Rights for that matter. Maybe they really are diversions, little gimmicks that the politicians can use to fool a gullible public into thinking they are safe.
But that is clearly not what Sesit is arguing in his Bloomberg piece. No, he is arguing that the gold standard is a bad idea because it keeps the central bankers from using all the latest, cutting-edge macro models to fine-tune the economy.
Rather than his proposal, I would far prefer the classical gold standard. It's true that the government can always renege on its pledge to maintain a fixed peg to gold, but at least everybody would know exactly when the government cheated. You would at least avoid absurdities such as the present crisis, in which people are actually praising the Fed for pumping in unprecedented amounts of new money in order to "help."
Robert Murphy, an adjunct scholar of the Mises Institute and a faculty member of the Mises University, runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, and the Human Action Study Guide.
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In the March 15 CBS show "60 Minutes", Federal Reserve Chairman Ben Bernanke used a false analogy already popularized by President Obama in his quasi-State of the Union Speech. He likened the financial sector to a house burning down – fair enough, as it is destroying property values, leading to foreclosures, abandonments, stripping (for copper wire and anything else recoverable) and certainly a devastation of value. The problem with this analogy was just where this building was situated, and its relationship to "other houses" (e.g., the rest of the economy).
Mr. Bernanke asked what people should do if an irresponsible smoker let his bed catch fire so that the house burned down. Should the neighbor say, "it’s his fault, let the house burn"? That would threaten the whole neighborhood with fire, Mr. Bernanke explained. The implication, he spelled out, was that economic recovery required a strong banking and financial system. And this is just what he said: The economy cannot recover without yet more credit and debt. And that in turn requires trillions and trillions of dollars given by "the neighbors" to the bad irresponsible man who burned down his own house. This is where the analogy goes seriously off track.
But watching "60 Minutes," my wife said to me, "That’s just what Mr. Obama said the other night. What do they do – have a meeting and agree on what metaphor to popularize?" They seem to have an image that will lock Americans into supporting a policy even though they don’t like it and many feel like letting the financial house (A.I.G., Citibank, and Bank of America/Countrywide) burn down.
What’s false about this analogy? For starters, banking houses are not in the same neighborhood where most people live. They’re the castle on the hill, lording it over the town below. They can burn down and leave the hilltop revert "back to nature" rather than having the whole down gaze up at a temple of money that keeps them in debt.
More to the point is the false analogy with U.S. policy. In effect, the Treasury and Fed are not "putting out a fire." They’re taking over houses that have not burned down, throwing out their homeowners and occupants, and turning the property over to the culprits who "burned down their own house." The government is not playing the role of fireman. "Putting out the fire" would be writing off the debts of the economy – the debts that are "burning it down."
To Mr. Bernanke the "solution" to the debt problem is to get the banks lending again. He’s spreading the debt-fire. The government is to lend the "threatened neighbors" enough money so that credit customers of the financial "house on the hill" can to pay it the stipulated interest charges they owe. It is not burning down at all; the neighborhood’s money (in this case, tax money) is being burned up.
Mr. Bernanke explained to the Sunday evening audience that his policy aimed at helping the economy return to "normalcy." Fully in line with what Mr. Paulson was saying last summer, "normalcy" is defined as a new exponential growth in the volume of debt. He talked about "sustainable" recovery. But "the magic of compound interest" is not sustainable. It’s all a false metaphor.
Mr. Bernanke then left the realm of metaphor altogether to give an outright false explanation of the balance of payments and the upcoming Gang of 20 meetings in Europe. On Friday, China’s premier expressed worry over the health of the American economy, in which China had recycled nearly $2 trillion of its dollar inflows in order to prevent the yuan from rising in price against the dollar. The fear is that despite this heavy recycling of dollars by foreign central banks, the U.S. exchange rate will still weaken as the trade balance continues unabated and, just as seriously, U.S. military spending keeps on pumping dollars into the world economy as war spreads eastward from Iraq to Afghanistan and Pakistan.
The way Federal Reserve Chairman Bernanke explained the problem on CBS, America had to keep its markets attractive to "Chinese savers." The image being conjured up again and again is that there is a world "savings surplus." That is supposed to be what flooded the large U.S. banks and Wall Street with so much money that they were obliged to move it into riskier and riskier investments. "They made us do it" was the message not quite spelled out.
One would think that Mr. Bernanke knows nothing at all about the balance of payments or how the global monetary system works. Here’s what really has been happening. The U.S. economy itself pumps "savings" into foreign central banks by spending abroad on military bases. (60 Minutes showed robot fork-lift machines moving around $40-million loads of U.S. currency through the New York Federal Reserve Bank the way that similar machines have been doing in Iraq to buy off local supporters and political groups.) U.S. consumers likewise buy more than the country is exporting. When these surplus dollars are turned over to foreign banks for domestic currency, the banks turn them over to the central bank – which has a problem.
Remember when an earlier U.S. Secretary, John Connolly, said "It’s our deficit, but their problem"? He meant that the U.S. was spending funds (at that time mainly in Southeast Asia) that ended up in foreign central banks, which faced a dilemma: If they let "the market" handle these dollars, their own currency would rise. That would threaten to price their exports out of world markets, and hence would cause domestic unemployment. So foreign governments chose to recycle their dollar inflows by keeping them in dollars – mainly in U.S. Treasury bills and then, when the supply began to run out, in federal agency securities such as Fannie Mae and Freddie Mac.
So the "fire" in the international sphere was the U.S. military-spending deficit and trade deficit. This doesn’t have much to do with Chinese consumers saving too much. Central banks were doing the quasi-saving, by being stuck with surplus U.S. dollars like a hot potato. But one rarely hears public officials mention the nation’s military deficit. It is as if foreign saving comes first, then a "market-based" decision to place these in the U.S. economy, "the engine of world growth." What actually comes first is the U.S. balance-of-payments deficit, pumping surplus dollars into the economy – which foreign central banks find themselves obliged to recycle within the dollar sphere. (This is the phenomenon I discuss in Super Imperialism: The Economic Strategy of American Empire, and Global Fracture.)
As for the surplus credit that Wall Street lent out, it is created out of thin air. At least Mr. Bernanke was clear about this, when he explained that the Fed "creates deposits" for its member banks just as these banks "create deposits" for their own customers at a stroke of the computer keyboard.
The bottom line is that the American public is being fed a carefully crafted mythology (no doubt "market tested" on "response groups" to see which images fly best) to mislead the American public into misunderstanding the nature of today’s financial problem – to mislead it in such a way that today’s policies will make sense and gain voter support.
But this mythology is based on false analogies, not economic reality. It is designed to make Wall Street appear as a savior, not an arsonist – and to depict the Fed and Treasury as protecting the welfare of American citizens by shoveling billions of dollars at the banks whose gambles have caused the crisis.
While Mr. Bernanke’s "60 Minutes" interview was being broadcast, the government was releasing the counterparties on the winning side of the Wall Street casino in bets that A.I.G. lost. To deflect the widespread voter disapproval of giving $160 billion to A.I.G., the Treasury finally released the names of the "counterparties" who ended up with the funds A.I.G. paid out to winning betters. Confirming rumors that had been circulating for the past few months, Mr. Paulson’s own company, Goldman Sachs, headed the list at $13 billion! Followed by Merrill Lynch ($7 billion), Bank of America ($5 billion), Citigroup ($23 billion and the much-loathed junk-mortgage lender Wachovia ($1.5 billion). So as Treasury Secretary, Mr. Paulson turns out to have represented not the U.S. interest but that of his own firm and its Wall Street neighbors.
These neighbors were given U.S. Treasury bonds in "cash for trash" transactions. The rest of the economy will be paying interest on this debt for a century to come. This is what causes "debt deflation." Revenue is diverted from spending on goods and services to pay interest and taxes. So the Treasury is spreading the fire, not putting it out.
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Finally US authorities have gotten ‘tough’ with the predator financial institutions. The world has been waiting for such decisive intervention since an unending series of Government bailouts of financial institutions began early in 2008 amounting to now trillions of taxpayer dollars. Now, with the world’s largest insurance giant, AIG, the White House Economic Council chairman, Larry Summers has expressed ‘outrage.’ President Obama himself has entered the fray to promise ‘justice.’ US Senators have threatened a law to change the injustice. The only problem is they are all exercising ‘politics of deflection,’ taking attention away from the real problem, the fraudulent bailout.
The issue is over AIG announcing it was obligated to pay its traders in its high-risk London unit a sales bonus totaling $165 million for the year. Obama Treasury Secretary, Tim Geithner has announced a novel strategy for ‘justice.’ AIG will ‘reimburse’ the taxpayers up to $165 million for bonuses the company is giving employees. AIG will pay the Treasury an amount equal to the bonuses, and the Treasury will deduct that amount from the $30 billion in government (taxpayer) assistance that will soon go to the company. But he said that the Obama administration hasn't given up on efforts to recoup the money from the employees who got the bonuses. Good luck.
Larry Summers is the man directly responsible for the mess. As Clinton Treasury Secretary from 1999-January 2001 he shaped and pushed the financial deregulation that unleashed the present crisis. He was Treasury Secretary after July 1999 when his boss, Robert Rubin left to become Vice Chairman of Citigroup, where Rubin went on to advance the colossal agenda of deregulated finance directly.
As Treasury Secretary in 1999 Summers played a decisive role in pushing through the repeal of the Glass Steagall Act of 1933 that was instituted to guard against just the kind of banking abuses taxpayers now are having to bail out. Not only Glass-Steagall repeal. In 2000 Summers backed the Commodity Futures Modernization Act that incredibly mandated that financial derivatives, including in energy, could be traded between financial institutions completely without government oversight, ‘Over-the-Counter’ as in where the taxpayer is now being dragged. Credit default Swaps, at the center of the current storm, would not have been possible without Larry Summers and the Commodity Modernization Act of 2000. He is now the White House Economic Council chairman, mandated to find a solution to the crisis he helped make along with Tim Geithner, his friend who is Treasury chief. Foxes should never be asked to guard the henhouse.
Theatre of the absurd or deflection?
This all makes great food for tabloid headlines and popular outrage. They can write that elected politicians are finally acting in taxpayer interests. Until we look a bit more closely. Paying $165 million in employee bonuses or any amount for a company that is in the middle of a multi-trillion dollar fraud that is bringing the world economy down with it is ‘outrageous.’
The problem is the tax bailout haemmorrhage will go on. The reason is the Obama Administration like its predecessor refuses to take consequent action with AIG, despite the fact today the US Government owns at least 80% of AIG stock, bought for $180 billion of, yes, taxpayer dollars. To demand AIG ‘pay back the government’ is absurd as the government is in effect demanding it pay itself back with its own money. The latest claim that the Treasury will subtract the $165 million bonus money from the next $30 billion tranche it will give AIG says it all.
Preserving the CDS bubble
The political ‘outrage’ expressed by the Obama Administration is an example of ‘perception management.’ The population is being slylyduped into believing their officials are working in their interest. In reality the officials are channeling growing popular outrage over endless bank bailouts away from the real problem to an entirely tertiary one. The US Government has injected $180 billion since September 2008 to keep the ‘brain dead’ AIG in business and honoring its Credit Default Swap obligations. In effect, they are propping up the casino to continue endless gambling with taxpayer dollars.
The rise of a market in derivatives or ‘swaps’ contracts supposedly to ‘insure’ against a company going into default and not being able to honor its debts, the Credit Default Swaps market, is at the heart of the global financial catastrophe. The market was ‘invented’ by a young economist at JP MorganChase, interestingly enough one of the few big banks recording profit today.
As noted, CDS trading was created free from US Government regulation by President Clinton when he signed the Commodity Futures Modernization Act of 2000 that mandated that financial derivatives not be under government regulation scrutiny. Enron crony and UBS bank adviser, Texas good ‘ol boy Congressman Phil Gramm helped pass the laws at a time his wife, Wendy headed the putative regulator, the Commodity Futures Trading Corporation (CFTC). That gave the green light to a derivatives market nominally worth more than $62 trillion in 2008. No one knows the exact size because this is a ‘phantom banking market’ completely private and between banks, so-called OTC for Over-The-Counter, ‘just between us.’
Michael Greenberger who headed the CFTC Division of Trading and Markets in the late 1990’s at the time of the financial deregulation acts, says that banks and hedge funds"were betting the subprimes would pay off and they would not need the capital to support their bets." The unregulated Credit Default Swaps, he says, have been at "the heart of the subprime meltdown. In 1998 Greenberger proposed regulating the growing derivatives market. At the prospect, he says, "all hell broke loose. The lobbyists for major commercial banks and investment banks and hedge funds went wild. They all wanted to be trading without the government looking over their shoulder."
The confidence between banks, the ‘just between us,’ collapsed after the ill-conceived decision by the US Government on September 15 2008 not to save the world’s fourth largest investment bank, Lehman Brothers. By then, there was no alternative but to nationalize and then sort out the mess. Bankruptcy, as the world now realizes, was not an option. But neither was the Henry Paulson TARP ‘casino rescue plan’ and Geithner’s continuation any option.
At the point the Government let Lehman Bros go down only months after saving the far smaller Bear Stearns and also AIG, not even a bank, there was no clear idea who would be saved and who not. No bank could afford to trust any other bank not to be holding just as risky loans as they. The crisis became a global systemic crisis. Notably, the man who participated in the decision to let Lehman Bros fail ‘to teach a lesson’ was then President of the New York Federal Reserve, US Treasury Secretary Tim Geithner.
The US Government has stated that AIG cannot be allowed to fail, that, to use the jargon, AIG is ‘too big to fail.’ The reason the Government says it can’t let AIG fail is that if the company defaulted, hundreds of billions of dollars’ worth of Credit-Default Swaps (CDS) would ‘blow up,’ and US and European banks whose toxic assets are supposedly insured by AIG would suddenly be sitting on immense losses. Quite the contrary, AIG is ‘too big to save’ under current rules of the game that have been written by Wall Street and the privately-owned Federal Reserve, Treasury Secretary Geithner’s former employer.
The CDS fraud
Credit Default Swaps purported, in theory, to let banks remove loan risk from their balance sheet onto others such as AIG, an insurer. It was based on a colossal fraud using flawed mathematical risk models.
AIG went big into the selling Credit Default Swaps with banks around the world, from its London ‘Financial Practices’ unit. AIG in effect issued pseudo ‘insurance’ for the hundreds of billions of dollars in new Asset Backed Securities (ABS) that Wall Street firms and banks like Citigroup, Goldman Sachs, Deutsche Bank, Barclays were issuing, including Sub-prime Mortgage Backed Securities.
It was a huge Ponzi scheme built by AIG that depended on the fact the world’s largest insurance company held a rare AAA credit rating from Moody’s and S&P rating agencies. That meant AIG could borrow more cheaply than other companies with lower ratings AIG issuing of CDS contracts acted as a form of insurance for the various exotic Asset Backed Securities (ABS) securities being issued by Wall Street and London banks. AIG was saying ‘if, by some remote chance’ those mortgage-backed securities suffered losses, AIG would pay the loss, not the banks.
Then it got really wild. Because credit-default swaps were not regulated, not even classed as a traditional insurance product, AIG didn’t have to set aside loss reserves! And it didn’t. So when housing prices started falling, and losses started piling up, it had no way to pay off.
AIG then issued of hundreds of billions of dollars worth of CDS instruments to allow banks to make their balance sheets look safer than they really were. Banks were able to get their loan risk low not by owning safer assets. They simply bought AIG’s credit-default swaps. The swaps meant that the risk of loss was transferred to AIG, making the bank portfolios look absolutely risk-free. That gave banks the legal illusion of BIS minimum capital requirements, so they could increase their leverage and buy yet more ‘risk-free’ assets.
How could that be allowed? The level of venal corruption in the Clinton and then Bush Administration rivals that of the last days of Rome before its fall from the internal rot of corruption. Banks invested billions in lobbying Washington politicians to get their way.
What can be done?
Fortunately there is a simple way out of the AIG debacle. The US Government can step in and fully nationalize AIG, 100%, kick out responsible management, declare AIG’s CDS contracts null and void and let holders sue the US government to regain value for what were in reality lottery gambles not loans to the real economy. They own 80% so the step is small to 100%. Doing that would end the global market in CDS and open the door for countless legal challenges. But AIG’s counterparties, as we begin to learn, were exactly the big Wall Street players like Goldman Sachs, Citigroup, even Deutsche Bank. They have gotten enough taxpayer bailouts to cover their risk in CDS. Let them recognize risk is the heart of banking, not the opposite.
Myron Scholes, the ‘father’ of financial derivatives, who won a Nobel Prize in economics in 1997 for inventing the stock options model that led to financial derivatives back in the 1970’s, has declared that derivatives and Credit Default Swaps have gotten so dangerously out of hand that authorities must ‘blow up’ the market.
Scholes says derivatives traded over the counter should be shut down completely. Speaking at York University Stern School of Business recently, he said the "solution is really to blow up or burn" the over-the-counter market and start over. He included derivatives on stocks, interest rate swaps and credit default swaps that should be then moved into regulated markets.
The idea is simple and not that radical. A US law banning OTC derivatives and moving them to regulated exchanges would end a colossal ‘shadow banking’ fraud. Banks would not lose much more than already, but the world financial system would get back to ‘normal.’ OTC derivatives are unregulated precisely to hide risk and enable fraud by the banks. It is past time to end that. There is where the US Treasury and other Governments must focus, not on meaningless ‘transparency’ calls or trading bonus ‘justice.’
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Last weekend, Harvard University sponsored a conference called (I am not making this up) "The Free Market Mindset: History, Psychology, and Consequences." Its purpose was to try to figure out why, since everyone knows the current crisis amounts to a failure of the market economy, the stupid rubes continue to believe in it. The promotional literature for the conference opened with That Quotation from Alan Greenspan — the one in which he suggested that there was, after all, a "flaw" in the free market he hadn't noticed before.
Well, that does it, then! If our Soviet commissar in charge of money and interest rates says the free market doesn't work, who are you to disagree?
The promotional material continues:
If the current state of the U.S. economy makes clear that former Federal Reserve Chairman Alan Greenspan's faith in free markets was misplaced, the question remains: what was it about free markets that proved — and still continues to prove — so alluring to economists, scholars, and policy-makers alike?
Because, of course, if there's one guiding principle behind the largest government in world history, it's free markets. Ahem.
This conference, we were told, brings together leading scholars in law, economics, social psychology, and social cognition to present and discuss their research regarding the historical origins, psychological antecedents, and policy consequences of the free market mindset. Their work illustrates that the magic of the marketplace is partially an illusion based on faulty assumptions and outmoded approaches.
The speakers then spent the day, I am sure, laying out their own faulty assumptions and outmoded approaches, and studiously ignoring the Austrian School of economics.
In short, the conference was about this: Why do people still think the interaction of free individuals is a superior economic system to one directed by Harvard Ph.D.s like us? I mean, apart from the failure of central planning in every case in which it's been tried, a failure so staggering that only a blockhead could miss it, why would people cling to the idea that being herded into a collective run by the experts isn't the best way to live?
So by assuming from the outset the very thing that needs to be proven — namely, that the current state of the economy just occurred spontaneously, as the result of wicked market forces — our betters relieve themselves of the need to consider that central banking, a government-established institution, just might have had, you know, a little something to do with what happened.
George Reisman has already demonstrated the absurdity of referring to our present system as a "free-market" one. Naturally, of course, none of the participants bothered to notice that a Soviet commissar in charge of money and interest rates amounts to something like the opposite of the free market, or that the economic distortions he causes cannot, therefore, be the fault of the free market. This is exactly why, in my book Meltdown, I call the Fed "the elephant in the living room." We're not supposed to notice it, and we're supposed to pretend the damage it causes is the result of wildcat capitalism, unfettered free markets, or whatever other juvenile phrase is currently in vogue to describe the usual bogeyman.
Now I don't want to list all the paper topics at this conference, since it'd be a shame to make all of you feel stupid for having frittered away your weekend when you could have listened to, say, Stephen Marglin's paper on "How Thinking Like an Economist Undermines Community." Now there's a topic I haven't heard quite enough platitudes about. (If you must, you can view the whole schedule here.) You could also have heard a bunch of totally conventional polemics about how the market economy allows for "too much" pollution, when in fact a genuine free market — which, I need hardly point out, is not actually considered in any of these alleged papers — would punish polluters and bring about the internalization of so-called externalities. Murray Rothbard dealt with this matter in an extremely important article none of the participants had read.
I wonder if anyone at the conference asked questions like these:
• When Greenspan flooded the economy with newly created money and brought interest rates down to destructively low levels, thereby distorting entrepreneurial calculation as well as consumers' home-purchasing decisions, was that the fault of the free market?
• Do you think the Fed's creation of cheap credit out of thin air makes market participants more careful or less careful in how they allocate borrowed funds?
• When Alan Greenspan bailed out Long Term Capital Management in 1998, was that a "free market" phenomenon? Do you think he thereby encouraged more or less risk taking among other major market actors?
• The Financial Times spoke in 2000, in the wake of the dot-com boom, of an increasing concern that the so-called "Greenspan put" was injecting into the economy "a destructive tendency toward excessively risky investment supported by hopes that the Fed will help if things go bad." "All the insane dot-com investment we've seen, all this destruction of capital, all the crazy excesses of the past few years wouldn't have happened without the easy credit accommodated by the Fed," added financial consultant Michael Belkin. Did the free market cause that?
• Do lending standards decline for no particular reason, or could this phenomenon have a teensy weensy bit to do with
(a) government regulation aimed at increasing "homeownership" and (b) loose monetary policy by the Fed? (When the banks get the additional reserves the Fed creates, they naturally want to lend it out — and in order to do so, they wind up lending it to people they either have or would have rejected previously. As I show in Meltdown, the phenomenon of lax lending standards in the wake of an inflationary boom by a central bank is traceable all the way to the 19th century. There is nothing even slightly unexpected — or market-driven — about it.)
Questions like these could go on and on. Not one, you can be certain, was raised at this conference.
Now if you really wanted to sponsor an event whose purpose was to try to understand why people believe inane things that have been falsified by reality, you'd do much better to hold a conference on socialism, or on Keynes and his school. It would be fascinating to learn the psychological motivation behind the persistence of Keynesian economics, whose popular version is a nonfalsifiable, ersatz religion.
Is Japan's economy still suffering? Why, that's because Japan didn't spend enough — even though it spent so much that it became the most indebted country in the developed world.
Have people spent so much that they're now burdened with debt they can't possibly repay? Then we need more spending.
Is the economy a distorted mess after an artificial boom? Then instead of letting the economy restructure itself along sustainable lines, let's instead "stimulate" the system just as it is, with the goal of bringing about more "consumption," more "labor" employed, and higher "income," without bothering to disaggregate any of these things and deciding what kinds of labor need to go where, what kinds of consumption are sustainable and what are figments of the bubble economy, or how the capital structure needs to be reassembled in order to cater to genuine consumer demand. In fact, let's actually boast about neglecting capital theory altogether (as indeed Keynes did in a 1937 article in the Quarterly Journal of Economics).
Here's another thought: given how many Keynesian economists predicted a return to depression conditions when World War II spending came to an end, and that what we instead got was the single most robust year the private economy has ever seen, isn't it a little strange that not one of these economists went back and reexamined his premises?
On the other hand, consider the names Jim Grant, Peter Schiff, Ron Paul, and Jim Rogers. Apart from having predicted the current crisis — unlike anyone at the Harvard conference and indeed unlike the paper-tiger economists they unsurprisingly preferred to spar with during their deep-thinking session last weekend — one thing these men have in common is that they are all Austrian economists, they all believe in the Austrian theory of the business cycle, and they all pin the blame for the crisis on the Fed, a nonmarket institution. These men believe in the real free market, not the centrally planned market of Alan Greenspan, Ben Bernanke, and the Federal Reserve. And they saw a crisis coming at a time when everyone else was predicting new highs for the Dow and singing the praises of a world economy that was more robust than it had ever been.
Maybe that's why people believe in market economics: unlike the Rube Goldberg models of their counterparts in the profession, the things Austrian economists write and say actually have some connection to the real world.
People who believe in the market economy support a social order in which free individuals make voluntary contracts with each other, and no one can initiate physical force against anyone else. Is that vision so obviously unattractive that we have to refer its supporters for psychological evaluation?
We might instead wonder at the psychological condition of those who would denounce such a system: might they be motivated, for all their noble talk, by nothing but base envy of those with more material wealth than they, or by a pathological desire to dominate other people?
I'm sure that will be covered at next year's conference.
Thomas E. Woods, Jr., is a resident scholar at the Mises Institute. He is the author of Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. His other recent books include 33 Questions About American History You're Not Supposed to Ask, The Church and the Market: A Catholic Defense of the Free Economy, and The Politically Incorrect Guide to American History.
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Much of the new money the Bank of England has "printed" to stimulate the UK economy is ending up abroad where it will be of no benefit to UK households and businesses, according to an analysis of the Bank's "quantitative easing" programme.
The Bank is in the process of purchasing about £75bn of government securities, or gilts, over a three-month period, the first instalment of a massive £150bn programme. The Bank is effectively converting these government securities or gilts into cash and bank balances which, it is hoped, will be used to support lending and spending in the UK and boost the economy.
But City experts analysing the scheme for The Independent say large quantities of money will simply end up abroad because so many of the gilts are held by foreign investors. They fear that they will hoard the cash, which will be of no benefit to the British economy, or dump it in favour of safer currencies, which could cause a run on sterling. More than a third of gilts are owned by foreign entities, official statistics reveal, and there are doubts about how effective the policy will be if that sort of proportion of the new money is diverted abroad.
Colin Ellis, an economist at Daiwa Securities, said: "In principle, creating new money to pump into the economy is the right thing to do when interest rates are already near zero and further monetary stimulus is required. But the Bank of England may, possibly inadvertently, be buying up gilts from foreign investors – who, according to the latest data, held over £190bn, or 36 per cent, of UK Government debt. If the Bank is pumping its new money abroad, it is clearly not going to UK households and businesses, and will not help boost UK demand."
Even if relatively little of the cash leaks overseas there is a strong possibility that the banks, as with previous attempts to bolster them, may end up "hoarding" the cash to shore up their own beleaguered positions, with little extra lending to companies and first-time buyers.
Recent speculation suggests that many UK pension fund managers – large holders of gilts – are reluctant to sell up and buy riskier assets such as shares instead, given the current dire economic environment.
Last week, the Bank made a successful start by buying £2bn of gilts, having received offers for £10bn-worth. Next week, it is planning a further two auctions, of £2bn and £3bn. Yet the Bank does not necessarily know the ultimate fate of the money it is handing out.
Even if a UK banking group sells the gilts, there is no easy way of telling whether the bank is selling those gilts on its own behalf, or more likely, on behalf of a pension fund or institutional investor in the UK or abroad. This uncertainty about the ultimate destination of bank money makes the policy hazardous. Recently, statistics released by the Bank suggested a significant outflow of funds from London over the latter part of 2008, which amounts to some $1trn ($1,000bn), 15 per cent of total foreign deposits.
Sterling has lost more than a quarter of its overseas value since mid-2007, an indication of loss of nerve by investors, some of whom have openly talked about the UK being "bust" and following Iceland's unenviable example into insolvency – hence the jibe doing the rounds in the City that London may soon become "Reykjavik on Thames".
George Soros, the man who "broke the Bank of England" by helping to force sterling out of the exchange rate mechanism in 1992, has been selling or "shorting" sterling for much of the past year or two. The fall in sterling has not, as ministers and the Bank hoped, saved British exports, which are if anything falling as global demand and international trade flows evaporate.
Even Germany and Japan have recorded sharp deterioration in their trading positions – and some believe that if those champion exporters cannot sell abroad then there can be little hope for the UK.
Mr Ellis added: "There may be implications for sterling: for example, if foreign investors that have sold their gilts and then want to switch their funds into one of the two global reserve currencies, the dollar and the euro. All of this suggests that the Bank of England may well yet be forced back to the drawing board and may have to consider even more radical measures in order to stimulate nominal spending. Quantitative easing is easier said than done."
More radical measures might require the Government to inject more cash directly into the hands of consumers, and find ways of bypassing the banking system altogether as it becomes more desperate to get the economy moving and avoid the sort of deflation that floored the US and the UK in the 1930s and Japan in the 1990s.
Vince Cable, the Liberal Democrats' Treasury spokesman, warned: "This may be another failed and ineffective initiative, especially when set against the size of the economy. It might be better if the Government used its shareholding in the nationalised banks to get the banks to start lending."
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In the six months since the government's bailout of insurance giant American International Group, a rescue that has become increasingly costly and contentious, one question has loomed above all others: Where did the money go?
The answer became a little clearer yesterday when AIG unexpectedly released the names of dozens of trading partners it has paid using billions in taxpayer dollars. The disclosure, which the company said was made after consulting the Federal Reserve, revealed that AIG paid more than $75 billion in the final months of 2008 to numerous domestic and foreign banks, as well as to various U.S. municipalities.
The funds were paid from the government's initial $85 billion emergency loan in September and included major firms such as Goldman Sachs, Societe Generale, Deutsche Bank, Merrill Lynch, Morgan Stanley, Bank of America and Barclays.
The payments were made between Sept. 16 -- the date that government assistance began -- and Dec. 31.
More than $34 billion of the money went to trading partners of AIG Financial Products, the small subsidiary whose exotic derivatives brought AIG to the edge of collapse. In recent years, the firm had written massive numbers of credit-default swaps, insurance-like contracts that other companies bought as protection against the default of mortgage-backed securities. When the housing boom began to go bust, banks that had purchased the swaps demanded collateral from AIG, burying the company under a tidal wave of debt. Federal officials, wanting to keep the company from failing because they feared it was too intertwined with the global economy, stepped in to help.
In the last months of 2008, AIG Financial Products paid more than $22 billion in taxpayer money to satisfy debts caused by its swap contracts. Another $12 billion went to pay off municipalities in dozens of states for whom the firm had created complex investment agreements.
Nearly $44 billion went to pay debts that AIG incurred under its "securities lending" program, according to the company. In those instances, various companies borrowed securities from AIG in exchange for cash. In turn, AIG invested much of the money in mortgage-backed assets that plummeted in value, leaving the insurer on the hook for billions.
Yesterday's disclosure was an about-face for AIG and the Fed. In recent weeks, public outrage and pressure from lawmakers demanding to know who benefited from the AIG bailout has reached a crescendo. But until yesterday, AIG executives and federal officials had repeatedly refused to release such details, arguing that trading partners had a right to privacy and that any disclosure could harm their businesses.
"These are extraordinary times," AIG spokeswoman Christina Pretto said yesterday in explaining the company's decision. "And we and our partners at the Fed thought this was right thing to do."
Fed spokeswoman Michelle Smith agreed, saying, "We commend the company for finding a balance between its concerns with confidentiality and the concerns of the public interest."
AIG's disclosure came on the same day that President Obama's top economic adviser berated the firm for its plans to dole out hundreds of millions of dollars in employee bonuses and retention pay, despite posting a record $62 billion loss in the fourth quarter of 2008.
"There are a lot of terrible things that have happened in the last 18 months, but what's happened at AIG is the most outrageous," Lawrence H. Summers, chairman of the White House National Economic Council, said yesterday during an appearance on ABC's "This Week." "What that company did, the way it was not regulated, the way no one was watching, what's proved necessary, it is outrageous."
Summers was but one in a chorus of administration officials and lawmakers who took to the airwaves yesterday to excoriate AIG, whose rescue package from the federal government stands at an estimated $170 billion.
"This is an example of people at the commanding heights of the economy misbehaving, abusing the system," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee.
Their anger stemmed in large part from AIG's decision to move forward with retention bonuses for executives at the troubled Financial Products unit. In early 2008, before the government rescue, the firm's employees had been promised more than $400 million in retention pay this year and next. Lawyers for the government and AIG have agreed that most of those payments, however unsavory, are legally binding.
"We are a country of laws. There are contracts," Summers said yesterday. "The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system."
In addition, AIG is in the process of paying $121 million in previously scheduled corporate bonuses and hundreds of millions more in retention payments to more than 6,000 employees throughout the company's global insurance units.
The bonuses and other payments have infuriated the public and government officials. After a contentious call on Wednesday between Treasury Secretary Timothy F. Geithner and AIG chairman Edward M. Liddy, first reported by The Washington Post, Liddy agreed to alter the terms of some executive bonuses and make future payments contingent on the company's progress with its restructuring and paying back taxpayers.
But in a letter that followed, Liddy said he had "grave concerns" about the impact on the firm's ability to retain talented staff "if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."
Speaking on CBS's "60 Minutes" last night, Fed Chairman Ben S. Bernanke once again expressed frustration with the bad will that AIG has wrought.
"I understand why the American people are angry," he said. "It's absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets, that was operating out of the sight of regulators, but which we have no choice but to stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy."
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The eye-popping national debt surpassed $11 trillion Monday, the largest in U.S. history.
The new Treasury Department figures on the national debt were released as the non-partisan Congressional Budget Office is expected to project that the annual budget deficit will be higher than previously estimated by the White House's Office of Management and Budget. The debt, which refers to the cumulative amount of money the government owes, hit $10.9 trillion on Friday.
The whopping number has major ramifications for President Barack Obama, who is trying to push through a raft of big-ticket bills on health care, energy, education and climate change — while also attempting to stabilize the swooning economy.
Sen. Kent Conrad (D-N.D.), chairman of the Budget Committee, said Tuesday that the numbers could force Congress to make "adjustments" to Obama's $3.6 trillion budget plan.
"It’s very important get a result for the American people and one that has the priorities that have been [announced] by the president in terms of reducing our dependence on foreign energy, that’s in all of our interests, excellence in education, health care reform and dramatic reduction of the deficit,” Conrad told reporters. “Those will be our guiding principles as we go forward, but as I say, we’ve not yet seen CBO’s new numbers. But I think we can all anticipate because they were done substantially later than OMB’s, that they are going to be more adverse. That that’s going to require all of us to make adjustments.”
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A former diplomat at the centre of events in the run-up to the Iraq war revealed yesterday that the government has a "paper trail" that could reveal new information about the legality of the invasion.
Carne Ross, who was a first secretary at the United Nations in New York for the Foreign Office until 2004, told MPs: "A lot of facts about the run-up to this war have yet to come to light which should come to light and which the public deserves to know." There were also assessments by the joint intelligence committee which had not been disclosed, Ross told the Commons public administration select committee.
He told the inquiry that the intelligence made it "very clear" that Saddam Hussein did not pose a significant threat to the UK, as was being claimed at the time by ministers, and that tougher enforcement of sanctions could have brought his regime down.
He said he tried to inform ministers about his misgivings over the developing momentum towards war, taking them aside during their visits to New York or having brief conversations in their car to the airport.
But he said he was aware that speaking out too often or too openly - even in internal debates - about his concerns about the government's policy direction would damage his career by winning him a reputation as a "naive troublemaker".
Ross's evidence, by video link from New York, came days after Jack Straw, who was foreign secretary at the time, used the first ministerial veto under the freedom of information act to ban the release of cabinet minutes on the decision to go to war.
"I feel very strongly that there has still not been proper accountability and scrutiny into what happened in Iraq," Ross said.
"There should be a full public inquiry or parliamentary inquiry into the decision-making that took place. Hutton and Butler are by no means sufficient to that purpose and it is disgraceful that the government pretends that they are... if we had those systems of accountability and scrutiny then leaking and other more aberration behaviour from civil servants would be less necessary."
He was one of four "whistleblowers" who yesterday gave evidence to the committee.
They also included Katharine Gun, a former GCHQ translator who revealed the organisation was tapping phones of countries that were against the Iraq war; Brian Jones, the most senior expert on chemical weapons at the Defence Intelligence Staff; and Derek Pasquill, a former Foreign Office official who leaked documents about rendition and Muslim groups who were hostile to the UK receiving government money.
Jones and Ross never leaked any information to the press. Jones instead complained to his superior that he thought the intelligence dossier on weapons of mass destruction was being exaggerated but was told that there was "one secret piece of information which could not be shared with [him]" because it was too sensitive.
He told MPs that when the WMD dossier was published and he saw the difference between the foreword by the prime minister and the contents he "thought the intelligence services were going to be crucified".
But he instead he found that most MPs, with a few exceptions, supported the government. "I feel that you gentlemen [the MPs] have been either deliberately or accidentally misled and these incidents have not been followed up. I think that there has been a great laxity and that won't encourage people like me or my colleagues to come to you," he said.
Tony Wright, the chairman of the committee, agreed with the allegation. "I think you are absolutely right to castigate parliament, which I think has behaved abysmally in this matter - endless bleating about the need for an inquiry but a complete failure to insist upon one," he said.
Gordon Brown has promised to look at an inquiry after all the troops come home from Iraq.
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LUXEMBOURG - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.
Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.
Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.
"It is a good moment to move to a shared reserve currency," he said.
Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.
Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.
"Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar's slide between 2002 and mid-2008," CMC Markets said in a note.
Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.
It has significantly reduced the dollar's share in its own reserves in recent years.
GOOD TIME
Persaud said that the United States was concerned that holding the reserve currency made it impossible to run policy, while the rest of world was also unhappy with the generally declining dollar.
"There is a moment that can be grasped for change," he said.
"Today the Americans complain that when the world wants to save, it means a deficit. A shared (reserve) would reduce the possibility of global imbalances."
Persaud said the panel had been looking at using something like an expanded Special Drawing Right, originally created by the International Monetary Fund in 1969 but now used mainly as an accounting unit within similar organizations.
The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent's economic clout, which can be valued against other currencies and indeed against those inside the basket.
Persaud said there were two main reasons why policymakers might consider such a move, one being the current desire for a change from the dollar.
The other reason, he said, was the success of the euro, which incorporated a number of currencies but roughly speaking held on to the stability of the old German deutschemark compared with, say, the Greek drachma.
Persaud has long argued that the dollar would give way to the Chinese yuan as a global reserve currency within decades.
A shared reserve currency might negate this move, he said, but he believed that China would still like to take on the role.
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Singapore's recession-hit economy may take up to six years to recover in a worse-case scenario, influential founding father Lee Kuan Yew said.
"The optimistic scenario is, two to three years, we're out of this," Lee told an audience at a local university late Friday.
"At the worst, four, five, six years... Because we are export-dependent," he said, adding the country's "imports and exports are the highest in the world as a percentage of GDP."
Singapore is forecast to slip into its worst recession this year with the economy likely to shrink by up to 5.0 percent. The city-state's worst recession since independence in 1965 was in 2001 when the economy contracted 2.4 percent.
The city-state was the first Asian country to slip into a recession when figures released in October last year showed the economy contracted for two straight quarters in the period to September.
Lee, an adviser in his son Prime Minister Lee Hsien Loong's cabinet with the title minister mentor, said earlier this month the economy may contract by as much as 10 percent this year if exports continue to fall sharply.
The latest trade figures released last week showed Singapore's key exports plunged 24 percent in February from a year ago as shipments to its key markets including the US continued to decline.
The government's official projection is for the trade-dependent economy to contract between 2.0 and 5.0 percent this year after growing 1.1 percent in 2008.
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Published: March 12, 2009
NEW YORK: Bernard Madoff pleaded guilty Thursday to all the charges against him and expressed remorse for a vast Ponzi scheme that bilked investors out of billions of dollars.
Standing before Judge Denny Chin in U.S. District Court in New York, Madoff was sworn in and reminded that he was under oath. Noting that he had waived indictment, Judge Chin asked, "How do you now plead," guilty or not guilty? "Guilty," Madoff responded.
His formal confession will cost him his liberty.
Rather than letting him remain free on bail and return to his apartment in New York, Chin ordered Madoff immediately jailed as he awaited sentencing.
"He has incentive to flee, he has the means to flee, and thus he presents the risk of flight," Chin said. "Bail is revoked."
Multimedia
Big CIty: Pity, with no leniency, for the schemer
Madoff pleads guilty to vast fraud and is jailed
For Sweden, tiny Latvia, Lithuania and Estonia are too big to fail
Japanese finance minister backs U.S. call for more stimulus
The 11 counts of fraud, money laundering, perjury and theft to which Madoff pleaded guilty carry maximum terms totaling 150 years. Sentencing was scheduled for June 16.
Dressed in a gray suit, Madoff, 70, appeared in a courtroom packed with journalists, lawyers and some of his victims.
Flanked by his lawyers, he stood up and began to answer questions from Chin about whether he understood the ramifications of his guilty plea, whether he was satisfied with his legal representation and whether he was competent to enter the guilty plea.
At first, Madoff's voice was barely audible as he acknowledged the litany of crimes.
"Try to keep your voice up so that I can hear you, please," Chin said. At one point, Madoff asked for water.
In recounting how he sustained a 20-year fraud whose collapse erased as much as $65 billion that his customers thought they had in their accounts, Madoff said, "I believed it would end shortly and I would be able to extricate myself and my clients from the scheme."
He added, "I cannot adequately express how sorry I am for what I have done."
Although Madoff admitted to operating what he called "a Ponzi scheme through the investment advisory side of my business," he said all other aspects of his enterprise, operated by his sons and brother, were legitimate, profitable and successful.
The court session was the first time since his arrest by U.S. government agents on Dec. 11 that Madoff had spoken publicly about how he ran what was perhaps the largest fraud in Wall Street history, a global scheme that ensnared hedge funds, nonprofit groups and celebrities, and wiped out the life savings of thousands of people.
During the 75-minute court hearing, a few victims were permitted to speak up against accepting the plea.
One was Maureen Ebel, who said: "If we go to trial we have more of a chance to comprehend the global scope of this horrendous crime. We can hear and bear witness to the pain that Madoff has inflicted on the young, the old and the infirm."
It remains unclear where the billions of dollars that his victims lost has gone, and whether those victims will ever see any meaningful restitution. Prosecutors have said the government is seeking $170 billion in forfeited assets from Madoff, apparently representing all the money that ran through Madoff accounts traceable to the crimes.
A court-appointed trustee liquidating Madoff's business has so far only been able to identify about $1 billion in assets to satisfy claims.
This week, the government said Madoff had 4,800 client accounts at the end of November supposedly containing $64.8 billion in customer savings. But the government said Madoff's business "held only a small fraction of that balance."
As Madoff arrived at the courthouse early Thursday morning, helicopters buzzed overhead and television news trucks lined the street. The day's events marked a coda in the saga of a man whose name has become shorthand for an entire era of greed and deceit on Wall Street.
With the promise of steady, unwavering returns, Bernard L. Madoff Investment Securities enticed thousands of investors including such prominent people as Senator Frank Lautenberg of New Jersey, the Hall of Fame baseball pitcher Sandy Koufax and a charity run by the Nobel Peace Prize laureate Elie Wiesel.
This week, the government offered more details on how Madoff ran the fraud that had financed his lush lifestyle of a beachfront mansion in the exclusive Hamptons area on Long Island, east of New York City; an estate near the French Riviera; and yachts in New York, Florida and the Mediterranean.
Prosecutors said that Madoff concocted an elaborate charade to make it seem like he was running a legitimate investment business when, in reality, "no such business was actually being conducted."
He hired employees with little training or experience and directed them to generate false monthly account statements.
He shuttled millions of dollars between banks in New York and London to make it seem as if he was "conducting securities transactions in Europe on behalf of investors when, in fact, he was not conducting such transactions," prosecutors said.
And they said he repeatedly lied to regulators from the U.S. Securities and Exchange Commission to cover up his scheme.
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The reason is simple.
There has been such a massive and unprecedented malinvestment and misallocation of capital resources from productive endeavours to the global financial casino in the last twenty-five years, that when the global financial system collapsed in 2007, the real economy starved of essential capital and other resources went into a tailspin in 2008 throughout the Western developed economies. We are now witnessing the pernicious effects spreading throughout the global economy. No one and no economy has been spared!
The gamblers know that unless they can keep suckers coming back to the financial casino on the false promise that not only can they recover their losses, but more importantly, they have better than an even chance to make good money, these financial rapists would in turn be wiped out for good.
Vikram Pandit, Citigroup Chief Executive is a financial fraud par excellence and in testimonies to the US Congress has been lying about the bank’s balance sheet to the extent of short changing the US taxpayers of the value of securities that were pledged to secure the bailout to the tune of US$19 billion.
Financial analysts, including our idiots in Malaysia’s financial dailies and radio talk-show hosts were so taken up by the announcement of the alleged profits in the first two months of 2009 by this crook, that they have commented that the market has bottomed and this good news has sparked the rally and will continue to boost market sentiments.
If there is an example of a drowning man grasping at straws, this is it!
Anyone who believes in this trash is an idiot and I hope that every penny that they still have will be wiped out when this manipulated bear rally fizzles out in the next few days and that they will be forced into bankruptcy. They deserve no pity whatsoever.
Citigroup is bankrupt in law and in fact, notwithstanding the massive bailout by the US Treasury and the Fed. The fact that it has been “nationalised” does not change the financial status of the bank.
I will give a simple analogy.
You have a business which has gone into receivership (“conservatorship” in US jargon) and the receivers and managers are now winding up the affairs of the company. Creditors are all lining up to take whatever remaining of the company’s assets in part settlement of the credit extended (hopefully 5 cents to the dollar). Just because, the receivers and managers sold some assets and were able to obtain a better price than expected, would this good news change the status of the company?
So what is all this baloney that Citigroup is now on the road to recovery and this is an indication of a turn around in the US economy. The once mighty Citigroup had a market capitalisation of over $250 billion, just a year ago and it has now slumped to less that $8 billion, its share price hovering around $1.05.
Common sense tells me (and I am truly amazed why so many refuse to apply common sense) that if in fact Citigroup is on the road to recovery, this unscrupulous banker, Vikram Pandit would call for a global press conference to announce this fantastic news. Champagne would be flowing again at corporate headquarters.
Compare and contrast what Tiger Woods did when he had recovered from his knee operation. He gave a global press conference and went out to compete again in one of the most demanding match-play tournaments. And although he did not win the tournament, there was ample evidence that he had recovered, but it was also obvious that he needed more time and matches to get back to his normal groove!
But no, this Pandit sent out a so-called memo to his staff, which was conveniently leaked to the mass media (and knowing the gullibility of the stock market idiots) so as to lend credence that this confidential information must be true.
Surely the duty is first to inform officially the shareholders and taxpayers who have bailout the bank. But the preferred method of disclosure (and we are suppose to be in the age of transparency and good governance) is by way of a memo to the staff.
The actual memo has not been reproduced in full by the mass media. But surely the quoted words attributed to this financial crook is sufficient even to a first year student in economics and or finance that the so-called profit is bullshit and horseshit!
I quote:
“In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007. The bank had US$19 billion of revenue in January and February before disclosed write-downs.”
If you cannot detect the stupid nonsense from this quote, you have no business to be an economist, a banker, an accountant, an investor and or a regulator!
Firstly, two months revenue does not make a quarter.
Revenue is meaningless by itself if your debts are far, far greater than your revenue.
Revenue or income is only one side of the balance sheet.
The financial idiots who put out this piece of shit should be hounded down, hung from the street lamp-post and then tarred and feathered, the preferred punishment by the Irish Republican Army against traitors and other scumbags during the British colonial occupation of Ireland.
To the citizens of America: if you don’t bring a class action against Vikram Pandit, you bloody deserve to be financially raped and plundered by these crooks!
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The following is an interview with Prof. Jack Rasmus by the Workers Emergency Relief Campaign (WERC). Rasmus is a professor of economics at St. Mary's College and Santa Clara University in Northern California. Below he outlines the details of Obama's economic recovery plan, showing the plan's inadequacies and the resulting implications.
WERC: What is your assessment of Obama's economic recovery plan? Can you describe it for our readers and tell us if you think it will deliver the jobs and benefits that people are anxiously awaiting?
Jack Rasmus: The Obama Plan has five major components, The first is the $787 billion stimulus plan that was adopted recently by the U.S. Congress. The second, third and fourth parts aim to resuscitate the financial markets: Part 2 is the PPIF, or Public-Private Investment Fund; Part 3 is the TALF, or Term Asset-Backed Securities Loan Facility; and Part 4 is the Homeowner Affordability and Stability Plan. The fifth component is Obama's proposed 2009 budget -- which is likely to be modified substantially by the Republicans before it is finally adopted.
As for the stimulus package: As I have stated repeatedly, it's too little too late. First, it's not a jobs bill. By the end of 2009, there could be a total of 20 million people unemployed. We are now at 14 million jobs lost, and the job losses are accelerating. Over the past three months, we lost one million jobs each month, when job losses are calculated correctly. This package is not going to regenerate the jobs that we are talking about -- and jobs are the most important thing, because job loss is what's driving the collapse of consumption and bringing down the economy.
Thirty-eight percent of the stimulus package goes to providing aid; that is, unemployment, food stamps, vets' benefits, medical aid, COBRA -- as well as aid to state and local governments. This is all necessary, but what it shows is that this plan is aimed at softening the collapse, not at creating jobs. This aid will have little effect in terms of job creation. As for the aid to state and local governments, it is nowhere near the amount needed to halt the massive job cuts in state after state.
WERC: This is clear. In California Republican Governor Arnold Schwarzenegger is demanding that public-sector workers across the state take two days off per month with no pay. His plan also calls for tens of thousands of layoffs statewide.
The Progressive States Network (PSN) reported that the Obama stimulus plan would cover less than half of projected state deficits. The authors of the PSN report note, "A new study by the Center on Budget and Policy Priorities details that state deficits are projected to be $350 billion over the next 30 months. But the stimulus recovery plan includes only about $150 billion that can be used to address those shortfalls, meaning that 55% to 60% of projected state deficits will remain."
Rasmus: Indeed. These "shortfalls" will mean millions of destroyed jobs, lives, families, and entire communities.
To continue with the stimulus plan: Another 38% of the package, or $300 billion, is tax cuts: (1) business tax cuts, (2) reversing the alternative minimum tax; and (3) payroll tax cuts. The business tax cuts will not have any effect in stimulating the economy. Some economists in fact are arguing they will have a negative effect that the spending from the tax cuts will be less than the amount of the tax cuts; they call this "negative multipliers."
When you're in a deep downturn like this, businesses sit on their tax cuts, waiting for better days ahead; they use the money to pay off their debts and that sort of thing. Even the payroll taxes will have virtually no effect in terms of consumption and stimulating the economy.
Only 24% of the stimulus plan, or $200 billion, will go to federal spending, with just $27 billion allocated this year to job-creating expenditures. The rest is long-term alternative energy technology and other similar projects, all of which are capital intensive.
The point is this: It's not a jobs bill. Obama says the plan will create 3 million to 4 million jobs. But over what time period? It's over multiple years, with the hope that the biggest impact will come in the second year.
This year the total spending impact of this bill, dollar-wise, is only $180 billion, which is roughly what 2008 stimulus package was last year. It had virtually no effect last year, and the conditions are even worse this year. We will continue to be gushing jobs this year at the continued rate of half a million to 1 million jobs per month.
We're going to be in very bad shape at the end of the year. The number one cause driving foreclosures is job loss. I was just reading a statistic today that 72% of all the sub-prime loans issued between 2005 and 2007 are going to default. In other words, we haven't seen the total impact of the housing price collapse. Housing prices will fall at least another 20%. There is no light at the end of this downturn tunnel.
With 20 million unemployed at the end of the year, with an additional 5 million to 7 million people losing their homes to foreclosure, the stimulus plan fails miserably when it comes to creating jobs -- so bad that I predict they will have to come up with a Stimulus Plan II at some point.
So if there not a program this year to deal with this situation, the odds go up significantly that what I call an epic recession will become a classic global depression in 2010. We are on the cusp of this now. The momentum is moving in that direction.
WERC: Let's look at the other components of Obama's program. You mentioned that the administration is putting most of its hopes into reviving the banking system as a means to jump-start the economy. What about the Public-Private Investment Fund, for example?
In mid-February Treasury Secretary Tim Geithner announced that up to $1 trillion would be provided by the Treasury to "provide financing for private investors to buy 'distressed securities.'" Geithner said the the goal is to clean up the banks' "toxic assets so that the credit crunch that is hobbling the economy can be ended." What is your take on the PPIF?
Rasmus: This is really Part Two of the big banks' rescue plan -- and the $1 trillion figure that Geithner presents is just for starters; the figure is going to increase significantly.
As you say, they plan to use taxpayer money to help the banks and investors buy bad assets that exist in these banks and financial institutions. It's the existence of these bad assets that prevent the banks from making loans to businesses and homeowners. It's what's been clogging up the system.
But the Treasury has refused to deal with these bad assets. If you go back to then-Treasury Secretary Henry Paulson and the Troubled Assets Relief Plan (TARP), you can see that we gave the banks $700 billion in bailout funding. But Paulson didn't buy up the bad assets, which was the whole idea behind the rescue plan. Why is that?
It's because the banks are on strike. The banks don't want to lend, or if they do, it's at ridiculously high rates. They don't want to sell all the bad assets on their books because they are essentially worthless now, and they don't want to sell at their worthless market price.
If they sold them at their market prices, they would have even greater losses than they have now. They don't want to loan when their balance sheets are so negative, because if they loan that reduces their reserves on hand. And this is freezing up the system.
Paulson and TARP could not buy them at above-market prices because Congress was looking over their shoulders and saying, "Hey! What are you doing, subsidizing these banks, giving them more than the market value of these assets?"
So, Paulson looked around, saw that he couldn't do anything, and did nothing in relation to these bad assets.
Today, with the PPIF, we have essentially the same situation, but with a little twist.
What they're trying to do with PPIF is to create a market price to sell these bad assets, thereby subsidizing not only the banks but the investors who would buy them. In other words, this $1 trillion is designed to give money incentives to the banks to make up the difference between what the price would be and what the market value would be. So, they are giving the banks a windfall to encourage them to sell at above-market price.
At the same time, they're giving an incentive to the investors; in other words, they are subsidizing the investors as well, with taxpayer money, to come in and buy. They hope this will create a new market price that will take off on its own and unblock the lending. It's going to cost well over $1 trillion to get that going, and it's really questionable whether investors will want to buy those bad assets at any price.
WERC: All the business media report that investors are not willing to buy these assets, even at higher rates. ...
Rasmus: That's right. And if the $1 trillion doesn't work, the government is prepared to throw more money at them. The investors know this, so they are going to sit and wait, saying that the price is not high enough and that you have to subsidize us even more. With the government already so committed to this effort, they will throw more money at the banks. Geithner and Obama are already saying that this is just a start, and that we may have to throw more money into this bad assets plan some time soon.
WERC: Some economists, and even some top-level financial gurus such as Former Federal Reserve chief Alan Greenspan, are saying that the government should simply take over and nationalize these bad assets. They say the Obama plan is doomed to fail.
Rasmus: The banks would love this. Keep in mind that Obama and Geithner are not talking about confiscating these bad assets. They are talking about is buying them. But they would have to buy at above-market price because the banks won't sell them. The bankers are holding out for even-higher prices. That's the crux of the problem.
And when Greenspan and the others talk about nationalization, we must be clear, that's a misnomer. They don't really mean nationalization. Buying preferred stock or even common stock does not amount to nationalization. It's just partial receivership, or subsidization, at taxpayer expense.
Seizure of private companies on behalf of investors is not nationalization. Their goal is to buy the bad assets and then sell them back to private investors at below-market prices -- all at taxpayers' expense.
WERC: What is the total amount of bad assets, assuming there's agreement on the amount?
Rasmus: Professor Rubini at New York University estimates that there's at least $3.6 trillion in bad assets. Fortune magazine says $4 trillion. Geithner, last June, indicated he thought there was about $6 trillion.
So to buy these bad assets, the taxpayers; would have to fork over $6 trillion.
WERC: The figure is staggering. Clearly, this situation calls out for true nationalization.
Rasmus: Yes, it does. But what is true nationalization? It means totally taking over these banks and financial institutions -- with bondholders and shareholders not just taking a haircut, but taking a scalping. It means getting rid of management. It means consolidating and running these banks on behalf of the interests of the working-class majority in the country. You don't pay dividends. You don't pay stock shares. you take full day-to-day operational control of all strategic decision-making. You run it and turn over the profits for public investment, not to line the pockets of private investors.
Without a doubt, what we need is a fully nationalized banking system.
WERC: Many of the initiators of the Workers Emergency Recovery Campaign are calling for the nationalization of the banks without compensation. They also say that the $700 billion in the Paulson plan -- funds that are simply sitting in the banks waiting to ride out the recession -- should be confiscated by the government and placed at the service of job creation.
Today, the government could nationalize the banks and use that $1 trillion in the PPIF fund -- just to give one example -- to put people back to work. If we assume a living wage of $50,000 per worker for one year, and we multiply this number by the 20 million projected unemployed workers, this gives us exactly $1 trillion. Shouldn't the Obama administration earmark that $1 trillion to provide unionized, living-wage jobs for one year to the 20 million unemployed? Isn't this a better way to jump-start the economy?
Rasmus: That's the point I have been making all along. People are referring to the Great Depression. But what got us out of the Depression? It was not the New Deal.
The New Deal did not really come on the scene till 1935, with some success. It stopped the decline, but it did not generate the recovery, and after two years, Roosevelt and others started dismantling the New Deal. Once they started doing this and trying to balance the budget, in mid-1937, we went right back into the Depression. We did not come out of the Depression till 1942. Why was this? It was because government spending, i.e., public investment, rose from 20 percent to 40 percent of annual Gross Domestic Product (GDP), the total annual spending in the economy.
WERC: How are they planning to finance the PPIF: Would it be through the Treasury?
Rasmus: Yes. They've got about $190 billion left over from that $700 billion TARP fund, and they will put in initially another $810 million, again, to subsidize the investors and the banks with the hope that they will come into the market to start buying and selling the bad assets at above the market price. They want to induce a market and a price, and they hope that once they do this, all the investors will step in and follow suit. But that's a big if. I don't see it coming.
Now the second part of the financial plan is designed to work in conjunction with the PPIF, and that's the TALF, or Term-Backed Securities Loan Facility. This will be run by the Federal Reserve.
The Fed had $200 billion assigned for this last November 2008, but it just held onto it. Now in about a week they are going to issue another $800 billion. So they'll have an addition $1 trillion for TALF.
WERC: Will this mean that the Federal Reserve will issue bonds for the TALF?
Rasmus: Not exactly. The idea is for Fed to lend money to investors, particularly investors in the hedge funds, money-marked mutual funds, and private equity funds -- that is, to the shadow banks that are responsible for so much of the speculation that got us into the mess we're in today -- so that they can buy the bad assets. As you see, they are coming at it from two directions.
But bad assets of what? The plan is to buy up the securitized bonds and loans associated with consumer credit. We are on the verge of another sub-prime-like bust in the consumer credit markets -- meaning auto loans, student loans, credit card loans, and commercial property loans.
The whole idea here is that the Fed will loan money to hedge funds and private equity funds to buy these bad assets that are about to collapse. Estimates are that defaults on credit cards alone are going to rise from their current 2% to 3% today to 8% to 10%.
It's ironic, when you think about it, that the government is going to try to resurrect this thing through the shadow banking system and securitized markets, which collapsed from more than a trillion dollars in credit a few years ago and which have lost close to $4 trillion total. The hedge funds have lost $1 trillion of their total value, and yet we are going to give them money to buy out all these bad assets ... all of this to try to stimulate and increase the lending to industry, to commerce, and the like.
This doesn't make any sense. It just shows that the government has absolutely no confidence that the commercial banks can lead a recovery.
The question is, Is anyone going to re-enter into these securitized markets that have collapsed and buy up these bad assets, even with these government loans? Does anyone want to touch the toxic securitized markets? I don't think so. Even with loans ... unless the government gives them interest-free loans -- and if that happens, the government should just enter and take over these consumer credit markets and provide credit directly through the Fed the auto, student, commercial property and other markets. Let the Fed provide the funds directly to, for instance, credit unions as the local loaning institutions. Why have middle-men come in and skim off the profits?
We must also keep in mind that the $2 trillion they are throwing at the banks with this plan is just the beginning. Everyone is lining up at the trough for a taxpayer payout.
WERC: Let's talk now about Homeowner Affordability and Stability Plan, which is both the third financial package and the fourth component of the Obama recovery plan.
Rasmus: There are two parts to it. The first is $200 billion to go to Fannie Mae and Freddie Mac, because they already ran through the $200 billion we gave them back in August 2008. They have bought up the bad housing loans, or mortgage loans -- and as their values continue to fall as housing prices fall, the values of the loans they bought up have collapsed. So they have run through their $200 billion, and they need $200 billion more.
It's not really going to improve anything when you just keep buying up these bad loans. That's the first part.
Regarding the second part, we have to keep in mind that Fannie Mae, Freddie Mac, and AIG, which is now supposedly "government owned," only constitute about 20% to 30% of the housing market. That leaves 70% to 80% of the bad housing mortgage market, which the government had not been addressing. It's this other portion that the Homeowner Affordability and Stability Plan now addresses -- but with only $75 billion, a paltry sum!
And even this $75 billion is targeting subsidies to mortgage lenders; in other words, it's trickle-down once again -- that is, give money to the mortgage lenders to have the government and taxpayers pay to lower the interest rates on new home loans -- up to $75 billion, which is not all the many home loans.
And what's even more outrageous, these loans are to go to new buyers -- not to those 5 million to 7 million homeowners who face foreclosure, delinquency, or default. The government is not attempting to do anything about people who are losing their homes. What they plan to do is subsidize the markets, so that the lenders can create new, affordable buyers to buy up some of the foreclosed homes.
This is a sop, a freebie, thrown to the mortgage lenders who are asked to come in buy some of the foreclosures and some of the huge stock of homes, to help them sell all the new homes. So really, it's a plan to benefit the mortgage lenders and construction firms holding all these new, unsold homes.
WERC: Now, let's get to the last item: the 2009 budget. This is the part that many are touting as New Deal and even "socialist," if we are to believe Rush Limbaugh.
Rasmus: This is a $3.6 trillion budget with a lot of spending. There is going to be a firestorm over it. Watch the Republicans, the corporations and the banking interests come out of the woodwork. The gloves are going to come off. This is where the big split in the capitalist class is going to reveal itself, because there are some proposals in this plan that would shift income. It's a shift that is insufficient, -- too little too late, once again -- but it is certainly moving in a better direction.
This is what we know so far about the budget:
It will increase taxes on the wealthiest 2% of households -- but it will only increase taxes from 35% to 39.5%. This will effect people making more than $250,000 per year. This amounts to a rollback to the Clinton period. But that tax increase on the top-margin rate does not take effect until 2011, when the Bush tax cuts expire. This is absurd. It should take effect in 2009. They shouldn't be putting it off, when funding is needed so desperately to stop teacher layoffs, prevent home foreclosures, or to stop autoworker layoffs.
What's more, they will not come close to obtaining the funding they need for a real economic recovery by only rolling back the capital gains' and capital incomes' tax cuts only to the 1990s levels. They have to roll them back to the pre-Reagan, pre-1980s, rates. They have to raise these rates back to 50%, minimum.
So there is some increase in the tax rate, but it is delayed and it is far less than what is needed. Again, 2009 is a critical juncture year. If the declining situation is not reversed, the odds are increasing that we will be moving in 2010 to a global recession. There really is no way out without a real re-distribution of income, reversing the redistribution of income from workers to investors and corporations that has been going on since 1980.
Second, on healthcare. The budget calls for $634 billion in healthcare funding, but this is only half of what is needed for single-payer. Also, if this funding goes to the private insurance companies, as appears to be the case, there will be no real solution to the healthcare crisis in our country. Only single-payer offers a solution.
Third, the budget calls for deprivatizing student loans. This is one point that is commendable in the plan.
The details of the plan are only emerging. We will have to monitor it closely. But one thing is certain: What has been proposed by the Obama administration is likely to be modified substantially by the Republicans and centrist Democrats. There is going to be a big fight, with major changes expected.
WERC: The government is talking about incurring a $1.75 trillion deficit with this budget. What does this mean? How will the deficit be financed?
Rasmus: First, it should be noted that the real deficit by 2010 will be $2.25 trillion.
One way they are talking about financing this deficit is with carbon credits. These are carbon pollution permits. The government is expecting a $526 billion revenue from this source, though it's questionable whether they will be able to raise this amount. Governments and corporations in Europe want to give corporations credits for free. They'll try that here too.
They will issue more Treasury bonds, and they will simply have go to the printing presses and print more money. Clearly, they are in a bind -- especially if the economy continues to tank.
WERC: You have made many predictions that have actually come true -- unlike just about every mainstream economist and forecaster. What are your predictions today?
Rasmus: We're on the knife's edge of a transition between this epic recession and a depression. The bank bailout will require trillions more dollars. And even then, the impact is likely to be marginal.
The depression could be triggered by one or more of the following factors: sovereign debt crises in Eastern Europe, deepening job losses in the United States, the collapse of the treasuries' markets; the collapse of the global bond markets. These are among the many possible scenarios.
WERC: What is to be done?
Rasmus: I have outlined some policy recommendations here. Readers who would like to delve into this question in greater depth can get my full set of proposals on my website, which is www.kyklosproductions.com. You can also see my latest article in the March 2009 of "Z" magazine, where I describe my full set of proposals for recovery as an alternative to the Obama program.
[Baca]
The metaphor that originally seemed to capture the global financial crisis best was Jeremy Grantham’s “slow motion train crash”, in which a world dominated by unsound monetary policies and reckless bankers headed inevitably towards its eventual demise, unable or unwilling to abandon the course that had led them to this point in the first place. (Some, like the UK Prime Minister Gordon Brown, appear to be still in denial that they were ever driving the train).
However, the market action of the first two months of 2009 brings to mind another metaphor, that of the “falling knife” that only the foolhardy will be trying to catch. The speed with which the markets have taken out the lows of November 2008 and headed further south in the past two weeks has been as breathtaking as it has been brutal. For the Dow Jones index to lose 20 per cent of its value in two months is some going.
Clearly, when such powerful market momentum develops, there are dangers in trying to stand in the way. There is no obvious reason why the markets cannot now go on to test further new lows.
Valuations, though beginning to look attractive on a medium term view, are not yet anywhere near the level – dividend yields as high as 10 per cent, price/earnings ratios as low as six – which typically characterise the bottom of history’s worst bear markets.
In a world where the average institutional holding period for equities has fallen to an absurdly low nine months, and relative performance and career risk drive the behaviour of many investment institutions, such downward dynamics could become as lethally self-feeding as portfolio insurance was in 1987. Investors’ emotions are already being tested further by the exceptionally high levels of daily volatility, and if sentiment continues to buckle, the Dow at 5000 or even lower is by no means an impossibility.
By its nature, however, this is the kind of market in which value gets trampled by momentum, and by extension therefore a period in which fantastic returns will be made and lost by those with the liquidity and nerve to identify the worst cases of mispricing.
It is also the mechanism by which future generations who have been effectively excluded from the housing and equity markets by overvaluation will be priced back into their normal long-term real returns.
As usual, Warren Buffett almost certainly has it right when he says the markets have moved from underpricing to overpricing risk. In his latest annual report he confesses to Berkshire Hathaway’s worst annual performance since he first took control more than 44 years ago (this is based, it has to be said, on his chosen performance measure of book value per share, which would not be everyone’s choice, as its effect is to smooth out some of the volatility produced by year-on-year marking to market).
“In 75 per cent of those [44] years,” he writes, “the S&P stocks recorded a gain. I would guess that a roughly similar percentage of years will be positive in the next 44. But neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. [In our usual opinionated view, we don’t think anyone else can either.] We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.”
Those who criticise Mr Buffett for his bad timing, as many invariably do in a falling market, take comfort from the fact that the market has fallen since he first started making his comments about equities, inferring (to their own satisfaction, at least) that this makes them smarter than him and that he must therefore have been wrong. All it actually shows however is that their investment horizons are much shorter and that their investment philosophies are radically different.
If he were of the bragging kind, Mr Buffett could easily respond by pointing to his 20 per cent a year compound return over 40 years, his place at the top of the Fortune list of wealthiest individuals, his high-yielding investments in Goldman Sachs, Wrigley et al, and ask: “where’s your equivalent”?
In fact, one of the reasons Mr Buffett has always stood out from the investment herd is precisely because he is often happy to own up to his share of real howlers. What could he have been thinking, for example, when buying Irish bank shares in 2008 and Conoco Phillips when the oil price was above $100 a barrel? It is a useful reminder that even great stockpickers can behave like idiots at times.
[Baca]
It is Mayfair's house of financial horrors. Owned by the Abu Dhabi royal family, One Curzon Street is among London's flashiest office blocks. But behind the elegant curves, polished white stone, sweeping windows and panoramic atrium lie billions of dollars in losses that have threatened the global financial system.
Popular with financial enterprises, the building is known as a hedge fund hotel. Its tenants include GLG Partners, one of the City's star funds, which has fallen on hard times, and the struggling Swiss bank UBS, but on the fifth floor can be found the most notorious of the property's troubled tenants - a formerly obscure financial products division of the sprawling American International Group (AIG).
It was in this London office of AIG that big-brained financial whiz-kids created a casino offshoot of the once-mighty insurer that spectacularly wrecked the company, racking up billions of dollars in losses on arcane derivatives, swaps and contracts. Fatally undermined by the unit's wheeler-dealing culture, AIG crashed to the US's biggest corporate loss of $61.7bn (£43bn) for the final quarter of 2008 and is limping along the brink of oblivion, saved from bankruptcy by an eye-watering $150bn of emergency aid from US taxpayers.
The Federal Reserve chairman, Ben Bernanke, wasted few words in condemning the division's antics, telling Congress this week: "This was a hedge fund, basically, that was attached to a large and stable insurance company."
The Serious Fraud Office is examining exactly what type of business took place on the fifth floor of One Curzon Street, where a team of some 225 staff were managed by a policeman's son from New York, Joseph Cassano, who boasted a degree in politics from Brooklyn College and lived in a company flat behind Harrods. He was scorned by one California congressman, Jackie Speier, as "the golden boy of the casino in London".
The division dates back to 1987, when a small group of former traders from the junk bond firm Drexel Burnham Lambert persuaded AIG's then chairman, Hank Greenberg, that there was a highly lucrative opportunity in offering insurance that would protect banks against default on debt or against fluctuations in the value of derivatives.
AIG had a sought-after selling point: a triple-A credit rating. For a fee, it would stand behind lesser institutions' credit obligations. By lending its gilt-edged rating, it could give clients' investments a higher value and make them easier to trade. Headquartered in Connecticut but largely run from London, the division transacted billions in credit default swaps (CDS) - instruments trading financial risk - which have been dubbed "acts of Satan" by a leading US credit analyst, Christopher Whalen.
"These people were deluded," says Whalen, who views the CDS as a phenomenon dreamt up by those whose obsession with the free market has caused them to lose their grip on reality. "In a world where people believe in market efficiency, in total market completion, things like CDSs make sense. It goes back to Milton Friedman."
Whalen views London's light-touch regulatory regime as enabling such ill-conceived shenanigans to run out of control: "A lot of this kind of structured product came out of London."
CDSs are priced on historical models. Lulled by rising property prices and relatively predictable economic cycles, the AIG bankers were convinced they had hit on a gold mine. Tom Savage, the financial products division's former president, told the Washington Post recently: "The models suggested that the risk was so remote that the fees were almost free money."
They were wrong. A collapse in the US property market, which began in 2007, left AIG's clients with portfolios of toxic mortgage-related securities, and calls on the insurer's guarantees against default rocketed. AIG lost its triple-A credit rating, triggering contractual requirements forcing it to provide billions of dollars in extra collateral it simply did not have. The unit exploded in a mass of red ink, recrimination and buck-passing.
So how did they misjudge the market so badly? Insiders say AIG has always pushed its people to the limit, some seeing Greenberg's legacy as part of the problem. Ron Shelp, a former AIG executive whose book, Fallen Giant, chronicles the insurer's rise and fall, describes AIG as an intense environment where staff were expected to devote much of their lives to business.
"Success bred phenomenal rewards," he says. "In general, it was a freewheeling environment - they'd look for different regulatory regimes and push it right to the edge, looking for something different."
Favoured employees were rewarded with trips to a Connecticut rural bolt hole, Morefar, and with shares held in Star International Co, an offshore company, which were often released only to those who stayed to 65. The head of every profit centre was expected to produce a 15% annual rise in profits and net worth or their position would be under threat.
Just how much AIG's senior executives knew, or understood, about the London office's activities is a moot point. "It's a damned good question," says Mark Keenan, an insurance analyst at Anderson Kill & Olick in New York. "Whatever risk controls were in place, if there even were any, the fact is that someone was not watching what was going on."
If AIG collapses, the US government fears that scores of banks on both sides of the Atlantic could be pushed over the brink. But propping up the company is proving enormously costly. Donn Vickrey, founder of the US research firm Gradient Analytics, reckons the cost to US taxpayers will reach $250bn.
"They thought they were smarter than everybody else - that they knew how to price risk and nobody else did," says Vickrey. "That's hubris. Instinct should have kicked in - the simple logic that there's no such thing as a free lunch."
AIG's new chief executive, Ed Liddy, faces a race against time to raise money by selling unaffected operations before they are fatally infected by association with Cassano's casino in London. Meanwhile, the blame game is running at full tilt. Greenberg, who was pushed out in a 2005 accounting scandal, is suing his successors for wiping out $2bn of value in his personal shareholding. His targets include the Essex-born Martin Sullivan, who began his career as an insurance clerk in London and ended up running AIG between 2005 and 2008.
Greenberg maintains that until his own departure, risk controls were robust. "It wasn't a freewheeling culture," he told CNBC television. "It was competitive, aggressive, but very, very controlled."
Sceptics point out that Greenberg himself left as a result of an accounting controversy that led to AIG restating five years' financial results - and that his regime established the financial products division and recruited its key staff.
Within AIG, the mood is said to be one of gloom and shell shock. Many have lost decades of wealth built up in AIG shares.
"The old-timers are really distressed," says Shelp, "not just about the money they've lost. One of them said to me the other day, 'I bought into the AIG dream.'"
Thanks to an outbreak of financial "innovation" that turned fatally sour, the dream has turned into a nightmare.
[Baca]
The beneficiaries of the government's bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.
Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.
Covered Counterparties
Some banks that were paid by AIG after it was bailed out by the government:
Goldman Sachs
Deutsche Bank
Merrill Lynch
Société Générale
Calyon
Barclays
Rabobank
Danske
HSBC
Royal Bank of Scotland
Banco Santander
Morgan Stanley
Wachovia
Bank of America
Lloyds Banking Group
Source: WSJ research
Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Société Générale SA.
More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document.
The names of all of AIG's derivative counterparties and the money they have received from taxpayers still isn't known, but The Wall Street Journal has identified some of them and is publishing others here for the first time.
Lawmakers Want Names
The AIG bailout has become a political hot potato as the risk of losses to U.S. taxpayers rises. This past week, legislators demanded that the Federal Reserve disclose names of financial firms that have received money from AIG, which Fed officials have described as too systemically important in the financial system to be allowed to fail.
In a Senate Banking Committee hearing in Washington on Thursday, Fed Vice Chairman Donald Kohn declined to identify AIG's trading partners. He said doing so would make people wary of doing business with AIG.
But Mr. Kohn told lawmakers he would take their requests to his colleagues. The Fed, through a new committee led by Mr. Kohn to discuss transparency concerns, is now weighing whether to disclose more details about the AIG transactions.
The Fed rescued AIG in September with an $85 billion credit line when investment losses and collateral demands from banks threatened to send the firm into bankruptcy court. A bankruptcy filing would have caused losses and problems for financial institutions and policyholders globally that were relying on AIG to insure them against losses.
Since September, the government has had to extend more aid to AIG as its woes have deepened; the rescue package now has swelled to more than $173 billion.
The government's rescue of AIG helped prevent its counterparties from incurring immediate losses on mortgage-backed securities and other assets they had insured through AIG. The bailout provided AIG with cash to pay the banks collateral on the money-losing trades; it also bought out underlying mortgage-linked securities, many of which are currently worth less than half their original value.
Banks and other financial companies were trading partners of AIG's financial-products unit, which operated more like a Wall Street trading firm than a conservative insurer. This AIG unit sold credit-default swaps, which acted like insurance on complex securities backed by mortgages. When the securities plunged in value last year, AIG was forced to post billions of dollars in collateral to counterparties to back up its promises to insure them against losses.
More Problems
Now, other problems are popping up for AIG. The insurer generated a sizable business helping European banks lower the amount of regulatory capital required to cushion against losses on pools of assets such as mortgages and corporate debt. It did this by writing swaps that effectively insured those assets.
Values of some of those assets are declining, too, forcing AIG to also post collateral against those positions. And if the portfolios incur losses, AIG will have to compensate the banks.
AIG had seen this business as a relatively safe bet for the company and its investors. The structures were designed to allow European banks to shuck aside high capital costs. A change in capital rules has meant that the AIG protection no longer meets regulatory requirements.
The concern has been that if AIG defaulted, banks that made use of the insurer's business to reduce their regulatory capital, most of which were headquartered in Europe, would have been forced to bring $300 billion of assets back onto their balance sheets, according to a Merrill report.
[Baca]
WASHINGTON — America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.
Citibank, Bank of America , HSBC Bank USA , Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31 . Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.
The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.
The banks' potentially huge losses, which could be contained if the economy quickly recovers, also shed new light on the hurdles that President Barack Obama's economic team must overcome to save institutions it deems too big to fail.
While the potential loss totals include risks reported by Wachovia Bank , which Wells Fargo agreed to acquire in October, they don't reflect another Pandora's Box: the impact of Bank of America's Jan. 1 acquisition of tottering investment bank Merrill Lynch , a major derivatives dealer.
Federal regulators portray the potential loss figures as worst-case. However, the risks of these off-balance sheet investments, once thought minimal, have risen sharply as the U.S. has fallen into the steepest economic downturn since World War II, and the big banks' share prices have plummeted to unimaginable lows.
With 12.5 million Americans unemployed and consumer spending in a freefall, fears are rising that a spate of corporate bankruptcies could deliver a new, crippling blow to major banks. Because of the trading in derivatives, corporate bankruptcies could cause a chain reaction that deprives the banks of hundreds of billions of dollars in insurance they bought on risky debt or forces them to shell out huge sums to cover debt they guaranteed.
The biggest concerns are the banks' holdings of contracts known as credit-default swaps, which can provide insurance against defaults on loans such as subprime mortgages or guarantee actual payments for borrowers who walk away from their debts.
The banks' credit-default swap holdings, with face values in the trillions of dollars, are "a ticking time bomb, and how bad it gets is going to depend on how bad the economy gets," said Christopher Whalen , a managing director of Institutional Risk Analytics, a company that grades banks on their degree of loss risk from complex investments.
J.P. Morgan is credited with launching the credit-default market and is one of the most sophisticated players. It remains highly profitable, even after acquiring the remains of failed investment banker dealer Bear Stearns , and says it has limited its exposure. The New York -based bank, however, also has received $25 billion in federal bailout money.
Gary Kopff , president of Everest Management and an expert witness in shareholder suits against banks, has scrutinized the big banks' financial reports. He noted that Citibank now lists 60 percent of its $301 billion in potential losses from its wheeling and dealing in derivatives in the highest-risk category, up from 40 percent in early 2007. Citibank is a unit of New York -based Citigroup . In Monday trading on the New York Stock Exchange , Citigroup shares closed at $1.05 .
Berkshire Hathaway Chairman Warren Buffett , a revered financial guru and America's second wealthiest person after Microsoft Chairman Bill Gates , ominously warned that derivatives "are dangerous" in a February letter to his company's shareholders. In it, he confessed that he cost his company hundreds of millions of dollars when he bought a re-insurance company burdened with bad derivatives bets.
These instruments, he wrote, "have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks . . . When I read the pages of 'disclosure' in (annual reports) of companies that are entangled with these instruments, all I end up knowing is that I don't know what is going on in their portfolios. And then I reach for some aspirin."
Most of the banks declined to comment, but Bank of America spokeswoman Eloise Hale said: "We do not believe our derivative exposure is a threat to the bank's solvency."
While Bank of America advised shareholders that its risks from these instruments are no more $13.5 billion , Wachovia last year similarly said it could overcome major risks. In reporting a $707 million first-quarter loss, Wachovia acknowledged that it faced heavy subprime mortgage risks, but said it was "well positioned" with "strong capital and liquidity." Within months, losses mushroomed and Wachovia submitted to a takeover by Wells Fargo , which soon got $25 billion in federal bailout money.
Trading in credit-default contracts has sparked investor fears because they are bought and sold in a murky, private market that is largely out of the reach of federal regulators. No one, except those holding the instruments, knows who owes what to whom. Not even banks and insurers can accurately calculate their risks.
"I don't trust any numbers on them," said David Wyss , the chief economist for the New York credit-rating agency Standard & Poor's.
The risks of these below-the-radar insurance policies became abundantly clear last September with the collapse of investment banker Lehman Brothers and global insurer American International Group , both major swap dealers. Their insolvencies threatened to zero out the value of billions of dollars in contracts held by banks and others.
Until then, "we assumed everyone makes good on the contracts," said Vincent Reinhart , a former top economist for the Federal Reserve Board.
Lehman's and AIG's failures put in doubt their guarantees on hundred of billions of dollars in contracts and unleashed a global pullback from risk, leading to the current credit crunch.
The government has since committed $182 billion to rescue AIG and, indirectly, investors on the other end of the firm's swap contracts. AIG posted a fourth quarter 2008 loss last week of more than $61 billion , the worst quarterly performance in U.S. corporate history.
The five major banks, which account for more than 95 percent of U.S. banks' trading in this array of complex derivatives, declined to say how much of the AIG bailout money flowed to them to make good on these contracts.
Banking industry officials stress that most of the exotic trades are less risky — such as interest-rate swaps, in which a bank might have tried to limit potential losses by trading the variable rate interest of one loan for the fixed-rate interest of another.
In their annual reports to shareholders, the banks say that parties insuring credit-default swaps or other derivatives are required to post substantial cash collateral.
However, even after subtracting collateralized risks, the banks' collective exposure is "a big, big number" and a matter for concern, said a senior official in a banking regulatory agency, speaking on condition of anonymity because agency policy restricts public comments.
In their reports, the banks said that their net current risks and potential future losses from derivatives surpass $1.2 trillion . The potential near-term losses of $587 billion easily exceed the banks' combined $497 billion in so-called "risk-based capital," the assets they hold in reserve for disaster scenarios.
Four of the banks' reserves already have been augmented by taxpayer bailout money, topped by Citibank — $50 billion — and Bank of America — $45 billion , plus a $100 billion loan guarantee.
The banks' quarterly financial reports show that as of Dec. 31 :
— J.P. Morgan had potential current derivatives losses of $241.2 billion , outstripping its $144 billion in reserves, and future exposure of $299 billion .
— Citibank had potential current losses of $140.3 billion , exceeding its $108 billion in reserves, and future losses of $161.2 billion .
— Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.
— HSBC Bank USA had current potential losses of $62 billion , more than triple its reserves, and potential total exposure of $95 billion .
— San Francisco -based Wells Fargo , which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion , below the banks' combined reserves of $104 billion , but total future risks of about $109 billion .
Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking."
The banks' credit-default portfolios have gotten little scrutiny because they're off-the-books entries that are largely unregulated. However, government officials said in late February that federal examiners would review the top 19 banks' swap exposures in the coming weeks as part of "stress tests" to evaluate the institutions' ability to withstand further deterioration in the economy.
Representatives for Citibank, J.P. Morgan and Wells Fargo declined to comment.
Hale, the Bank of America spokeswoman, said that the bank uses swaps as insurance against its loan portfolio — they "gain value when the loans they are hedging lose value."
She said that Bank of America requires thousands of parties that are guarantors on these insurance-like contracts to post "the most secure collateral — cash and U.S. Treasuries, minimizing risk roughly 35 percent." The collateral is adjusted daily.
Bank of America's report of an $80.4 billion exposure doesn't count the collateral and "also assumes the default of each of the thousands of counterparty customers, which isn't likely," Hale said. Counterparties are the investors on the other side of the deal, often other banks or investment banks.
In response to questions from McClatchy , HSBC spokesman Neil Brazil said that the bank closely manages its derivatives contracts "to ensure that credit risks are assessed accurately, approved properly (and) monitored regularly."
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For those who argue that the rate of growth of economic activity is turning positive--that economies are contracting but at a slower rate than in the fourth quarter of 2008--the latest data don't confirm this relative optimism. In 2008's fourth quarter, gross domestic product fell by about 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the U.S.
There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession. Here's why:
First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the U.S. and China. Some signals that the second derivative was turning positive for the U.S. and China turned out to be fake starts. For the U.S., the Empire State and Philly Fed indexes of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels, suggesting accelerating job losses; and January's sales increase is a fluke--more of a rebound from a very depressed December, after aggressive post-holiday sales, than a sustainable recovery.
For China, the growth of credit is only driven by firms borrowing cheap to invest in higher-returning deposits, not to invest, and steel prices in China have resumed their sharp fall. The more scary data are those for trade flows in Asia, with exports falling by about 40% to 50% in Japan, Taiwan and Korea.
Even correcting for the effect of the Chinese New Year, exports and imports are sharply down in China, with imports falling (-40%) more than exports. This is a scary signal, as Chinese imports are mostly raw materials and intermediate inputs. So while Chinese exports have fallen so far less than in the rest of Asia, they may fall much more sharply in the months ahead, as signaled by the free fall in imports.
With economic activity contracting in 2009's first quarter at the same rate as in 2008's fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe.
Fiscal and monetary stimulus is becoming more aggressive in the U.S. and China, and less so in the euro zone and Japan, where policymakers are frozen and behind the curve. But such stimulus is unlikely to lead to a sustained economic recovery. Monetary easing--even unorthodox--is like pushing on a string when (1) the problems of the economy are of insolvency/credit rather than just illiquidity; (2) there is a global glut of capacity (housing, autos and consumer durables and massive excess capacity, because of years of overinvestment by China, Asia and other emerging markets), while strapped firms and households don't react to lower interest rates, as it takes years to work out this glut; (3) deflation keeps real policy rates high and rising while nominal policy rates are close to zero; and (4) high yield spreads are still 2,000 basis points relative to safe Treasuries in spite of zero policy rates.
Fiscal policy in the U.S. and China also has its limits. Of the $800 billion of the U.S. fiscal stimulus, only $200 billion will be spent in 2009, with most of it being backloaded to 2010 and later. And of this $200 billion, half is tax cuts that will be mostly saved rather than spent, as households are worried about jobs and paying their credit card and mortgage bills. (Of last year's $100 billion tax cut, only 30% was spent and the rest saved.)
Thus, given the collapse of five out of six components of aggregate demand (consumption, residential investment, capital expenditure in the corporate sector, business inventories and exports), the stimulus from government spending will be puny this year.
Chinese fiscal stimulus will also provide much less bang for the headline buck ($480 billion). For one thing, you have an economy radically dependent on trade: a trade surplus of 12% of GDP, exports above 40% of GDP, and most investment (that is almost 50% of GDP) going to the production of more capacity/machinery to produce more exportable goods. The rest of investment is in residential construction (now falling sharply following the bursting of the Chinese housing bubble) and infrastructure investment (the only component of investment that is rising).
With massive excess capacity in the industrial/manufacturing sector and thousands of firms shutting down, why would private and state-owned firms invest more, even if interest rates are lower and credit is cheaper? Forcing state-owned banks and firms to, respectively, lend and spend/invest more will only increase the size of nonperforming loans and the amount of excess capacity. And with most economic activity and fiscal stimulus being capital- rather than labor-intensive, the drag on job creation will continue.
So without a recovery in the U.S. and global economy, there cannot be a sustainable recovery of Chinese growth. And with the U.S, recovery requiring lower consumption, higher private savings and lower trade deficits, a U.S. recovery requires China's and other surplus countries' (Japan, Germany, etc.) growth to depend more on domestic demand and less on net exports. But domestic-demand growth is anemic in surplus countries for cyclical and structural reasons. So a recovery of the global economy cannot occur without a rapid and orderly adjustment of global current account imbalances.
Meanwhile, the adjustment of U.S. consumption and savings is continuing. The January personal spending numbers were up for one month (a temporary fluke driven by transient factors), and personal savings were up to 5%. But that increase in savings is only illusory. There is a difference between the national income account (NIA) definition of household savings (disposable income minus consumption spending) and the economic definitions of savings as the change in wealth/net worth: savings as the change in wealth is equal to the NIA definition of savings plus capital gains/losses on the value of existing wealth (financial assets and real assets such as housing wealth).
In the years when stock markets and home values were going up, the apologists for the sharp rise in consumption and measured fall in savings were arguing that the measured savings were distorted downward by failing to account for the change in net worth due to the rise in home prices and the stock markets.
But now with stock prices down over 50% from peak and home prices down 25% from peak (and still to fall another 20%), the destruction of household net worth has become dramatic. Thus, correcting for the fall in net worth, personal savings is not 5%, as the official NIA definition suggests, but rather sharply negative.
In other terms, given the massive destruction of household wealth/net worth since 2006-07, the NIA measure of savings will have to increase much more sharply than has currently occurred to restore households' severely damaged balance sheets. Thus, the contraction of real consumption will have to continue for years to come before the adjustment is completed.
In the meanwhile the Dow Jones industrial average is down today below 7,000, and U.S. equity indexes are 20% down from the beginning of the year. I argued in early January that the 25% stock market rally from late November to the year's end was another bear market suckers' rally that would fizzle out completely once an onslaught of worse than expected macro and earnings news, and worse than expected financial shocks, occurs. And the same factors will put further downward pressures on U.S. and global equities for the rest of the year, as the recession will continue into 2010, if not longer (a rising risk of an L-shaped near-depression).
Of course, you cannot rule out another bear market suckers' rally in 2009, most likely in the second or third quarters. The drivers of this rally will be the improvement in second derivatives of economic growth and activity in the U.S. and China that the policy stimulus will provide on a temporary basis. But after the effects of a tax cut fizzle out in late summer, and after the shovel-ready infrastructure projects are done, the policy stimulus will slacken by the fourth quarter, as most infrastructure projects take years to be started, let alone finished.
Similarly in China, the fiscal stimulus will provide a fake boost to non-tradable productive activities while the traded sector and manufacturing continue to contract. But given the severity of macro, household, financial-firm and corporate imbalances in the U.S. and around the world, this second- or third-quarter suckers' market rally will fizzle out later in the year, like the previous five ones in the last 12 months.
In the meantime, the massacre in financial markets and among financial firms is continuing. The debate on "bank nationalization" is borderline surreal, with the U.S. government having already committed--between guarantees, investment, recapitalization and liquidity provision--about $9 trillion of government financial resources to the financial system (and having already spent $2 trillion of this staggering $9 trillion figure).
Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.
But even in this case, the distinction is only between partial nationalization and full nationalization: With 36% (and soon to be larger) ownership of Citi (nyse: C - news - people ), the U.S. government is already the largest shareholder there. So what is the non-sense about not nationalizing banks? Citi is already effectively partially nationalized; the only issue is whether it should be fully nationalized.
Ditto for AIG (nyse: AIG - news - people ), which lost $62 billion in the fourth quarter and $99 billion in all of 2008 and is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.
Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.
News and banks analysts' reports suggested that Goldman Sachs (nyse: GS - news - people ) got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)
But some things are known: Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.
So for the Treasury to hide behind the "systemic risk" excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.
And even with the $2 trillion of government support, most of these financial institutions are insolvent, as delinquency and charge-off rates are now rising at a rate--given the macro outlook--that means expected credit losses for U.S. financial firms will peak at $3.6 trillion. So, in simple words, the U.S. financial system is effectively insolvent.
Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global
[Baca]
European Central Bank Executive Board member Juergen Stark said cutting interest rates won’t remedy the financial crisis and pushing them too low may backfire.
“The financial crisis can’t be solved with rate cuts,” Stark said in an interview to be published in Luxembourg’s Tageblatt newspaper on March 9. “Too low a rate level can even be counter-productive.”
The Frankfurt-based ECB this week lowered its key rate by a half point to a record low of 1.5 percent and President Jean- Claude Trichet indicated it may act again to combat the worst recession since World War II. At the same time, some central bankers are signaling unease with the prospect of rates falling much further for fear they may provoke future inflation and won’t do much to reverse the current economic and financial turmoil.
“The lower rates are, the less incentive banks have to clean up their balance sheets and carefully monitor their credit risks,” Stark said. Erkki Liikanen, who heads the Bank of Finland, told broadcaster YLE today that while the ECB has room to cut rates more “the impact is weakened” the closer they drop toward zero.
Such comments echo those made yesterday by ECB colleague Lorenzo Bini Smaghi, who cautioned against monetary policy makers “overshooting and cutting interest rates to too-low levels.”
Stark said the financial turbulence will be solved by a restructuring and recapitalizing of the banking sector. While he said there are no signs that inflation will accelerate in the medium-term, he urged governments not to fan it by running excessively easy fiscal policies for too long.
Money Markets
Stark said there are signs of improvement in money markets, noting that banks are borrowing less money from the ECB in its refinancing operations and that fewer institutions are participating in them.
The economy of the 16 euro nations is shrinking faster than the ECB expected just three months ago as the global slowdown curbs export demand and companies lay off workers. The bank this week cut its economic growth and inflation forecasts for this year and next.
The economy will contract about 2.7 percent this year and stagnate in 2010, according to the new forecasts. Inflation will average about 0.4 percent in 2009 and 1 percent next year, the projections show.
In another speech today, Bini Smaghi said banks need to increase their capital ratios. “The crisis keeps weighing on the banking system, increasing their bad loans and diminishing the confidence in the system,” he said at a conference in Cortina D’Ampezzo, Italy. “Banks need to increase their capital ratios to restore confidence in the financial system.”
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“I would like to come back as the bond market. You can intimidate everybody.” This was allegedly the ambition of a political adviser to Bill Clinton, overawed by the power of the bond market to influence government.
The individual who has come closest to fulfilling this dream is Mohamed El-Erian, chief executive and co-chief investment officer of Pimco, the bond investment manager.
Despite being the man ultimately in charge of $747bn (£529bn, €596bn) worth of assets, mostly bonds, Mr El-Erian is dismissive of claims Pimco is worryingly powerful in the bond market.
“We don’t think in those terms. We live in a world of constructive paranoia,” he says, adding this is focused on continuing to add value for clients. “We have over 8m clients in the US and millions more around the world. We manage money for teachers, policemen, firefighters, across a whole range. If people entrust you with their assets, you have to continuously work at what the world will look like.”
That view of the world is not sunny at the moment. “2009 will be as bad as 2008,” predicts Mr El-Erian. This crisis has now morphed into “something much more sinister” than a market downturn. Pimco’s house view is that the world has changed fundamentally, and the firm is trying to position itself for the “new normal”, without knowing precisely what that will be.
“There are three things that are unambiguous about the new world,” says Mr El-Erian. First he predicts a shift in the balance of power between private and public sectors as governments step in, first to bail out collapsing markets and industries, then to regulate them in the future. “This is very consequential,” he says, because it will affect “price formation, risks and capital structure”.
Then there will be “massive consolidation in the financial industry, which is going to play out in every segment of the industry”. Finally, underlying all this is a major change in the global growth dynamics, as multiple growth engines, largely from the developing world, replace the single engine of growth of the US-centric twentieth century.
While the ride there may be very bumpy, Mr El-Erian is confident Pimco has the necessary skills to deal with the new world order. As governments get more involved in financial markets and regulation becomes a more high profile element of the framework of capital markets, investors will need an extra skillset, that of dealing with public policy.
Mr El-Erian’s background, including 12 years as an economist with the International Monetary Fund, should help a bit, but Pimco is not relying on this. Instead, it has beefed up its public policy expertise with recent appointments such as Andrew Balls, a former Financial Times journalist and brother of the UK education secretary.
The IMF background, and the fact that Mr El-Erian started his Pimco career as an emerging markets bond manager, should also be helpful with that other aspect of the brave new world, the increased importance of economies such as India and China.
He is adamant this is not the reason Pimco called him back from Harvard Management Company after just two years in the top job there. “There isn’t causality, but there is coincidence. It just happens I have that experience.”
Emerging markets experience will not just be helpful when the world finally reaches some form of stability, he says. It is useful now, during the crisis.
“Industrialised countries find themselves in a very unfamiliar situation. This crisis is happening at the centre of the global system, not on the periphery, and the centre is not wired for crisis management. The skillset we have found very useful at Pimco is our emerging markets team.”
Speaking during a press day where Allianz Global Investors, Pimco’s parent, announced its results, Mr El-Erian was notably calm for someone predicting gloom and doom.
This may in part be due to being a bond investor – the bond markets have not seen the terrible plunges of equity markets in the past 12 months – but is also due to Pimco’s foresightfulness, he claims.
During the past 10 years, while other commentators noted the moderation of volatility and interest rates on world markets, Pimco identified a “stable disequilibrium”, a temporary state that would be followed by market turmoil. In order to meet this rocky future, now realised, it developed what Mr El-Erian calls a “forward looking bond index”.
The Global Advantage Bond Index covers both sovereign and corporate debt and employs a methodology Pimco hopes will be less pro-cyclical than traditional indices.
Building an index like this is not traditionally the job of an investment manager, but Pimco felt that “because of our standing in the market, we had an obligation to put something out there to be discussed”, says Mr El-Erian, in the first hint of acceptance that his company is a powerful player in the financial world.
With the expectation that the global economy will be less centred on the US comes a need for such a large company to think of itself as global. With nine offices around the world, including a recently opened base in Hong Kong, Pimco is making that transition. But it will take it slowly, says Mr El-Erian, ensuring the company remains true to its values.
Among these values is a self-definition as an “investment manager” as opposed to an asset manager. The difference, he explains, is the focus on investment returns for clients, rather than gathering assets.
Mr El-Erian himself is part of the investment returns search – as well as being chief executive and co-chief investment officer, he recently announced he would be lead portfolio manager on a new fund based on the Global Advantage Bond index.
[Baca]
The Federal Reserve is bankrupt for all intents and purposes.
The same goes for the Bank of England!
But my article will focus on the Fed, because the Fed is the financial land-mine, and the shadow banking system [1] stepped on the land-mine some time ago. How long can someone who has stepped on a landmine, remain standing – hours, days? Eventually, when he is exhausted and his legs give way, the mine will just explode!
The shadow banking system has not only stepped on the land-mine but it is carrying such a heavy load (trillions of toxic wastes) that sooner or later it will tilt, give way and trigger off the land-mine!
Recently, I posted the remarks of Prime Minister Gordon Brown and President Obama calling for the shadow banking system to be outlawed. Even if the call was genuine, it is too late. The land-mine has been triggered and the explosion cannot be averted under any circumstances. The only issue is the extent of the damage to the global economy and how long it will take for the world to recover from this fiasco – a financial madness that has no precedent. The great depression is “Mary Poppins” in comparison!
For those who have not researched and are only too eager to heap their profanities on me for asserting such a view, may I remind them that the idea of a central bank going bankrupt is not that outlandish and I am not in fact the one who first gave this stark warning. However, I did say as far back as December 2006 that the crisis is the collapse of the global banking system, specifically the Shadow Money-Lenders.
Nouriel Roubini, the New York University professor said [2]:
“The process of socialising the private losses from this crisis has moved many of the liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case, the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued.”
Please read the underlined words again. “Sovereign bank” means central bank. When a central bank “cracks” i.e. goes into insolvency, all hell will break lose, because as the professor correctly pointed out, any government guarantees will ring hollow and will be useless.
If a central bank goes belly up, it is as good as the government going bankrupt. Period!
In another article, the said professor also admitted that the pressure on the land-mine is totally unbearable. He wrote: “The US Financial system is effectively insolvent”. It follows that if the financial system is bankrupt, it is a matter of time before the “sovereign bank” goes belly up. This is a given!
He stated further that:
“Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.
“AIG which lost $62 billion in the fourth quarter and $99 billion in all of 2008 is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.
“Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.
“News and banks analysts' reports suggested that Goldman Sachs got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)
“But some things are known: Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.
“So for the Treasury to hide behind the "systemic risk" excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.
“And even with the $2 trillion of government support, most of these financial institutions are insolvent, as delinquency and charge-off rates are now rising at a rate - given the macro outlook -that means expected credit losses for U.S. financial firms will peak at $3.6 trillion. So, in simple words, the U.S. financial system is effectively insolvent.”
(Emphasis Added)
McClatchy newspaper reported yesterday more bad news affecting the banks. It reported:
“America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.
“Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.
“The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.
“The government has since committed $182 billion to rescue AIG and, indirectly, investors on the other end of the firm's swap contracts. AIG posted a fourth quarter 2008 loss last week of more than $61 billion, the worst quarterly performance in U.S. corporate history.
“The five major banks, which account for more than 95 percent of U.S. banks' trading in this array of complex derivatives, declined to say how much of the AIG bailout money flowed to them to make good on these contracts.
“The banks' quarterly financial reports show that as of Dec. 31:
— J.P. Morgan had potential current derivatives losses of $241.2 billion, outstripping its $144 billion in reserves, and future exposure of $299 billion.
— Citibank had potential current losses of $140.3 billion, exceeding its $108 billion in reserves, and future losses of $161.2 billion.
— Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.
— HSBC Bank USA had current potential losses of $62 billion, more than triple its reserves, and potential total exposure of $95 billion.
— San Francisco-based Wells Fargo, which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion, below the banks' combined reserves of $104 billion, but total future risks of about $109 billion.
“Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking."
Berkshire Hathaway Chairman, Warren Buffet is so livid by the sheer magnitude of the financial mess that he said:
“These instruments [derivatives] have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks . . . When I read the pages of 'disclosure' in (annual reports) of companies that are entangled with these instruments, all I end up knowing is that I don't know what is going on in their portfolios. And then I reach for some aspirin."
The above bad news refers to the losses and potential losses that the big banks have suffered and will suffer in the near future.
But what is overlooked by many financial analysts is that these very same derivative products have caused another financial organ failure. And there is no way that the said organ can be resuscitated to its former state of health.
The Repo Market is gridlocked!
There has been an incestuous relationship between the traditional banking system and the shadow banking system and the link that joined the two together is the Repo Market.
This is in fact the weakest link in the entire financial system.
This is a very technical subject and I seek your indulgence and patience when reading the remaining part of this article. The gridlock of the repo market is the basis for my assertion that over and above the aforesaid dire financial facts, it is the major contributing factor to the bankruptcy of the Federal Reserve!
I want to use a simple analogy. This will make the issue easier to understand.
Picture a one-inch diameter thick rope. Such a rope is made up of a few strands of narrower ropes, say 1/10th inch which are twined together to make the thick one-inch diameter rope.
Picture again that all the outer strands have been burnt away, and what remains is the middle strand, still lifting the weight. But this strand cannot on its own, lift such a weight and sooner or later, it will snap. When that happens, the weight will come crashing down!
The middle strand is the repo market.
Alternatively, you can use the analogy that the repo market is the heart that pumps the blood (the cash flow). The financial system is the body and it has suffered a massive heart attack!
What is the repo market?
The repo market is the market whereby all financial institutions (regulated and unregulated) invariably go to obtain financing to meet reserve requirements, bridging finance, to lend or purchase securities, to hedge and or to invest on short-term basis.
It used to be that mainly US Treasuries (bear this in mind at all times) were used as security for the repo transactions, as it is considered as most secure i.e. as good as cash since it is backed by the credit of the US government!
This requirement is no longer the case. More of this issue later.
Before proceeding further, I would like to explain some technical issues.
1. In repo transactions, securities are exchanged for cash with an agreement to repurchase the securities at a future date. The securities serve as collateral for what is effectively a cash loan. A distinguishing feature of repos is that they can be used either to obtain funds or to obtain securities. As repos are short-maturity collateralised instruments, repo markets have strong linkages with securities markets, derivative markets and other short term markets such as inter-bank and money markets. [3]
2. Like other financial markets, repo markets are subject to credit risks, operational risks and liquidity risks. However, what distinguishes the credit risks on repos from that associated with uncollateralized instruments is that repos credit exposures arise from volatility (or market risk) in the value of collateral. Bear this in mind at all times.
3. Repos allow institutions to use leverage to take larger positions in financial markets which could add to systemic risks. Bear this in mind at all times.
4. And because of the close linkages between repo markets and securities markets, any shocks will be transmitted quickly, resulting in a gridlock. Bear this in mind at all times.
5. Transactions covered by definition of repos are as follows:
(A) Repurchase Agreement
A repurchase agreement involves the sale of an asset under an agreement to repurchase the asset from the same counterparty. Interest is paid on the repurchase agreement by adjusting the sale and purchase price. A reverse repo is the purchase of an asset with an agreement to re-sell the same or a similar asset.
A hold-in-custody repurchase agreement is a trade whereby the repoer (the borrower of cash) continues to hold the collateralizing securities in custody for the lender of cash. The risks are obvious!
A deliver-out repurchase agreement is where securities are delivered to the cash lender for custody in exchange for cash.
A tri-party repurchase agreement is similar to a deliver-out repurchase agreement, except that the security is placed in the custody of a third-party entity. The third-party ensures that the security meets the cash lender’s requirements and provides valuation and margining services. This is the primary form of repurchase agreement for securities dealers in the United States. Bank of New York and JP Morgan Chase are the two main custodians or clearing banks in the US and supervise the vast majority of the tri-party repos. Bear this in mind at all times.
(B) Sell/Buy-Back Agreement
A sell buy-back is two distinct outright cash market trades, one for forward settlement. The forward price is set relative to the spot price to yield a market rate of return.
(C) Securities Lending
This is where the owner of the security lends them to another person in return for a fee. The borrower of the security is contractually obliged to redeliver a like quantity of the same securities, or return precisely the same securities.
6. Repos can be of any duration but are most commonly over-night loans. Repos longer than over-night are called Term Repos. There are also Open Repos which are transactions which can be terminated by both parties on a day’s notice.
7. The largest players of repos and reverses are the dealers in government securities. There are about 20 primary dealers recognised by the Fed which are authorised to bid for new-issued treasury securities for resale in the market. The dealers are highly leveraged, 50 to 100 times their own capital. To finance the purchase of treasury securities, the dealers need to have repo monies in large amounts on a continuing basis. The institutions that supply such huge funds in the repo market are money funds, large corporations, state and local governments and foreign central banks.
As stated earlier when repo market first started, US treasuries were the preferred security. But when financial engineering exploded and many financial products (i.e. CDOs) were rated AAA by rating agencies, these securities were also traded as described above in the repo market. This was when problems started.
According to Gary Gorton [4], the repo market before the crisis was estimated to be worth a whopping $12 trillion as compared to the total assets in the entire US banking system of $10 trillion.
The former President of New York Fed and now the US Treasury Secretary , Tim Geithner observed in 2008:
“The structure of the financial system changed fundamentally during the boom, with dramatic growth in the share of assets outside the traditional banking system. This non-bank financial system grew to be very large, particularly in money and funding markets.
“This parallel system financed some of these very assets on a very short term basis in the bilateral or tri-party repo markets. As the volume of activity in repo markets grew, the variety of assets financed in this manner expanded beyond the most highly liquid securities to include less liquid securities, as well. Nonetheless, these assets were assumed to be readily sellable at fair values, in part because assets with similar credit ratings had generally been tradable during past periods of financial stress. And the liquidity supporting them was assumed to be continuous and essentially frictionless, because it had been so for a long time.
“The scale of long term risky and relatively illiquid assets financed by very short-term liabilities made many of the vehicles and institutions in this parallel financial system vulnerable to a classic type run, but without the protection such as deposit insurance that the banking system has in place to reduce such risks.”
Economic historians will argue for another century as to the cause for the run on the repo market. The collapse of Bear Stearns is as good a staring point as any. When the market discovered that its securities were duds, pure junk, shock waves ripped through the system.
Recall that I had mentioned earlier that Bank of New York and JP Morgan Chase were the primary clearing banks for repos. The Fed’s rescue of Bear Stearns through JP Morgan was not so much to save the former but rather to shore up the “clearing system” of the repos for which JP Morgan Chase and the Bank of New York were the main pillars. One of the functions of a “clearing bank” for repos is to value and match securities tendered for cash borrowings. If Bear Stearns securities are now valued as junks, the integrity of JP Morgan and Bank of New York as clearing banks in this market is as good as zero! And bearing in mind that the five major investment banks in the US rely heavily on the repo market for their funding, any gridlock in this part of the shadow banking system would tear wide open the entire banking system, including the traditional counter-part.
Hence, the FED intervention by the creation of the Primary Dealer Credit Facility (PDCF) which was in effect the backstop for all investment banking using tri-party repos!
This was what Bernanke said:
“We have been working with market participants to develop a contingency plan should there ever occur a loss of confidence in either of the two clearing banks that facilitate the settlement of tri-party repos.”
Louis Crandall, economist at Wrightson ICAP observed:
“The vulnerability of the tri-party repo system has been a recurring theme among Federal Reserve and Treasury officials in recent weeks.”
The inherent weakness of tri-party repos is that the counter-party risks of billions worth of funding agreements are shouldered by essentially two players – Bank of New York and JP Morgan Chase.
Yet, way back then, they were held up as rock solid. It is almost hilarious to read the then advert of the Bank of New York as to their expertise and service:
“Sophisticated collateral selection: enforce diversification and credit quality; control adequacy, volatility & liquidity.
“Cutting edge infrastructure: economies of scale facilitate extensive data warehousing, access to more asset classes and markets, auto-substitution, auto-allocation & optimisation technology, same day reporting.
“Introduction to new counterparts: A Global Collateral Clearing House.”
Panic swept across the entire repo market. No securities were considered safe enough for repos except US treasuries. Fundings in the repo market grind to a halt. Market players withdrew funds and began hoarding treasuries. The rest who own structured products were slaughtered.
I would like to quote Gary Gorton again:
“Imagine a firm that is levered 30:1, by borrowing in the repo market. If the haircut [5] doubles, or goes from zero to a positive amount, the required deleveraging is massive! Most investment banks were levered 30:1, equivalent to about a 3 per cent haircut. If the haircut rises to 6 per cent, at least half the assets will have to be sold.
“Another sign of trouble is a ‘repo fail’. A ‘repo fail’ occurs when one side of the agreement fails to abide by the contract. [Fail to deliver the security under the repurchase agreement.]
“Dealer banks would not accept collateral because they rightly believed that if they had to seize the collateral should the counter-party fail, then there would be no market in which to sell it. This was due to the absence of buyers because of the deleveraging. This led to an absence of prices for these securities. If the value cannot be determined because there is no market – no liquidity or there is the concern that if the asset is seized by the lender, it will not be saleable at all, then the dealer will not engage in repo. Repo dealers report that there was uncertainty about whether to believe the ratings on these structured products, and in a very fast moving environment, the response was to pull back from accepting anything structured. If no one would accept structured products for repo, then these bonds could not be traded – and then no one would want to accept them in repo transactions.”
This change led to a sharp increase in the demand for government securities for repo transactions, which was compounded by significantly higher safe-haven demand for US Treasuries and the increased unwillingness to lend such securities in repo transactions. As the crisis unfolded, this combination resulted in US government collateral becoming extremely scarce. [6]
I will now turn to the issue of the FED’s solvency.
As has been observed, the Fed intervened aggressively to check the run on the repo market. Various measures were taken, but in my view the most dangerous was the widening of the collaterals which the Fed was willing to accept to secure funding of the players in the repo market. The Fed also intervened by lending a huge chunk of its US treasuries in exchange for junks to facilitate credit expansion.
In the result, what happened was that the Fed’s present balance sheet of approximately $2 trillion is made up mostly of junk securities.
The Fed is no different from banks in that confidence in the quality of its assets is critical and that if and when the market recovers, there is in fact a market for the junk assets that it took on to unravel the gridlock in the financial markets.
By way of analogy, if your high street bank’s balance sheet is made up of junk, what would you do? There are just not enough assets to meet its liabilities.
But of course, one can argue that the Fed is not your high street bank. It is the central bank of the mighty USA. It will always be able to “print money” or “digitalise” money and keep the markets going.
But beware that the Federal Reserve Note is mere paper, fiat money which cannot be redeemed for anything tangible such as gold. And although it is stated boldly in the notes issued - “In God we trust” - you and I are not actually placing our trust in God when accepting the Federal Reserve Notes as “money”.
When Joe Six-Packs realises that the Federal Reserve Note is not even secured by US treasuries and or the FED has real tangible assets, but its balance sheet is littered with junks and toxic waste, there will be a run on the Fed i.e. when Americans and foreigners no longer have faith in the Federal Reserve Notes as “money”.
If confidence could vaporise in a second and cause a stampede in what was once considered solid security, the triple A rated bonds in the repo and money markets, the same confidence that is now reposed in the Federal Reserve Notes can likewise disappear into the memory hole.
All these years, the con was maintained by the Fed that it was solid because it has on its balance sheet over $800 billion of US treasuries i.e. its notes “were so-called backed by these treasuries”. It could sell its treasuries in the repo market for cash and thereby control the money flows in the economy and vice versa.
In their subconscious mind, Americans and stupid foreign central banks and their executives (brain-washed by the Chicago School of Economics) somehow believe in the infallibility of the Fed.
Now it has been exposed that the Fed’s “assets” comprise of junk bonds and toxic wastes.
The Emperor has no clothes!
Paul Volcker, former Chairman of the Federal Reserve may have given the ultimate epitaph: “The bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the market place.”
And it is any wonder that Professor Nouriel Roubini declared:
“The process of socialising the private losses from this crisis has already moved many liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued.”
It is my confident assertion that the Fed has already come unglued. Whatever guarantees given to secure the indebtedness of Citibank and others to prevent a run on these banks are useless.
It is bankrupt!
End Notes
[1] There are two banking systems in existence today. The Traditional Banking System – i.e. your High Street banks and the Shadow Banking System. But the players in both the system overlaps because, the major banks of the traditional system helped spawn the shadow banking system. In fact they are the key players in the use of the so-called “new financial products, the CDOs, CLOs, MBS” etc and which have now turned toxic – worthless, junk to be exact.
[2] See my website archives: Roubini Warns of Sovereign Bank Failure – February 20, 2009 www.theage.com.au
[3] See: Implications of repo markets for central banks, CGFS Publications No 10, March 1999.
[4] Gary Gorton, Information, Liquidity, and the (Ongoing) Panic of 2007 prepared for the Jackson Hole Conference 2008
[5] “haircut” here refers to the rate payable for the cash loan or the margin.
[6] Peter Hordahl and Martin R King, Developments in repo markets during the financial turmoil BIS Quarterly Review, December 2008
[Baca]
When the two Pakatan Rakyat State Assemblymen for Perak, Jamaluddin Mohd Radzi and Mohd Osman Mohd Jailu, were charged with corruption, a ticking time bomb was set to go off.
The newspaper reported that the two State Assemblymen were caught red-handed in committing the offence of corruption. The public prosecutor would not proceed with a charge against anyone unless there was at the minimum, a prima facie case. In this case, the two accused were caught red-handed!
But Anwar hung on to the two accused even though they were toxic.
It would have secured Pakatan Rakyat’s credibility as a bastion against corruption had the coalition demanded the resignation of the two accused as State Assemblymen and held By-elections. Pakatan Rakyat chose instead to cling on to the stupid political strategy that everyone is innocent until proven guilty. This may well be the case for ordinary folks charged with a crime.
This standard cannot apply to a politician. While innocent until proven guilty, transparency demands that they resign from office and let the legal process take its course. But Anwar was too desperate for power. He has been charged for sodomy and he cannot demand of the two State Assemblymen what he was not prepared to do himself.
Herein lies the true character of Anwar.
Why did UMNO not wait for the prosecution of the two accused? If they were to be convicted, a By-election would be inevitable and the two parties could then go to the people for a fresh mandate.
But the Badawi regime is equally desperate for power. So they mindlessly adopted Anwar’s tactics of luring weak and corruptible representatives, men who have no principles at all.
As a result of the defections, Barisan Nasional is now back in power in Perak. But for how long?
The toxic time bomb is ticking!
If there are no prosecutions against the two accused until after the next general elections, it is a given that the rakyat will rebel in full force and accuse UMNO and Barisan Nasional of abusing the law and a massive cover-up to cling on to power.
If the two accused are convicted after a full trial, hopefully very soon, the status quo is back to square one. And there will have to be By-elections. Once again, Barisan Nasional would be at a disadvantage, because the rakyat would perceive the government of having mindlessly took on two corrupt politicians just so to regain power.
In both scenarios, Barisan Nasional would be perceived negatively.
What about Anwar and Pakatan Rakyat?
This will be a wake up call for the rakyat not to believe and fall for the theatrics of Anwar and Pakatan Rakyat.
Instead of consolidating their political power in the five states and help the people overcome the global financial tsunami, the power-crazy loonies in Pakatan Rakyat are only concerned with grabbing power so that they can have their turn to loot the national treasury.
With regard to the DAP representative, she is as good as a factory reject. The Chinese community will “lynch her politically” and she will be an outcast. MCA will suffer a backlash from the betrayal of this factory reject, even though MCA has nothing to do with the defection. The Chinese community will take it out on MCA. I sincerely hope that MCA will avoid her like a plague if its leaders are to survive in the next General Elections!
The toxic time bomb is ticking and it is only a matter of time before it explodes.
I would like to take this opportunity to suggest to the good people of Malaysia – ignore the political theatrics of both sides, focus on the financial crisis and save your family from unemployment, foreclosure and or bankruptcy if you are deep in debt. There is no time to waste. After March 2009, the economy will turn messy.
When that time comes, go out in full force and harass the politicians in Parliament, in the State Assemblies, in their service centres, and in their offices for answers and demand from them why they have wasted so much time, energy and money on grabbing power instead of saving the country.
When the country is in deep shits and no one seems to know anything and or able to do anything, be reminded that I was there to warn you of the dangers since 2006 and I will be there with my team to help you if need be.
[Baca]
However, there was a particular representative who had substantial investments in the Iskandar Project and was only too eager to trumpet his contribution to the region and how the project would benefit the entire Malaysian economy, specifically in two aspects, namely:
1) As the hinterland of Singapore.
2) As the wholesale centre for the distribution of Asia’s exports to the global markets.
It was clear from his very sincere comments that he was totally out of touch with reality and an obvious victim not only of his own corporate spin but that of Badawi regime’s flawed strategies in establishing the Iskandar project soon after the launch of the 9th Malaysia Plan.
During the discussions, I raised the issue of business cycles and pointed out that the last two peaks before the collapse was in 1987 and 1997 and that it was obvious that the next peak would be 2007 / 2008. [1] Hence, Malaysia and corporate leaders should be preparing for a downturn and not as was the case, preparing for a new era of economic prosperity as a result of Wall Street’s financial engineering. Obviously, the policy tools, management strategies and mindsets for an upturn will be different for a downturn.
The particular developer went on and on extolling his grand plans for Iskandar and how with the help of China, the Malaysian economy would be transformed!
One can be forgiven for the lack of foresight, but when a person with the benefit of hindsight, ignores reality and persists in his own spin, he deserves the financial catastrophe that is coming his way!
Since December 2006, I had been warning whosoever that cared to listen of the global financial tsunami. It is common sense and simple logic, that when the US and Europe collapse, all exporting economies would suffer grievously. But so-called experts gleefully boasted that Asia has been de-coupled from the vagaries of the developed economies and would be immune from any financial flu or worse, on account of huge foreign exchange reserves which will provide the necessary protection. Asians have learnt from the 1997 crisis!
Utter rubbish!
What Asian economies did after 1997 was to substitute dependence on hot capital inflows for dependence on global demand, specifically the US, for export led growth! External factors still dominate and determine Asia’s economic survival – “jumping from the frying pan into the fire!”
When the Badawi regime drew the blueprint for Iskandar, their entire strategy was anchored primarily on the financial health of Singapore. This is the fatal flaw, as Singapore’s strength in good times is also the Achilles heel in any downturn.
This was all too obvious since the last quarter of 2008. But any idiot would have noticed that when Singapore’s investment arm, Temasek was injecting huge sums of monies into Wall Street banks in 2007, all of which were insolvent, it was arrogance and misplaced confidence that ruled their minds and their vaunted research capabilities seem to have been put on a back burner.
And what a price Singapore paid for their arrogance – its worst financial crisis since separation from Malaysia in the early sixties!
The same arrogance and misplaced confidence of the Badawi regime, pushed to do the unthinkable by the immaturity and inexperience of the “4th Floor boys” and the various infantile consultancy outfits, have now created an economic nightmare in the Malay heartland of Johor, the bastion of UMNO.
Wall Street has reported that Singapore has admitted that it will experience the “deepest recession in its history.” Growth contracted 16.9% in the last quarter of 2008 and GDP growth in 2009 would decline by 5%. Massive unemployment has already set in. Finance Minister Mr. Tharman Shanmugaratnam even stated that “no one knows how prolonged or deep this recession is going to be. We are plugged into the markets that are largely in the rich countries and when we go through a global crisis like this, we come down very quickly.” The Minister also remarked that there was no Asian domestic demand to provide a cushion for Singapore.
It follows that if there is no cushion for Singapore, there will likewise be no cushion for Malaysia, specifically for the Johoreans who depend so much on Singapore.
Johor and Iskandar are dead meats. This is a given
Malaysia is also much dependent on Japan.
It was reported yesterday that Japan’s GDP was contracting at an annualized 12%. Experts have observed that the speed “of the decline embedded in the latest Asia data is on par with the collapse in the US during the 1930s Depression.”
A microcosm of Japan’s financial woes can be seen in the horrendous performance of Toyota Motors, the flagship of Japanese manufacturers and the world’s largest producer of cars. It has suffered the biggest loss and are shutting down factories and reducing drastically production in Japan. Japan was counting on a continuous growth of 3% in the US for her exports. Exports fell 35% in the 12 months to December 2008. The US consumer market has vaporized completely!
South Korea is in the same leaking boat. In the last quarter of 2008, GDP fell by an average annualized rate of around 15% in the Tiger economies of Hongkong, Singapore, South Korea and Taiwan. South Korea’s GDP in fact fell by 21%!
The collapse in exports has been exacerbated by the lack of credit, specifically trade financing of Asia’s customers i.e. importers. Even exporters are cautious of the letters of credit issued by the tottering banks.
The intra-regional trade is of no help because it disguises the fact that 60% of the final demand for Asian products still come from advanced economies – USA, Europe and Japan, and they are all bleeding and in intensive care!
The developer whom I had referred to earlier, had pinned his hopes for a rebound in Iskandar and the revival of his shrinking fortune on China’s ability to take up the export slack. He must be wandering in la la land to come to this conclusion. China, the world’s factory has been hard hit, its exports declined for the third consecutive month in January, falling 17.5%. Imports have plunged even further by a whopping 43.1% and bearing in mind that China’s imports are mainly inputs for manufacturing exports, this sharp decline means that China’s manufacturing is in a grid-lock.
So, if Malaysia and Iskandar are looking towards Asia and specifically Singapore for a lifeline, there is none. The Malaysian boat is leaking fast and we don’t even have a paddle. There is not even a focus attempt to plug the leak as the Badawi regime is just too busy retaining power and grabbing power from the Pakatan Rakyat controlled states and now in these critical months, indulging in fruitless campaigning in two silly By-elections in Perak and Kedah!
Malaysia’s exports have collapsed and will collapse further. This is a given.
Asia cannot replace the US / Europe markets.
The monies the Badawi regime has pumped into Iskandar have been wasted and there is no likelihood of any returns in the next ten years.
The Badawi regime had counted on the Arabs and their oil monies. But the stupid Arabs are all in a financial mess. Their dollars were put into the toxic wastes that are now deemed worthless. They were then lured by the fraudsters of Wall Street to invest in insolvent banks. These investments are not even worth ten cents to the dollar! The gleaming skyscrapers and man-made islands sprouting multi-million homes and multi-billion hotels will soon become the largest concrete jungle on planet earth.
The US and Europe are already turning to protectionism as a way to insulate their economies. “Buy America First” is the battle cry and the sooner we come to grips that these export markets are no longer sustainable and accessible for the next few years, the better will we be able to deliver a pragmatic blueprint for survival – one that will take into consideration that the next few years will be very painful.
I am now issuing another grim warning. As the only political / financial analyst who has the guts to do so, I am not confident that the ruling elites will take heed. But I hope that those who are reading this article in my website will put pressure on the Badawi regime.
What is this danger? It is the complete devastation of most if not all European banks. Yes, there can be no rescue of these banks. In an “for eyes-only” document prepared by the European Commission for the Finance Ministers of Europe, it was estimated that European banks must write down $25 trillion on account of gambling in toxic wastes products. This is not a typo, It is not billions. It is $25 trillion. A mind-boggling sum.
In the aforesaid Forum, I warned the delegates that a conservative estimate of total global write down for derivatives debts on the most conservative basis was $50 trillion, approximately 10% of the $565 Trillion derivative trade as at end 2008. The major banks in the US control 90% of this global market. Now, common sense and simple logic tells me that if the EU banks collectively represent the remaining 10% of the global derivative market and has to write off $25 trillion, the US of A is beyond salvage, specifically its banks. The write off in America would easily exceed $50 trillion. The combine write down would dwarf the global GDP of approximately $60 trillion.
If this is too outlandish for you to accept, then do your research – check it out from Google.
The fascist thugs at website “Malaysia Today”, the mouthpiece of Anwar Ibrahim and the Badawi regime, used to attack me for my warnings. They have all scattered but some die-hards remain. If you had listened to these idiots instead of taking my warnings to heart, now is the time to hunt them down and demand that they account for their actions. Demand from the webmaster to reveal their NRIC number and address and then sue their pants off!
If Johor cannot survive this financial turmoil because of Badawi regime’s and Khairy’s foolish schemes, UMNO as a political party will be finished for good. The Malays in Johor (the bastion of Malay nationalism) will be so disillusioned that mass rejection of UMNO as the defender and custodian of Malay rights will erupt into an avalanche! If UMNO cannot save the Malays in Johor, it will be buried in the next general elections.
Since last year, I had warned repeatedly that the first quarter of 2009 would be critical and time is of the essence, but all to no avail. Not one political leader took me seriously. It is only after the 4th February 2009 closed door forum organized by NCCIM that there is a discernable seriousness in acknowledging the need for a more dynamic and hands-on approach in addressing the consequences of the present financial meltdown.
But we may have left it too late. We are still on auto-pilot mode.
If a new pilot takes over at the end of March, he will not be able to stop the bleeding in Johor, and by the end of the third quarter, Johor will be in deep shits.
My advice to UMNO and Barisan Nasional is simple and the rakyat will thank you for this courageous and pragmatic initiative – give Pakatan Rakyat a walk over in the two By-elections as the outcome in any event will have no strategic significance to UMNO’s survival as a political party.
But if UMNO is distracted by the By-elections and waste precious time in resolving the growing financial crisis, it will lose the support of the Malay heartland and the bastion of Malay nationalism.
UMNO, you have been forewarned. Ignore this advice and UMNO will lose everything at stake! Barisan Nasional will not survive beyond 2010!
Follow my advice, and UMNO and the Barisan Nasional will be able to wipe out Pakatan Rakyat by the second quarter of 2010.
This is strategic thinking at the highest level.
I am playing the chess game. Why are you still playing marbles?
Badawi has asked his members of Parliament to come out with ideas as to how we can resolve this crisis. This is an open admission that he is devoid of any ideas and that Khairy and his much touted advisers are all intellectual bankrupts. The MPs have no idea whatsoever. They are all groping in the dark.
We in Malaysia have a major structural problem with regard to the Bumiputra economy. Stimulus packages no matter how massive cannot resolve inherent structural issues in the economy. I have the answers but until and unless Barisan Nasional is willing to listen and make changes, my lips are sealed.
This may sound arrogant to many. But I was the only one in the entire freaking country that got it right since December 2006. The entire nation was auto-pilot. The 9th Malaysia Plan got it wrong, the Mid-Term Review got it wrong, the 2008 budget got it wrong, the 2009 budget got it wrong and now the mini budget will also not get it right!
Time is running out. The rakyat has to decide as to who got it right and what needs to be done. I rest my case here.
Notes
1. I postulated that in Malaysia, our business cycles have a 10-year cycle. Obviously other markets’ business cycle will differ from Malaysia and therefore analysts must of necessity focus on their respective markets. The point I was making was that whatever the business cycle, there will always be ups and downs and therefore we should prepare accordingly at the critical junctures of the business cycle.
[Baca]
Timothy Geithner is putting the finishing touches on a plan that will dump $1 trillion of toxic assets onto the US taxpayer. The plan, which goes by the opaque moniker the "Public-Private Investment Fund" (PPIF), is designed to provide lavish incentives to hedge funds and private equity firms to purchase bad assets from failing banks. It is a sweetheart deal that provides government financing and guarantees for illiquid mortgage-backed junk for which there is no active market. As one might expect, the charismatic President Obama has been called in to generate public support for this latest addition to the TARP bailout. In this week's address to Congress he said:
"This administration is moving swiftly and aggressively to restore confidence, and re-start lending.
We will do so in several ways. First, we are creating a new lending fund that represents the largest effort ever to help provide auto loans, college loans, and small business loans to the consumers and entrepreneurs who keep this economy running."
The Obama administration is clearly afraid to use the unpopular Geithner to sell this boondoggle to the American people. Geithner's last performance set off a political firestorm and put the equities markets into a swan-dive. No one wants to see that again.
Details of the plan remain sketchy, but the PPIF will work in concert with the Fed's new lending facility, the Term Asset-Backed Securities Loan Facility, or TALF, which will start operating in March and will provide up to $1 trillion of financing for buyers of new securities backed by credit card, auto and small-business loans. Geithner's financial rescue "partnership" will also focus on cleaning up banks balance sheets by purging mortgage-backed securities. (MBS)
In Monday's New york Times, Paul Krugman summed up the Geithner plan like this:
"Now the administration is talking about a “public-private partnership” to buy troubled assets from the banks, with the government lending money to private investors for that purpose. This would offer investors a one-way bet: if the assets rise in price, investors win; if they fall substantially, investors walk away and leave the government holding the bag. Again, heads they win, tails we lose.
Why not just go ahead and nationalize?"
Why not, indeed, except for the fact that Geithner's main objective is to "keep the banks in private hands" regardless of the cost to the taxpayer. The Treasury Secretary believes that if he presents his plan a "lending program" rather than another trillion dollar freebie from Uncle Sam, he'll have a better chance slipping it by Congress and thereby preserving the present management structure at the banks. Keeping the banking giants intact is "Job 1" at the Treasury.
The PPIF is a way of showering speculators with subsidies to purchase non-performing loans at bargain-basement prices. The Fed is using a similar strategy with the TALF which, according to the New York Times, could easily generate "annual returns of 20 percent or more" for those who borrow from the facility.
From the New York Times:
"Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.
Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.
In the initial phase, the Treasury will provide $20 billion and the Fed will provide $180 billion. Treasury Secretary Timothy Geithner said last week that the Treasury could increase its commitment to $100 billion to allow the Fed to lend up to $1 trillion." (NY Times)
This is a blatant ripoff, which is why the plan is being concealed behind abstruse acronyms and complex explanations of how the transactions actually work. The only way investors can lose money is if they hold on to the securities after they fall below 16 percent of their original value which, of course, is unlikely, since the buyers can bail out at any time leaving the taxpayer holding the bag. Call it the "Geithner Put", another gift from Uncle Sugar to Wall Street land-sharks.
Geithner thinks that by obfuscating the details of his plan, he'll be able to carry it off with no one the wiser. But he's mistaken. His credibility has already been badly battered by his chronic evasiveness. Now the pundits are blaming him for falling consumer confidence and the plummeting stock market. Whatever plan Geithner proposes, will be put under a microscope and dissected word by word. He won't get a second chance to pull the wool over the public's eyes. If he botches the rescue operation, Obama will be forced to give him the sack. The political furor would be too much to bear.
It is no surprize that the Fed announced its expansion of the TALF on the same day that Geithner presented his outline for a "public-private partnership". The two plans represent the Obama Team's strategy for "squaring the circle", that is, for keeping the big banks in private hands while purging their balance sheets of worthless assets at the public's expense. Here's how it's presented on the Fed's website:
"Under the TALF, the Federal Reserve Bank of New York will provide non-recourse funding to any eligible borrower owning eligible collateral... As the loan is non-recourse, if the borrower does not repay the loan, the New York Fed will enforce its rights in the collateral and sell the collateral to a special purpose vehicle (SPV) established specifically for the purpose of managing such assets... The TALF loan is non-recourse except for breaches of representations, warranties and covenants, as further specified in the MLSA"
Non-recourse funding? In other words, the loans will be like mortgages, where if the homeowner finds that he is underwater, he can just walk away and leave the bank to cover the losses? In this case, it is the taxpayer who will be left taking the loss.
The PPIF is basically the same deal, 90 percent government-funded "no risk" financing offered to the same speculators who just blew up the financial system. It's a complete scam. The process allows Geithner to avoid assigning a market value to these garbage assets that no one wants. That means that he's planning to pay inflated prices--up to $1 trillion-- to keep the banks happy. Once their balance sheets are scrubbed clean, the banks can begin engineering their next swindle. Meanwhile, the hedge funds and private equity firms will demand refunds for the toxic waste they bought but cannot offload on skeptical investors. Once again, the government will pick up the tab. No problem.
Does Geithner really think he can sneak this by the American people?
The markets aren't going to like the idea of recapitalizing the banks through the backdoor. Wall Street will see right through the smoke n' mirrors and hit the "sell" button. If the banks need recapitalizing, they will have to do it the old fashion way. They'll have to restructure their capital, which means that shareholders get the ax, bond holders get a haircut, management gets the door, and the American people become majority shareholders. That's how it works in a free market. When businesses are insolvent; they file for bankruptcy and the debts are written down. Period. No exceptions. Geithner thinks he can just make up the rules as he goes
along, but he's in for a big surprise. This plan is not going to fly. The banks are going to have to take their lumps and start over. Geithner could save us all a lot of trouble by just doing his job and nationalizing them now.
The Baseline Scenario's Simon Johnson put it perfectly when he said:
"Above all, we need to encourage or, most likely, force the large insolvent banks to break up. Their political power needs to be broken, and the only way to do that is to pull apart their economic empires. It doesn’t have to be done immediately, but it needs to be a clearly stated goal and metric for the entire reprivatization process."
[Baca]
The financial crisis is even worse than people think (and people already think it's pretty bad), and we aren't doing enough to stop it, economist and Mother Jones contributor James K. Galbraith told the House Financial Services Committee on Thursday morning. From his prepared testimony:
In 1930, John Maynard Keynes wrote, "The world has been slow to realize that we are living this year in the shadow of one of the greatest economic catastrophes of modern history." That catastrophe was the Great Crash of 1929, the collapse of money values, the destruction of the banking system. The questions before us today are: is the crisis we are living through similar? And if so, are we taking adequate steps to deal with it? I believe the answers are substantially yes, and substantially no.
Galbraith pointed to six significant problems with the Obama administration's response to the financial crisis. First, he said, the White House is being way too optimistic:
Why is the price of oil so high? Because the Bush administration did to the commodities market what it did to housing.
...[B]ad news has been outrunning the forecasts for months. Professional economists, working with the normal models, failed to predict the crisis. In many important cases, including high officials, they actively denied it could happen. Chairman Bernanke was typical: through July of 2007, he argued that the Federal Reserve Board's predominant concern was inflation; thus the Federal Reserve was unable to give Congress a foretaste of a crisis that was to erupt within days. And as the crisis has unfolded, events have repeatedly come in worse than expected or caught us by surprise. This should tell us something.
Second, we know that the origins of the crisis lie in a breakdown of the banking and financial system, following a breakdown in the regulation of mortgage originations, in underwriting, and in credit default swaps. This is something we have not seen in our lifetimes. We know that the actions already taken in response - the TARP, the nationalization of the commercial paper market and the swap agreements with the ECB and other central banks - are unprecedented. We know that these measures have, at best, only averted a deeper catastrophe. And we know that the baseline forecast, which is a mechanical procedure based on statistical relationships between non-financial variables, for the most part, takes none of this into account.
We therefore have no basis for confidence in the baseline forecasts, and we should prepare ourselves, as Churchill said to Parliament at the time of Dunkirk, "for hard and heavy tidings."
The second problem Galbraith identified with the Obama administration's response to the crisis is an over-reliance on monetary policy:
[M]onetary policy today has little power to restore growth. In the Depression they called it "pushing on a string." With interest rates already at zero, there is little more the Federal Reserve can do.
The Obama administration's bank rescue plan is also fatally flawed, Galbraith says:
The bank plan appears to turn on a metaphor. Credit is "blocked" or "frozen." It must be made to "flow again." Take a plunger to the toxic assets, a blowtorch to the pipes, it's said, and credit will flow. This will make the recession essentially normal, validating the baseline forecast. Add the stimulus to a normalization of credit, and the crisis will end. That's the thinking, so far as I can tell, of the Treasury department in this new administration.
But common sense begins by noting that the metaphor is wrong. Credit is not a flow. It is not something that can be forced downstream by clearing a pipe. Credit is a contract. It requires a borrower as well as a lender, a customer as well as a bank. The borrower must meet two conditions ... [creditworthiness and willingness to borrow] ... The "credit-flow" metaphor implies that people came flocking to the auto showrooms last November and were turned away because there were no loans to be had. This is not true. What happened was that people stopped coming in. And they stopped coming in because, suddenly, they felt poor, uncertain and afraid.
In this situation, stuffing the banks with money will not change their behavior... [T]he bank chiefs have made it very clear, in testimony here and elsewhere: they will not return to ordinary commercial, industrial and residential lending until they can see a reasonable way to make money at it... More likely, they will hunker down, invest in Treasuries and prime corporate bonds, and rebuild capital for the long-term, as they did from 1989 to 1994. Only this time, with the yield curve as flat as it is and the insolvencies as deep as they are, it could take a decade or longer.
[...]
The Treasury plan, if put in place as described, would have a perverse effect on the distribution of wealth. To guarantee bad assets at rates above their market value is simply a transfer to those who hold those assets. It would enable them to convert those assets, sooner or later, to cash. The plan would thus preserve the wealth of bank insiders and financial investors, while failing to prevent the collapse of the wealth of almost everyone else. I cannot believe that the American public will tolerate this, for very long.
[...]
In short, the Treasury plan will not achieve its stated goals, and meanwhile risks both triggering inflation and obstructing growth.
Galbraith sees no alternative to putting "several very big banks" that are "deeply troubled" into receivership, breaking them up, firing existing management, and selling them in parts or relaunching them as "multiple mid-sized institutions. While that happens, he says, there should be a publicly-run bank "to provide the loans to businesses - small, medium and large - sufficient to keep them running through the crisis," as the Reconstruction Finance Corporation did during the Depression.
The fourth point that Galbraith emphasizes is that Social Security and Medicare are not causing our problems, and a "preoccupation" with the two programs is "actively dangerous to the prospects for economic recovery." He calls for a "permanent increase" in Social Security benefits, a payroll tax holiday, and a reduction in the age of eligibility for Medicare:
These measures are among the most promising available at this moment. Congress should be prepared to use them if and when it becomes clear that the present policies are insufficient.
"The housing crisis," Galbraith says, "is at the root of our difficulties," but "There is no way for public policy to stabilize housing prices as such in the near term." But there are other things we can do, and in this sphere, at least, Galbraith thinks the Obama team is on the right track:
The administration's plan of action in the housing sphere is a bright spot on the policy horizon. It meets, so far as I can tell, the tests of fairness and sustainability reasonably well. But it does so only for a limited class of borrowers, who are not too deeply underwater already on their homes. It will provide a measure of relief, but it will not, so far as I can tell, either stop the wave of foreclosures or prevent a continued decline in prices.
Galbraith points to two alternative housing plans that "might work." The first is a moratorium of new foreclosures and the creation of an organization like the depression-era Home Owners Loan Corporation "for triage and renegotiation on a case-by-case basis." (James Ridgeway, Mother Jones' senior Washington correspondent, called for a similar plan in September.) The other alternative would be to allow the normal foreclosure process to work but to have the government buy foreclosed homes and allow the previous owners to rent their houses while maintaining an option to repurchase their homes from the government at a later date. "This would have the advantage of protecting against moral hazard, while at the same time preserving occupancy, to the maximum extent possible," Galbraith says.
Finally, Galbraith says, the Obama administration has to think long-term, especially about infrastructure, energy, and the dollar. He calls for curtailing crude oil imports, instituting a national infrastructure fund, and conserve energy. On the dollar, he says:
[While] the world crisis has revealed the relative strength of the dollar and the structural weakness of the euro and of other major currencies, ... it awakens an equally serious danger, which is that instability between world currencies could produce a cumulative spiral of global economic collapse. This is an important danger, for which we are ill-prepared. There needs to be a new attention to the financial architecture, both to achieve a coordinated fiscal expansion and to admit the serious possibility of an even larger crisis.
The bottom line, Galbraith emphasizes, is that he believes "we are not in a temporary economic lull, an ordinary recession, from which we will emerge to return to business-as-usual." Instead, he says, "We are at the beginning of a long, profound, painful process of change." On that last bit, at least, Galbraith and the Obama administration can probably agree.
[Baca]
This week we have adopted an unprecedented procedure in our posting.
There has been a rush of statements coming out of the White House and these are all KEY POLICY STATEMENTS FROM PRESIDENT OBAMA.
To assist your reading and understanding of the issues raised in these policy statements, I have posted them in a time sequence in the folder “Feature Article” as follows:
1) Remarks By The President and Vice President At Opening of the Fiscal Responsibility Summit - February 23, 2009
2) Remarks By The President in Question and Answer Session At the Closing of the Fiscal Responsibility Summit - February 23, 2009
3) Remarks By The President After The Regulatory Reform Meeting - February 25, 2009
4) Remarks By The President On The Fiscal Year 2010 Budget - February 26, 2009
I would like the readers to then GO TO THE FOLDER: Financial Analysis to read and evaluate some of the commentaries on the above stated policy issues in the sequence as follows:
1) James Glabraith: Obama Isn’t Doing Enough To Solve The Financial Crisis.
2) The Geithner Put: Its Time to Break Up The Big Banks
3) Banks To Get Nearly Unlimited Federal Funds
4) Recipe for Disaster: The Formula That Killed Wall Street
5) How the Lust for Money Powers The City
6) How The US Economy Was Lost
I hope these articles and documents will enable you to have a better understanding of the issues in relation to the financial crisis and the US government’s attempt to resolve them.
[Baca]
For all the anxiety the idea brings, we accept something similar whenever the FDIC takes over a bank. The real worry is financial Armageddon.
Philosophically, I am opposed to government intervention, as longtime readers know. But we are faced with financial Armageddon.
It was precipitated, in essence, by (a) the Alan Greenspan Federal Reserve's insane meddling in the market for two decades, combined with its failure to do its regulatory job generically, and (b) the abdication of responsibility on the part of all regulators, including Congress.
When one looks at the litany of financial companies that have ended up in the trash heap, it's sort of hard to make the case that any regulators (with the exception of maybe some state insurance commissioners) did their jobs in anything approaching an acceptable manner over the past decade.
What lies before us now is the prospect of bank nationalization -- an idea that seems to arouse an awful lot of hysteria. Perhaps we should use the phrase "government-assisted reorganization," which is nothing new.
Near as I can tell, whenever the Federal Deposit Insurance Corp. steps in to take over a bank (as it did with Washington Mutual and Wachovia), a government-assisted reorganization has taken place. That is effectively what transpired at American International Group (AIG, news, msgs), Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs), and is likely to be the outcome for others, such as Citigroup (C, news, msgs), and possibly for Bank of America (BAC, news, msgs).
Can banks handle real stress?
In my opinion, the Treasury Department's idea of a stress test is a great one. That way, we would have some idea of which institutions may need to become wards of the state -- being either carved up or shut down.
Those capable of passing such a test obviously have a decent chance of surviving the recession and probably will be able to raise additional capital. In all likelihood, they will see their stock prices rally.
The sooner the stress test is performed and the reorganization of busted financial institutions completed, the sooner this phase of the financial crisis will be behind us, regardless of the outcome at various banks.
Unfortunately, the assumptions built into the Treasury's stress-test plan are a little disappointing. They look too optimistic for 2010 to be really useful, though I would think stock bulls would still embrace this process.
Citi tries to head off nationalization
Why is Citigroup so eager to sell 25% to 40% of itself to the government? Because it's afraid the government might take a 51% stake, MSN Money's Jim Jubak says.
The status quo is bearish. Addressing the problems head on is the first step in the healing process. However, I would caution people not to get too comfortable with the results of these somewhat sanguine tests.
Of course, to the extent that these broken financial entities require government money, that will create a funding problem down the road. That is not today's worry. Today's worry is financial Armageddon.
Defend yourself with gold
The funding problem is, however, a reason to own gold, as gold is the only defense against the money-printing press. Not that the gold market was too worried about the printing press last week.
I thought it might be worth making a couple of points about gold, given the rout it suffered last week. As gold dropped 8% (roughly $80 per ounce), the key gold exchange-traded fund, SPDR Gold Shares (GLD, news, msgs), saw no liquidation. But the double-short ETF ProShares UltraShort Gold (GLL, news, msgs) experienced record volume.
Thus, the recent decline in the price of gold has been precipitated by some combination of short-selling in the gold ETF (where the short interest has been rising quite aggressively) and/or the short-selling and liquidation of gold futures.
Those of us who believe gold belongs in one's portfolio need to remember that the folks who don't like it really don't like it. After all, gold is easy to hate. It's just a price, and it appears to many that today's price is too high.
A lot of people want to see stocks trade higher, and many of them believe a sinking gold price is a sign that stocks should go up. So they have a vested interest in rooting gold lower.
Gold mining stocks are even easier to hate because mining is a tough business and what the companies wind up with is gold, which, as noted above, stock bulls (and gold bears) already hate. So it's pretty easy to see why there's quite a contingent that wants to bet against gold. However, those doing so have every government of the world fighting against them, in the form of printing money.
Meanwhile, the physical market continues to show signs of people wanting to exchange their colored pieces of paper for gold. Interestingly, Brinks said Wednesday that it had been seeing "a large spike in clients shipping gold and silver" from the New York Mercantile Exchange and Commodity Exchange, or Comex, over the past few months.
Thus the battle continues. Folks need to be aware that gold will remain volatile. But I don't believe the run in gold will be over for quite some time. Gold has been rising sort of quickly for eight years, and I expect it should continue to do so.
[Baca]
Washington, DC
Two years ago, we set out on a journey to change the way that Washington works.
We sought a government that served not the interests of powerful lobbyists or the wealthiest few, but the middle-class Americans I met every day in every community along the campaign trail – responsible men and women who are working harder than ever, worrying about their jobs, and struggling to raise their families. In so many town halls and backyards, they spoke of their hopes for a government that finally confronts the challenges that their families face every day; a government that treats their tax dollars as responsibly as they treat their own hard-earned paychecks.
That is the change I promised as a candidate for president. It is the change the American people voted for in November. And it is the change represented by the budget I sent to Congress this week.
During the campaign, I promised a fair and balanced tax code that would cut taxes for 95% of working Americans, roll back the tax breaks for those making over $250,000 a year, and end the tax breaks for corporations that ship our jobs overseas. This budget does that.
I promised an economy run on clean, renewable energy that will create new American jobs, new American industries, and free us from the dangerous grip of foreign oil. This budget puts us on that path, through a market-based cap on carbon pollution that will make renewable energy the profitable kind of energy; through investments in wind power and solar power; advanced biofuels, clean coal, and more fuel-efficient American cars and American trucks.
I promised to bring down the crushing cost of health care – a cost that bankrupts one American every thirty seconds, forces small businesses to close their doors, and saddles our government with more debt. This budget keeps that promise, with a historic commitment to reform that will lead to lower costs and quality, affordable health care for every American.
I promised an education system that will prepare every American to compete, so Americans can win in a global economy. This budget will help us meet that goal, with new incentives for teacher performance and pathways for advancement; new tax credits that will make college more affordable for all who want to go; and new support to ensure that those who do go finish their degree.
This budget also reflects the stark reality of what we’ve inherited – a trillion dollar deficit, a financial crisis, and a costly recession. Given this reality, we’ll have to be more vigilant than ever in eliminating the programs we don’t need in order to make room for the investments we do need. I promised to do this by going through the federal budget page by page, and line by line. That is a process we have already begun, and I am pleased to say that we’ve already identified two trillion dollars worth of deficit-reductions over the next decade. We’ve also restored a sense of honesty and transparency to our budget, which is why this one accounts for spending that was hidden or left out under the old rules.
I realize that passing this budget won’t be easy. Because it represents real and dramatic change, it also represents a threat to the status quo in Washington. I know that the insurance industry won’t like the idea that they’ll have to bid competitively to continue offering Medicare coverage, but that’s how we’ll help preserve and protect Medicare and lower health care costs for American families. I know that banks and big student lenders won’t like the idea that we’re ending their huge taxpayer subsidies, but that’s how we’ll save taxpayers nearly $50 billion and make college more affordable. I know that oil and gas companies won’t like us ending nearly $30 billion in tax breaks, but that’s how we’ll help fund a renewable energy economy that will create new jobs and new industries. In other words, I know these steps won’t sit well with the special interests and lobbyists who are invested in the old way of doing business, and I know they’re gearing up for a fight as we speak. My message to them is this:
So am I.
The system we have now might work for the powerful and well-connected interests that have run Washington for far too long, but I don’t. I work for the American people. I didn’t come here to do the same thing we’ve been doing or to take small steps forward, I came to provide the sweeping change that this country demanded when it went to the polls in November. That is the change this budget starts to make, and that is the change I’ll be fighting for in the weeks ahead – change that will grow our economy, expand our middle-class, and keep the American Dream alive for all those men and women who have believed in this journey from the day it began.
Thanks for listening.
[Baca]
“…the U.S. government has pledged more than $11.6 trillion on behalf of American taxpayers over the past 19 months, according to data compiled by Bloomberg. Changes from the previous table, published Feb. 9, include a $787 billion economic stimulus package. The Federal Reserve has new lending commitments totaling $1.8 trillion. It expanded the Term Asset-Backed Lending Facility, or TALF, by $800 billion to $1 trillion and announced a $1 trillion Public-Private Investment Fund to buy troubled assets from banks. The U.S. Treasury also added $200 billion to its support commitment for Fannie Mae and Freddie Mac…” Bloomberg, February 24, 2009 (Mark Pittman and Bob Ivry)
The Administration’s new budget projects an astounding $1.75 TN fiscal 2009 federal deficit - or about 12% of GDP. Federal outlays are expected to surge 32% this year to $3.94 TN. In nominal terms, the deficit is set to quadruple the previous all-time record. In percentage terms one has to return back to the war economy of the 1940s to find anything comparable.
Yesterday, Fannie Mae reported a fourth quarter loss of $25.2bn, bringing the company’s second-half 2008 shortfall to more than $50bn. Non-performing assets surged a stunning 87% during the quarter to $119.2bn, a three-fold increase in just 12 months. Having more than depleted its razor-thin capital base, Fannie requested $15.2bn of additional Treasury support (from the $200bn promised).
The FDIC announced yesterday a $26.2bn Q4 2008 loss for the banking system. The Office of Thrift Supervision reported that our nation’s Savings & Loans lost $3.0bn during the final quarter of the year, increasing 2008 losses to a record $13.4bn. General Motors announced a $9.6bn Q4 loss, increasing its annual loss to a staggering $30.9bn. Analysts are expecting even greater losses to be reported at AIG and Citigroup.
The dimensions of the reported deficits and losses are not easily digested; the scope of the today’s systemic problems not so easily comprehended. I’ll push ahead with efforts to use the Credit Bubble Framework as an analytical tool for making some sense of the historic nature of the unfolding bust.
Let’s try to place the various huge – and increasingly numbing – deficit/loss numbers (attendant with this bust) into coherent context. For such an endeavor it is imperative to first examine the preceding boom. This week, in particular, seems an appropriate time to summarize, in Credit terms, the incredible dimensions of the fateful inflationary Bubble.
From the Federal Reserve’s “flow of funds” report, we can see that Total System Credit (non-financial and financial) ended 1995 at $18.475 TN. By the end of 2007, this number had inflated to $49.882 TN, for growth of 170% in only 12 years. During this period, Household Debt swelled 184% to $8.959 TN; Non-farm Corporate Debt 130% to $3.832 TN; and State & Local Government borrowings 109% to $2.192 TN. Federal debt expanded “only” 41% to $5.122 TN. Rest of World holdings of U.S. assets inflated 365% to $16.048 TN. While significantly trailing Credit growth, GDP nonetheless bulged 87% during this period.
Over the past decade, the “optimists” often cited the federal government’s positive fiscal position as evidence of the health of the overall economy and soundness of our prosperity. It should be clear these days that the protracted boom's massive inflation of private-sector Credit had grossly inflated government receipts (among other things). Indeed, over the 12-year period Federal Receipts inflated 88% (to $2.651 TN) and State & Local receipts increased 92% (to $1.903bn). This crucial facet of the inflationary boom spurred federal and state & local spending growth of 80% and 93%, respectively.
State & Local governments will now attempt to maintain these inflated levels of expenditures, while the federal government will move aggressively to grossly inflate already inflated spending. The budget now calls for federal expenditures this year to approach $4.0 TN. This compares to spending of about $1.6 TN back in 1995. The federal deficit is projected to expand by a combined $3.0 TN during fiscal years ’09 and ’10. This would amount to a 60% increase in federal debt in only two years.
Today’s unparalleled expansion of federal debt and obligations is being dressed up as textbook “Keynesian.” It’s rather obvious that we are in dire need of some new books, curriculum and economic doctrine. But from a political perspective, the title is appropriate enough. From an analytical framework perspective such policymaking is more accurately labeled “inflationism” – a desperate attempt to prop inflated asset prices, incomes, business revenues, government receipts, and economic “output”. There have been many comparable sordid episodes throughout history, and I am not aware of any positive outcomes.
The Administration’s budget earmarks an additional $750 billion as a contingency for added financial sector bailouts. Fed data nicely illuminate the dimensions of the financial sector's problem. Between 1996 and 2007, Total Mortgage Debt expanded 220% to $10.061 TN. Total GSE Agency Securities (debt and MBS) tripled to $7.397 TN. The ABS market inflated 580% to $4.50 TN. Over this 12-year period, Bank Assets swelled 150% to $11.194 TN. Securities Broker/Dealer assets ballooned 440% to $3.10 TN. In 12 years, Total Financial Sector borrowings expanded 300% to $16.90 TN – in the process creating a Credit and liquidity junky out of U.S. asset markets and the real economy. Today, the deeply impaired financial sector is incapable of assuaging the system's bloated Credit needs.
For perspective, a little compare and contrast is in order. Total Mortgage Debt increased $188bn in 1995, compared to $1.437 TN growth in 2005, $1.410 TN in 2006, and $1.098 TN in 2007. Agency MBS increased $98bn in 1995, compared to $609bn growth last year. The ABS market grew $127bn in 1995, in contrast to the $725bn growth in 2005 and 2006’s $808bn. Bank Credit expanded $273bn in 1995, compared to 2007’s $788bn and 2008's $1.294 TN. Broker/Dealer assets expanded $113bn in 1995, a small fraction of 2007’s fateful $615bn growth.
This unprecedented Credit explosion inflated asset prices as well as incomes. Between 1996 and 2007 National Incomes inflated 90% to $12.271 TN. Compensation of Employees surged 86% to $7.812 TN. Bubble Impacts were even more dramatic with respect to the Household (including non-profits) Balance Sheet. In twelve short years, Household Sector Asset holdings inflated $43.685 TN, or 133%, to $76.549 TN. Despite Household Liabilities surging 185% to $14.379 TN, Household Net Worth (assets minus liabilities) inflated $34.360 TN, or 124%, to $62.170 TN. Importantly, this Massive Inflation of Perceived Financial Wealth over years glossly distorted the quantity and pattern of spending throughout the real economy.
This historic Credit-induced inflation of Household Incomes and Net Worth was at the core of deep structural maladjustment to the U.S. “Bubble” economy. The implosion of “Wall Street finance” (in particular the collapse of Broker/Dealer financing, private-label MBS and other ABS, and various methods of leveraging mortgage, corporate and other securities) marked the demise of various Bubbles, including ones in private-sector debt securities, residential and commercial real estate, equities, and Household Net Worth more generally. In the final analysis, the bust has left multi-Trillion dollar holes in various sector balance sheets. Moreover, Patterns of Spending throughout the economy have been forever altered. Year-after-year of reckless lending has quickly come home to roost in a Big way.
Our federal government has commenced the process of attempting to fill holes through the massive inflation of government Credit and obligations (by the Trillions). Depending on the reader’s perspective, I risk appearing either the master of the obvious or a rabid sensationalist. Yet the stakes associated with the current course of fiscal and monetary policy are absolutely momentous. And I am compelled to write that “if you’re not confused you don’t understand the nature of the problem.”
What are the ramifications and consequences associated with U.S. deficits approaching 12% of GDP? Over the short and intermediate terms? Will unprecedented fiscal and monetary measures stem financial sector implosion? Will Washington’s efforts work to bolster a faltering Bubble Economy, or will they instead only tend to delay unavoidable structural adjustment? Will the Treasury market continue to so easily accommodate reflationary efforts? How long will the dollar remain relatively stable in the face of massive growth in U.S. Non-Productive Credit? Will multi-Trillions of government debt and obligation expansion help to resuscitate private-sector Credit creation - or will it instead simply destroy the Creditworthiness of the entire economy?
Not uncharacteristically, I pose more questions than I have answers. But I do fear that we now face Trillion dollar deficits as far as the eye can see. I don’t expect “Keynesian” policies to have much success in reinvigorating busted asset markets. I’ll be surprised if private-sector Credit creation bounces back anytime soon. I fear policymaking will do more harm than good when it comes to needed economic restructuring. And my worst fears of policymaking (fiscal and monetary, democrat and republican, national and local) bankrupting the country are being anything but allayed. Similar to my belief that mortgage Credit growth should have been limited to, say, no more than 4 or 5% annually during the boom, there is today a very serious need to incorporate some reasonable limits on the expansion of federal debt and obligations.
[Baca]
NEW YORK - Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) is carrying loans on its balance sheet marked at more than $44 billion above their fair value, the company said in its annual report filed with U.S. regulators on Friday.
The bank said it ended 2008 with $886.2 billion in loans, but estimated the fair value -- or market price -- for these loans as $841.6 billion.
The bank intends to hold these loans to maturity, not for sale, said spokesman Scott Silvestri, explaining why the loans are marked above market value.
The report showed the bank struggled throughout the year as losses on consumer debt including mortgages, home equity and credit cards piled up.
Falling home prices prompted the bank to modify more than 230,000 mortgages in 2008 to help homeowners stay in their homes -- but the value of these mortgages has continued to fall.
Along with losses from mortgages and other consumer loans, the bank said it holds $6.45 billion in impaired commercial loans, up from $2.14 billion at the end of 2007, according to the report.
Separately, Bank of America's investment bank lost more than $10 million on one in every four trading days in 2008.
The Charlotte, North Carolina-based bank has reported write-downs and credit losses of more than $60 billion since the credit crisis began in the middle of 2007.
Bank of America shares finished down more than 25 percent on Friday at $3.95, amid a broad rout of financial stocks after the announcement the government is converting its position in Citigroup Inc's (C.N: Quote, Profile, Research, Stock Buzz) preferred stock to common shares to help restore investor confidence in that bank's capital position. Shares in Bank of America have fallen 72 percent since the start of the year.
[Baca]
TOP secret contingency plans have been drawn up to counter the threat posed by a “summer of discontent” in Britain.
[FF Editorial: In the ground breaking book, the Shadow-Money Lenders and the Global Financial Tsunami, Matthias Chang has warned as far back as early 2007, that there will be blood on the streets when the impact of the crisis hits the real economy. The people disgusted with the bailouts of the rich and mighty, will take to the streets to demand justice and retribution.]
The “double-whammy” of the worst economic crisis in living memory and a motley crew of political extremists determined to stir up civil disorder has led to the ¬extraordinary step of the Army being put on ¬standby.
MI5 and Special Branch are targeting activists they fear could inflame anger over job losses and payouts to failed bankers.
One of the most notorious anarchist websites, Class War, asks: “How to keep warm ¬during the credit crunch? Burn a banker.”
Such remarks have rung alarm bells in Scotland Yard and the Ministry of Defence.
Intelligence sources said the police, backed by MI5, are determined to stay on top of a situation that could spiral out of control as the recession bites deep.
The chilling prospect of soldiers being drafted on to the streets has not been discounted, although it is regarded as a last resort.
What worries emergency planners most is that the middle classes, now struggling to cope with unemployment and repossessions, may take to the streets with the disenfranchised.
The source said “this potent cocktail is reminiscent of the poll tax riots which fatally wounded Margaret Thatcher’s government in 1990”.
Last night Scotland Yard vowed it was ready to face any threat. A source said: “We do have a policing plan in place and we have riot police officers trained for such measures.”
But other senior police leaders fear the force will be unable to cope.
Were that to be the case, the ¬Government has a contingency plan to deploy troops on the streets of Britain’s major cities.
A senior source said: “This is a very real, and very serious, problem.
“I can tell you there have been crisis talks in Whitehall about this.
“H
Arkib: March 2009
Tun Dr. Mahathir: Melayu dalam cemas, perlu tolak rasuah & usaha keras untuk ubah nasib dalam cabaran globalisasi
Tun Dr. Mahathir: Melayu dalam cemas, perlu tolak rasuah & usaha keras untuk ubah nasib dalam cabaran globalisasiUCAPAN OLEH
YABHG TUN DR MAHATHIR BIN MOHAMAD
DI PERHIMPUNAN DAN SIDANG KEMUNCAK PRIBUMI PERKASA NEGARA
DI KOMPLEKS SUKAN TNB, JALAN BANGSAR,
KUALA LUMPUR
PADA HARI AHAD, 22 MAC 2009
——————————–
1. Terlebih dahulu saya ucap terima kasih kepada penganjur perhimpunan ini kerana menjemput saya dan memberi peluang kepada saya untuk berucap kepada hadirin.
2. Saya yakin ramai daripada kita yang hadir, terutamanya orang Melayu dan bumiputra lain, hadir kerana kita berasa kita berada dalam keadaan cemas, keadaan yang merbahaya, keadaan terancam.
3. Kenapa tidak? Kita kini diserang berkali-kali oleh berbagai pihak.
4. Ramai daripada orang lain berkata Melayu adalah kaum pendatang.
5. Melayu mengamalkan apartheid ala kulit putih Afrika Selatan.
6. Melayu tidak adil, suka menidakkan hak kaum-kaum lain.
7. Melayu sudah cukup kaya dan tidak perlu dasar Ekonomi Baru lagi.
8. Semua peluang perniagaan dan pelajaran diberi hanya kepada orang Melayu.
9. Kuasa politik dibolot oleh orang Melayu dan lain-lain.
10. Berhadapan dengan tuduhan dan tohmahan ini Melayu sekarang tidak boleh mempertahankan diri, bahkan tidak boleh bercakap berkenaan dengan bangsa mereka tanpa dituduh sebagai racist. Mereka harus terima sahaja semua tuduhan/tohmahan ini dan berdiam diri atau bersetuju sahaja. Mereka juga boleh tambah tokok kepada kecaman ini dan mereka ini akan dianggap liberal dan disanjung tinggi oleh orang lain. Sebenarnya orang Melayu sekarang berada dalam ketakutan, tidak mempunyai pemimpin yang sanggup pertahankan mereka. Sebaliknya pemimpin mereka mengerohkan lagi keadaan dengan memohon maaf walaupun kesalahan dilaku oleh orang lain.
11. Demikianlah situasi yang mereka hadapi sehingga mereka berasa mereka bersalah, tergamam dan tak dapat berkata apa-apa.
12. Keadaan hari ini lebih merbahaya daripada keadaan semasa British merancang untuk menakluk negeri-negeri Melayu dengan perancangan Malayan Union. Pada masa itu kita boleh cakap berkenaan Melayu dan tidak ada sesiapa yang akan tuduh kita sebagai racist. British pun tidak panggil kita racist. Mereka akui memang pun hak orang Melayu menuntut negeri-negeri Melayu sebagai hak orang Melayu. Semua perjanjian berkenaan dengan negeri-negeri di semenanjung mesti dibuat dengan Raja-Raja Melayu. Tidak ada siapa dari kaum laim yang berhak membuat apa-apa perjanjian.
13. Sekarang orang Melayu tidak pun boleh berkata negeri ini negeri Melayu, tidak boleh sebut negeri ini dikenali sebagai Tanah Melayu. Negeri Jepun boleh dikatakan negeri orang Jepun, negeri Korea – negeri orang Korea, negeri China – negeri orang Cina, negeri India – negeri orang India. Tetapi negeri Melayu – bukan negeri orang Melayu. Dahulu mungkin. Tetapi tidak sekarang. Sekarang Malaysia, hak orang Malaysia dan bukan hak orang Melayu. Kesanggupan dan kerelaan orang Melayu berkongsi milik negara ini tidak sedikit pun dihargai. Pemberian satu juta kerakyatan oleh Tunku Abdul Rahman Putra kepada kaum lain tidak dihargai bahkan tidak diingati, dilupakan dengan begitu sahaja.
14. Orang Melayu dikatakan kaum pendatang di negaranya sendiri. Dan kaum pendatang lain tidak boleh dipanggil kaum pendatang. Jika sesiapa berbuat demikian, mereka mesti minta maaf. Tidak perlu sesiapa minta maaf jika berkata Melayu kaum pendatang.
15. Namun saya memberanikan diri untuk bercakap sedikit berkenaan orang Melayu di Malaysia walaupun akan dituduh sebagai racist. Saya beranikan diri kerana sesungguhnya orang Melayu berada dalam keadaan cemas, dilanda oleh bermacam-macam masalah dan ancaman. Jika orang Melayu tidak dibenar bercakap berkenaan masalah mereka, maka mereka mungkin jadi kaum yang terlucut hak (dispossessed) di negara mereka sendiri. Bahaya ini benar kerana kita sudah lihat tekanan dan kehinaan terhadap bangsa kita apabila mereka dijadikan bangsa minoriti di wilayah yang dahulu adalah sebahagian daripada negeri-negeri Melayu.
16. Keadaan ini boleh berlaku kepada orang Melayu bukan sahaja kerana orang lain tetapi kerana orang Melayu sendiri. Mereka suka membinasakan diri mereka.
17. Mereka tidak mahu merebut peluang yang disedia bagi mereka. Tempat di universiti tidak diambil. Peluang perniagaan diselewengkan. Belia Melayu tidak ingin belajar, lebih berminat dengan melepak atau jadi Mat Rempit.
18. Majoriti daripada rakyat Malaysia yang terlibat dengan dadah terdiri daripada orang Melayu, yang mendapat penyakit HIV Aids kebanyakan adalah Melayu, kes rogol dan jenayah lain juga ramai orang Melayu.
19. Yang gagal dalam perniagaan juga Melayu, tidak bayar hutang Melayu, tak selesaikan kontrak juga Melayu.
20. Gejala jualan AP pun melibatkan Melayu.
21. Kita tak suka dengar semua ini. Kita malu. Tetapi jika tidak disuarakan masalah tidak akan hilang dengan sendirinya. Orang lain tahu juga. Lebih baik malu jika kita dapat sedarkan beberapa kerat daripada kita dan mereka mengubah tabiat supaya tidak melakukan yang salah lagi. Yang lain tak malu tak mengapa. Tak mungkin kita dapat sedarkan semua. Yang kena akan terus kena.
22. Dasar Ekonomi Baru dibentuk supaya dalam jangkamasa 20 tahun kita akan dapat bahagian kita sebanyak 30%. Tetapi sekarang sudah hampir 40 tahun. 20% yang dikatakan kita dapat pun dapat kerana badan-badan yang mewakili Melayu, bukan orang Melayu sendiri. Kita hendak supaya DEB diteruskan. Apa gunanya jika kita tidak mahu guna peluang yang diwujudkan? Apakah kita mahu DEB kerana nak jual AP, kontrak, lesen dan sebagainya? Lebih baik DEB tidak diteruskan dan kita tidak dapat selewengkannya. Sekurang-kurangnya kita tak akan malu kerana pelbagai ejekan yang akan dibuat kepada kita.
23. Kita bernasib baik kerana dalam bidang politk kita cekap, kita kuat, kita dapat menguasai Kerajaan selama 50 tahun. Walaupun Melayu berpecah kepada beberapa parti, bermusuh sesama sendiri, tetapi majoriti Melayu masih dapat kekalkan kuasa mereka. Mereka dihormati dan disegani.
24. Tetapi itu pun sudah terlepas daripada genggaman kita. Sekarang kita tidak kuat lagi. Parti Melayu yang terkenal sudah kalah dalam Pilihanraya Umum ke-12. Parti Melayu yang menangpun berada dalam ketakutan jika parti rakan mereka menolak mereka. Sekarang orang tidak lagi hormat kita. Apa sahaja yang dituntut orang lain, baik yang menang, baik yang kalah akan kita layan. Kita yang perlu hormati orang lain. Tersilap sikit kita minta maaf bagi pihak semua bangsa Melayu.
25. Sesungguhnya pemimpin kita yang perjuangkan kemerdekaan, yang menebus maruah kita sudah kita khianati. Mereka berjuang bermati-matian supaya kita hidup bahagia. Mereka korbankan apa sahaja yang ada pada mereka. Pemimpin Melayu hari ini, pengikut –pengikut mereka tidak tahu mengenang budi. Mereka khianati pejuang-pejuang dahulu dengan melupakan perjuangan asal kerana utamakan kepentingan diri sendiri. Biar bangsa hancur asalkan dapat kemenangan bagi diri sendiri, dapat jadi Menteri, Perdana Menteri, dapat kontrak, dapat duit.
26. Kononnya nak jadi Perdana Menteri termuda. Bukan nak majukan bangsa dan negara, hanya jawatan tertinggi untuk diri sendiri seawal mungkin. Dengan apa cara sekalipun, halal atau haram, tak mengapa asalkan boleh jadi Perdana Menteri termuda.
27. Jika kita sudah sanggup jual bangsa kita, kita jual untuk dapat duit sedikit, untuk jawatan kecil dan besar, untuk isi temolok kita, alamatnya apa? Yang dikejar tidak akan dapat, yang dikilik akan berciciran. Lepas itu kita tidak ada apa-apa yang boleh diraih lagi. Semuanya akan dikuasai orang. Pada masa itu kita jadi hamba sahaja, kita akan meminta-minta sepanjang masa.
28. Ada pula yang dibawah bertanya, orang yang mereka sokong dapat jadi Perdana Menteri, Menteri, Menteri Besar – dapat kereta, dipanggil Yang Berhormat, elaun besar, terbang sana, terbang sini.
29. Kita dapat apa? Duduk di takuk tu juga. Lebih baik kita ambil sedikit bagi diri kita, sementara ada peluang.
30. Salahkah kalau kita terima duit sedikit? Mungkin kita tidak undi orang yang menyogok. Dia bukan tahu. Tetapi Tuhan tahu. Kamu membuat sesuatu yang haram. Kamu bukan sahaja jual bangsa. Kamu menolak agama kamu yang melarang, yang mengharamkan perbuatan kamu. Kamu berdosa.
31. Tapi tak mengapa. Masih muda, tak akan mati lagi. Bila dekat nak mati pakai kopiah putih dan sembahyang kuat-kuat.
32. Tetapi yang haram, haram juga. Kalau makan daging bibi haram, makan duit rasuah lebih haram, kerana ia akan binasakan bukan kita sahaja, tetapi kaum bangsa kita yang semuanya beragama Islam.
33. Pengundi salah, samada undi penyogok atau tidak. Salah kerana sudah terima jenayah rasuah sebagai budaya kamu. Apabila rasuah dibudayakan, percayalah bangsa dan negara mungkin dijajah oleh penyogok secara langsung atau tidak langsung. Bangsa akan dihina oleh dunia, akan dipandang rendah, akan dipermainkan orang. Akhirnya yang makan suap, mereka sendiri akan jadi mangsa, mereka sendiri akan terpaksa hulur untuk mendapat apa yang sebenarnya hak mereka. Inilah nasib bangsa yang menjadikan rasuah sebagai budaya biasa.
34. Sesungguhnya Melayu mudah lupa. Kita lupa betapa kita dijajah dahulu, kita terpaksa panggil tuan orang yang menjajah kita, orang yang menghina kita. Tak boleh cakap berkenaan ketuanan Melayu. Kamu jadi hamba dahulu, bukan Tuan, layak hanya untuk tanam padi, tangkap ikan, jadi kuli orang, bawa kereta orang, tukang masak orang.
35. Selama 450 tahun kita dijajah, hidup sebagai hamba, dianggap tidak layak mentadbir negara sendiri, tidak layak merdeka.
36. Kita terpaksa letak diri kita dibawah naungan negara-negara jiran yang lebih kuat.
37. Tiap tahun kita usung bunga emas dan perak untuk dipersembahkan kepada negara penaung-penaung kita.
38. Kadang-kadang Raja kita pun pergi bersama, untuk membukti kesetiaan diri dan negeri kepada negara penanung.
39. Kata orang Kedah “Terkerempun-kerempun” apabila berhadapan dengan orang asing. Mungkin ramai yang tidak faham. Tanyalah orang Kedah. Itulah “body language” kita dahulu walaupun hari ini ada juga, tetapi pada Raja yang tak bertakhta.
40. Saya biasa lihat seorang orang tua Melayu berbasikal di tendang jatuh oleh askar Siam semasa Kedah diberi kepada Siam oleh Jepun. Kesalahan orang tua ini ialah kerana tidak berhenti dan menghormati lagu kebangsaan Siam.
41. Saya biasa lihat orang Melayu ditempeleng dan disuruh panjat pohon kelapa seperti kera oleh Jepun. Inilah nasib orang yang tidak merdeka, tidak memerintah negara sendiri. Boleh ditendang, boleh ditempeleng.
42. Dan yang lihat diam sahaja, tak dapat buat apa-apa, termasuk saya. Dalam kehinaan ini muncul kesedaran dan semangat untuk menebus balik maruah bangsa. Dan bergabunglah orang Melayu untuk menangkis rancangan Malayan Union British, untuk mengekalkan perhambaan orang Melayu. Tidak siapa yang bertanya “apa yang saya akan dapat bagi diri saya” pada ketika itu. Yang kita tumpukan ialah untuk membebaskan bangsa dan negara daripada dijajah dan dihina. Kalau dalam proses ini kita terkorban, atau kita berada seperti biasa, itu tidak mengapa. Yang kita utamakan ialah maruah bangsa kita, tidak lagi akan ditendang, tidak lagi akan ditempeleng – tetapi akan dihormati oleh kawan dan lawan.
43. Sekarang kita merdeka. Perjuangan pengasas negara telah berjaya. Kita tidak akan ditendang dan ditempeleng lagi. Kita bebas daripada kehinaan. Memang pun keadaan terhormat ini sudah menjadi perkara biasa bagi kita. Bagi ramai dari kita ia datang bergolek. Ia datang melayang. Ia tidak akan dipisah dari kita.
44. Perjuangan orang dahulu adalah perkara lama, tidak perlu diingati. Yang jelas kita sudah merdeka, dapat pelajaran dan kaya sedikit. Soal tendang, tempeleng, itu cerita lama. Pepatah Melayu berkata sekali merdeka, selama-lamanya merdeka. Apa pun kita buat merdeka tetap merdeka. Sekarang ialah masa untuk kita “enjoy”. Kita kecap sepenuhnya nikmat yang ada pada kita.
45. Apa dianya semangat ke-Melayuan? Apa relevannya? Bukankah kita sudah berjaya? Hendak semangat buat apa lagi? Masuk parti untuk apa? Perjuangan sudah selesai dengan jayanya.
46. Tidak bermakna masuk parti jika tidak dapat sesuatu bagi diri sendiri. Kita sokong orang dapat jadi Yang Berhormat, jadi Menteri, dapat peluang raih duit kerajaan dan lain-lain. Kita tak bolehkah dapat sikit bagi diri kita?
47. Tetapi benarkah kita akan merdeka selama-lamanya? Memang benar. Walaupun kita tidak buat apa-apa untuk mengekalkan kemerdekaan, bukankah sudah 50 tahun kita merdeka? Apa yang hendak dikhuatirkan? Lima puluh tahun, 100 tahun lagi pun kita akan merdeka walau apa pun kita lakukan. Takkanlah kerana kita ambil 100 Ringgit duit sogokan maka akan hilanglah kemerdekaan kita? Kita boleh sembahyang hajat dan terima 100 Ringgit lagi. Orang lain terima lebih daripada kita., katanya satu juta. Masih kita merdeka. Tidak benar kerana sedikit rasuah kemerdekaan akan hilang.
48. Tetapi ingatlah penjajahan tidak selalu berbentuk penaklukan secara langsung. Penjajahan boleh berlaku walaupun kita miliki pemerintahan sendiri. Ia boleh berlaku apabila pemerintah kita yang dipilih dan diberi kuasa oleh kita sudah menjual diri mereka kepada orang lain, samada dari dalam negeri atau dari luar. Atau takut jiran marah.
49. Pemerintah yang mengikut telunjuk orang lain bukan bebas lagi. Pemerintah yang menjadi pemerintah melalui rasuah akan benar diri mereka disogok kerana perlu mendapat kewangan yang cukup untuk membeli sokongan lagi supaya kedudukan mereka sebagai pemerintah akan kekal.
50. Untuk mendapat sogokan yang cukup mereka akan sanggup ikut arahan penyogok. Dengan perkataan lain mereka akan jadi alat pada penyogok.
51. Kepentingan penyogok tidak sama dengan kepentingan kita, atau kepentingan bangsa dan negara.
52. Kita sudah lihat hanya kerana hendak kekal sebagai pemerintah, ada yang sanggup layan apa sahaja arahan, tuntutan, desakan oleh pihak yang menentukan jawatan bagi kita. Kalau pun apa yang dituntut merugikan orang Melayu, itu tidak mengapa asalkan kita dapat jawatan, walaupun sebagai “figurehead”, patung sahaja, tidak berkuasa pun.
53. Jika kita terjemah keadaan ini kepada jawatan yang didapati kerana disogok apakah yang tidak sanggup kita buat? Jual bangsa, jual negara pun kita sanggup.
54. Apabila kita sudah jual bangsa dan negara apakah kita merdeka lagi? Sudah tentu tidak.
55. Justeru itu tidak benar kepercayaan kita bahawa sekali merdeka selama-lamanya merdeka. Pada permukaannya kita merdeka tetapi pada hakikatnya kita sudah kembali dijajah. Apabila kita kembali dijajah maka kita sudah khianati pejuang-pejuang kemerdekaan kita dahulu.
56. Itulah kenyataan yang sebenar.
57. Melayu mudah lupa. Kata seorang ahli falsafah; “Mereka yang lupa akan sejarah mereka akan didera dengan mengulangi kesalahan mereka berkali-kali”.
58. Inilah hasil daripada mudah lupa. Kita lupa bahkan kita tidak suka diperingati akan sejarah kita. Apa kena-mengena peristiwa 50 tahun dahulu? Apa kena-mengena dengan kita akan kemiskinan Melayu, dengan kedaifan mereka dalam bidang ilmu dan profesyen di masa dahulu? Itu dahulu, ini sekarang. Sudah tentu sejarah penjajahan kita dahulu tidak ada kena mengena dengan keadaan kita sekarang. Tidak ada pelajaran yang akan kita dapati daripada sejarah 100, 500 tahun dahulu. Itu semua cerita dongeng.
59. Apa yang kita lakukan sekarang, kita lakukan kerana kita sudah merdeka dan selamat. Buatlah apa pun kita tetap selamat, tetap merdeka.
60. Jadi penagih dadah, jadi pelepak, jadi “Mat Rempit”, jadi penjenayah pun tak mengapa.
61. Bukankah kita yang memilih dan membentuk Kerajaan? Kerajaan perlu bertanggungjawab terhadap kita. Jika kerana amalan buruk kita, sesuatu yang tidak baik menimpa kita, bukankah menjadi tanggungjawab Kerajaan pilihan kita untuk menyelamatkan kita?
62. Jika kita diserang orang bukankah menjadi tanggungjawab Kerajaan yang kita pilih untuk menangkis serangan ini?
63. Jika kerana Kerajaan yang kita pilih terdiri daripada orang yang sogok duit pada kita dan mereka pula disogok oleh orang lain dan mereka berasa lebih terikat kepada yang menyogok mereka dan kurang bertanggungjawab kepada kita kerana sokongan kita mereka dapati kerana kita terima sogokan, apakah yang dapat kita buat? Tak banyak. Hanya menerima sahaja.
64. Akan menjadi lebih buruklah nasib kita sepanjang masa.
65. Hakikat yang sebenar ialah sokongan kita, undi kita yang kita jual tidak lagi mengikat mereka yang kita pilih untuk jadi Kerajaan.
66. Mereka akan anggap balasan kepada sokongan kita sudah pun dibuat melalui wang sogokan daripada mereka.
67. Sesungguhnya nasib kita ada di tangan kita. Jika nasib ini tidak baik kitalah yang harus berusaha untuk memperbaikinya. Ingatlah, Tuhan telah berfirman yang Dia tidak akan mengubah nasib sesuatu kaum melainkan kaum itu sendiri berusaha mengubah nasibnya.
68. Apakah kita sedang berusaha untuk memperbaiki nasib kita? Tidak ternampak satu pun usaha ke arah ini. Yang kita lihat ialah perbuatan merosakkan lagi keadaan nasib yang sudah buruk ini.
69. Kita tahu yang kita lakukan bukan untuk memperbaiki keadaan. Tetapi kita lakukan juga untuk kepentingan semasa kita. Masa depan soal lain.
70. Pejuang-pejuang kemerdekaan telah pilih demokrasi sebagai cara kita memerintah. Kenapa?
71. Sebabnya ialah kerana mereka percaya majoriti daripada rakyat tentulah bijak dalam amalan mereka, tentulah tahu antara yang baik dengan yang buruk, tentulah bijak semasa membuat pilihan.
72. Pengasas kemerdekaan percaya majorti akan tahu pilih apa yang baik bagi mereka. Sudah tentu mereka akan menolak orang yang hanya bergantung kepada sogokan untuk dipilih.
73. Tetapi mereka tidak sangka pewaris mereka, sebilangan yang tidak kecil akan tolak kebaikan dan mengutamakan sogokan untuk menentukan siapa akan memerintah mereka.
74. Pejuang kemerdekaan yang sedar betapa sukarnya bagi orang Melayu mendapat peluang dan bantuan dahulu dan dengan kerana itu Melayu tidak berjaya.
75. Dengan kesedaran ini mereka merangka untuk mengadakan lebih banyak peluang dan sokongan kepada bangsa mereka supaya bangsa mereka boleh berdiri sama tinggi dan duduk sama rendah dengan kaum-kaum lain, bahkan dengan bangsa-bangsa lain di dunia. Mereka percaya semua peluang dan sokongan akan direbut oleh pewaris daripada bangsa mereka.
76. Ya, mereka ini kebanyakan sudah tidak ada, sudah tinggal kita. Tetapi jika mereka ada apakah perasaan mereka? Tentulah mereka akan kecewa dan hampa amat sangat kerana segala-gala yang mereka ilhamkan sudah dipermainkan oleh pewaris mereka, tidak dihargai oleh pewaris mereka.
77. Mereka melihat bagaimana peluang dan bantuan disalahgunakan atau ditolak dengan begitu sahaja. Sepatutnya dengan peluang belajar di semua peringkat bangsa mereka sudah jadi bangsa yang berilmu. Dengan peluang berniaga mereka sudah jadi kaya, atau sekurang-kurangnya tidak miskin.
78. Tetapi tidak. Peluang bukan sahaja tidak direbut tetapi peluang digunakan secara yang boleh merosakkan bangsa. Mereka lepak, mereka jadi Mat Rempit, yang lakukan jenayah yang kadang-kadang menyebabkan kematian mangsa mereka.
79. Diberi peluang berniaga, diberi modal, diberi latihan tetapi kerana ingin kaya cepat mereka memperdagangkan peluang, kontrak, lesen, permit dan sebagainya.
80. Modal mereka guna untuk belanja bagi memenuhi nafsu, hutang mereka tidak dibayar. Kerana kelakuan beberapa daripada mereka, bangsa mereka dicap sebagai bangsa yang tidak beramanah, dan tidak boleh dilayan, tidak boleh diharap dengan duit ringgit.
81. Dan banyaklah lagi perbuatan mereka yang tetap mengecewakan pejuang bangsa dahulu.
82. Kata mereka, jangan buka pekong di dada.
83. Malu kata mereka.
84. Tetapi tidakkah lebih malu apabila mereka lakukan apa yang telah saya sebutkan. Tak buka pekong pun busuk juga. Biarlah pekong di dada dibuka supaya kerana bau terlalu busuk kita akan cuba melepaskan diri daripadanya. Jika tidak ia akan menjadi lebih busuk di dalam dan akan bunuh kita.
85. Semua yang disebut ini menjadi pengkhianatan kepada pejuang bangsa dahulu. Kerosakan kerana ini lambat laun akan merosakkan masa depan kita
86. Tetapi yang terdahsyat diantara amalan buruk kita ialah rasuah, terutama rasuah politik. Politiklah yang dapat memberi kuasa walaupun pada yang lemah dan miskin. Politik kita sewaktu perjuangan untuk kemerdekaan berjaya memberi kekuatan kepada Melayu sehingga mereka yang daif ini dapat mengalahkan kuasa besar dunia. Hanya dengan bersatu dan bertindak bersama, hanya dengan pendirian yang tegas kelemahan dapat diatasi dan kejayaan dicapai. Sesungguhnya kuasa politik kuasa ajaib.
87. Selagi ada kuasa ini kepada kita, percayalah kita akan dapat pulih segala-galanya, kita akan dapat mengatasi kelemahan kita, kita akan dapat tentukan masa depan kita.
88. Tidakkah kita lihat bagaimana daripada bangsa yang dijajah dan dihina, kuasa politik sudah mengubah nasib kita demikian sehingga kita dianggap sebagai contoh kepada bangsa-bangsa lain di dunia.
89. Bandingkan negara kita 50 tahun dahulu di waktu kita mencapai kemerdekaan dan negara kita sekarang. Negara dagang yang ke-17 terbesar di dunia. Kemiskinan dikurangkan daripada 70 peratus kepada lima peratus. Bandar sebesar bandar di negara maju, penuh dengan pencakar langit. Bekalan air, api dan kenderaan yang terkini.
90. Pendapatan per kapita yang 20 kali lebih tinggi dari 50 tahun dahulu dan lain-lain.
91. Semua ini adalah hasil kuasa politik semata-mata. Kerana kuasa politik, negara berbilang kaum, ugama, budaya dan bahasa dapat distabilkan. Dan sesungguhnya kita sudah dapat berdiri hampir sama tinggi dengan kaum-kaum lain dan bangsa-bangsa lain.
92. Tetapi sekarang kita lakukan perbuatan untuk menghakis dan menghapus kuasa politik kita.
93. Kerana wang yang sedikit, kerana 100-200 Ringgit kita jual kuasa politik, kita serah nasib kita kepada perasuah, perasuah yang akan jual bangsa dan negara.
94. Apakah akan jadi kepada kita apabila kuasa politik terlucut daripada kita? Apakah kita akan terus merdeka? Saya fikir tidak.
Tuan-Tuan dan Puan-Puan,
95. Perhimpunan Melayu hari ini memang menjadi hak bagi kita kerana kita menghadapi masalah-masalah yang besar-besar, bukan satu tetapi banyak masalah.
96. Kita semua berasa cemas. Di mana-mana sahaja orang Melayu sedang berhimpun untuk membincang masalah mereka, kecemasan yang mereka rasai.
97. Jika pada hari ini kita dapat menyedarkan akan musibah yang sedang dan akan timpa keatas kita, jika kesedaran ini akan menyebabkan kita bertindak keras terhadap mereka diantara kita yang mencetuskan masalah ini, jika kita dapat bandingkan gejala rasuah yang menjadi ancaman terhadap kita yang terbesar sekali, maka ralatlah perhimpunan ini, berjayalah perhimpunan ini.
98. Saya tak salahkan orang lain. Saya salahkan kita sendiri. Tak mungkin orang lain menguasai kita jika kita tegas dan tidak membenarkan mereka.
99. Maju mundurnya bangsa kita terpulanglah kepada kita. Ingatlah Tuhan tidak akan ubah nasib kita melainkan kita berusaha mengubah nasib kita sendiri.
100. Oleh itu berusahalah mengubah nasib diri sendiri setelah kita berhimpun di sini untuk membincang masalah yang kita hadapi. Saya percaya perbincangan kita akan membuahkan pemikiran dan tindakan yang boleh menyelamatkan kita.
Wassalamu’alaikum warahmatullahi wabarakatuh.
Terima kasih.
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War Crimes and Double Standards - By Robert Parry (8/3/09)
5 March 2009 Consortium NewsNew York Times columnist Nicholas D. Kristof - like many of his American colleagues - is applauding the International Criminal Court's arrest order against Sudanese President Omar Hassan al-Bashir for his role in the Darfur conflict that has claimed tens of thousands of lives.
In his Thursday column, Kristof describes the plight of an eight-year-old boy named Bakit who blew off his hands picking up a grenade that Kristof suspects was left behind by Bashir's forces operating on the Chad side of the border with Sudan.
"Bakit became, inadvertently, one more casualty of the havoc and brutality that President Bashir has unleashed in Sudan and surrounding countries," Kristof wrote. "So let's applaud the I.C.C.'s arrest warrant, on behalf of children like Bakit who can't."
By all accounts, Kristof is a well-meaning journalist who travels to dangerous parts of the world, like Darfur, to report on human rights crimes. However, he also could be a case study of what's wrong with American journalism.
While Kristof writes movingly about atrocities that can be blamed on Third World despots like Bashir, he won't hold U.S. officials to the same standards.
Most notably, Kristof doesn't call for prosecuting former President George W. Bush for war crimes, despite hundreds of thousands of Iraqis who have died as a result of Bush's illegal invasion of their country. Many Iraqi children also don't have hands - or legs or homes or parents.
But no one in a position of power in American journalism is demanding that former President Bush join President Bashir in the dock at The Hague.
Tortured Commission
As for the unpleasant reality that Bush and his top aides authorized torture of "war on terror" detainees, Kristof suggests only a Republican-dominated commission, including people with close ties to the Bush Family and to Bush's first national security adviser Condoleezza Rice.
"It could be co-chaired by Brent Scowcroft and John McCain, with its conclusions written by Philip Zelikow, a former aide to Condoleezza Rice who wrote the best-selling report of the 9/11 commission," Kristof wrote in a Jan. 29 column entitled
"Putting Torture Behind Us ."
"If the three most prominent members were all Republicans, no one on the Right could denounce it as a witch hunt - and its criticisms would have far more credibility," Kristof wrote.
"Democrats might begrudge the heavy Republican presence on such a commission, but surely any panel is better than where we're headed: which is no investigation at all. ...
"My bet, based on my conversations with military and intelligence experts, is that such a commission would issue a stinging repudiation of torture that no one could lightly dismiss."
In an earlier formulation of this plan, Kristof suggested that the truth commission be run, in part, by Bush's first Secretary of State Colin Powell.
One of the obvious problems with Kristof's timid proposal is that Rice and Powell were among the senior Bush officials who allegedly sat in on meetings of the Principals Committee that choreographed the abuse and torture of specific detainees.
Zelikow remained a close associate of Rice even after she replaced Powell as Secretary of State. And Scowcroft was President George H.W. Bush's national security adviser and one of Rice's key mentors.
It's also not true that any investigation is always better than no investigation. I have witnessed cover-up investigations that not only failed to get anywhere near the truth but tried to discredit and destroy whistleblowers who came forward with important evidence.
In other words, bogus and self-interested investigations can advance bogus and self-interested history, which only emboldens corrupt officials to commit similar crimes again.
No Other Context
Kristof's vision of having President Bush's friends, allies and even co-conspirators handle the investigation of Bush's crimes would be considered laughable if placed in any other context.
But Kristof's cockeyed scheme passes almost as conventional wisdom in today's Washington.
On Wednesday, the Washington Post assigned its satirical writer, Dana Milbank, to cover - and mock - Sen. Patrick Leahy's Judiciary Committee hearing on his own plan for a truth commission to examine Bush-era abuses.
Milbank's clever article opened with the knee-slapping observation: "Let's be truthful about it. Things aren't looking so good for the Truth Commission."
The derisive tone of the article also came as no surprise. Milbank has made a cottage industry out of ridiculing anyone who dares think that President Bush should be held accountable for his crimes.
In 2005, when the Democrats were in the minority and the Republicans gave Rep. John Conyers only a Capitol Hill basement room for a hearing on the Downing Street Memo's disclosures about "fixed" intelligence to justify the Iraq War, Milbank's column dripped with sarcasm.
"In the Capitol basement yesterday, long-suffering House Democrats took a trip to the land of make-believe," Milbank wrote. "They pretended a small conference room was the Judiciary Committee hearing room, draping white linens over folding tables to make them look like witness tables and bringing in cardboard name tags and extra flags to make the whole thing look official."
And the insults - especially aimed at Conyers - kept on coming. The Michigan Democrat "banged a large wooden gavel and got the other lawmakers to call him ‘Mr. Chairman,'" Milbank wrote snidely.
Then, last July, Milbank ridiculed a regular House Judiciary Committee hearing on Bush's abuses of presidential power. The column ignored the strong case for believing that Bush had violated a number of international and domestic laws, the U.S. Constitution, and honorable American traditions, like George Washington's prohibition against torture.
Instead, it was time to laugh at the peaceniks. Milbank opened by agreeing with a put-down from Rep. Lamar Smith, R-Texas, calling the session "an anger management class." Milbank wrote: "House Democrats had called the session ... to allow the left wing to vent its collective spleen."
Milbank then insulted Rep. Dennis Kucinich, who had introduced impeachment resolutions against Bush, by calling the Ohio Democrat "diminutive" and noting that Kucinich's wife is "much taller" than he is.
What Kucinich's height had to do with an issue as serious as abuses of presidential power was never made clear. What Milbank did make clear, through his derisive tone and repeated insults, was that the Washington Establishment takes none of Bush's crimes seriously.
So, Milbank's mocking of Leahy's latest initiative fits with this pattern of the past eight years - protecting Bush from the "nut cases" who think international law and war-crimes tribunals should apply to leaders of big countries as well as small ones.
The pattern of "American exceptionalism" also can be seen in Kristof cheering the application of international law against an African tyrant but suggesting that Bush's offenses should be handled discreetly by his friends.
Journalist Murray Waas often used the saying, "all power is proximate." I never quite understood what he meant, but my best guess was that Waas was saying that careerists - whether journalists or from other professions - might have the guts to take on someone far away or who lacked power, while ignoring or excusing similar actions by someone close by with the power to hurt them.
That seems to be especially true about Washington and its current cast of "respected" journalists. They can be very tough on President Bashir but only make excuses for President Bush
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War Comes Home To Britain - By John Pilger (9/3/09)
In his latest column for the New Statesman, John Pilger describes the basic freedoms being lost in Britain as the "national security state", imported from the United States by New Labour, takes effect.March 4, 2009 Information Clearing House
Freedom is being lost in Britain. The land of Magna Carta is now the land of secret gagging orders, secret trials and imprisonment. The government will soon know about every phone call, every email, every text message. Police can wilfully shoot to death an innocent man, lie and expect to get away with it. Whole communities now fear the state. The foreign secretary routinely covers up allegations of torture; the justice secretary routinely prevents the release of critical cabinet minutes taken when Iraq was illegally invaded. The litany is cursory; there is much more.
Indeed, there is so much more that the erosion of liberal freedoms is symptomatic of an evolved criminal state. The haven for Russian oligarchs, together with corruption of the tax and banking systems and of once-admired public services such as the Post Office, is one side of the coin; the other is the invisible carnage of failed colonial wars. Historically, the pattern is familiar. As the colonial crimes in Algeria, Vietnam and Afghanistan blew back to their perpetrators, France, the United States and the Soviet Union, so the cancerous effects of Britain’s cynicism in Iraq and Afghanistan have come home.
The most obvious example is the bombing atrocities in London on 7 July 2005; no one in the British intelligence mandarinate doubts these were a gift of Blair. “Terrorism” describes only the few acts of individuals and groups, not the constant, industrial violence of great powers. Suppressing this truth is left to the credible media. On 27 February, the Guardian’s Washington correspondent, Ewen MacAskill, in reporting President Obama’s statement that America was finally leaving Iraq, as if it were fact, wrote: “For Iraq, the death toll is unknown, in the tens of thousands, victims of the war, a nationalist uprising, sectarian in-fighting and jihadists attracted by the US presence.” Thus, the Anglo-American invaders are merely a “presence” and not directly responsible for the “unknown” number of Iraqi deaths. Such contortion of intellect is impressive.
In January last year, a report by the respected Opinion Research Business (ORB) revised an earlier assessment of deaths in Iraq to 1,033,000. This followed an exhaustive, peer-reviewed study in 2006 by the world-renowned John Hopkins School of Public Health in the US, published in The Lancet, which found that 655,000 Iraqis had died as a result of the invasion. US and British officialks immediately dismissed the report as “flawed” – a deliberate deception. Foreign Office papers obtained under Freedom of Information disclose a memo written by the government’s chief scientific adviser, Sir Roy Anderson, in which he praised The Lancet report, describing it as “robust and employs methods that are regarded as close to ‘best practice’ given [the conditions] in Iraq.” An adviser to the prime minister commented: “The survey methodology used here cannot be rubbished, it is a tried and tested way of measuring mortality in conflict zones”. Speaking a few days later, a Foreign Office minister, Lord Triesman, said, “The way in which data are extrapolated from samples to a general outcome is a matter of deep concern.”
The episode exemplifies the scale and deception of this state crime. Les Roberts, co-author of the Lancet study, has since argued that Britain and America might have caused in Iraq “an episode more deadly than the Rwandan genocide”. This is not news. Neither is it a critical reference in the freedoms campaign organised by the Observer columnist Henry Porter. At a conference in London on 28 February, Lord Goldsmith, Blair’s attorney-general, who notoriously changed his mind and advised the government the invasion was legal, when it wasn’t, was a speaker for freedom. So was Timothy Garton Ash, a “liberal interventionist”. On 9 April, 2003, shortly after the slaughter had begun in Iraq, a euphoric Garton Ash wrote in the Guardian: “America has never been the Great Satan. It has sometimes been the Great Gatsby: ‘They were careless people, Tom and Daisy – they smashed up things...'. One of Britain’s jobs “is to keep reminding Tom and Daisy that they now have promises to keep”. Less frivolously, he lauded Blair for his “strong Gladstonian instincts for humanitarian intervention” and repeated the government’s propaganda about Saddam Hussein. In 2006, he wrote: “Now we face the next big test of the west after Iraq: Iran.” (I have italicized we). This also adheres precisely to the propaganda; David Milliband has declared Iran a “threat” in preparation for possibly the next war.
Like so many of New Labour’s Tonier-than-thou squad, Henry Porter celebrated Blair as an almost mystical politician who “presents himself as a harmoniser for all the opposing interests in British life, a conciliator of class differences and tribal antipathies, synthesiser of opposing beliefs”. Porter dismissed as “demonic nonsense” all analysis of the 9/11 attacks that suggested there were specific causes: the consequences of violent actions taken by the powerful in the Middle East. Such thinking, he wrote, “exactly matches the views of Osma bin Laden... with America’s haters, that’s all there is – hatred”. This, of course, was Blair’s view.
Freedoms are being lost in Britain because of the rapid growth of the “national security state”. This form of militarism was imported from the United States by New Labour. Totalitarian in essence, it relies upon fear mongering to entrench the executive with venal legal mechanisms that progressively diminish democracy and justice. “Security” is all, as is propaganda promoting rapacious colonial wars, even as honest mistakes. Take away this propaganda, and the wars are exposed for what they are, and fear evaporates. Take away the obeisance of many in Britain’s liberal elite to American power and you demote a profound colonial and crusader mentality that covers for epic criminals like Blair. Prosecute these criminals and change the system that breeds them and you have freedom.
www.johnpilger.com
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Barack Obama, Meet Team B - By Scott Ritter (14/3/09)
12 March, 2009 TruthDig.comPresident Obama received a lesson in international gamesmanship last week, when his secret offer to trade the deployment of a controversial missile defense system in Eastern Europe for Russian assistance in getting Iran to back down from its nuclear program was publicly rebuffed. The lesson? You don't get something for nothing, especially when the something you're looking for is, itself, nothing.
If the members of the Obama administration would bother to take a stroll down memory lane, they might recall that once upon a time there was a document called the anti-ballistic missile treaty, signed in 1972 between the United States and the former Soviet Union, which recognized that anti-missile defense shields were inherently destabilizing, and as such should not be deployed. The ABM treaty represented the foundational agreement for a series of strategic arms limitation and arms reduction agreements that followed. President Obama was 10 years old when that treaty was signed. He was 40 years old when President George W. Bush withdrew from it, in December 2001, and set in motion a series of events which saw arms control between the U.S. and Russia completely unravel. The proposed U.S. missile defense shield, to be deployed in Poland and the Czech Republic, had the Russians talking about scrapping the INF treaty (which eliminated two classes of nuclear-armed ballistic missiles that threatened Europe) and deploying highly accurate SS-21 "Iskander" missiles within striking range of the proposed Polish interceptor site.
Russia did not create the missile defense system crisis. The United States did, and, as such, cannot expect to suddenly receive diplomatic credit when it puts this controversial program on the foreign policy gaming table as if it were a legitimate chip to be bargained away.
Russia has always, correctly, claimed that any missile defense system deployed in Eastern Europe can only be directed at Russia. While both the Bush and Obama administrations denied that was the case, Poland has all but admitted its concerns are not about missiles coming from Tehran, but rather missiles coming from Moscow. The American "sweetener" for a potential Polish loss of a missile shield is to offer Poland advanced Patriot surface-to-air missiles, whose intended target is clearly not a Persian missile which cannot reach Polish soil, but rather Russian missiles and aircraft which can.
There are three basic facts that the Obama administration needs to address, but as of yet has not: First, missile defense systems are inherently destabilizing and only contribute to the acquisition of offensive counters designed to defeat those defenses. Second, the rapid expansion of NATO in the past decade has in fact threatened Russia. And third, the Iranian missile "threat" to Europe has always been illusory.
The proposed U.S. missile defense shield in Eastern Europe has been a highly flawed concept from its very inception. Although it used unproven technology, it was sold as a means of protecting Europe from a threat that did not exist (Iranian missiles), while creating the conditions for exposing Europe to a real threat that the missile defense shield was incapable of defeating (Russian missiles). The fact that Obama would put the missile defense shield up for trade as part of a "Grand Bargain" with Russia on Iran only underscores how little value the system has to begin with. It is a big zero, both from a military and diplomacy perspective. Obama, in making it part of his bargain, was trying to give it value it lacked, and the Russians weren't buying.
The Iranian situation is far too real, but not in terms of the dangers posed by anything Iran itself is doing. The United States has not helped matters by hyping the threat posed by nonexistent Iranian missiles targeting Europe and capable of carrying nonexistent nuclear warheads. Russia has expressed a desire to work with the United States to better control Iran's program of uranium enrichment, which Iran and the nuclear watchdog, the International Atomic Energy Agency (IAEA), state has been clearly demonstrated as part of a peaceful nuclear energy program. For Russia to buy into Obama's "deal," it would have to buy into a threat from Iran's missile and nuclear programs, a threat Russia does not believe to exist.
Obama would do well to call in his national security team and have it lay out the intelligence information used to assert the Iranian threat. There must be such a foundational document, since Secretary of State Hillary Clinton, Secretary of Defense Robert Gates, Chairman of the Joint Chiefs of Staff Adm. Michael Mullen and the president himself all have repeatedly referred to the "threat" posed by Iran's "nuclear weapons" ambitions. It is important to distinguish between what we know and what we think we know. For instance, we know that Iran does not have any highly enriched uranium, the kind needed to produce a nuclear weapon. Just ask Admiral Dennis Blair, the Director of National Intelligence. This is what he told the U.S. Senate Armed Services Committee this week in testimony on Iran. And yet many in the U.S. intelligence community continue to state unequivocally that Iran is on the verge of possessing a nuclear weapon.
Obama should take each assertion put forward about Iran's nuclear ambition and then reverse-engineer the underlying factual basis for making that assertion. If he did so, he would quickly find that he and his advisers know less about Iran than they think they do. The entire U.S. case against Iran is built on supposition and speculation. If the president disassembled the speculative assertions, he would find them cobbled together from an ideologically motivated methodology designed more to justify a policy of containing and undermining Iran's theocracy than understanding its nuclear ambitions.
Obama ought to reacquaint himself with the 1972 ABM treaty and the case of the CIA versus "Team B." This chapter of America's failed arms control policy unfolded from 1975-1976, during the administration of Gerald Ford. Once upon a time, there was a Soviet Union, and a Cold War between the Soviet Union and the United States. In an effort to prevent the Cold War from becoming a "hot war," the two powers launched arms control initiatives, packaged as part of a larger East-West détente, to better manage the escalation of an arms race derived from Cold War tensions. It was critical in this effort to have an accurate understanding of not only the physical reality of Soviet strategic weapons programs, but also their intent. The CIA produced a national intelligence estimate that addressed these issues, National Intelligence Estimate (NIE) 11-3/8-74, "Soviet Forces for Intercontinental Conflict Through 1985."
The benign picture painted by the CIA's estimate of Soviet strategic capability clashed with ideologues in and out of government who were pushing for U.S. defense programs that could not be justified if the CIA's estimates were allowed to stand. Rather than confront the facts of the CIA's estimates, these ideologues instead assaulted the methodology used to determine them. Political pressure was brought to bear on President Ford by conservative opponents of détente to prepare a "Team B" of analysts (outside ideologues) who would challenge the conclusions put forward in the CIA estimate by "Team A" (the CIA's own staff). "Team B" didn't produce better facts (indeed, every one of its assertions was proved to be wrong), but it did produce better fear. Its claims about Soviet intentions and capabilities, highly inflated and inaccurate, were political dynamite which could not be ignored, especially in the politically charged presidential election year of 1976. "Team B" won out over "Team A," and the foundation was set for not only the dismantling of U.S.-Soviet détente, but also for the biggest arms race in modern history, culminating in the destruction of the very agreements designed to constrain such an escalation.
Obama should acquaint himself with the story of "Team B," because "Team B" exists today, propagating myths about an Iranian "threat" that are analogous to those employed by the team that sold the fable of the Soviet "threat." The new president was critical of the Iraq war, and the sad tale of misinformation and deception that has since been repackaged as an "intelligence failure." There was no "failure" because there was no "intelligence." "Team B" doesn't produce intelligence, but rather ideological assertions used as justification for policy. The same "Team B"-based methodologies which gave us the Iraq assertions about WMD programs are in play today in the Iran "intelligence" used by President Obama and his national security team.
Obama might be surprised that one of the programs being sold by "Team B" in its assault on truth was a missile defense shield to counter the team's perception of a Soviet missile threat. The falsehoods and fabrications sold by "Team B" back in the 1970s set America on the path toward the withdrawal from the ABM treaty in 2001, and the proposed deployment of the very missile defense shield Obama is trying to bargain away to get Russia to help confront an Iranian "threat" manufactured by none other than "Team B."
Secretary of State Clinton impressed many when she spoke of the need for America to embrace "smart power." The implication of her words was that the United States, under President Obama, would use all the tools available, especially diplomacy, in seeking to solve the myriad problems it faces around the world in the post-Bush era, including the problem of Iran. But one cannot begin to solve a problem unless one first accurately defines the problem, for without that definition the "solution" would in fact solve nothing. Any solution to the problem of Iran must be derived from an accurate intelligence picture of what is transpiring inside the country today, one drawn more from fact than ideologically based fiction. Obama is advised to challenge the totality of the current U.S. intelligence used to define Iran as a threat, and purge once and for all the corrupting ideological "Team B" holdovers who still reside within the structure of the American intelligence community. Intelligence is never about hearing what you want to hear, but rather about learning what you need to know.
Obama needs to learn the truth about Iran, and about the proposed missile defense system in Europe. This truth would be inconvenient, but it would also liberate him to develop meaningful solutions to serious problems in a manner which avoids a repeat of his embarrassing "Grand Bargain" gambit with Russia, trying to trade nothing for nothing in an effort to certify something for nothing. There are a lot of "zero sums" in that equation, which pretty much sums up Obama's Iran and Russia policies to date.
Scott Ritter was a Marine Corps intelligence officer from 1984 to 1991 and a United Nations weapons inspector in Iraq from 1991 to 1998. He is the author of numerous books, including "Iraq Confidential " (Nation Books, 2005) , "Target Iran " (Nation Books, 2006) and his latest, "Waging Peace: The Art of War for the Antiwar Movement " (Nation Books, April 2007).
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French Military Strategy and NATO Reintegration - By Michael Moran (14/3/09)
12 March, 2009 CFR.orgIntroduction
The French government's decision to rejoin the integrated military command structure of the North Atlantic Treaty Organization (NATO) formalizes a decade-long rethink of French military strategy and foreign policy. Under President Charles de Gaulle, who perceived the alliance as dominated by the United States and Britain, France pulled its forces out of NATO in 1966 to pursue more independent policies. The 2009 reversal, championed by French President Nicolas Sarkozy, has broad support in the French policymaking community and the military, though some dissent from traditional Gaullists persists. The full reintegration of French forces into NATO's structure reflects France's view of a changed world in which domestic security will rely on the ability to coordinate with allies abroad. The move also acknowledges a diminished French ability to mount significant expeditionary operations abroad without logistical and other support from its closest allies, including the United States. In effect, the era of "French exceptionalism" in conventional military affairs is over.
Roots of the Policy Shift
The decision to rejoin NATO's military command structure is part of a larger shift following publication of a white paper on French defense and security policy in 2008. It reverses decades of French security policy, which has focused on a Cold War-style invasion scenario as the nation's primary challenge. Instead, the paper highlights counterterrorism and intelligence, reintegrates France with NATO for purposes of European security, and arguably draws Paris closer to Washington, in doctrinal terms, than any time since liberation.
Strategically, the changes echo moves that have been recommended (if not wholly undertaken) by U.S. and British defense policymakers since the end of the Cold War. Mobility--and in France's case, the ability to deploy and sustain up to thirty thousand troops in a far-off land--is a key goal.
"France's own strategic approach stresses that its forces must adapt further to the new dimensions of military operations overseas and to asymmetric warfare," writes France's former NATO Ambassador Benoît d'Aboville in the Guardian. "French forces will maintain a robust capacity for overseas military operations within the framework of Nato-led operations, but not exclusively so," he adds.
To achieve this, resources are shifting away from French formations and weapons systems designed for the Cold War environment of state-to-state warfare. This means slimming down armored units, artillery, and infantry divisions, along with some elements of the French navy and air force designed primarily for defense against conventional attack. The decision on whether to construct a second nuclear aircraft carrier, for instance, has been put off for five years, while the construction of more nuclear submarines continues.
The size of the uniformed component of the French army, now the largest in the European Union, is in line to drop by 24 percent over the next several years, a continuation of a trend which began at the end of the Cold War and picked up pace when France ended its national draft in 2001.
Since 1989, according to Defense Ministry figures, the army has decreased from nearly 500,000 to just about 250,000 today (including reserves), and will fall to 225,000 under the new plan. The combat-ready force will shrink to 88,000. This force will be organized into smaller, more rapidly deployable ground units--again, a reform the U.S. and British militaries already have made. New investments are planned in human espionage efforts, spy satellites, and homeland security efforts. The "slimming" of the current force will also alleviate readiness and reliability problems, which have become serious. An internal defense document described appalling maintenance problems across all services in 2008.
Foreign Policy Implications
The new French military posture, as outlined in the 2008 white paper, reinforces previous hints that France intends to reorient its geopolitical thinking to put Asia, rather than North Africa and the Levant, more squarely on its security agenda (World Politics Review). In line with public statements by Sarkozy and senior foreign policy officials, the doctrine puts greater emphasis on cooperation with the United States in countering Iran's growing influence, tracking nuclear proliferation, and expanding NATO's ability to act outside Europe, even as a separate EU defense capability matures. For instance, France announced in early 2008 its decision to add troops to NATO's Afghanistan mission. By early 2009, about three thousand French troops were deployed in and around Afghanistan. The new strategy also reflects the tempering of France's traditionally Arabist approach to the Middle East. Indeed, the same week the white paper was published, the European Union announced it had agreed to upgrade ties with Israel, a move long resisted by previous French governments.
Abroad, the French president has pledged to renegotiate colonial-era mutual defense agreements with many African states. As this Backgrounder discusses, some nine thousand French troops are deployed in Senegal, the Ivory Coast, Gabon, Djibouti, and the Central African Republic.
Yet Sarkozy has insisted the new doctrine represents a reorientation rather than a curbing of French ambition. The doctrine makes clear France's nuclear arsenal will be maintained and kept solely under French command. Sarkozy has shown no signs of abandoning France's African patch, either. When Sudanese rebels threatened to overthrow Chad's pro-Paris leader in 2008, France made it clear it was willing to intervene (Spiegel). Nor has Paris signaled an intention to give up on power projection. France operates Europe's only real fixed-wing aircraft carrier, the Charles De Gaulle, and even though a decision on a second has been postponed, talks with Britain continue on a proposed jointly built class of super carriers (PDF). Sarkozy in June 2008 told German officials he foresees eventual formation of a European naval strike force (Spiegel) with British and French carriers at its core, and Germany, Italy, Spain, and a host of other nations contributing frigates, submarines, and support vessels. Perhaps with Iran in mind, Sarkozy announced that France would build a new navy base in the United Arab Emirates, and it has also ratcheted up efforts to sell its weapons (NPR) in the region.
Francois Heisbourg, a member of the presidential commission that wrote the white paper and a former head of the International Institute for Strategic Studies in London, said "we're planning for one war and a half." In Heisbourg's view, that means the ability to project up to sixty thousand troops, seventy combat aircraft, and a full naval group, as part of a multinational deployment anywhere in "the arc of crisis." The white paper defines that arc as ranging from the North Atlantic to the Indian Ocean. Heisbourg notes that the Indian Ocean has taken on new significance for France, and that the new base in Abu Dhabi, combined with existing facilities in Djibouti and Reunion, gives the French military a "string of pearls" with which to influence events in the region.
Opposition Gathers
The breadth of these changes, not to mention Sarkozy's personal style, has kicked up significant domestic opposition (he announced the reintegration with NATO in June 2008 alongside U.S. President George W. Bush, who was deeply unpopular in France). Senior French military commanders reacted with a scathing open letter bemoaning the force level cuts and the NATO decision. "France will from now on be playing in the same division as Italy," they wrote in the June 18 edition of the conservative daily Le Figaro. "There is no point in denying it."
France regards its status as a major military power with great pride, and suggestions that the new doctrine will relegate the country to second-tier status rankle well beyond military circles. Sarkozy's Socialist Party opponents kicked up a storm of protest, and across France, towns adjacent to the fifty military bases slated for closure expressed strong concern (BBC). For the French security establishment, the debate over closer ties to NATO, often seen as a proxy for an Anglo-American agenda, runs right up against decades of exceptionalist policies instituted by de Gaulle with the express purpose of preventing such intimacy. In common with other European countries diminished by the rise of the Cold War superpowers in the 1950s, France struggled to adjust to the realities of its new position, fighting bloody and unsuccessful rearguard actions to retain colonies in Southeast Asia and Algeria.
Still, Paris insisted on maintaining its place as one of three European military forces (the other two are Britain and Russia) that can operate independently on far-flung missions. Similarly, France resisted the post-Cold War trend toward downsizing and reorienting its forces, in part due to its insistence on "independence" from the United States. France continued to conscript soldiers, for instance, right through the 1990s, long after most major militaries went to an "all volunteer" system. The white paper concluded that the size and capabilities of the French military no longer reflected the likely missions it would undertake in the future. "There is no risk of an invasion today ... but on the other hand we need to be able deploy forces to participate in the stabilization of regions or zones in crisis," Sarkozy said.
Sarkozy has consistently disarmed his opponents by inviting some into his government and ignoring others. Most recently, he appointed former Socialist foreign minister Hubert Vedrine, who coined the term "hyperpower" to describe the United States in the late 1990s, to lead a commission on the proper role of France in a globalized world.
Comparing France and Britain
France, to date, had charted a very different course from Britain (BBC). While the British, too, have insisted on "punching above their weight," since 1956 at least, closeness with America has underpinned their geopolitical thinking--"a bond forged through the blood spilled together in the sands of Iraq and Afghanistan"--as Britain's senior military officer, Gen. Sir Richard Dannatt, put it in a June 2008 speech. Laying out his own country's future military vision (PDF), he declared "we must focus on operating with the United States, and not necessarily as the United States." The implied criticism of France's more independent stance would not have been lost on his audience.
In contrast, France defined its military role more independently, often summing up its posture with the ambiguous phrase "friend, ally, non-aligned." U.S.-France ties often appeared strained, as in the run-up to the Iraq war, though practical cooperation remained quite close. Still, France opted out of the Iraq war, and aside from a period just after 9/11 when French special forces operated in Afghanistan, largely avoided that conflict, too.
Has France now come around to the British view? "The French are realizing that not even they are able to go it alone, and [Sarkozy] is putting the French military back in the business of dealing with threats that really matter," Tomas Valasek of the Center for European Reform told Newsweek. Certainly, many French senior officers fear otherwise. "We are abandoning European military leadership to the British, when we know their particular relationship with the United States," they wrote in Le Figaro. As such, the first battle involving France's new defense doctrine looks likely to take place on French soil.
[Baca]
Plan to Split Taliban Lures Obama Deeper Into War - By Gareth Porter (18/3/09)
16 March 2009 Inter Press ServiceWASHINGTON - Advanced reports on the Barack Obama administration's strategy to "peel off" a majority of insurgent commanders from the "hard core" of Taliban suggest that it will be presented as a political route to victory in Afghanistan that would not require U.S. and NATO troops to win militarily.
But experts warn that the strategy is unlikely to work. And by appearing to provide a political route to victory, the strategy is luring the administration into a renewed commitment to war in Afghanistan and diverting it away from a deal with the Taliban leadership aimed at keeping al Qaeda from having a presence there.
News reports this past week have raised the possibility of negotiations by Afghan, Saudi and Pakistani officials with the Taliban leadership that could result in an agreement not to allow an al Qaeda presence on Afghan territory in return for U.S. and NATO withdrawal and assurances that they will not intervene in the country as long as al Qaeda is kept out.
The strategy of splitting off "reconcilable" insurgents may make commitment to an indefinite continuation of the U.S. military effort more palatable to key U.S. officials, including Obama himself, who know that the war cannot be won through military efforts.
The new administration strategy was reported last week after briefings of Congressional leaders by Gen. David Petraeus, head of CENTCOM, and Ambassador Richard Holbrooke, the State Department special envoy for Afghanistan and Pakistan.
Petraeus has been a strong supporter of the strategy of trying to divide the Afghan insurgency by offering money and jobs to those willing to accept the government in Kabul. He has said that his strategy of outreach to what he has described as "reconcilables" among the insurgents in Iraq might be applicable in Afghanistan as well.
The premise of the plan being advanced by administration officials, at least for public consumption, was articulated by Vice President Joseph Biden in a speech in Brussels last week. Biden said only 100 to 1,000 Taliban or al Qaeda members - representing about 5 percent of the Taliban insurgency - are "incorrigible", and that at least 70 percent were involved in the insurgency only because they are "getting paid".
Biden was reflecting the view of the insurgency held by senior military officials at the NATO regional headquarters in Kandahar. Officials there see the insurgency in the south as made up largely of "young freelance fighters who are motivated more by money than religious zealotry," according to a report by Rajiv Chandrasekaran in the Washington Post Sunday.
But that extraordinarily optimistic assumption is not shared by most experts on the insurgency in Afghanistan. A report by Carlotta Gall in the New York Times last Wednesday quotes "several Western diplomats and officials in Afghanistan, including those already in contact with the Taliban" as saying that attempts to split off individual commanders or groups from the Taliban leadership "would not work."
The reason, according to those officials, is that the plan would require those commanders to surrender and accept an Afghan government and a foreign military presence in which they have no trust.
Jonathan Landay of McClatchy newspapers reported from Kabul Sunday that experts on the Taliban express "serious doubts" about the splitting strategy, because insurgent leaders believe they are winning and the Hamid Karzai government is growing weaker.
In contrast to the reported premise that most insurgents are motivated by material gain, most specialists on the insurgency emphasised the dominant role of Pashtun anger at foreign military operations in their locality killing members of their family or tribe.
An alternative strategy of seeking a deal with the Taliban aimed at separating them from al Qaeda was first raised by New York University Afghanistan specialist Barnett Rubin and Pakistani journalist Ahmed Rashid in an article in Foreign Affairs magazine last December. The article proposed that NATO offer to end military action in Afghanistan if the Taliban agrees "to prohibit the use of Afghan (or Pakistani) territory for international terrorism."
Rubin and Rashid have been hired by Holbrooke as adviser and short-term consultant, respectively, according to a report by national security correspondent Laura Rozen at Foreign Policy.
The option proposed by Rubin and Rashid has now been given new credibility by reports that Saudi Arabia is engaged in an effort to persuade the Taliban to separate itself clearly from al Qaeda.
The London Times published a report by Christina Lamb Sunday that Prince Muqrin bin Abdul Aziz, the Saudi intelligence chief, visited Islamabad, Delhi and Kabul in January to talk to both Taliban and Afghan government officials.
Lamb also reported that Taliban Chief Mullah Omar had given his approval to peace talks with the Afghan government for the first time, citing a "mediator" with the Taliban, Algerian former Mujahideen fighter in Afghanistan Abdullah Anas and an Afghan government official involved in the negotiations as the sources.
The Afghan government negotiator told Lamb that government officials "have been in contact both with Mullah Omar's direct representatives and commanders from the front line."
Asked for a comment on this development, Rubin, the Columbia University expert, told IPS in an e-mail that the Lamb story "is accurate".
A report published by Strategic Forecasting (Stratfor) last week by director of Middle East analysis Kamran Bokhari and Scott Stewart also noted the Saudi intelligence chief's trip to Pakistan and Afghanistan. In meetings with actual Taliban commanders in both countries, the Saudis have offered financial support if the Taliban agrees to divorce itself completely from al Qaeda, according to the report.
Bokhari, a Pakistani specialist on Islamist groups, has had extensive contacts with high-ranking Pakistani and Saudi officials in the past.
The Saudi regime, once reluctant to crack down on al Qaeda, has pursued a very successful political strategy against al Qaeda within Saudi Arabia since 2003. Saudi Arabia has credibility with the Taliban leadership because of shared religious beliefs and because it is one of the few foreign governments that continued to recognise the Taliban after 9/11.
The Taliban chief, Mullah Omar, had rejected U.S. and Saudi pressures to expel Osama bin Laden from Afghanistan prior to the 9/11 attacks. But the question of ties between the Taliban and al Qaeda have been far less clear since the expulsion of both organisations from Afghanistan in late 2001.
Amin Tarzi, director of the Middle East Studies Program at the Marine Corps University in Quantico, Virginia, wrote in an essay for the 2007 book "Taliban and the Crisis in Afghanistan" that there was "no evidence of concerted cooperation" between what he called the "neo- Taliban" and al Qaeda in southern Afghanistan.
Some factions in the north and northeast, however, had "resurrected old ties with al Qaeda" to obtain funds, recruits and technical support, according to Tarzi.
Tarzi cited a comment by Taliban spokesman Mohammad Hanif to an Italian newspaper in March 2006 that the movement had "no operational ties" to al Qaeda, but that they had "tactical alliances based given circumstances and territorial situations".
As suggested in the Rubin-Rashid proposal, any deal with the Taliban will have to include a date for withdrawal of all U.S. and NATO forces. In October 2007, The Guardian reported that senior Taliban commanders in Helmand province had sent a list of demands to the Karzai government through intermediaries that included control of 10 southern provinces, a timetable for withdrawal of foreign troops and the release of all Taliban prisoners within six months.
Gareth Porter is an investigative historian and journalist specialising in U.S. national security policy. The paperback edition of his latest book, "Perils of Dominance: Imbalance of Power and the Road to War in Vietnam ", was published in 2006.
[Baca]
Zionism Is The Problem - The Zionist Ideal of a Jewish State Is Keeping Israelis And Palestinians From Living In Peace - By Ben Ehrenreich (20/3/09)
March 16, 2009 Los Angeles TimesIt's hard to imagine now, but in 1944, six years after Kristallnacht, Lessing J. Rosenwald, president of the American Council for Judaism, felt comfortable equating the Zionist ideal of Jewish statehood with "the concept of a racial state -- the Hitlerian concept." For most of the last century, a principled opposition to Zionism was a mainstream stance within American Judaism.
Even after the foundation of Israel, anti-Zionism was not a particularly heretical position. Assimilated Reform Jews like Rosenwald believed that Judaism should remain a matter of religious rather than political allegiance; the ultra-Orthodox saw Jewish statehood as an impious attempt to "push the hand of God"; and Marxist Jews -- my grandparents among them -- tended to see Zionism, and all nationalisms, as a distraction from the more essential struggle between classes.
To be Jewish, I was raised to believe, meant understanding oneself as a member of a tribe that over and over had been cast out, mistreated, slaughtered. Millenniums of oppression that preceded it did not entitle us to a homeland or a right to self-defense that superseded anyone else's. If they offered us anything exceptional, it was a perspective on oppression and an obligation born of the prophetic tradition: to act on behalf of the oppressed and to cry out at the oppressor.
For the last several decades, though, it has been all but impossible to cry out against the Israeli state without being smeared as an anti-Semite, or worse. To question not just Israel's actions, but the Zionist tenets on which the state is founded, has for too long been regarded an almost unspeakable blasphemy.
Yet it is no longer possible to believe with an honest conscience that the deplorable conditions in which Palestinians live and die in Gaza and the West Bank come as the result of specific policies, leaders or parties on either side of the impasse. The problem is fundamental: Founding a modern state on a single ethnic or religious identity in a territory that is ethnically and religiously diverse leads inexorably either to politics of exclusion (think of the 139-square-mile prison camp that Gaza has become) or to wholesale ethnic cleansing. Put simply, the problem is Zionism.
It has been argued that Zionism is an anachronism, a leftover ideology from the era of 19th century romantic nationalisms wedged uncomfortably into 21st century geopolitics. But Zionism is not merely outdated. Even before 1948, one of its basic oversights was readily apparent: the presence of Palestinians in Palestine. That led some of the most prominent Jewish thinkers of the last century, many of them Zionists, to balk at the idea of Jewish statehood. The Brit Shalom movement -- founded in 1925 and supported at various times by Martin Buber, Hannah Arendt and Gershom Scholem -- argued for a secular, binational state in Palestine in which Jews and Arabs would be accorded equal status. Their concerns were both moral and pragmatic. The establishment of a Jewish state, Buber feared, would mean "premeditated national suicide."
The fate Buber foresaw is upon us: a nation that has lived in a state of war for decades, a quarter-million Arab citizens with second-class status and more than 5 million Palestinians deprived of the most basic political and human rights. If two decades ago comparisons to the South African apartheid system felt like hyperbole, they now feel charitable. The white South African regime, for all its crimes, never attacked the Bantustans with anything like the destructive power Israel visited on Gaza in December and January, when nearly1,300 Palestinians were killed, one-third of them children.
Israeli policies have rendered the once apparently inevitable two-state solution less and less feasible. Years of Israeli settlement construction in the West Bank and East Jerusalem have methodically diminished the viability of a Palestinian state. Israel's new prime minister, Benjamin Netanyahu, has even refused to endorse the idea of an independent Palestinian state, which suggests an immediate future of more of the same: more settlements, more punitive assaults.
All of this has led to a revival of the Brit Shalom idea of a single, secular binational state in which Jews and Arabs have equal political rights. The obstacles are, of course, enormous. They include not just a powerful Israeli attachment to the idea of an exclusively Jewish state, but its Palestinian analogue: Hamas' ideal of Islamic rule. Both sides would have to find assurance that their security was guaranteed. What precise shape such a state would take -- a strict, vote-by-vote democracy or a more complex federalist system -- would involve years of painful negotiation, wiser leaders than now exist and an uncompromising commitment from the rest of the world, particularly from the United States.
Meanwhile, the characterization of anti-Zionism as an "epidemic" more dangerous than anti-Semitism reveals only the unsustainability of the position into which Israel's apologists have been forced. Faced with international condemnation, they seek to limit the discourse, to erect walls that delineate what can and can't be said.
It's not working. Opposing Zionism is neither anti-Semitic nor particularly radical. It requires only that we take our own values seriously and no longer, as the book of Amos has it, "turn justice into wormwood and hurl righteousness to the ground."
Establishing a secular, pluralist, democratic government in Israel and Palestine would of course mean the abandonment of the Zionist dream. It might also mean the only salvation for the Jewish ideals of justice that date back to Jeremiah
[Baca]
Obama's Economic Saviour Savaged as Keating Lets Rip - By Peter Hartcher (16/3/09)
16 March, 2009 Sydney Morning HeraldWhen Barack Obama announced his champion to rescue the world from economic ruin, it was the first time most Americans had ever heard the name Tim Geithner.
The initial impression was good. The stockmarket surged and the pundits swooned. "Exactly a decade ago, he was Uncle Sam's golden-boy emissary sent into the stormy centre of what was then the world's worst financial crisis [the Asian crisis]," reported The New York Post.
The paper gushed: "Just 36 at the time, he'd been raised in Asia and knew the culture so intimately he scored successes and won confidences that other diplomats couldn't match. Geithner earned widespread plaudits for pulling together quarrelling Asian finance ministers into a $US200 billion rescue of their economies."
"A fantastic choice," said a Bank of Tokyo-Mitsubishi analyst, Chris Rupkey, as the Dow rose by nearly 6 per cent. Even one of Obama's political rivals, the hard-bitten Republican senator Richard Shelby, agreed Geithner was "up to the challenge".
If anyone in the US media had thought to ask a former Australian prime minister for his assessment, they would have heard a different view. And they would not have been so surprised at Geithner's performance since.
In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.
"In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.
Geithner thought Asia's problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts.
The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment.
But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans - Thailand, South Korea and Indonesia - all had sound public finances.
The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind.
But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.
Keating continued: "Soeharto's government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power."
Exactly who was the "gigantic fool"? It was, obviously, the man who wrote the program, Geithner, although Keating is prepared to put the then managing director of the IMF, the Frenchman Michel Camdessus, in the same category.
Worse, Keating argued, Geithner's misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences: "The IMF is the gun that can't shoot straight. They've been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose."
China, in particular, drew hard conclusions from the IMF's mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.
Keating continued: "This has all been noted inside the State Council of China and by the Politburo. And it's one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it's why through a series of exchange-rate interventions each day that they've built these massive reserves.
"These reserves are so large at $US2 trillion as to equal $US2000 for every Chinese person, and when your consider that the average income of Chinese people is $US4000 to $US5000, it's 50 per cent of their annual income. It's a huge thing for a developing country to not spend its wealth on its own development."
Is this some flight of Keatingesque fancy? The former deputy governor of the Reserve Bank of Australia, Stephen Grenville, doesn't think so: "After the Asian crisis, the countries of east Asia decided that they would never go to the IMF again. The IMF is taboo in east Asia. Look at the evidence. The revealed preference of the region is that no one has gone to the IMF since, even when they needed the money."
And Asian capitals know that they have no real influence over the IMF - while European governments enjoy 40 per cent of the voting power on the IMF, Japan, China and the rest of east Asia put together have only about 16 per cent. This is an artefact of the immediate postwar power structure, when the IMF was set up.
Keating urges that the fund should be decapitated, with control passing to the governments of the Group of 20 countries whose leaders are to meet in London on April 2. The summit, which is to include China, India and Indonesia as well as Australia, is meeting to consider solutions to the global crisis.
As for The New York Post's claim that Geithner was the hero who cajoled those quarrelsome Asians into agreeing to a $US200 billion rescue, the key fact burned into the minds of Asian elites is that the US was deaf to requests for funds. Washington did not contribute a cent of its own money to any of the emergency packages. Japan and Australia were the only nations that made loans to all three of the stricken Asian countries.
Keating went on to argue that, by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy.
China invested most of its reserves in US debt markets. Keating again: "So we have this massive recycling of funds into the system by [the former US Federal Reserve chairman Alan] Greenspan's monetary policy so even if you are greedy Dick Fuld [the former head of the collapsed investment bank Lehman Brothers] or you are hopeless Charles Prince at Citibank, you're being told there's an endless supply of money at a low interest rate and no inflation. So of course the system geared up to spend it.
"That is the fundamental cause of the problem - the imbalance is the fundamental cause."
If Keating's opinion of Geithner had circulated in the US, the Americans would not have been so surprised and disappointed with their new Treasury Secretary. They quickly learned that he had failed to pay $43,000 in taxes owing.
Then, when he announced his much-anticipated plan to rescue the US banking system, share prices slumped by 4 per cent immediately and a new round of weakness in the financial sector began. The pundits turned savagely against him: "So much for the saviour-based economy," wrote Maureen Dowd of The New York Times. Senator Shelby changed his mind: "Aggravating economic problems by contributing to marketplace uncertainty about what steps the Government will take - is that what this is?" he fumed.
US bank stocks weakened so much that nationalisation seems to be the only remaining option to put them quickly out of their misery.
Australia's banks, by contrast, are strong, said Keating, because of his decision as Treasurer to create the "Four Pillars" policy. This requires that the four big banks remain separate, barred from taking each other over. This prevented them "cannibalising each other", in Keating's words. As protected species, they had no need to mount risky takeovers to bulk themselves up defensively.
Their strength certainly wasn't due to the brilliance of their managers, whom Keating described as "counterhopping clerks" who had managed to work their way up the bank hierarchies. A further source of the soundness of the Australian banks, he said, was that they had learned well the lessons of risky speculative lending as a result of "the recession we truly did have to have".
In sum, Tim Geithner is a gigantic fool, the IMF the gun that can't shoot straight, Alan Greenspan a bungler. The big US banks were run by the greedy and the hopeless, the Australian banks by counter-hopping clerks. It's a world of many villains. And only one hero.
[Baca]
G20 Finance Ministers’ and Central Bank Governors’ Communiqué (18/3/09)
Published 14 March, 2009The G-20 nations met on March 14, 2009 in Horsham, Engand to discuss the global economic situation prior to their London Summit in early April.
We, the G20 Finance Ministers and Central Bank Governors, met today to prepare for the Leaders’ London Summit. We agreed further action to restore global growth and support lending, and reforms to strengthen the global financial system.
Restoring Global Growth
1. We have taken decisive, coordinated and comprehensive action to boost demand and jobs, and are prepared to take whatever action is necessary until growth is restored. We commit to fight all forms of protectionism and maintain open trade and investment.
2. Our key priority now is to restore lending by tackling, where needed, problems in the financial system head on, through continued liquidity support, bank recapitalisation and dealing with impaired assets, through a common framework (attached). We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions.
3. Fiscal expansion is providing vital support for growth and jobs. Acting together strengthens the impact and the exceptional policy actions announced so far must be implemented without delay. We are committed to deliver the scale of sustained effort necessary to restore growth, and call on the International Monetary Fund (IMF) to assess the actions taken and the actions required. We will ensure the restoration of growth and long-run fiscal sustainability.
4. Interest rates have been cut aggressively in most countries, and G20 central banks will maintain expansionary policies as long as needed, using the full range of monetary policy instruments, including unconventional policy instruments, consistent with price stability.
5. We are committed to helping emerging and developing economies to cope with the reversal in international capital flows. We recognise the urgent need to pursue all options for mobilising International Financial Institution (IFI) resources and liquidity to finance countercyclical spending, bank recapitalisation, infrastructure, trade finance, rollover risk and social support. We agreed on the urgent need to increase IMF resources very substantially. This could include further bilateral support, a significantly expanded and increased New Arrangements to Borrow (NAB), and an accelerated quota review. We should also ensure that all Multilateral Development Banks have the capital they need, beginning with a substantial capital increase for the Asian Development Bank, and put it to best use to help the world’s poorest. We welcomed the progress by the IMF and World Bank in introducing new and enhanced instruments, including the development of a new high-access, quick-disbursing precautionary facility.
Strengthening the Financial System
6. To further strengthen the global financial system we have completed the immediate steps in the Washington Action Plan and we welcome the Financial Stability Forum’s (FSF) expansion to all G20 members. We remain focused on the medium term actions, and make recommendations to the London Summit to ensure:
• all systemically important financial institutions, markets and instruments are subject to an appropriate degree of regulation and oversight, and that hedge funds or their managers are registered and disclose appropriate information to assess the risks they pose;
• stronger regulation is reinforced by strengthened macro-prudential oversight to prevent the build-up of systemic risk;
• financial regulations dampen rather than amplify economic cycles, including by building buffers of resources during the good times and measures to constrain leverage; but it is vital that capital requirements remain unchanged until recovery is assured; and,
• strengthened international cooperation to prevent and resolve crises, including through supervisory colleges, institutional reinforcement of the FSF, and the launch of an IMF/FSF Early Warning Exercise.
7. We have also agreed to: regulatory oversight, including registration, of all Credit Rating Agencies whose ratings are used for regulatory purposes, and compliance with the International Organisation of Securities Commissions (IOSCO) code; full transparency of exposures to off balance sheet vehicles; the need for improvements in accounting standards, including for provisioning and valuation uncertainty; greater standardisation and resilience of credit derivatives markets; the FSF’s sound practice principles for compensation; and the relevant international bodies identify non-cooperative jurisdictions and to develop a tool box of effective counter measures.
8. To strengthen the effectiveness and legitimacy of the IFIs we must enhance their governance and ensure they fully reflect changes in the world economy. Emerging and developing economies, including the poorest, should have greater voice and representation and the next review of IMF quotas should be concluded by January 2011. The package of quota and voice measure decided in April 2008 should be swiftly implemented. World Bank reforms should be completed by the Spring Meetings 2010. The heads of the IFIs should be appointed through open, merit based selection processes.
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Stop Wall Street Loan-Sharking - By Bernie Sanders (18/3/09)
16 March 2009 OpEdnews.comThere is a huge sense of outrage in our country today at what Wall Street has done through greed, recklessness and, likely, illegal behavior. The “Masters of the Universe” have plunged our nation, and much of the world, into a deep recession which has caused millions of Americans to lose their jobs, their homes, their savings and their hope for the future. In order to fully understand the cause of this fiasco, I have introduced legislation calling for a thorough investigation of the financial meltdown and the prosecution of those CEOs who might be guilty of illegal behavior. The culture of greed, fraud and excessive speculation must come to an end.
As I talk to Vermonters about this crisis one of the great frustrations that I hear is that while taxpayers are spending hundreds of billions of dollars bailing out major financial institutions, and while these big banks are getting near-zero interest rate loans from the Fed, these very same financial institutions are now charging Americans 20 percent or 30 percent interest rates on their credit cards. In fact, one-third of all credit card holders in this country are now paying interest rates above 20 percent and as high as 41 percent – more than double what they paid in interest in 1990. Recently, some major institutions, such as Bank of America, have informed responsible cardholders that their interest rates would be doubled to as high as 28 percent, without offering any explanation or excuse why the increase was taking place.
Let’s be clear. What Wall Street and credit card companies are doing is really not much different from what gangsters and loan sharks do who make predatory loans. While the bankers wear three-piece suits and don’t break the knee caps of those who can’t pay back, they still are destroying people's lives.
The Bible has a term for this practice. It’s called usury. And in The Divine Comedy, Dante Alighieri’s epic poem, there was a special place reserved in the Seventh Circle of Hell for sinners who charged people usurious interest rates.
Today, we don’t need the hellfire and pitch forks, we don’t need the rivers of boiling blood, but we do need a national usury law.
We need a national law because state laws no longer work. States used to protect consumers from predatory lenders, but strong state usury laws were obliterated by a 1978 U.S. Supreme Court decision. Justices allowed national banks to charge whatever interest rate they wanted if they moved to a state without an interest rate cap. So major credit card issuers moved to places like South Dakota and Delaware that don’t have usury laws.
That is why I have introduced legislation to require any lender in this country to cap all interest rates on consumer loans at 15 percent, including credit cards. Why did I select 15 percent as the appropriate rate to deal with the usury which is going on in this country? The reason is that 15 percent is the maximum that Congress imposed on credit union loans almost 30 years ago when it amended the Federal Credit Union Act. That approach has worked! Under current law, credit unions are allowed to charge higher interest rates only if their regulator, the National Credit Union Administration (NCUA), determines that it is necessary to maintain the safety and soundness of these institutions and when money market interest rates have risen over the preceding six months. Right now, while most credit unions charge lower rates, the NCUA allows credit unions to charge an interest rate as high as 18 percent.
Unlike their counterparts at the big banks, credit unions are not lining up for hundreds of billions in bailouts. In fact, they're doing quite well. They are responding to the credit needs of the small businesses in their communities and to individuals. They have not only survived this regulation, they are functioning exactly the way they are supposed to function. In my view, the rules that have worked well for credit unions for decades can work for all financial institutions.
Former Senator Al D’Amato in 1991 offered an amendment to cap credit card interest rates at 14 percent. The amendment passed the Senate by a vote of 74 to 19, but never became law. Now is the time to return to that debate. Now is the time to protect a struggling middle class and pass legislation to put a cap on interest rates.
Author's Bio: Bernie Sanders is the independent U.S. Senator from Vermont. He is the longest serving independent member of Congress in American history. He is a member of the Senate's Budget, Veterans, Environment, Energy, and H.E.L.P. (Health, Education, Labor, and Pensions) committees.
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The Size of the Derivatives Bubble = $190K Per Person on Planet - The Invisible One Quadrillion Dollar Equation - By DK Matai (19/3/09)
March 16, 2009 Global Research / siliconvalleywatcher.comThe Invisible One Quadrillion Dollar Equation -- Asymmetric Leverage and Systemic Risk
According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland -- the central bankers' bank -- the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:
1. Listed credit derivatives stood at USD 548 trillion;
2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:
a. Interest Rate Derivatives at about USD 393+ trillion;
b. Credit Default Swaps at about USD 58+ trillion;
c. Foreign Exchange Derivatives at about USD 56+ trillion;
d. Commodity Derivatives at about USD 9 trillion;
e. Equity Linked Derivatives at about USD 8.5 trillion; and
f. Unallocated Derivatives at about USD 71+ trillion.
Quadrillion? That is a number only super computing engineers and astronomers used to use, not economists and bankers! For example, the North star is "just" a couple of quadrillion miles away, ie, a few thousand trillion miles. The new "Roadrunner" supercomputer built by IBM for the US Department of Energy's Los Alamos National Laboratory has achieved a peak performance of 1.026 Peta Flop per second -- becoming the first supercomputer ever to reach this milestone. One Quadrillion Floating Point Operations (Flops) per second is 1 Peta Flop/s, ie, 1,000 Trillion Flops per second. It is estimated that all the data found on all the websites and stored on computers across the world totals more than One Exa byte of memory, ie, 1,000 Quadrillion bytes of data.
Whilst outstanding derivatives are notional amounts until they are crystallised, actual exposure is measured by the net credit equivalent. This is normally a lower figure unless many variables plot a locus in the wrong direction simultaneously. This could be because of catastrophic unpredictable events, ie, "Black Swans", such as cascades of bankruptcies and nationalisations, when the net exposure can balloon and become considerably larger or indeed because some extremely dislocating geo-political or geo-physical events take place simultaneously. Also, the notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. This means that no large OTC derivative house can be allowed to go broke without falling into the arms of another. Whatever funds within reason are required to rescue failing international investment banks, deposit banks and financial entities ought to be provided on a case by case basis. This is the asymmetric nature of derivatives and here lies the potential for systemic risk to the global economic system and financial markets if nothing is done.
Let us think about the invisible USD 1.144 quadrillion equation with black swan variables -- ie, 1,144 trillion dollars in terms of outstanding derivatives, global Gross Domestic Product (GDP), real estate, world stock and bond markets coupled with unknown unknowns or "Black Swans". What would be the relative positioning of USD 1.144 quadrillion for outstanding derivatives, ie, what is their scale:
1. The entire GDP of the US is about USD 14 trillion.
2. The entire US money supply is also about USD 15 trillion.
3. The GDP of the entire world is USD 50 trillion. USD 1,144 trillion is 22 times the GDP of the whole world.
4. The real estate of the entire world is valued at about USD 75 trillion.
5. The world stock and bond markets are valued at about USD 100 trillion.
6. The big banks alone own about USD 140 trillion in derivatives.
7. Bear Stearns had USD 13+ trillion in derivatives and went bankrupt in March. Freddie Mac, Fannie Mae, Lehman Brothers and AIG have all 'collapsed' because of complex securities and derivatives exposures in September.
8. The population of the whole planet is about 6 billion people. So the derivatives market alone represents about USD 190,000 per person on the planet.
The Impact of Derivatives
1. Derivatives are securities whose value depends on the underlying value of other basic securities and associated risks. Derivatives have exploded in use over the past two decades. We cannot even properly define many classes of derivatives because they are highly complex instruments and come in many shapes, sizes, colours and flavours and display different characteristics under different market conditions.
2. Derivatives are unregulated, not traded on any public exchange, without universal standards, dealt with by private agreement, not transparent, have no open bid/ask market, are unguaranteed, have no central clearing house, and are just not really tangible.
3. Derivatives include such well known instruments as futures and options which are actively traded on numerous exchanges as well as numerous over-the-counter instruments such as interest rate swaps, forward contracts in foreign exchange and interest rates, and various commodity and equity instruments.
4. Everyone from the large financial institutions, governments, corporations, mutual and pension funds, to hedge funds, and large and small speculators, uses derivatives. However, they have never existed in history with the overarching, exorbitant scale that they now do.
5. Derivatives are unravelling at a fast rate with the start of the "Great Unwind" of the global credit markets which began in July 2007 and particularly after the collapse of Freddie Mac and Fannie Mae in September this year.
6. When derivatives unravel significantly the entire world economy would be at peril, given the relatively smaller scale of the world economy by comparison.
7. The derivatives market collapse could make the housing and stock market collapses look incidental.
Three Historical Examples
1. The so-called rogue trader Nick Leeson who made a huge derivatives bet on the direction of the Japanese Nikkei index brought on the collapse of Barings Bank in 1995.
2. The collapse of Long Term Capital Management (LTCM), a hedge fund that had a former derivatives and bond dealer from Salomon Brothers and two Nobel Prize winners in Economics as principals, collapsed because of huge leveraged bets in currencies and bonds in 1998.
3. Finally, a lot of the problems of Enron in 2000 were brought on by leveraged derivatives and using derivatives to hide problems on the balance sheet.
The Pitfall
The single conceptual pitfall at the basis of the disorderly growth of the global derivatives market is the postulate of hedging and netting, which lies at the basis of each model and of the whole regulatory environment hyper structure. Perfect hedges and perfect netting require functioning markets. When one or more markets become dysfunctional, the whole deck of cards could collapse swiftly. To hope, as US Treasury Secretary Mr Henry Paulson does, that an accounting ruse such as transferring liabilities, however priced, from a private to a public agent will restore the functionality of markets implies a drastic jump in logic. Markets function only when:
1. There is a price level at which demand meets supply; and more importantly when
2. Both sides believe in each other's capacity to deliver.
Satisfying criterion 1. without satisfying criterion 2. which is essentially about trust, gets one nowhere in the long term, although in the short term, the markets may demonstrate momentary relief and euphoria.
Conclusion
In the context of the USD 700 billion rescue plan -- still being finalised in Washington, DC -- the following is worth considering step by step.
Decision makers are rightly concerned about alleviating immediate pressure points in the global financial system, such as, the mortgage crisis, decline in consumer spending and the looming loss of confidence in financial institutions. However, whilst these problems are grave, they are acting as a catalyst to another more massive challenge which may have to be tackled across many nation states simultaneously. As money flows slow down sharply, confidence levels would decline across the globe, and trust would be broken asymmetrically, ie, the time taken to repair it would be much longer. Unless there is government action in concert, this could ignite a chain-reaction which would swiftly purge trillions and trillions of dollars in over-leveraged risky bets.
Within the context of over-leverage, the biggest problem of all is to do with "Derivatives", of which CDSs are a minor subset. Warren Buffett has said the derivatives neutron bomb has the potential to destroy the entire world economy, and is a "disaster waiting to happen." He has also referred to derivatives as Weapons of Mass Destruction (WMD). Counting one dollar per second, it would take 32 million years to count to one Quadrillion.
The numbers we are dealing with are absolutely astronomical and from the realms of super computing we have stepped into global economics.
There is a sense of no sustainability and lack of longevity in the "Invisible One Quadrillion Dollar Equation" of the derivatives market especially with attendant Black Swan variables causing multiple implosions amongst financial institutions and counterparties! The only way out, albeit painful, is via discretionary case-by-case government intervention on an unprecedented scale. Securing the savings and assets of ordinary citizens ought to be the number one concern in directing such policy.
This article was originally published on the ATCA Open and Philanthropia Socratic Dialogue on Facebook. To reflect further on this, please respond within Facebook's ATCA Open discussion board.
The "ATCA Open" network on Facebook is for professionals interested in ATCA's original global aims, working with ATCA step-by-step across the world, or developing tools supporting ATCA's objectives to build a better world.
Asymmetric Threats Contingency Alliance (ATCA) is a philanthropic expert initiative founded in 2001 to resolve complex global challenges through collective Socratic dialogue and joint executive action to build a wisdom based global economy.
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Mammoth Financial Losses: Credit Default Swaps – Exercises in Surrealism - By Satyajit Das (19/3/09)
March 16, 2009 Global Research / wilmott.com/blogs/satyajitdasAt the quantum level, the laws of classical physics alter in intriguing ways. In financial markets, at the derivative level, the rules of finance also operate differently.
The derivative industry’s indefatigable advocacy of credit default swaps (“CDS”) centers on the fact that contracts related to recent defaults settled and the overall net settlement amounts were small. Closer scrutiny suggests causes for caution.
The CDS contract is triggered by a “credit event”; broadly, default by the reference entity. CDS contracts on Freddie and Fannie were ‘technically’ triggered as a result of the conservatorship necessitating settlement of around $500 billion in CDS contracts with losses totaling $25 to $40 billion. Government actions were specifically designed to allow the firms to continue fully honouring their obligations. Triggering of these contracts poses questions on the effectiveness of CDS contracts in transferring risk of default.
Practical restrictions on settling CDS contracts has forced the use of “protocols” – where counterparties may substitute cash settlement for physical delivery. In cash settlement, the seller makes a payment to the buyer of protection to cover the loss suffered by the protection buyer based on the market price of defaulted bonds established through an “auction” system.
For the GSEs, the auction prices resulted in the following settlements by sellers of protection: Fannie Mae – around 8.49% for senior debt and 0.01% for subordinated debt. Freddie Mac – around 6.00% for senior debt and 2.00 % for subordinated debt.
Subordinated debt ranks behind senior debt and is expected to suffer larger losses in bankruptcy. The lower payout on subordinated debt probably resulted from subordinated protection buyers suffering in a short squeeze resulting in their contracts expiring virtually worthless. Differences in the payouts between the two entities are also puzzling given that they are both under identical “conservatorship” arrangements and the ultimate risk in both cases is the US government.
In other CDS settlements in 2008 and 2009, the payouts required from sellers of protection have been highly variable and large relative to historical default loss statistics. This may reflect poor economic conditions but are more likely driven by technical issues related to the CDS market.
For example, the Washington Mutual payout (around 43%) may have been affected by capital remaining at the holding company, Washington Mutual Inc. (estimated at $2.8 billion). More recently, the auction settlement of Lyondell (around 80-85%) reflected complication from the role of debtor in possession financing and complex collateral allocation mechanisms.
Skewed payouts do not assist confidence in CDS contracts as a mechanism for hedging. In addition, the large payouts are placing a material pressure on the price of underlying bonds and loans exacerbating broader credit problems.
Low overall net settlement amounts may also be misleading. In practice, there are actually two settlements. The ‘real’ settlement where genuine hedgers and investors deliver bonds under the physical settlement rules (i.e. those who actually own bonds and were hedging). The ‘auction’ where dealers who have both bought and sold protection and have small net positions settled via the auction.
In the case of Lehman Brothers, the net settlement figure of $6 billion that was quoted refers to the auction. Some banks and investors that had sold protection on Lehmans did not participate in the auction choosing to take delivery of defaulted Lehman debt resulting in losses of almost the entire face value.
CDS contracts can amplify losses in credit market. Lehman Brothers defaulted with around $600 billion in debt implying a maximum loss to creditors of that amount. In addition, according to market estimates, there were CDS contracts of around $400-500 billion where Lehmans was the reference entity.
Market estimates suggest that only around $150 billion of the CDS contracts were hedges. The remaining $250-350 billion of CDS contracts were not hedging underlying debt. The losses on these CDS contracts (in excess of $200-300 billion) are additional to the $600 billion. The CDS contracts amplified the losses as a result of the bankruptcy of Lehmans by (up to) approximately 50%.
The CDS market is also complicating restructuring of distressed loans as all lenders do not have the same interest in ensuring the survival of the firm. A lender with purchased protection may seek to use the restructuring to trigger its CDS contracts.
As the global economy slows and the risk of corporate default increases sharply, the identified issues with CDS contracts are likely to complicate the problems of credit markets and banks generally.
In October 2008, Alan Greenspan, the former Chairman of the Fed, acknowledged he was “partially” wrong to oppose regulation of CDS. “Credit default swaps, I think, have serious problems associated with them,” he admitted to a Congressional hearing.
Ludwig von Mises, the Austrian economist from the early part of the twentieth century, once noted: “It may be expedient for a man to heat the stove with his furniture; but he should not delude himself by believing that he has discovered a wonderful new method of heating his premises”.
Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall)
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Caution On Quantitive Easing: Be Warned Ben... - By Karl Denninger (21/3/09)
19 March 2009 Market TickerThe BOE executed their first "QE" operation today.
The "bid to cover" was an astonishing 7.35.
This means that for every bond purchased 7.35 were tendered, or made available by willing sellers.
Back in January I posted a Ticker in which I made clear what was likely to happen if Bernanke actually attempted to do (as opposed to threatening) QE:
Bernanke bluffed and the bond market called it. He cannot monetize several trillion in new issue plus the entirety of the 10 and 30 year bonds out there to stop a bond market sell-off. In addition, the market no longer believes him, as evidenced by today's price action. A serious bond-market sell-off will ramp the cost of all credit, including mortgages and commercial loans. If he tries to monetize the result will be current bondholders tendering into his buying, forcing him to essentially "consume" the entire float. That stunt will cause the dollar to implode and we wind up exactly like Iceland. Overnight. Ben knows this; ergo, he is screaming like a petulant child while the market laughs at him just like the market forced Paulson to do what he said he wouldn't with Fannie and Freddie. Bernanke had better shut the hell up before he precipitates a bond market dislocation; traders can and will try to force him to make good on the threat.
Ding. The BOE now has seen exactly what happens when you promise as a government to overpay for something - everyone hits your bid immediately!
This is a form of crack that the government cannot afford to loose into the market - as soon as the buying pressure is removed rates will start to rise again, forcing yet another purchase.
Ultimately The Fed winds up owning all of its own government's bonds, having destroyed the private capital market for sovereign debt (just as it has done for other securitized debt by threatening to overpay for those issues!)
The difference is that if this happens for sovereign debt then deficit spending becomes impossible on an instant basis; this would in turn force a nearly 75% contraction of government spending.
The outcome of this event would be the immediate destruction of Social Security, Medicare, half the military budget and half of all other government programs.
PS: Bernanke knows this, which is why it hasn't happened yet. Let's hope he continues to remember it, because the destruction of our government is very, very un-funny, and this would likely precipitate exactly that in a "vast and fast" form.
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Bernanke's Economic Strategy: Trillions Now, Worry Later - By Tom Petruno (21/3/09)
18 March 2009 Los Angeles TimesThe Federal Reserve made it clearer than ever Wednesday that it's willing to go for short-term gain at the risk of future pain.
Chairman Ben S. Bernanke and his peers at the central bank stunned financial markets by announcing two huge steps aimed at driving down long-term interest rates, including mortgage rates: The Fed said it would buy up to $300 billion of longer-term Treasury securities for its own portfolio and that it would expand its purchases of mortgage-backed bonds to $1.25 trillion from the previously announced $500 billion.
The announcements drove the yield on the benchmark 10-year Treasury note down by nearly a half-percentage-point, to 2.53%. That put it back to where it was in late January.
The stock market was thrilled. The Standard & Poor’s 500 index rallied 2.1% to 794.35. It’s now up 17.4% from its 12-year closing low reached March 9.
No question, the Fed’s moves should be a confidence-builder for the economy in the short run. Mortgage rates, already under 5%, are expected to slide further with the Fed’s help. And nearly everyone agrees that halting or slowing the hemorrhaging of the housing market is key to stabilizing the economy.
"We are not out of the woods yet, but the Fed is working overtime to come up with new approaches to tackling this credit freeze," said Chris Rupkey, economist at Bank of Tokyo-Mitsubishi in New York. "Our forecast of a second-half recovery is on much firmer ground today."
So, what’s the risk? As the Fed effectively pumps another $1 trillion-plus into the financial system, critics say it's setting a time bomb for a future surge in inflation -- the classic case of too much money chasing a limited supply of goods and services.
At the moment, however, that is hardly a worry. If anything, the world faces gluts of most goods and even some services (say, investment banking).
The Fed has said it plans to pull this money back once the economy is on solid footing. But some investors and traders don’t trust the Fed -- which, ostensibly, is why the dollar tumbled Wednesday against the euro, the yen and other major and minor currencies. The euro jumped to a two-month high of $1.342 from $1.301 on Tuesday.
"By continuing to print money at breakneck speed to fund these [bond] purchases, the Fed has guaranteed that the dollar will decline," said Peter Schiff, head of brokerage Euro Pacific Capital and a longtime Fed critic.
Yet it isn’t clear why other currencies should get a leg up on the dollar, with most of the planet in recession. What’s more, the central banks of Japan, Britain and other countries also are buying their own governments’ bonds. The Fed is following, not leading, in this case.
And if the Fed’s efforts manage to end the recession this year, that could help, not hurt, the dollar’s standing, notes John Lonski, economist at Moody’s Investors Service.
As for the long-term inflation risk -- and the risk to the Fed’s own credibility -- the central bank has little choice but to put those concerns aside for now and focus on saving the economy from a far worse collapse, says Tony Crescenzi, bond market strategist at Miller, Tabak & Co. in New York.
On inflation, he suggests, Bernanke can afford the Scarlett O’Hara approach: "I’ll think about that tomorrow
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Federal Reserve Press Release (21/3/09)
For immediate releaseInformation received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
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Dollar Crisis In The Making - Part 3: China Inoculates Itself Against Dollar Collapse - By W Joseph Stroupe (17/3/09)
This article concludes a three-part report.PART 1: Before the stampede
PART 2: The not-so-safe haven
There is mounting evidence that China's central bank is undertaking the process of divesting itself of longer-dated US Treasuries in favor of shorter-dated ones.
There is also mounting evidence that China's increasingly energetic new campaign of capitalizing on the global crisis by making resource buys across the globe may be (1) helping its central bank to decrease exposure to the dollar, while (2) simultaneously positioning China to make much greater profit on its investment of its reserves into hard assets whose prices are now greatly beaten down, while (3) also affording it greatly increased control of strategic resources and the geopolitical clout that goes with it. This is turning out to be a win-win-win situation for China as it capitalizes upon the important opportunities afforded it by the present global crisis.
The exact size and the precise composition of China's huge forex reserves, the exact degree of China's exposure to the dollar and its viable options, if any, in decreasing that exposure are matters of intense interest, because China's policies in this regard could have gargantuan implications for the US and the global financial systems and for the dollar.
One of the foremost experts who continues to research and track these matters is the highly respected Brad W Setser, a Fellow for Geoeconomics at the prestigious Council on Foreign Relations in New York. His work is providing significantly deeper insight into the size and composition of China's reserves and is affording the world a better view of that country's options in managing its reserves going forward and what the implications of those options might be.
Another expert whose ongoing work is also adding very important, deeper insight into such matters is the highly respected Rachel Ziemba, lead analyst on China and the oil exporting economies at the prestigious RGE Monitor, founded by Nouriel Roubini.
Drawing on the work of these two experts, let's examine the matter of the likely size and composition of China's forex reserves and its investment options going forward, and the probable implications of those options for the dollar.
The first issue is to determine the actual size of China's foreign exchange reserves. Its central bank officially confirms the current figure of about US$1.95 trillion. However, Setser's work reveals that China's actual reserves are significantly higher and may actually be as high as $2.4 trillion, according to his latest figures [1]. About $2.2 trillion of this total figure is easily identifiable, according to Setser, with the remaining $200 billion being his estimate of the amount currently held in China's state banks.
As for the issue of the composition of these reserves and its total exposure to the dollar, the most recent Treasury International Capital (TIC) report by the US Treasury has China's holdings of Treasuries at $696 billion as of the end of 2008. However, Setser's research indicates China's total holdings of US Treasuries is likely to be more than that figure, since some of the purchases of Treasuries by the UK and Hong Kong should actually be attributed to China's central bank. China also holds US government-sponsored agency debt (Fannie Mae and Freddie Mac paper) and corporate bonds, but the recent TIC reports indicate its central bank has been steadily divesting itself of these assets in favor of short-dated Treasuries.
As for China's purchases of Treasuries over the most recent three months (October - December of 2008), note this statement from Setser:
And over the past three months, almost all the growth in China's Treasury portfolio has come from its rapidly growing holdings of short-term bills not from purchases of longer-term notes.
Setser goes on to make the point that China's central bank is unquestionably divesting itself of the comparatively less-safe assets such as agency debt in favor of very short-dated Treasuries. The best estimates of the total exposure of China's central bank to dollar-denominated assets of all kinds is about 70%, or somewhere between $1.5 trillion and $1.7 trillion depending upon whether you use the $2.2 trillion figure or the $2.4 trillion figure for the total sum of China's reserves.
That uncomfortably high level of exposure to the dollar is what has been causing concern to flare in China most recently. A much more desirable figure, from China's standpoint, of its total exposure to the dollar would be 50% or less of its total reserves. A reserve composition of 50% dollars to 50% everything else is much safer because an excessive decline in the value of the dollar would tend to be offset by corresponding increases against the dollar in the value of the non-dollar assets comprising the rest of the reserves.
In order to get to that more desirable composition fairly quickly over the next several months, China would have to somehow divest itself of as much as $450 billion of its existing dollar-denominated assets, not purchase a significant amount of new dollar-denominated assets, and accomplish all this without triggering a global dollar panic. That's a very tall order indeed - but it is not by any means impossible. How so?
If we stand back to look at Setser's work from a distance, we see what appears to be a clear strategy on China's part that is potentially very compelling. The country has its official reserves, which it acknowledges now total about $1.95 trillion, and it also has its unofficial or secret reserves, which Setser estimates at about $450 billion at present.
Coincidentally (or perhaps not merely coincidentally) the secret reserves total about the same sum that China needs to divest itself of in order to reach the desired composition of its reserves noted in the previous paragraph - about $450 billion. At this point, recall the intriguing and potentially very important statement quoted earlier (see DOLLAR CRISIS IN THE MAKING, Part 2), a statement made by Fang Shangpu, deputy director of the State Administration of Foreign Exchange and reported by the Xinhua News Agency on February 18, 2009:
Fang Shangpu, deputy director of the State Administration of Foreign Exchange, noted Wednesday that the report released by the US Treasury of the amount of government bonds held by China included not only the investment from the reserves, but also from other financial institutions. It might be a hint that Chinese government is not holding as much US government bonds. [Italics added]
China is managing its foreign exchange reserves with a long-term and strategic view, Fang told a press briefing. "Whether China is to purchase, and to buy how much of the US government bonds will be decided according to China's need," Fang said. "We will make judgment based on the principle of ensuring safety and the value of the reserves," Fang said.
Is Fang Shangpu hinting that China has intentionally, as a deliberate strategy, divided its reserves into two general holdings, official and secret, and that SAFE (the State Administration of Foreign Exchange) has ensured that the composition of the official (government) holdings of the $1.95 trillion is such that its exposure to the dollar is not the roughly 70% assumed in the West, but rather something much closer to the desired target of 50%, while the secret reserves hold predominantly dollar-denominated assets?
If this is the case, then China could employ a number of schemes to clandestinely further reduce its total exposure to the dollar, using its secret reserves, all the while maintaining safety for the official reserves. Note Fang Shangpu's recent statement to the Wall Street Journal regarding how carefully, and with what foresight, China manages its reserve holdings:
"Since the subprime crisis evolved into the international financial crisis in September last year, we have executed the central authorities' plans to cope with the international financial crisis and launched the emergency response mechanism. We have closely followed developments, made timely adjustments to risk management, taken decisive and forward-looking measures to evaluate and remove risks ... "
Chinese officials have been painfully aware, for several years now, of the increasing risks of too great an exposure to the dollar. It simply isn't believable that their level of prudence and foresight in this regard was so low as to allow them to fail to formulate and execute strategies designed to limit that exposure to safer levels than is presently assumed in the West. But if China has indeed prudently and deliberately structured its official reserves (now totaling $1.95 trillion) to be much less exposed to the dollar than is assumed in the West, while off-loading the riskier, dollar-denominated assets into its secret reserves, how might it propose to use those secret reserves to further decrease its exposure to the dollar?
Conversion into resource reserves
Enter China's resource buys. Several Chinese experts have been saying that China needs to spend a significant portion of its dollar-denominated reserves on hard assets, thereby further reducing its exposure to the dollar. It certainly appears that China is embarking upon just such a strategy.
According to research by Rachel Ziemba of RGE Monitor, in the first two months of 2009 alone China has already confirmed such deals for hard assets worth a total of over $50 billion [2]. Clearly, China is just now opening its global strategy of pursuing such resource buys at a time when the prices of hard assets are extremely attractive and many more such buys are in the offing. This is made evident by the recent February 23, 2009 report by China Daily which stated the following:
As part of the National Energy Administration's three-year plan for the oil and gas industry, the government is considering setting up a fund to support firms in their pursuit of foreign mergers and acquisitions, the report said.
Fang Shangpu, deputy director of SAFE, the State Administration of Foreign Exchange, said earlier this week that more measures will be introduced to support firms seeking to expand overseas.
Veteran analyst Han Xiaoping said the time is now ripe for China to convert some of its capital reserves into resource reserves, as global oil prices have fallen 70% since last year, to about $40 a barrel. [Italics added]
"We shouldn't miss this opportunity to use our foreign exchange reserves to build up our oil stocks," he said.
Jiang Jiemin, chairman of PetroChina, said recently: "The low share prices of some global resource companies provide us with some fresh opportunities."
RGE Monitor's Ziemba says the resource buys are a smart move now because they decrease the role of increasingly uncertain financial assets such as Treasuries, which now carry little profit appeal and diminishing appeal as safe stores of wealth, and increase the role of hard assets, which now carry an ever greater profit potential and a mounting appeal as safe stores of wealth: "For China, these investments seem to be a relatively efficient way to use its financial resources given the likely long-term appreciation of resource prices and uncertainty about financial assets."
Ziemba, in response to questions e-mailed to her, also alerts us to watch for forthcoming details about the currencies employed in China's resource buys. If these deals are being transacted largely in dollars, then she notes that there will likely be no negative near-term effect upon the dollar's role as the world's reserve currency. But if they are arranged outside of the dollar, it might well serve to undermine the dollar's international role to some extent.
However, it should be noted that almost no matter what currencies these resource buys are being transacted in, there does exist a potential negative impact for the dollar itself further down this path. How so?
Obviously, with China's uncomfortably large present exposure to the dollar, it is in its interests to concentrate on converting much of the dollar-denominated portion of its secret reserves into resources reserves. In other words, China will undoubtedly spend dollars, whether directly or indirectly, to fund its resource buys. But it must do so in a largely opaque manner that leaves little, if any trace in official data such as the US Treasury's TIC report. It will also be likely to be a net buyer of Treasuries, though nowhere near its 2008 pace, or else refrain from selling significant amounts of Treasuries, while it clandestinely reduces its exposure to the dollar. Otherwise, its actions could spark a dollar panic.
Increased buying of Treasuries by US citizens and investors, and by various foreign investors other than China, as the global crisis rapidly deepens and increases risk aversion, may likely take significant pressure off of China to soak up the huge issuance of new sovereign US debt now getting underway. That will help to provide breathing room for China to address its problem of reducing exposure to the dollar.
Whether China will approach the problem with a scheme of swaps amongst its various state-controlled entities and wealthy private Chinese investors, or by some other nearly opaque means, probably cannot be determined with any certainty at present. But it has undoubtedly worked out the problem of clandestinely converting significant sums of its dollar-denominated financial assets into hard assets without dumping Treasuries and triggering a dollar panic.
It is most unlikely, therefore, that its actions in this regard will be sufficiently proved before it has already succeeded in accomplishing its goals. Furthermore, since resource prices are now very attractive, China will certainly expand and accelerate its resource buys while prices remain attractive, converting ever-larger sums of its dollar-denominated reserves into resource reserves.
If China averaged a conversion of only $35 billion per month from dollars into resources, it could convert the entire $450 billion in little more than 12 months' time. Hence, I predict that the next eight to 15 months will provide China with sufficient time to bring its total exposure to the dollar much more in line with its strategic goals.
What about the problem of dealing with any ongoing accumulation of dollars? A number of analysts note that China's trade surplus is worsening even in the global slowdown because, while China's exports are falling, its imports are falling much faster. However, Chinese officials have made clear that they will use their reserve holdings to bolster imports, and that measure should alleviate China's need to accumulate large sums of dollars and other currencies in order to keep the yuan stable.
China is extremely unlikely, therefore, to accumulate dollars at anywhere near the rate at which it did in 2008. China is also funding its domestic stimulus package designed to spur domestic consumption. All these measures denote a much wiser use of its huge reserves and a steadily decreasing focus on the dollar. All in all, China looks set to weather the storm quite well in spite of some significant hardships along the way.
Summarizing the escalating risks of a dollar crisis
The bubble in US Treasuries is getting increasingly massive and unstable with each week that passes. Deepening global risk aversion is keeping investors lined up, so far, to buy Treasuries - especially short-dated ones. And the deepening economic crisis in the US is moving its own citizens to join in the buying spree.
If the Treasuries bubble persists for much longer, and especially if it continues to mount, the massive and dangerous distortions in the global financial system and the Treasuries-induced strangulation of its credit markets will only become more severe, likely leading to a meltdown somewhere in the emerging markets, one of whose effects will almost certainly spread to engulf the severely weakened Western European and US financial sectors and plunge particularly the US economy into a deep depression, with potent negative effects upon the dollar.
Such an eventuality will tend to force global investors to evaluate the safe-haven appeal of the dollar based much more on the fundamentals of the US economy, and that will portend a stampede out of the dollar and a potentially chaotic bursting of the massive Treasuries bubble. Hence, even if the US finds buyers for its huge sums of new sovereign debt now beginning to flood the markets, the picture does not look good for the dollar beyond the short term.
Obviously, if the US reaches the point where it fails to find sufficient buyers for its new flood of Treasuries, that will also become a perilous situation for the dollar and for the huge Treasuries bubble, which will almost certainly burst as global investors seek better stores of wealth in hard assets, following the lead of China's central bank.
Either way, the US is engaged in the implementation of extremely risky and potent inflationary, dollar-debasing policies, making a loss of global confidence in the dollar in the short to medium term a virtual certainty. Even if the massive spending does restore economic growth, the US economy is likely to remain very weak for some time. That will make it extremely difficult for the US Federal Reserve to tighten monetary policy to fight off the inevitable and potent inflation that will result from today's shortsighted policies.
When the Fed attempts to tighten, the US economy will likely be plunged into a second-round recession or depression, with obviously awful effects upon the dollar. But if the Fed fails to tighten sufficiently and quickly, runaway inflation will ravage the currency anyway.
Prudent, forward-looking Chinese officials have clearly assessed the entire situation as one demanding careful but swift action to ensure that its huge reserves are not imperiled by what has obviously become an untenable global rush into an unstable and perilous dollar bubble.
Hence, China's central bank is enacting with a sense of urgency prudent measures, both explicit and clandestine, to significantly decrease exposure to the dollar. If the details of such measures should become sufficiently public and should attract undue global attention before China accomplishes its goals, a dollar panic might be triggered.
This risk, though perhaps not major, does exist nonetheless, and it is significantly increasing as China undertakes new measures that might attract undue and unwanted global attention. However, it is also likely that China will enjoy cover and gain breathing space to enact its prudent measures while much of the rest of the world continues to rush into the bubble.
Notes
1. See "China's Record Demand for Treasuries in 2008", by Brad Setser, The Council on Foreign Relations.
2. See "China's Resource Buys" by Rachel Ziemba, RGE Monitor.
W Joseph Stroupe is a strategic forecasting expert and editor of Global Events Magazine online at www.globaleventsmagazine.com
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Dollar Crisis In The Making - Part 2: The Not-So-Safe Haven - By W Joseph Stroupe (17/3/09)
Official and popular analysis of the predicament facing the US dollar has for the most part been distinctly unwilling to come fully to grips with the stark truth about the real nature of this deepening crisis and the escalating risks that are surfacing. Far too much optimism and wishful thinking, and scarce courageous realism, is a recipe for an even worse disaster than the one we're suffering at present.We have seen in Part 1 the profound risks of a dollar crisis being triggered if global demand for US Treasuries remains high and that the debt bubble persistently and destructively sucks all the air out of the global credit markets. However, if global demand for Treasuries is not sustained at a very high level, there exists an entirely different, yet equally destructive set of impending and mounting risks that a dollar crisis might be triggered.
Like it or not, the US dollar still constitutes the de facto central framework of the present global financial order - the dollar is its fundamental support structure, much like the steel framework that supported the Twin Towers in New York. The global crisis is sending shockwaves of ever increasing intensity throughout the present order. Few thought the shaking would reach its present intensity and scope, and no one really knows how powerful and destructive the shaking might get before the crisis is over.
The initial, knee-jerk reaction in this situation has been to reach out and grab tightly onto the framework with both hands (that is, in an exceptionally risk-averse reflex, flee into the dollar for relative safety) and hold on for dear life. This reaction of global investors is motivated partly by logic but also in large part by the strong psychological components of uncertainty, fear and even panic.
As China Banking Regulatory Commission deputy head Luo Ping stated on February 12, in his own reactive-style retort to the unfolding crisis, Treasuries are just about the only safe-haven option in perilous times. However, his clarification on the next day appeared a bit less knee-jerk and more rational, stating that gold and selected government bonds (but not those of the US) look more attractive to China from a risk assessment standpoint, because China rightly fears its dollar-denominated holdings will almost certainly be inflated away over time by the US policy of issuing huge new sums of dollar-denominated debt in the form of Treasuries.
This brings us to the crux of the matter of escalating risks for the dollar. In the current fiscal year alone, the US is expected to issue somewhere between US$2 trillion and $2.5 trillion in new debt. It could conceivably exceed that amount if the crisis worsens and more money than anticipated is required to rescue the financial and economic sectors from ruin, or if virtually the entire financial sector has to be nationalized to prevent a total collapse. That is a prospect that is swiftly becoming more and more likely. A running estimate by Bloomberg News recently put the total so far of all the new sums of dollars the US government has spent, lent and/or committed to spend due to this crisis at about $9.7 trillion and counting!
To deal with a crisis that fundamentally arose, at length, out of the escalating risks of shortsightedly spending in colossal sums of dollar-debasing debt, the US government is attempting to "solve" the crisis by frantically spending gigantic additional sums of new dollar-debasing debt. Before this crisis spending binge was undertaken, the dollar's strength had already been greatly undermined over the past four decades by a combination of shortsighted dollar-debasing government policies and the accumulation of huge sums of debt since the 1980s.
According to official calculations, it required $5.54 in 2008 to equal the purchasing power of just $1.00 in 1970. This comparison illustrates the potency of inflation in undermining the value of a mere fiat currency such as the dollar.
But now, the US government is risking setting in motion inflationary forces that are profoundly more potent and difficult to manage. Virtually every economist on the planet calls this situation one that has the real potential for seriously and permanently damaging the dollar by inflating away too much of its remaining value not very far down the road. They also warn that, specifically due to the extremely risky monetary and budgetary policies now being embarked upon, the timing will be absolutely crucial for future Fed watchfulness and actions aimed at preventing a catastrophic, uncontrolled rise in dollar inflation.
They further warn that the severely weakened US financial and economic systems will be very slow to recover strength and stability and will likely be unable to withstand the tightening measures that will be needed further down the road so as to keep inflation from running out of control. The US may therefore be condemning its own currency to collapse by enacting such shortsighted policies.
In spite of such warnings, extremely potent inflationary, dollar-debasing policies are being enacted anyway. Is this the picture of a fundamentally sound global financial and economic superpower worthy of international respect, confidence and trust, or the picture of an erstwhile global financial and economic empire that is even now falling over the threshold into collapse? This is absolutely a valid question to pose at this juncture. Why?
What's the salient point here? International trust and confidence in the monetary, financial and economic policies of the US government are far more crucial now, right in the midst of this deepening global crisis, than at any previous time in history because these policies will directly and indirectly affect the dollar, either for good or for bad. Since the dollar does still constitute the central framework of the present global financial order, and since the shaking of present order is only intensifying, international confidence and trust in the dollar as a safe store of wealth is absolutely essential.
If that trust and confidence in the dollar should be sufficiently undermined anytime soon by risky policy, then the present global crisis will almost certainly turn into a global catastrophe - the perfect storm against the dollar alluded to in the introduction of this article. The importance of international trust and confidence cannot be over-emphasized for the dollar, a mere fiat currency that is backed by no hard assets at all (such as gold), but only by the pledge of the US government to stand by it and not to default on its international debt.
The massive global rush into the dollar as a safe haven would appear to indicate that we don't have much to worry about respecting international trust and confidence in the dollar. That might well be true if it could be clearly established that such a global move has been strategic in nature and well thought-out and as such has come as a result of rationality, logic and reason much more than being merely a tactical move as a result of fear and panic. Some important questions must be posed here:
Are investors such as China, which likely holds 70% of its reserves in dollar-denominated assets, satisfied to remain in the dollar for the foreseeable future, and satisfied to increase exposure to the dollar, or do its central bank governors increasingly find themselves having to hold their noses, as it were, with respect to their exposure to the dollar? Is their concern flaring?
Are global doubts and fears mounting with respect to the appeal of the dollar as a safe store of wealth beyond the short term?
If the answer to the question above is yes, then is the appeal of the dollar being undermined mostly because of fears over the potential effects of the dollar-debasing policies that are now irreversibly being implemented in Washington?
Are key investors like China's central bank increasingly looking for ways to reduce exposure to the dollar?
Is the dollar facing significantly increasing competition from other safe haven stores of wealth, such as gold?
Gold's increasing appeal as a safe haven, demonstrated by its ongoing surge, adequately answers the last question. From the start of January 2009 until mid-February, gold has surged from around $800 per ounce to near $1,000 per ounce and is likely to rise further. This surge coincides with the raft of official data releases since the start of 2009 that demonstrate the US and global financial systems and economies are moving deeper into crisis. Investors increasingly see the value of investing in hard assets, and in times of uncertainty and crisis gold and other precious metals are usually the ultimate investment in that category.
As for the answers to the remaining questions posed above, even before Premier Wen Jiabao last week publicly warned the US of his government's concern about the safety of China's US holdings (see Wen puts US honor on the debt line, Asia Times Online, March 14, 2009) consider the recent comments of Luo Ping, China's Banking Regulatory Commission deputy head, referred to above:
"We hate you guys. Once you start issuing $1 trillion-$2 trillion ... we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."
Also note the recent comments of Yu Yongding, a prominent former advisor to China's central bank, as reported by Bloomberg News on February 11, 2009:
China should seek guarantees that its $682 billion holdings of US government debt won't be eroded by "reckless policies", said Yu Yongding, a former adviser to the central bank. The US "should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way," said Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences
Also, as reported by Bloomberg News on February 11, 2009:
China may voice its concerns over US government finances and the potential for a weaker dollar when Secretary of State Hillary Clinton visits China on February 20, according to He Zhicheng, an economist at Agricultural Bank of China, the nation's third-largest lender by assets. "In talks with Clinton, China will ask for a guarantee that the US will support the dollar's exchange rate and make sure China's dollar-denominated assets are safe," said He in Beijing. "That would be one of the prerequisites for more purchases."
Now, note the clarification offered by Luo Ping on the next day, as reported by Reuters News Service:
Buying US Treasury bonds is an option - but not the only option - for China, which is aware that huge debt issuance by Washington would reduce the value of China's existing portfolio, a banking regulator said in remarks published on Friday. In an elaboration of his remarks, the China News Service paraphrased Luo as saying: "Compared with gold or bonds issued by other countries and regions, US Treasury bonds are still an option (for China). But if the US government issues a large amount of Treasury bonds amid efforts to deal with the economic crisis, all investors who hold US Treasuries will suffer losses."
Now, note these statements made by Chinese officials, advisors and experts as reported by the official Xinhua News Agency on February 18, 2009:
"To rescue the ailing US economy by increasing government borrowing will create a record-high federal deficit," said Yu Zuyao, economist with the Chinese Academy of Social Sciences, a government think tank. "This can further lead to catastrophic consequences such as serious inflation and US dollar depreciation," he said Tuesday. China faced high depreciation risk to its foreign exchange reserves, US Treasury bonds and other US dollar-denominated assets, Yu said.
With regard to whether Chinese advisors and experts think the US government is creating a dangerous and unstable Treasuries bubble, note this statement:
"Buying US government bonds amid an economic downturn, [a purchase] that is not based on the sound performance of the US economy itself, indicates a huge bubble," said Zuo Xiaolei, chief economist of China Galaxy Securities. [italics added]
Chinese officials express mounting alarm at the likely negative near-to-medium term effects upon the dollar, and upon their huge reserves, of the spend-spend-spend policy emanating from Washington:
The huge deficit would not immediately lead to inflation, since banks were likely to curb lending as the financial system remained weak, Zuo said. "It might be two or three years before the huge deficit leads to serious inflation." Analysts noted that if the stimulus plan didn't accomplish its goal of restarting growth, the US government would have to ease its large fiscal burden by borrowing more and issuing more dollars, instead of relying on economic growth.
Huge Treasury bond issues would exacerbate the depreciation of the US dollar and world wealth. Such developments would be more catastrophic than the global financial crisis, according to Zhang Yansheng, head of the International Economic Research Institute under the National Development and Reform Commission, the chief economic planning body in China.
A weaker US dollar would hurt that currency's international status, he said, which would "not be in the interests of the United States and other countries and would exacerbate the crisis." Said Zuo: "US dollar depreciation is inevitable in the long run. China should prepare and reduce its holdings of US Treasuries to a proper size."
In a strong hint that China's central bank won't be adding to its holdings of Treasuries at anywhere near the rate it did in 2008, that it may already have clandestinely achieved more diversification out of the dollar than is widely known, and may well find ways to further decrease its holdings without explicitly telegraphing its moves, note this statement:
Fang Shangpu, deputy director of the State Administration of Foreign Exchange, noted Wednesday that the report released by the US Treasury of the amount of government bonds held by China included not only the investment from the reserves, but also from other financial institutions. It might be a hint that Chinese government is not holding as much US government bonds. [Italics added.]
China is managing its foreign exchange reserves with a long-term and strategic view, Fang told a press briefing. "Whether China is to purchase, and to buy how much of the US government bonds, will be decided according to China's need," Fang said. "We will make judgment based on the principle of ensuring safety and the value of the reserves," Fang said.
The foregoing quotes beg the following questions:
What about the widely held view, which is even at times recited by Chinese central bank officials themselves, that says China has no choice but to maintain its holdings of Treasuries and to keep buying more, lest any significant slowdown in its rate of purchases risk triggering a global dollar panic?
Is that view correct, or does China's central bank actually have other viable options, as Luo Ping and other officials insist that it does?
What might those other options be, are they really viable, and what might happen to the dollar if China's central bank began to exercise its professed "other options"?
What kind of scenario might prompt China's central bank to attempt to do so?
Could its enactment of "other options" be carried out in a way that would be difficult to trace, so that China would avoid triggering a dollar panic while it steadily reduced its exposure to the dollar over the coming months?
Saying "goodbye!" sooner, not later
With respect to whether China will continue to purchase Treasuries at anywhere near the same rate at which it has in the recent past, a new and fundamental problem is arising. Its significantly slowing economy is causing a rapid slowing of the rate of growth of its reserves, which makes much less new reserve accumulation available, and therefore also undermines the need for the purchase of Treasuries. Experts state that even if China's central bank uses all of its new accumulation of reserves each month to purchase Treasuries, the sums it would purchase would still fall.
Additionally, China must now fund its new $585 billion domestic stimulus package, and that will only further decrease funds available for the purchase of Treasuries. Therefore, its rate of purchase of Treasuries will almost certainly decline significantly from here forward.
This potentially potent new fundamental comes into play at the most inopportune time for the US, when it intends to sell perhaps as much as $2.5 trillion in Treasuries this fiscal year alone. The question that begs an answer, and that is increasingly being asked around the globe, is who's going to buy this huge new supply of debt? Certainly not Japan, for its exports are plunging, as is its new reserve accumulation, as it suffers a severe economic contraction at an annual rate of 12.7% according to the latest figures.
It certainly appears likely that as new Treasuries flood the market, the point could soon be reached where supply outstrips demand, causing yields to rise. The Fed is trying to keep yields as low as possible so as to attract big buyers that already have large holdings of Treasuries, such as China. For such holders of Treasuries, rising yields would ravage the value of their holdings, making the purchase of yet more Treasuries distinctly unattractive. Yet, lower yields tend to be less attractive for new buyers, except in the case where such a buyer is suffering from strong risk aversion and is looking, not so much for profit, but rather for a safe haven.
Therefore, minus the environment of extreme risk aversion that still plagues the markets, the US is caught between multiple contradictory interests. On the one hand, it wants to keep yields low so as to attract buyers such as China to purchase significantly more Treasuries. On the other hand, it needs higher yields to attract many new buyers because the big buyers are becoming much less able to keep up their purchases, let alone increase them. But those higher yields would almost certainly force investors such as China's central bank to begin to more quickly divest themselves of Treasuries - or risk seeing the value of the dollar-denominated portion of their reserves eaten away.
The biggest factor that has so far prevented a destructive collision of all these conflicting interests is the persistence of extreme risk aversion in the markets, causing a global rush into Treasuries as a safe haven.
If that extreme risk aversion were to subside, then investors holding Treasuries and prospective new buyers of Treasuries would be lured instead to investments that offer greater profit potential. The yields on Treasuries would have to rise in order to attract buyers, but that would undermine the value of investors' holdings of Treasuries, which would in turn drive them to sell out in favor of better safe stores of wealth. As yields rise rapidly, prospective buyers would likely stay on the sidelines to wait for the best deal rather than jump in too soon only to see their holding ravaged by yields that continue to rise.
The yields would rise yet further on the falling demand for Treasuries, and the downward spiral would feed into itself in a stampede out of Treasuries and the dollar. What I am describing here is a bursting of the Treasuries bubble. It would most likely be disorderly and chaotic.
But such a bubble burst for Treasuries could come about even if risk aversion persists, or perhaps intensifies, in this deepening global crisis. What if investors become more worried about the safety of Treasuries, fearing, as China's central bank increasingly does, that the flooding of the market with huge new sums of US debt will inevitably inflate away the value of their Treasury holdings? Or what if the costly new US stimulus package and bank rescue fail, and the US descends into a much deeper recession or a full-blown depression and is forced to nationalize virtually the entire financial sector, stoking fears that the US government may have no choice but to default on at least a portion of its gargantuan debt?
In that case there is a real threat that investors will begin to transfer their risk aversion strategy from focusing on Treasuries and the dollar to focusing on something else that is deemed much safer - perhaps including hard assets like gold and other precious metals and commodities. If US gross domestic product (GDP) deteriorates significantly further than it has already, the dollar will become much more vulnerable and will likely fall as investors begin to value the safe haven currency more in line with the fundamentals of the US economy. Then, the same self-reinforcing downward spiral described above would likely come into play, and the Treasuries bubble would burst in chaotic fashion in an investor stampede to havens safer than the shaky dollar.
One can begin to see how very tentative is the dollar's recent appeal as a safe haven in the mounting storm. In verification of that fact, investors have been piling into short-dated Treasuries for the most part, for two reasons. First, these assets are less vulnerable to the ravages of higher yields, which tend to hit the long-dated Treasuries earliest and hardest. Second, the short-dated assets facilitate a quick exit in the event that it is deemed justified. When taken together, these two factors are not a very solid vote of confidence in Treasuries and the dollar.
Next: China Inoculating Itself against a Dollar Collapse
W Joseph Stroupe is a strategic forecasting expert and editor of Global Events Magazine online at www.globaleventsmagazine.com
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Dollar Crisis In The Making - Part 1: Before The Stampede - By W Joseph Stroupe (17/3/09)
March 15, 2009 Asia TimesIncreasingly ominous clouds are gathering in what could soon be the perfect storm against the United States dollar and against the present dollar-centric global financial order.
This is not shaping up to be a storm that anyone is trying to initiate, not even those who are actively driving for a new global financial order that is no longer centered on the dollar. Instead, it will result from a correlation of forces arising out of the deepening global financial and economic crises, coupled with recurring and conspicuous miscalculation on the part of some of the world's political, financial and economic leaders.
The storm has the potential to cause upheaval on a grand scale, opening the door to swift, and largely uncontrolled, fundamental transformation.
As is widely recognized, the present financial order that is inordinately reliant on the US dollar must some day give way to a new order that is more balanced, stable, resilient and reliable, one that is based on multiple currencies and that therefore won't be plagued by the extremely dangerous structural drawback of an increasingly worrisome elemental single point of failure (the dollar).
But if the current dollar-centric financial order should become more seriously shaken than it already has been, perhaps even suffering a collapse, as a casualty of the present deepening global crisis, then the transition to any new global financial order is most likely to be disorderly, disruptive and unmanageable rather than gradual and orderly.
We can hope - but cannot be at all confident - that world leaders and global investors will act coherently, cohesively and intelligently enough in this crisis so as to ensure that the policies and actions being undertaken will not put at further serious risk the fundamental structure of the current dollar-centric financial order, and that they will instead be effective in bolstering deteriorating global confidence in the present order and in the safety of the dollar, at least until we get through this crisis.
Unfortunately, we cannot be confident that world leaders know what they are doing in seeking to resolve the crisis. Are their measures attacking the heart of the problem, or only its periphery? Are they exacerbating the crisis, either by enacting certain misdirected measures, or by failing to enact certain required measures? Are they setting up conditions that make a dollar crisis and radically increased financial upheaval virtually inevitable, by blindly pushing ahead with a simplistic agenda of trying to spend their way out of the present crisis.
If the dollar is being put at significant short- and medium-term risk by such measures, then we're seriously risking plunging the global financial order into a depth and breadth of transition that we cannot adequately control.
Investment, finance and economics are a complex mix of at times downright illogical human psychology with the pure logic of mathematical science, introducing possibilities for potent wild-card factors that must be taken into consideration in any calculation.
History provides many unfortunate examples of how the psychological components of uncertainty, fear and panic can, at crucial times, trump the components of logic, reason, knowledge and discipline to give impetus to shortsighted and risky policies and actions that create a full-blown crisis. Humans simply don't always act in a rational and logical way that is in their best strategic interests. And institutions, regulatory agencies and governments, being composed of humans, don't always act rationally either.
All are subject to the potent influence of human psychology, which can at times be quite defensive, knee-jerk, irrational and somewhat unpredictable. In a crisis situation such as we presently find ourselves, the darker side of psychology's influence is often and unfortunately magnified.
Added to this is the fact that global investment, financial and economic systems have become increasingly complex and interrelated much faster than the ability of experts and leaders to adequately comprehend them. This makes it much easier to make mistakes of real consequence. This complexity also at times prevents governments and other institutions from taking requisite bold, comprehensive actions in the midst of crisis for fear that these may backfire by producing some unforeseen and intolerable effects and repercussions.
Further complicating matters, investment, finance and economics are nearly always deeply intertwined with politics, adding to potential uncertainty - especially so in a time of deepening global crisis, when individual governments invariably lean toward self-interest, nationalism, protectionism and self-preservation.
To illustrate the disturbing truthfulness of the foregoing, remember when experts and leaders confidently concluded that the free markets could mostly regulate themselves with success; when they concluded that no housing bubble existed in the US, but only some "regional froth"; when they insisted that complex new mortgage-backed securities, including high-risk mortgage paper, dispersed throughout the financial and investment system, would decrease default risk.
Empty reassurances
Remember when the present crisis broke in 2007, the reassurances that it would not spread beyond the confines of subprime; when it did spread, the forecasts that Wall Street banks' losses would amount only to a total of about US$200 billion. Remember when "experts" insisted no widespread credit crunch would result. Remember when they insisted that the crisis was unlikely to spread from Wall Street to the real economy on Main Street?
Remember when they said the hundreds of billions of dollars of liquidity thrown into the system would free up the credit seizure. Remember when they said the October 3, 2008, $700 billion stimulus package and the many more hundreds of billions of dollars in bank and corporate bailouts would move the system out of crisis. Where are all these pseudo-intellectual ideas, beliefs, ideologies, assessments and assurances now? On the trash heap, precisely where they belonged in the first place.
The record inspires little confidence in the ongoing efforts of governments to resolve the crisis, or even that they know how to resolve it. The damage and outright destruction inflicted on vital components of the present global investment, finance and economic orders just keeps piling up while governments keep trying their various "solutions".
As for the newly passed $787 billion stimulus package, and its accompanying sketchy bank rescue plan, economists and the markets widely doubt whether the two measures are potent enough and targeted accurately enough to come anywhere near accomplishing their stated aims.
The same is true of the perpetually disjointed and half-hearted efforts of the Group of Seven (G-7) leading industrialized nations, whose most recent confab in Rome ended with the customary whimper. In addition to its historic impotency, the G-7 is now being almost totally emasculated by the broader Group of 20 nations, to which has fallen the task of designing and constructing a new global order to replace the present broken one. If you concluded based on the hard facts that this crisis is spinning increasingly out of control in spite of, and in some important ways due to, the efforts of governments to resolve it, you would not be far wrong.
Investors, both private and official, around the globe have generally given in to a crisis reflex psychology of extreme risk aversion and have been clutching the US dollar ever more tightly, massively running into Treasuries as a refuge in the mounting storm. This fact would seem to imply that global confidence in the dollar is still fundamentally sound, despite the well-documented bruises it has received over the past few years.
The truth is that the potential for a global dollar panic is becoming greatly heightened, in spite of (and in part, actually because of) the dollar's recent significant gains as a refuge for investors, the bulk of whom continue to be distinctly risk-averse. Ironically, this massive piling onto the dollar opens yawning new vulnerabilities and risks that either did not exist before, or were at most very minimal.
For example, a number of experts warn that US Treasuries are increasingly taking on the characteristics of a bubble, and they remind us that bubbles inevitably deflate, and they rarely, if ever, do so in an orderly fashion. When this one deflates there could be uncontrolled, perhaps even chaotic, repercussions for the dollar.
Much discussion and debate is currently underway as to whether the US will find sufficient global demand for the more than $2 trillion in new Treasuries coming online this fiscal year alone. But the fundamental risks for the dollar aren't only arising out of that fear over whether demand for Treasuries will be sustained.
Serious risks for the dollar also arise if global demand for Treasuries is sustained. Why? Because that would only thrust the present Treasuries bubble to even more gigantic proportions, further warping the structure of the already severely deformed present global financial order, magnifying the dangerous distortions that already exist and increasing the likelihood of a massive second wave of damage and destruction in this present crisis, and an eventual burst in the Treasuries bubble.
The emerging markets and their banks and governments are suffering under increasingly tighter credit strangulation and mounting financial and economic losses, with skyrocketing risks of default, due to the tightening global credit seizure. And US and European commercial credit not explicitly backed by governments is also suffering likewise. As if that dangerous situation were not bad enough, the massive spending and debt issuance policies being embarked on by the US government only greatly exacerbate the increasingly unstable situation for all these players.
By facilitating and encouraging the massive global flight into Treasuries, and by issuing a huge new supply of US sovereign debt, emerging markets, their governments and banks, and US businesses are deeply suffering. As the US government sucks all the air out of the global credit markets via the unstemmed growth of its latest in a series of dangerous asset bubbles, namely the Treasuries bubble, these other entities find it extremely difficult to issue debt (obtain credit) at feasible costs, if at all. Investors are demanding very high yields to exit the relative "safety" of Treasuries to invest in corporate and government bonds in the emerging markets and in large swaths of the US and Western Europe as well.
These increasingly high yields demanded by investors translate into high costs and mounting losses by banks across the financial system. The situation is moving rapidly to a potential massive wave of bank, corporate and government defaults. Eastern Europe is on the very precipice as a result. If such already severely weakened emerging market governments, banks, businesses and US corporations do default, they will place enormous new pressures on European and US banks which are either heavily exposed, or not sufficiently immunized, to the risks.
The global credit markets and financial systems are deeply interconnected, meaning that contagion spreading from an Eastern Europe default to the rest of Europe and the US is virtually assured. So those pressures will be felt by the entire global financial order, and such new and profound stresses upon an already extremely shaky order won't likely be endured without a genuine meltdown of the entire system.
These huge and dangerous distortions in the global financial order are due largely to US government policies regarding Treasuries and the shortsighted willingness of global investors to participate in pumping up that profoundly harmful bubble. If the US succeeds in selling its greatly increased supply of Treasuries, then such distortions in the global order will only become more profound, their negative repercussions (credit strangulation) will only become much more potent, and the feared second wave will be virtually assured. And so far, demand for Treasuries has remained high, thereby ensuring the dangerous persistence of the credit strangulation referred to here.
That second wave, if it comes, will also carry profoundly negative repercussions for the Treasuries bubble itself, because the US and Europe will be plunged into undeniable, full-blown depression via a financial meltdown by the heavy burden of the cascading effects of default in Eastern Europe. That eventuality will force global investors to finally begin to evaluate the safety and appeal of Treasuries and the dollar based much more on the swiftly disintegrating fundamentals of the US economy and much less on a psychological reflex, driven by extreme risk aversion, that at present corrals investors into Treasuries for their supposed safe-haven benefits.
The stampede in the making Investors will begin to stampede out of financial assets such as Treasuries and into hard assets like precious metals and certain commodities whose price has been severely beaten down. These will offer comparatively much safer stores of wealth, ones with a real profit potential. China, via its resource buys, is already blazing the trail, going energetically into hard assets, rather than sustaining its 2008 rate of purchases of Treasuries and other financial assets.
Replay the recent histories of the chaotic housing and the commodities bubble bursts. Global investors, at the behest of enthusiastic governments, largely ignored the inevitable risks and piled into these assets on a grand scale, with the hottest interest coming just before the burst occurred. The environment of very low global interest rates and a massive global credit excess set the stage for enormous investor profits on these gigantic and mushrooming asset bubbles.
But when mounting inflation obliged the Fed to begin to steadily hike interest rates, the housing bubble began to burst in late 2006. As the dollar weakened under mounting inflation and loss of its appeal as a safe store of wealth, global investors piled ever faster into commodities for safety and for profit, inflating that bubble to gigantic proportions by the summer of 2008, when oil nearly reached $150 per barrel.
Then, when the global recession emerged later that summer, investors realized global demand and prices for commodities would plunge, so they stampeded out of commodities and into Treasuries, and the commodities bubble burst. Both bubble bursts left a great deal of wreckage in their wakes, with asset values collapsing, pulling businesses, banks and even governments into the abyss.
Though the present Treasuries bubble is more about safety than it is about profit, the fundamental risks associated with bubbles still apply to it. The bigger it gets, and the more reliant upon it as a safe store global investors become, the more unstable it turns out to be because it becomes more sensitive to various factors, both internal and external, both real and psychological.
The bigger and hotter any bubble gets, the more prepared its devotees become to speedily abandon it in favor of the next one. That explains why investors have mostly piled into very short term Treasuries - they know they may well have to sell out even faster than they bought in.
So, no one should assume that the present crisis will moderate or move toward resolution just because global demand for Treasuries might remain high in coming months. That would only signal that the Treasuries bubble is growing more massive, and that the distortions in the global financial order are only becoming more profound and dangerous, threatening to bring in a second wave of destruction, and that the bubble is therefore much nearer to bursting. This constitutes a potential perfect storm against the dollar and against the present global financial order that no one wants, but no one is seeking to prevent either.
W Joseph Stroupe is a strategic forecasting expert and editor of Global Events Magazine online at www.globaleventsmagazine.com
Copyright 2009 Global Events Magazine. All Rights Reserved.
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Defend the Gold Standard - By Robert P. Murphy (18/3/09)
16 March, 2009 Mises InstituteFor some reason, there are a lot of people out there who can't stand the gold standard. Maybe their hostility is in reaction to the large (and growing) number of gold bugs who think the worst day in history was August 15, 1971. But since I'm an economist, not a psychoanalyst, all I can really do is patiently explain how silly the antigold arguments are, rather than speculate on the motives of their authors. For today's article I will focus on a recent Bloomberg piece with the suggestive title, "Gold Standard Fans Yearn for Great Depression."
Gold Is Volatile?!
Early in his essay, the Bloomberg commentator Michael Sesit gives a rapid-fire sequence of flaws with the barbarous relic:
A return to the gold standard, where countries peg their currencies to a given quantity of the metal and thus to one another, is a bad idea. Gold-based monetary systems are overly rigid and restrictive, possess a deflationary bias and can be volatile. They make long-term inflation dependent on the pace of mining output in places such as China, South Africa and Russia.
Let's take these one at a time. To criticize a monetary system based on gold as "rigid" only makes sense if you believe that printing green pieces of paper makes a country richer. After all, the only rigidity enforced by the gold standard is on the central bank's use of the printing press. Requiring the government to maintain a fixed dollar/gold exchange rate is "restrictive" in the same way that the Bill of Rights limits the discretionary power of the feds.
"A fixed dollar/gold exchange rate is 'restrictive' in the same way that the Bill of Rights limits the discretionary power of the feds."
So yes, if Mr. Sesit thinks that the government does a good job centrally planning the economy with injections of new paper money, then I can see why he would consider the gold standard a bad idea. But let me ask you this: would you trust your next-door neighbor to use a legal-tender printing press "responsibly"? Now what about the people in DC? If we're going to be foolish enough to give them a printing press in the first place, don't you think it's a good idea to put some strict rules in place?
What's So Bad About Falling Prices?
Sesit's next point is that the gold standard has a "deflationary basis." So what? That's one of its virtues, that the purchasing power of the dollar doesn't fall or might actually increase over time. Even mainstream macroeconomists — whether neoclassical or New Keynesian — have come to realize over the last few decades that long-term predictability in monetary policy has definite advantages, and that in the long run, the best thing the monetary authorities can do is provide a currency with stable purchasing power.
So you tell me: looking at the graph below of the Consumer Price Index, when was the value of the dollar stable and predictable, and when was it really volatile? In which environment could businesses and investors confidently make long-term decisions? Remember that FDR took away private citizens' right to redeem dollars for gold in 1933, and then Nixon finally removed even the ability of central banks to do so in 1971.
As the chart above makes fairly clear, US prices (measured in dollars) exploded after Nixon formally closed the gold window. And what the chart above doesn't reveal — since it only goes back to 1913 — is how stable US prices were throughout its early history, compared to the 20th century. To get a sense, consider the following chart showing the price of gold (measured in US dollars per ounce) over a long stretch of time:
Remember, Mr. Sesit is warning us that under the gold standard, things were very volatile.
Let me deal with a possible objection: the opponent of the gold standard might look at the above chart and say, "Well of course the dollar-price of gold is stable under a gold standard; that's true by definition! The problem is that this enforced stability means that other parts of the economy get jerked around because of the arbitrary handcuffs placed on the central bank."
But the historical record does not support this (typical) claim. I always remind people who tout the stabilizing virtues of central banks that the Great Depression started fifteen years after the Federal Reserve opened its doors. Whether you subscribe to the Austrian theory (see this and this) that the Fed pumped up the stock market with artificial credit in the 1920s, or whether you subscribe to the Friedmanite theory that the Fed pushed on the brakes too hard in the late 1920s and then didn't inflate enough in the early 1930s, either way you are blaming the Great Depression on the botched policies of the Federal Reserve.
In contrast, throughout its previous 150 or so years, the American economy had managed to do just fine without the Federal Reserve "fine tuning" the money supply. Yes, there were occasional panics (the term they used before "depression") when the major economic powers adhered to the classical gold standard, but these business cycles paled in comparison to the Great Depression.
What About Those Foreign Gold Producers?
As for entrusting our money supply to gold miners in China, Russia, and South Africa, so what? When it comes to money, the great danger is a massive inflation. That's the only way you can really destroy an economy: through flooding it with more and more paper money so that prices start rising at runaway rates.
One of the prime virtues of using gold as money is that the annual output is a small fraction of the total world stockpile. We never need fear that prices — if they were expressed in terms of gold ounces — would rise at Zimbabwean rates. The absolute worst that could happen is that all of the major gold producers decide to stop operations in order to punish the United States. Note that they couldn't simply refrain from selling to American buyers: because gold is even more fungible than oil, the gold exporting countries would need to cut off all of their buyers if they wanted to punish Americans. Now how long could they afford to do that?
Unlike oil or other commodities intended for use in production, when gold is used as a money, a given amount can always "do the job." It's true that a sudden interruption in the growth of the world stock of mined gold would put downward pressure on prices, if those prices are quoted in gold ounces. But soon enough people would adjust, and would factor in the new trend to their expectations. There were plenty of long stretches in world history where genuine economic prosperity went hand in hand with gently falling prices. In any event, could those mischievous gold miners in Russia do anything like this to our money supply?
A Gold Standard Won't Work Because It Will Be Violated
Sesit concludes with an odd argument:
What's more, a gold standard isn't the panacea its advocates claim. A central bank's ability to adhere to it is only as strong as the population's willingness to endure the pain associated with enforcing the system.
Countries periodically abandoned the gold standard during times of war — Britain during World War I, for example — and free-spending Latin American countries were repeatedly forced to exit the system in the late 19th century. The Bretton Woods System collapsed in 1971 when the costs associated with fighting the Vietnam War forced President Richard Nixon to suspend the convertibility of dollars into gold.
If you don't have faith in central bankers or politicians to ride herd over inflation, why would you trust them to keep a country on a gold standard for more than a short period of time?
I'm not sure how to answer this. It's true, I don't trust central bankers to stick to a gold standard; that's why I think the government should get out of the money industry altogether. Suppose we were starting in an initial state of pure laissez-faire in money and banking, and someone said, "Hey I know! Let's give this Princeton professor — what was your name, sir, was it Ben? — a printing press, but be very stern that he can't overdo it and allow the gold price to rise more than 1 percent from the day he starts. Does that sound like a good idea?" In response, I would obviously say, "No, that seems rather risky. I think we should stick to the current system, where the market determines how much new money is brought into the economy through gold production."
But that's not where we're starting. If we're going to have a central bank, it makes a lot of sense to put in place rigid restrictions on it. Notice you could use Sesit's argument for any recommendation to restrain inflation. For example, Milton Friedman famously recommended that the central bank announce a fixed rate of growth in the money stock. Well gee whiz, Dr. Friedman, if you don't trust the central bank to responsibly exercise discretionary policy, how can you trust them to stick to a fixed rate of growth?
And the same thing applies to the Bill of Rights, too. If you can't trust the politicians to respect freedom of speech, why would they respect the First Amendment?
Conclusion
In closing, let me admit that a hardcore libertarian really could say that it is a waste of time to defend the gold standard, or even the Bill of Rights for that matter. Maybe they really are diversions, little gimmicks that the politicians can use to fool a gullible public into thinking they are safe.
But that is clearly not what Sesit is arguing in his Bloomberg piece. No, he is arguing that the gold standard is a bad idea because it keeps the central bankers from using all the latest, cutting-edge macro models to fine-tune the economy.
Rather than his proposal, I would far prefer the classical gold standard. It's true that the government can always renege on its pledge to maintain a fixed peg to gold, but at least everybody would know exactly when the government cheated. You would at least avoid absurdities such as the present crisis, in which people are actually praising the Fed for pumping in unprecedented amounts of new money in order to "help."
Robert Murphy, an adjunct scholar of the Mises Institute and a faculty member of the Mises University, runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, and the Human Action Study Guide.
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Sold Out, How Wall Street & Washington Betrayed America - By Consumer Education Foundation (18/3/09)
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The Financial Sector: "A House Burning Down" Ben Bernanke’s False Analogy - By Prof. Michael Hudson (20/3/09)
March 16, 2009 Global ResearchIn the March 15 CBS show "60 Minutes", Federal Reserve Chairman Ben Bernanke used a false analogy already popularized by President Obama in his quasi-State of the Union Speech. He likened the financial sector to a house burning down – fair enough, as it is destroying property values, leading to foreclosures, abandonments, stripping (for copper wire and anything else recoverable) and certainly a devastation of value. The problem with this analogy was just where this building was situated, and its relationship to "other houses" (e.g., the rest of the economy).
Mr. Bernanke asked what people should do if an irresponsible smoker let his bed catch fire so that the house burned down. Should the neighbor say, "it’s his fault, let the house burn"? That would threaten the whole neighborhood with fire, Mr. Bernanke explained. The implication, he spelled out, was that economic recovery required a strong banking and financial system. And this is just what he said: The economy cannot recover without yet more credit and debt. And that in turn requires trillions and trillions of dollars given by "the neighbors" to the bad irresponsible man who burned down his own house. This is where the analogy goes seriously off track.
But watching "60 Minutes," my wife said to me, "That’s just what Mr. Obama said the other night. What do they do – have a meeting and agree on what metaphor to popularize?" They seem to have an image that will lock Americans into supporting a policy even though they don’t like it and many feel like letting the financial house (A.I.G., Citibank, and Bank of America/Countrywide) burn down.
What’s false about this analogy? For starters, banking houses are not in the same neighborhood where most people live. They’re the castle on the hill, lording it over the town below. They can burn down and leave the hilltop revert "back to nature" rather than having the whole down gaze up at a temple of money that keeps them in debt.
More to the point is the false analogy with U.S. policy. In effect, the Treasury and Fed are not "putting out a fire." They’re taking over houses that have not burned down, throwing out their homeowners and occupants, and turning the property over to the culprits who "burned down their own house." The government is not playing the role of fireman. "Putting out the fire" would be writing off the debts of the economy – the debts that are "burning it down."
To Mr. Bernanke the "solution" to the debt problem is to get the banks lending again. He’s spreading the debt-fire. The government is to lend the "threatened neighbors" enough money so that credit customers of the financial "house on the hill" can to pay it the stipulated interest charges they owe. It is not burning down at all; the neighborhood’s money (in this case, tax money) is being burned up.
Mr. Bernanke explained to the Sunday evening audience that his policy aimed at helping the economy return to "normalcy." Fully in line with what Mr. Paulson was saying last summer, "normalcy" is defined as a new exponential growth in the volume of debt. He talked about "sustainable" recovery. But "the magic of compound interest" is not sustainable. It’s all a false metaphor.
Mr. Bernanke then left the realm of metaphor altogether to give an outright false explanation of the balance of payments and the upcoming Gang of 20 meetings in Europe. On Friday, China’s premier expressed worry over the health of the American economy, in which China had recycled nearly $2 trillion of its dollar inflows in order to prevent the yuan from rising in price against the dollar. The fear is that despite this heavy recycling of dollars by foreign central banks, the U.S. exchange rate will still weaken as the trade balance continues unabated and, just as seriously, U.S. military spending keeps on pumping dollars into the world economy as war spreads eastward from Iraq to Afghanistan and Pakistan.
The way Federal Reserve Chairman Bernanke explained the problem on CBS, America had to keep its markets attractive to "Chinese savers." The image being conjured up again and again is that there is a world "savings surplus." That is supposed to be what flooded the large U.S. banks and Wall Street with so much money that they were obliged to move it into riskier and riskier investments. "They made us do it" was the message not quite spelled out.
One would think that Mr. Bernanke knows nothing at all about the balance of payments or how the global monetary system works. Here’s what really has been happening. The U.S. economy itself pumps "savings" into foreign central banks by spending abroad on military bases. (60 Minutes showed robot fork-lift machines moving around $40-million loads of U.S. currency through the New York Federal Reserve Bank the way that similar machines have been doing in Iraq to buy off local supporters and political groups.) U.S. consumers likewise buy more than the country is exporting. When these surplus dollars are turned over to foreign banks for domestic currency, the banks turn them over to the central bank – which has a problem.
Remember when an earlier U.S. Secretary, John Connolly, said "It’s our deficit, but their problem"? He meant that the U.S. was spending funds (at that time mainly in Southeast Asia) that ended up in foreign central banks, which faced a dilemma: If they let "the market" handle these dollars, their own currency would rise. That would threaten to price their exports out of world markets, and hence would cause domestic unemployment. So foreign governments chose to recycle their dollar inflows by keeping them in dollars – mainly in U.S. Treasury bills and then, when the supply began to run out, in federal agency securities such as Fannie Mae and Freddie Mac.
So the "fire" in the international sphere was the U.S. military-spending deficit and trade deficit. This doesn’t have much to do with Chinese consumers saving too much. Central banks were doing the quasi-saving, by being stuck with surplus U.S. dollars like a hot potato. But one rarely hears public officials mention the nation’s military deficit. It is as if foreign saving comes first, then a "market-based" decision to place these in the U.S. economy, "the engine of world growth." What actually comes first is the U.S. balance-of-payments deficit, pumping surplus dollars into the economy – which foreign central banks find themselves obliged to recycle within the dollar sphere. (This is the phenomenon I discuss in Super Imperialism: The Economic Strategy of American Empire, and Global Fracture.)
As for the surplus credit that Wall Street lent out, it is created out of thin air. At least Mr. Bernanke was clear about this, when he explained that the Fed "creates deposits" for its member banks just as these banks "create deposits" for their own customers at a stroke of the computer keyboard.
The bottom line is that the American public is being fed a carefully crafted mythology (no doubt "market tested" on "response groups" to see which images fly best) to mislead the American public into misunderstanding the nature of today’s financial problem – to mislead it in such a way that today’s policies will make sense and gain voter support.
But this mythology is based on false analogies, not economic reality. It is designed to make Wall Street appear as a savior, not an arsonist – and to depict the Fed and Treasury as protecting the welfare of American citizens by shoveling billions of dollars at the banks whose gambles have caused the crisis.
While Mr. Bernanke’s "60 Minutes" interview was being broadcast, the government was releasing the counterparties on the winning side of the Wall Street casino in bets that A.I.G. lost. To deflect the widespread voter disapproval of giving $160 billion to A.I.G., the Treasury finally released the names of the "counterparties" who ended up with the funds A.I.G. paid out to winning betters. Confirming rumors that had been circulating for the past few months, Mr. Paulson’s own company, Goldman Sachs, headed the list at $13 billion! Followed by Merrill Lynch ($7 billion), Bank of America ($5 billion), Citigroup ($23 billion and the much-loathed junk-mortgage lender Wachovia ($1.5 billion). So as Treasury Secretary, Mr. Paulson turns out to have represented not the U.S. interest but that of his own firm and its Wall Street neighbors.
These neighbors were given U.S. Treasury bonds in "cash for trash" transactions. The rest of the economy will be paying interest on this debt for a century to come. This is what causes "debt deflation." Revenue is diverted from spending on goods and services to pay interest and taxes. So the Treasury is spreading the fire, not putting it out.
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AIG Larry Summers and the Politics of Deflection - By F. William Engdahl (21/3/09)
18 March 2009 FinancialsenseFinally US authorities have gotten ‘tough’ with the predator financial institutions. The world has been waiting for such decisive intervention since an unending series of Government bailouts of financial institutions began early in 2008 amounting to now trillions of taxpayer dollars. Now, with the world’s largest insurance giant, AIG, the White House Economic Council chairman, Larry Summers has expressed ‘outrage.’ President Obama himself has entered the fray to promise ‘justice.’ US Senators have threatened a law to change the injustice. The only problem is they are all exercising ‘politics of deflection,’ taking attention away from the real problem, the fraudulent bailout.
The issue is over AIG announcing it was obligated to pay its traders in its high-risk London unit a sales bonus totaling $165 million for the year. Obama Treasury Secretary, Tim Geithner has announced a novel strategy for ‘justice.’ AIG will ‘reimburse’ the taxpayers up to $165 million for bonuses the company is giving employees. AIG will pay the Treasury an amount equal to the bonuses, and the Treasury will deduct that amount from the $30 billion in government (taxpayer) assistance that will soon go to the company. But he said that the Obama administration hasn't given up on efforts to recoup the money from the employees who got the bonuses. Good luck.
Larry Summers is the man directly responsible for the mess. As Clinton Treasury Secretary from 1999-January 2001 he shaped and pushed the financial deregulation that unleashed the present crisis. He was Treasury Secretary after July 1999 when his boss, Robert Rubin left to become Vice Chairman of Citigroup, where Rubin went on to advance the colossal agenda of deregulated finance directly.
As Treasury Secretary in 1999 Summers played a decisive role in pushing through the repeal of the Glass Steagall Act of 1933 that was instituted to guard against just the kind of banking abuses taxpayers now are having to bail out. Not only Glass-Steagall repeal. In 2000 Summers backed the Commodity Futures Modernization Act that incredibly mandated that financial derivatives, including in energy, could be traded between financial institutions completely without government oversight, ‘Over-the-Counter’ as in where the taxpayer is now being dragged. Credit default Swaps, at the center of the current storm, would not have been possible without Larry Summers and the Commodity Modernization Act of 2000. He is now the White House Economic Council chairman, mandated to find a solution to the crisis he helped make along with Tim Geithner, his friend who is Treasury chief. Foxes should never be asked to guard the henhouse.
Theatre of the absurd or deflection?
This all makes great food for tabloid headlines and popular outrage. They can write that elected politicians are finally acting in taxpayer interests. Until we look a bit more closely. Paying $165 million in employee bonuses or any amount for a company that is in the middle of a multi-trillion dollar fraud that is bringing the world economy down with it is ‘outrageous.’
The problem is the tax bailout haemmorrhage will go on. The reason is the Obama Administration like its predecessor refuses to take consequent action with AIG, despite the fact today the US Government owns at least 80% of AIG stock, bought for $180 billion of, yes, taxpayer dollars. To demand AIG ‘pay back the government’ is absurd as the government is in effect demanding it pay itself back with its own money. The latest claim that the Treasury will subtract the $165 million bonus money from the next $30 billion tranche it will give AIG says it all.
Preserving the CDS bubble
The political ‘outrage’ expressed by the Obama Administration is an example of ‘perception management.’ The population is being slylyduped into believing their officials are working in their interest. In reality the officials are channeling growing popular outrage over endless bank bailouts away from the real problem to an entirely tertiary one. The US Government has injected $180 billion since September 2008 to keep the ‘brain dead’ AIG in business and honoring its Credit Default Swap obligations. In effect, they are propping up the casino to continue endless gambling with taxpayer dollars.
The rise of a market in derivatives or ‘swaps’ contracts supposedly to ‘insure’ against a company going into default and not being able to honor its debts, the Credit Default Swaps market, is at the heart of the global financial catastrophe. The market was ‘invented’ by a young economist at JP MorganChase, interestingly enough one of the few big banks recording profit today.
As noted, CDS trading was created free from US Government regulation by President Clinton when he signed the Commodity Futures Modernization Act of 2000 that mandated that financial derivatives not be under government regulation scrutiny. Enron crony and UBS bank adviser, Texas good ‘ol boy Congressman Phil Gramm helped pass the laws at a time his wife, Wendy headed the putative regulator, the Commodity Futures Trading Corporation (CFTC). That gave the green light to a derivatives market nominally worth more than $62 trillion in 2008. No one knows the exact size because this is a ‘phantom banking market’ completely private and between banks, so-called OTC for Over-The-Counter, ‘just between us.’
Michael Greenberger who headed the CFTC Division of Trading and Markets in the late 1990’s at the time of the financial deregulation acts, says that banks and hedge funds"were betting the subprimes would pay off and they would not need the capital to support their bets." The unregulated Credit Default Swaps, he says, have been at "the heart of the subprime meltdown. In 1998 Greenberger proposed regulating the growing derivatives market. At the prospect, he says, "all hell broke loose. The lobbyists for major commercial banks and investment banks and hedge funds went wild. They all wanted to be trading without the government looking over their shoulder."
The confidence between banks, the ‘just between us,’ collapsed after the ill-conceived decision by the US Government on September 15 2008 not to save the world’s fourth largest investment bank, Lehman Brothers. By then, there was no alternative but to nationalize and then sort out the mess. Bankruptcy, as the world now realizes, was not an option. But neither was the Henry Paulson TARP ‘casino rescue plan’ and Geithner’s continuation any option.
At the point the Government let Lehman Bros go down only months after saving the far smaller Bear Stearns and also AIG, not even a bank, there was no clear idea who would be saved and who not. No bank could afford to trust any other bank not to be holding just as risky loans as they. The crisis became a global systemic crisis. Notably, the man who participated in the decision to let Lehman Bros fail ‘to teach a lesson’ was then President of the New York Federal Reserve, US Treasury Secretary Tim Geithner.
The US Government has stated that AIG cannot be allowed to fail, that, to use the jargon, AIG is ‘too big to fail.’ The reason the Government says it can’t let AIG fail is that if the company defaulted, hundreds of billions of dollars’ worth of Credit-Default Swaps (CDS) would ‘blow up,’ and US and European banks whose toxic assets are supposedly insured by AIG would suddenly be sitting on immense losses. Quite the contrary, AIG is ‘too big to save’ under current rules of the game that have been written by Wall Street and the privately-owned Federal Reserve, Treasury Secretary Geithner’s former employer.
The CDS fraud
Credit Default Swaps purported, in theory, to let banks remove loan risk from their balance sheet onto others such as AIG, an insurer. It was based on a colossal fraud using flawed mathematical risk models.
AIG went big into the selling Credit Default Swaps with banks around the world, from its London ‘Financial Practices’ unit. AIG in effect issued pseudo ‘insurance’ for the hundreds of billions of dollars in new Asset Backed Securities (ABS) that Wall Street firms and banks like Citigroup, Goldman Sachs, Deutsche Bank, Barclays were issuing, including Sub-prime Mortgage Backed Securities.
It was a huge Ponzi scheme built by AIG that depended on the fact the world’s largest insurance company held a rare AAA credit rating from Moody’s and S&P rating agencies. That meant AIG could borrow more cheaply than other companies with lower ratings AIG issuing of CDS contracts acted as a form of insurance for the various exotic Asset Backed Securities (ABS) securities being issued by Wall Street and London banks. AIG was saying ‘if, by some remote chance’ those mortgage-backed securities suffered losses, AIG would pay the loss, not the banks.
Then it got really wild. Because credit-default swaps were not regulated, not even classed as a traditional insurance product, AIG didn’t have to set aside loss reserves! And it didn’t. So when housing prices started falling, and losses started piling up, it had no way to pay off.
AIG then issued of hundreds of billions of dollars worth of CDS instruments to allow banks to make their balance sheets look safer than they really were. Banks were able to get their loan risk low not by owning safer assets. They simply bought AIG’s credit-default swaps. The swaps meant that the risk of loss was transferred to AIG, making the bank portfolios look absolutely risk-free. That gave banks the legal illusion of BIS minimum capital requirements, so they could increase their leverage and buy yet more ‘risk-free’ assets.
How could that be allowed? The level of venal corruption in the Clinton and then Bush Administration rivals that of the last days of Rome before its fall from the internal rot of corruption. Banks invested billions in lobbying Washington politicians to get their way.
What can be done?
Fortunately there is a simple way out of the AIG debacle. The US Government can step in and fully nationalize AIG, 100%, kick out responsible management, declare AIG’s CDS contracts null and void and let holders sue the US government to regain value for what were in reality lottery gambles not loans to the real economy. They own 80% so the step is small to 100%. Doing that would end the global market in CDS and open the door for countless legal challenges. But AIG’s counterparties, as we begin to learn, were exactly the big Wall Street players like Goldman Sachs, Citigroup, even Deutsche Bank. They have gotten enough taxpayer bailouts to cover their risk in CDS. Let them recognize risk is the heart of banking, not the opposite.
Myron Scholes, the ‘father’ of financial derivatives, who won a Nobel Prize in economics in 1997 for inventing the stock options model that led to financial derivatives back in the 1970’s, has declared that derivatives and Credit Default Swaps have gotten so dangerously out of hand that authorities must ‘blow up’ the market.
Scholes says derivatives traded over the counter should be shut down completely. Speaking at York University Stern School of Business recently, he said the "solution is really to blow up or burn" the over-the-counter market and start over. He included derivatives on stocks, interest rate swaps and credit default swaps that should be then moved into regulated markets.
The idea is simple and not that radical. A US law banning OTC derivatives and moving them to regulated exchanges would end a colossal ‘shadow banking’ fraud. Banks would not lose much more than already, but the world financial system would get back to ‘normal.’ OTC derivatives are unregulated precisely to hide risk and enable fraud by the banks. It is past time to end that. There is where the US Treasury and other Governments must focus, not on meaningless ‘transparency’ calls or trading bonus ‘justice.’
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Supporters of Capitalism Are Crazy, Says Harvard - By Thomas E. Woods, Jr.(21/3/09)
17 March 2009 Mises InstituteLast weekend, Harvard University sponsored a conference called (I am not making this up) "The Free Market Mindset: History, Psychology, and Consequences." Its purpose was to try to figure out why, since everyone knows the current crisis amounts to a failure of the market economy, the stupid rubes continue to believe in it. The promotional literature for the conference opened with That Quotation from Alan Greenspan — the one in which he suggested that there was, after all, a "flaw" in the free market he hadn't noticed before.
Well, that does it, then! If our Soviet commissar in charge of money and interest rates says the free market doesn't work, who are you to disagree?
The promotional material continues:
If the current state of the U.S. economy makes clear that former Federal Reserve Chairman Alan Greenspan's faith in free markets was misplaced, the question remains: what was it about free markets that proved — and still continues to prove — so alluring to economists, scholars, and policy-makers alike?
Because, of course, if there's one guiding principle behind the largest government in world history, it's free markets. Ahem.
This conference, we were told, brings together leading scholars in law, economics, social psychology, and social cognition to present and discuss their research regarding the historical origins, psychological antecedents, and policy consequences of the free market mindset. Their work illustrates that the magic of the marketplace is partially an illusion based on faulty assumptions and outmoded approaches.
The speakers then spent the day, I am sure, laying out their own faulty assumptions and outmoded approaches, and studiously ignoring the Austrian School of economics.
In short, the conference was about this: Why do people still think the interaction of free individuals is a superior economic system to one directed by Harvard Ph.D.s like us? I mean, apart from the failure of central planning in every case in which it's been tried, a failure so staggering that only a blockhead could miss it, why would people cling to the idea that being herded into a collective run by the experts isn't the best way to live?
So by assuming from the outset the very thing that needs to be proven — namely, that the current state of the economy just occurred spontaneously, as the result of wicked market forces — our betters relieve themselves of the need to consider that central banking, a government-established institution, just might have had, you know, a little something to do with what happened.
George Reisman has already demonstrated the absurdity of referring to our present system as a "free-market" one. Naturally, of course, none of the participants bothered to notice that a Soviet commissar in charge of money and interest rates amounts to something like the opposite of the free market, or that the economic distortions he causes cannot, therefore, be the fault of the free market. This is exactly why, in my book Meltdown, I call the Fed "the elephant in the living room." We're not supposed to notice it, and we're supposed to pretend the damage it causes is the result of wildcat capitalism, unfettered free markets, or whatever other juvenile phrase is currently in vogue to describe the usual bogeyman.
Now I don't want to list all the paper topics at this conference, since it'd be a shame to make all of you feel stupid for having frittered away your weekend when you could have listened to, say, Stephen Marglin's paper on "How Thinking Like an Economist Undermines Community." Now there's a topic I haven't heard quite enough platitudes about. (If you must, you can view the whole schedule here.) You could also have heard a bunch of totally conventional polemics about how the market economy allows for "too much" pollution, when in fact a genuine free market — which, I need hardly point out, is not actually considered in any of these alleged papers — would punish polluters and bring about the internalization of so-called externalities. Murray Rothbard dealt with this matter in an extremely important article none of the participants had read.
I wonder if anyone at the conference asked questions like these:
• When Greenspan flooded the economy with newly created money and brought interest rates down to destructively low levels, thereby distorting entrepreneurial calculation as well as consumers' home-purchasing decisions, was that the fault of the free market?
• Do you think the Fed's creation of cheap credit out of thin air makes market participants more careful or less careful in how they allocate borrowed funds?
• When Alan Greenspan bailed out Long Term Capital Management in 1998, was that a "free market" phenomenon? Do you think he thereby encouraged more or less risk taking among other major market actors?
• The Financial Times spoke in 2000, in the wake of the dot-com boom, of an increasing concern that the so-called "Greenspan put" was injecting into the economy "a destructive tendency toward excessively risky investment supported by hopes that the Fed will help if things go bad." "All the insane dot-com investment we've seen, all this destruction of capital, all the crazy excesses of the past few years wouldn't have happened without the easy credit accommodated by the Fed," added financial consultant Michael Belkin. Did the free market cause that?
• Do lending standards decline for no particular reason, or could this phenomenon have a teensy weensy bit to do with
(a) government regulation aimed at increasing "homeownership" and (b) loose monetary policy by the Fed? (When the banks get the additional reserves the Fed creates, they naturally want to lend it out — and in order to do so, they wind up lending it to people they either have or would have rejected previously. As I show in Meltdown, the phenomenon of lax lending standards in the wake of an inflationary boom by a central bank is traceable all the way to the 19th century. There is nothing even slightly unexpected — or market-driven — about it.)
Questions like these could go on and on. Not one, you can be certain, was raised at this conference.
Now if you really wanted to sponsor an event whose purpose was to try to understand why people believe inane things that have been falsified by reality, you'd do much better to hold a conference on socialism, or on Keynes and his school. It would be fascinating to learn the psychological motivation behind the persistence of Keynesian economics, whose popular version is a nonfalsifiable, ersatz religion.
Is Japan's economy still suffering? Why, that's because Japan didn't spend enough — even though it spent so much that it became the most indebted country in the developed world.
Have people spent so much that they're now burdened with debt they can't possibly repay? Then we need more spending.
Is the economy a distorted mess after an artificial boom? Then instead of letting the economy restructure itself along sustainable lines, let's instead "stimulate" the system just as it is, with the goal of bringing about more "consumption," more "labor" employed, and higher "income," without bothering to disaggregate any of these things and deciding what kinds of labor need to go where, what kinds of consumption are sustainable and what are figments of the bubble economy, or how the capital structure needs to be reassembled in order to cater to genuine consumer demand. In fact, let's actually boast about neglecting capital theory altogether (as indeed Keynes did in a 1937 article in the Quarterly Journal of Economics).
Here's another thought: given how many Keynesian economists predicted a return to depression conditions when World War II spending came to an end, and that what we instead got was the single most robust year the private economy has ever seen, isn't it a little strange that not one of these economists went back and reexamined his premises?
On the other hand, consider the names Jim Grant, Peter Schiff, Ron Paul, and Jim Rogers. Apart from having predicted the current crisis — unlike anyone at the Harvard conference and indeed unlike the paper-tiger economists they unsurprisingly preferred to spar with during their deep-thinking session last weekend — one thing these men have in common is that they are all Austrian economists, they all believe in the Austrian theory of the business cycle, and they all pin the blame for the crisis on the Fed, a nonmarket institution. These men believe in the real free market, not the centrally planned market of Alan Greenspan, Ben Bernanke, and the Federal Reserve. And they saw a crisis coming at a time when everyone else was predicting new highs for the Dow and singing the praises of a world economy that was more robust than it had ever been.
Maybe that's why people believe in market economics: unlike the Rube Goldberg models of their counterparts in the profession, the things Austrian economists write and say actually have some connection to the real world.
People who believe in the market economy support a social order in which free individuals make voluntary contracts with each other, and no one can initiate physical force against anyone else. Is that vision so obviously unattractive that we have to refer its supporters for psychological evaluation?
We might instead wonder at the psychological condition of those who would denounce such a system: might they be motivated, for all their noble talk, by nothing but base envy of those with more material wealth than they, or by a pathological desire to dominate other people?
I'm sure that will be covered at next year's conference.
Thomas E. Woods, Jr., is a resident scholar at the Mises Institute. He is the author of Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. His other recent books include 33 Questions About American History You're Not Supposed to Ask, The Church and the Market: A Catholic Defense of the Free Economy, and The Politically Incorrect Guide to American History.
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MUST-WATCH VIDEO: MARK-TO-MARKET - ALAN GRAYSON QUESTIONS AIG MATH (16/3/09)
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There Is A Conclusive Need For Mark-to-Market As Opposed to
Mark-to-Model, This Video Spells It Out All Too Clearly. Look out for
the Last Speaker's Remarks. |
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Bailout Money Is Flowing Abroad - Study Casts Doubt On The Effectiveness of Bank of England’s "Quantitative Easing" Policy - By Sean O'Grady, Economics Editor (16/3/09)
14 March, 2009 The Independent UKMuch of the new money the Bank of England has "printed" to stimulate the UK economy is ending up abroad where it will be of no benefit to UK households and businesses, according to an analysis of the Bank's "quantitative easing" programme.
The Bank is in the process of purchasing about £75bn of government securities, or gilts, over a three-month period, the first instalment of a massive £150bn programme. The Bank is effectively converting these government securities or gilts into cash and bank balances which, it is hoped, will be used to support lending and spending in the UK and boost the economy.
But City experts analysing the scheme for The Independent say large quantities of money will simply end up abroad because so many of the gilts are held by foreign investors. They fear that they will hoard the cash, which will be of no benefit to the British economy, or dump it in favour of safer currencies, which could cause a run on sterling. More than a third of gilts are owned by foreign entities, official statistics reveal, and there are doubts about how effective the policy will be if that sort of proportion of the new money is diverted abroad.
Colin Ellis, an economist at Daiwa Securities, said: "In principle, creating new money to pump into the economy is the right thing to do when interest rates are already near zero and further monetary stimulus is required. But the Bank of England may, possibly inadvertently, be buying up gilts from foreign investors – who, according to the latest data, held over £190bn, or 36 per cent, of UK Government debt. If the Bank is pumping its new money abroad, it is clearly not going to UK households and businesses, and will not help boost UK demand."
Even if relatively little of the cash leaks overseas there is a strong possibility that the banks, as with previous attempts to bolster them, may end up "hoarding" the cash to shore up their own beleaguered positions, with little extra lending to companies and first-time buyers.
Recent speculation suggests that many UK pension fund managers – large holders of gilts – are reluctant to sell up and buy riskier assets such as shares instead, given the current dire economic environment.
Last week, the Bank made a successful start by buying £2bn of gilts, having received offers for £10bn-worth. Next week, it is planning a further two auctions, of £2bn and £3bn. Yet the Bank does not necessarily know the ultimate fate of the money it is handing out.
Even if a UK banking group sells the gilts, there is no easy way of telling whether the bank is selling those gilts on its own behalf, or more likely, on behalf of a pension fund or institutional investor in the UK or abroad. This uncertainty about the ultimate destination of bank money makes the policy hazardous. Recently, statistics released by the Bank suggested a significant outflow of funds from London over the latter part of 2008, which amounts to some $1trn ($1,000bn), 15 per cent of total foreign deposits.
Sterling has lost more than a quarter of its overseas value since mid-2007, an indication of loss of nerve by investors, some of whom have openly talked about the UK being "bust" and following Iceland's unenviable example into insolvency – hence the jibe doing the rounds in the City that London may soon become "Reykjavik on Thames".
George Soros, the man who "broke the Bank of England" by helping to force sterling out of the exchange rate mechanism in 1992, has been selling or "shorting" sterling for much of the past year or two. The fall in sterling has not, as ministers and the Bank hoped, saved British exports, which are if anything falling as global demand and international trade flows evaporate.
Even Germany and Japan have recorded sharp deterioration in their trading positions – and some believe that if those champion exporters cannot sell abroad then there can be little hope for the UK.
Mr Ellis added: "There may be implications for sterling: for example, if foreign investors that have sold their gilts and then want to switch their funds into one of the two global reserve currencies, the dollar and the euro. All of this suggests that the Bank of England may well yet be forced back to the drawing board and may have to consider even more radical measures in order to stimulate nominal spending. Quantitative easing is easier said than done."
More radical measures might require the Government to inject more cash directly into the hands of consumers, and find ways of bypassing the banking system altogether as it becomes more desperate to get the economy moving and avoid the sort of deflation that floored the US and the UK in the 1930s and Japan in the 1990s.
Vince Cable, the Liberal Democrats' Treasury spokesman, warned: "This may be another failed and ineffective initiative, especially when set against the size of the economy. It might be better if the Government used its shareholding in the nationalised banks to get the banks to start lending."
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AIG Discloses $75 Billion in Bailout Payments - Insurer Reveals List of Taxpayer Funds Doled Out to Settle Debts With Companies, Municipalities - By Brady Dennis (17/3/09)
March 16, 2009 Washington PostIn the six months since the government's bailout of insurance giant American International Group, a rescue that has become increasingly costly and contentious, one question has loomed above all others: Where did the money go?
The answer became a little clearer yesterday when AIG unexpectedly released the names of dozens of trading partners it has paid using billions in taxpayer dollars. The disclosure, which the company said was made after consulting the Federal Reserve, revealed that AIG paid more than $75 billion in the final months of 2008 to numerous domestic and foreign banks, as well as to various U.S. municipalities.
The funds were paid from the government's initial $85 billion emergency loan in September and included major firms such as Goldman Sachs, Societe Generale, Deutsche Bank, Merrill Lynch, Morgan Stanley, Bank of America and Barclays.
The payments were made between Sept. 16 -- the date that government assistance began -- and Dec. 31.
More than $34 billion of the money went to trading partners of AIG Financial Products, the small subsidiary whose exotic derivatives brought AIG to the edge of collapse. In recent years, the firm had written massive numbers of credit-default swaps, insurance-like contracts that other companies bought as protection against the default of mortgage-backed securities. When the housing boom began to go bust, banks that had purchased the swaps demanded collateral from AIG, burying the company under a tidal wave of debt. Federal officials, wanting to keep the company from failing because they feared it was too intertwined with the global economy, stepped in to help.
In the last months of 2008, AIG Financial Products paid more than $22 billion in taxpayer money to satisfy debts caused by its swap contracts. Another $12 billion went to pay off municipalities in dozens of states for whom the firm had created complex investment agreements.
Nearly $44 billion went to pay debts that AIG incurred under its "securities lending" program, according to the company. In those instances, various companies borrowed securities from AIG in exchange for cash. In turn, AIG invested much of the money in mortgage-backed assets that plummeted in value, leaving the insurer on the hook for billions.
Yesterday's disclosure was an about-face for AIG and the Fed. In recent weeks, public outrage and pressure from lawmakers demanding to know who benefited from the AIG bailout has reached a crescendo. But until yesterday, AIG executives and federal officials had repeatedly refused to release such details, arguing that trading partners had a right to privacy and that any disclosure could harm their businesses.
"These are extraordinary times," AIG spokeswoman Christina Pretto said yesterday in explaining the company's decision. "And we and our partners at the Fed thought this was right thing to do."
Fed spokeswoman Michelle Smith agreed, saying, "We commend the company for finding a balance between its concerns with confidentiality and the concerns of the public interest."
AIG's disclosure came on the same day that President Obama's top economic adviser berated the firm for its plans to dole out hundreds of millions of dollars in employee bonuses and retention pay, despite posting a record $62 billion loss in the fourth quarter of 2008.
"There are a lot of terrible things that have happened in the last 18 months, but what's happened at AIG is the most outrageous," Lawrence H. Summers, chairman of the White House National Economic Council, said yesterday during an appearance on ABC's "This Week." "What that company did, the way it was not regulated, the way no one was watching, what's proved necessary, it is outrageous."
Summers was but one in a chorus of administration officials and lawmakers who took to the airwaves yesterday to excoriate AIG, whose rescue package from the federal government stands at an estimated $170 billion.
"This is an example of people at the commanding heights of the economy misbehaving, abusing the system," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee.
Their anger stemmed in large part from AIG's decision to move forward with retention bonuses for executives at the troubled Financial Products unit. In early 2008, before the government rescue, the firm's employees had been promised more than $400 million in retention pay this year and next. Lawyers for the government and AIG have agreed that most of those payments, however unsavory, are legally binding.
"We are a country of laws. There are contracts," Summers said yesterday. "The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system."
In addition, AIG is in the process of paying $121 million in previously scheduled corporate bonuses and hundreds of millions more in retention payments to more than 6,000 employees throughout the company's global insurance units.
The bonuses and other payments have infuriated the public and government officials. After a contentious call on Wednesday between Treasury Secretary Timothy F. Geithner and AIG chairman Edward M. Liddy, first reported by The Washington Post, Liddy agreed to alter the terms of some executive bonuses and make future payments contingent on the company's progress with its restructuring and paying back taxpayers.
But in a letter that followed, Liddy said he had "grave concerns" about the impact on the firm's ability to retain talented staff "if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."
Speaking on CBS's "60 Minutes" last night, Fed Chairman Ben S. Bernanke once again expressed frustration with the bad will that AIG has wrought.
"I understand why the American people are angry," he said. "It's absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets, that was operating out of the sight of regulators, but which we have no choice but to stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy."
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National Debt Hits Record $11 Trillion - By Manu Raju (20/3/09)
March 17, 2009 Politico.comThe eye-popping national debt surpassed $11 trillion Monday, the largest in U.S. history.
The new Treasury Department figures on the national debt were released as the non-partisan Congressional Budget Office is expected to project that the annual budget deficit will be higher than previously estimated by the White House's Office of Management and Budget. The debt, which refers to the cumulative amount of money the government owes, hit $10.9 trillion on Friday.
The whopping number has major ramifications for President Barack Obama, who is trying to push through a raft of big-ticket bills on health care, energy, education and climate change — while also attempting to stabilize the swooning economy.
Sen. Kent Conrad (D-N.D.), chairman of the Budget Committee, said Tuesday that the numbers could force Congress to make "adjustments" to Obama's $3.6 trillion budget plan.
"It’s very important get a result for the American people and one that has the priorities that have been [announced] by the president in terms of reducing our dependence on foreign energy, that’s in all of our interests, excellence in education, health care reform and dramatic reduction of the deficit,” Conrad told reporters. “Those will be our guiding principles as we go forward, but as I say, we’ve not yet seen CBO’s new numbers. But I think we can all anticipate because they were done substantially later than OMB’s, that they are going to be more adverse. That that’s going to require all of us to make adjustments.”
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Intelligence Made It Clear Saddam Was Not A Threat, Diplomat Tells MPs - Government Left "Paper Trail" In Build-Up To War - More Facts Still To Come To Light, Says Former Envoy - By David Hencke (22/3/09)
March 20, 2009 The Guardian, UKA former diplomat at the centre of events in the run-up to the Iraq war revealed yesterday that the government has a "paper trail" that could reveal new information about the legality of the invasion.
Carne Ross, who was a first secretary at the United Nations in New York for the Foreign Office until 2004, told MPs: "A lot of facts about the run-up to this war have yet to come to light which should come to light and which the public deserves to know." There were also assessments by the joint intelligence committee which had not been disclosed, Ross told the Commons public administration select committee.
He told the inquiry that the intelligence made it "very clear" that Saddam Hussein did not pose a significant threat to the UK, as was being claimed at the time by ministers, and that tougher enforcement of sanctions could have brought his regime down.
He said he tried to inform ministers about his misgivings over the developing momentum towards war, taking them aside during their visits to New York or having brief conversations in their car to the airport.
But he said he was aware that speaking out too often or too openly - even in internal debates - about his concerns about the government's policy direction would damage his career by winning him a reputation as a "naive troublemaker".
Ross's evidence, by video link from New York, came days after Jack Straw, who was foreign secretary at the time, used the first ministerial veto under the freedom of information act to ban the release of cabinet minutes on the decision to go to war.
"I feel very strongly that there has still not been proper accountability and scrutiny into what happened in Iraq," Ross said.
"There should be a full public inquiry or parliamentary inquiry into the decision-making that took place. Hutton and Butler are by no means sufficient to that purpose and it is disgraceful that the government pretends that they are... if we had those systems of accountability and scrutiny then leaking and other more aberration behaviour from civil servants would be less necessary."
He was one of four "whistleblowers" who yesterday gave evidence to the committee.
They also included Katharine Gun, a former GCHQ translator who revealed the organisation was tapping phones of countries that were against the Iraq war; Brian Jones, the most senior expert on chemical weapons at the Defence Intelligence Staff; and Derek Pasquill, a former Foreign Office official who leaked documents about rendition and Muslim groups who were hostile to the UK receiving government money.
Jones and Ross never leaked any information to the press. Jones instead complained to his superior that he thought the intelligence dossier on weapons of mass destruction was being exaggerated but was told that there was "one secret piece of information which could not be shared with [him]" because it was too sensitive.
He told MPs that when the WMD dossier was published and he saw the difference between the foreword by the prime minister and the contents he "thought the intelligence services were going to be crucified".
But he instead he found that most MPs, with a few exceptions, supported the government. "I feel that you gentlemen [the MPs] have been either deliberately or accidentally misled and these incidents have not been followed up. I think that there has been a great laxity and that won't encourage people like me or my colleagues to come to you," he said.
Tony Wright, the chairman of the committee, agreed with the allegation. "I think you are absolutely right to castigate parliament, which I think has behaved abysmally in this matter - endless bleating about the need for an inquiry but a complete failure to insist upon one," he said.
Gordon Brown has promised to look at an inquiry after all the troops come home from Iraq.
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U.N. Panel Says World Should Ditch Dollar - By Jeremy Gaunt (22/3/09)
March 19. 2009 ReutersLUXEMBOURG - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.
Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.
Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.
"It is a good moment to move to a shared reserve currency," he said.
Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.
Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.
"Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar's slide between 2002 and mid-2008," CMC Markets said in a note.
Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.
It has significantly reduced the dollar's share in its own reserves in recent years.
GOOD TIME
Persaud said that the United States was concerned that holding the reserve currency made it impossible to run policy, while the rest of world was also unhappy with the generally declining dollar.
"There is a moment that can be grasped for change," he said.
"Today the Americans complain that when the world wants to save, it means a deficit. A shared (reserve) would reduce the possibility of global imbalances."
Persaud said the panel had been looking at using something like an expanded Special Drawing Right, originally created by the International Monetary Fund in 1969 but now used mainly as an accounting unit within similar organizations.
The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent's economic clout, which can be valued against other currencies and indeed against those inside the basket.
Persaud said there were two main reasons why policymakers might consider such a move, one being the current desire for a change from the dollar.
The other reason, he said, was the success of the euro, which incorporated a number of currencies but roughly speaking held on to the stability of the old German deutschemark compared with, say, the Greek drachma.
Persaud has long argued that the dollar would give way to the Chinese yuan as a global reserve currency within decades.
A shared reserve currency might negate this move, he said, but he believed that China would still like to take on the role.
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Singapore May Take Up To Six Years To Recover: Lee Kuan Yew - By AFP (22/3/09)
March 21, 2009Singapore's recession-hit economy may take up to six years to recover in a worse-case scenario, influential founding father Lee Kuan Yew said.
"The optimistic scenario is, two to three years, we're out of this," Lee told an audience at a local university late Friday.
"At the worst, four, five, six years... Because we are export-dependent," he said, adding the country's "imports and exports are the highest in the world as a percentage of GDP."
Singapore is forecast to slip into its worst recession this year with the economy likely to shrink by up to 5.0 percent. The city-state's worst recession since independence in 1965 was in 2001 when the economy contracted 2.4 percent.
The city-state was the first Asian country to slip into a recession when figures released in October last year showed the economy contracted for two straight quarters in the period to September.
Lee, an adviser in his son Prime Minister Lee Hsien Loong's cabinet with the title minister mentor, said earlier this month the economy may contract by as much as 10 percent this year if exports continue to fall sharply.
The latest trade figures released last week showed Singapore's key exports plunged 24 percent in February from a year ago as shipments to its key markets including the US continued to decline.
The government's official projection is for the trade-dependent economy to contract between 2.0 and 5.0 percent this year after growing 1.1 percent in 2008.
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Al-Maidah buka jalan pengislaman
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Membaca al-Quran mampu melembutkan hati pembaca seterusnya mendapat hidayah Allah.
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DIBESARKAN dalam keluarga yang beragama Kristian, Hayat Anne Collins Osman mengakui bahawa orang Amerika 20 tahun dulu, jauh lebih beragama berbanding sekarang. Ini kerana, masih ramai pergi gereja pada setiap Ahad.
Malah kata Anne, ibu bapanya turut aktif dengan komuniti gereja. Mereka selalu menjemput paderi berkunjung ke rumah serta ibu mengajar di sekolah Ahad dan dia selalu membantu ibu.
Boleh dikatakan Anne adalah antara kanak-kanak yang dikategorikan kuat pegangan agamanya berbanding anak ahli komuniti yang lain, walaupun Anne tidak merasai sedemikian.
Pernah sewaktu sambutan hari lahirnya, Anne menerima hadiah kitab Injil manakala kakaknya menerima anak patung. Anne juga pernah meminta ibunya buku-buku sembahyang dan mula mentelaah buku tersebut bertahun lamanya.
Tambah Anne, semasa di sekolah menengah rendah (kelas pertengahan), dia mengikuti program pengajian kitab Injil selama dua tahun. Sehinggakan pada satu peringkat, dia ada terbaca satu bab di dalam kitab tersebut yang tidak begitu difahami.
Semakin dia mendalami kitab Perjanjian Lama dan Perjanjian Baru, lebih banyak yang aneh dan tidak dapat diterangkan muncul.
Contohnya, kitab Injil mengajar akan idea yang dipanggil Dosa Azali. Yang membawa maksud, manusia itu dilahirkan dengan dosa. "Saya mempunyai adik lelaki dan saya tahu bayi (adik lelaki) itu tidak berdosa," getus hati kecil Anne mula mempersoalkan pengajaran dalam agama anutannya itu.
Yang pastinya, kata Anne, kitab Injil itu banyak yang pelik dan cukup menganggu atau menolak fitrah manusia itu sendiri. Alhamdulillah, pada masa itu ada seorang pelajar lelaki yang tidak putus-putus bertanya soalan. Malah persoalan yang paling kritikal ialah konsep Trinity. Ia langsung tidak dapat diterima akal dan yang paling mengarut, apabila tuhan itu menyamai manusia.
Walaupun banyak penjelasan yang diberikan berkaitan konsep Trinity namun jawapan yang diberikan masih tidak memuaskan hati pelajar lelaki itu. Begitu juga dengan Anne. Akhirnya, guru mereka, seorang profesor teologi Universiti Michigan menyuruhnya berdoa memohon petunjuk Tuhan. Anne pun berdoa.
Semasa di sekolah menengah, secara diam-diam Anne menyimpan cita-cita menjadi biarawati. Apabila berada di kolej, sesetengah pelajar kerap bertelagah tentang agama dan dia mula mendengar pelbagai idea. Malah beliau mula belajar tentang agama Buddha, Konfucius dan Hindu. Sayangnya, jawapannya tidak ada di situ.
Pada masa yang sama, Anne berkenalan dengan seorang Muslim dari Libya. Dia menceritakan tentang agama Islam dan kitab al-Quran mereka. Katanya, Islam adalah agama yang moden, agama yang tidak ketinggalan zaman.
Memandangkan pemahaman Anne tentang Islam tertumpu pada orang Islam di Afrika dan Asia Barat yang nampak terkebelakang, lantas Anne bulat-bulan menolak agama Islam itu.
Pernah semasa Anne sekeluarga menyambut Hari Natal, keluarganya membawa pemuda dari Libya tadi untuk meraikan acara sambutan di gereja.
Sayangnya, pemuda itu cuba membangkitkan persoalan seolah-olah memperkecilkan agama Kristian dan telah membangkitkan kemarahan Anne pada awalnya. Tetapi kemudian, Anne mula berfikir mengenai kebenaran di sebalik soalan itu tadi.
Anne mengakui sungguhpun dia kurang bersetuju dengan beberapa ajaran agama Kristian tetapi dia tetap mengunjungi gereja, walaupun jiwanya tidak berada di situ.
Sesuatu yang mengejutkan berlaku, bila seorang yang rapat dengannya mengalami masalah serius dalam perkahwinannya dan telah pergi berjumpa dengan pembantu paderi untuk meminta nasihat.
Pembantu paderi itu rupa-rupanya telah mengambil kesempatan di atas keperitan dan kesugulan wanita tadi, dengan membawanya ke motel lalu cuba menggodanya.
Pada peringkat ini, Anne sudah tidak dapat menerima bagaimana orang yang bertanggungjawab besar mendengar rintihan, sanggup mencabuli kepercayaan pengikut yang setia.
Anne pergi ke gereja sekali lagi, duduk dan memandang tepat wajah paderi di situ. Di fikirannya berputar-putar beberapa persoalan. Kenapa perlu orang tengah atau perantara? Mengapa kita tidak boleh berhubung secara terus dengan Tuhan? atau mohon pengampunan sendiri?
Tidak lama kemudian, Anne menemui jawapannya menerusi terjemahan al-Quran di sebuah kedai buku. Lantas, dia membelinya dan mula membacanya berkali-kali selama lapan tahun. Pada masa yang sama membuat perbandingan dengan agama lain.
Orang Yahudi
Akhirnya, surah al-Maidah ayat 82 hingga 84 yang bermaksud: Sesungguhnya kami dapati orang-orang yang paling keras permusuhannya terhadap orang-orang yang beriman ialah orang-orang Yahudi dan orang-orang musyrik.... ... Mengapa kami tidak akan beriman kepada Allah dan kepada kebenaran yang datang kepada kami, padahal kami sangat ingin agar tuhan kami memasukkan kami ke dalam golongan orang-orang yang soleh?" merungkai persoalan yang dicari selama ini.
Apa lagi bila melihat umat Islam bersolat jemaah yang ditayangkan di kaca televisyen dan mengetahui bahawa mereka mempunyai cara solat unik dan sudah pasati ia bukan ciptaan manusia tetapi ia daripada Allah SWT.
Malah menerusi surah yang sama ayat kelima yang bermaksud: ... Pada hari itu aku telah sempurnakan bagi kamu agamamu, dan Aku telah cukupkan kepadamu nikmat-Ku, dan Aku telah reda Islam itu menjadi agama bagimu..."
Air mata Anne berderai tanpa henti menanda kegembiraan dan kesyukuran. Allah mengetahui bahawa Anne Collins dari Cheektowaga, New York, Amerika Syarikat akan membaca ayat dari surah di atas pada Mei 1986 dan kemudian diselamatkan.
Kini, beliau sedar bahawa banyak yang perlu dipelajari terutamanya bagaimana menyempurnakan solat yang betul. Masalah beliau pada ketika itu ialah ketiadaan kenalan Muslim.
Anne buntu dan dia pernah mencari nombor telefon persatuan Islam menerusi buku panduan telefon tapi bila cuba dihubungi, suara lelaki yang menyambutnya membuatkan Anne terkejut lalu memutuskan talian tersebut.
Akhirnya, dia menemui kaedah yang sesuai iaitu dengan menulis sepucuk surat bertanyakan beberapa maklumat. Ada seorang hamba Allah lelaki dari masjid itu yang menghubungi Anne dan kemudian mengirimnya risalah-risalah berkaitan Islam.
Dari sehari ke sehari, Anne semakin teruja dengan Islam sehingga dia memikirkannya siang dan malam. Anne pernah beberapa kali melintasi masjid berdekatan hanya untuk mengetahui apa yang mereka lakukan di sana.
Akhirnya, pada awal November 1986 sewaktu sedang asyik menyiapkan kerja di dapur, Anne dapat merasakan yang dirinya sudah Islam.
Masih dengan sifat penakut, Anne menulis surat yang berbunyi: "Aku bersaksi bahawa tiada tuhan disembah melainkan Allah dan Nabi Muhammad itu pesuruh Allah".
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Nabi Isa hapuskan kekolotan Yahudi
MENURUT ayat ini, ketika Allah SWT berfirman kepada nabi-Nya, bahawa Aku akan menyelamatkanmu dan mengangkatmu ke sisi-Ku adalah sebagai tindakan memperdaya musuh Nabi Isa. a.s.
Ayat ini merupakan khabar gembira tentang selamatnya Nabi Isa a.s daripada tipu daya mereka, sehingga mereka tidak berhasil melaksanakan niat jahat dan tipu muslihat kepada Nabi Isa.
Iktibar dan fiqh ayat :
Para ulama berbeza pendapat terhadap ayat ini. Pendapat mereka terbahagi kepada dua:
i. Ibn Kathir berkata dalam tafsirnya: "Dalam susunan kalimah ayat ini, sepatutnya kalimah yang berada di hadapan diletakkan di belakang. Dari itu terbentuklah, "Sesungguhnya Aku mengangkatmu ke sisi-Ku dan menyelamatkanmu".
Maksudnya, sekarang Aku mengangkat kamu dan nanti kamu akan Aku matikan sesudah kamu turun dari langit, jika saat kematianmu telah tiba.
Menurut pendapat ini, Nabi Isa a.s diangkat ke langit dengan jasad dan rohnya dalam keadaan hidup, dan akan turun ke dunia pada akhir zaman, lalu Baginda akan memerintah manusia dengan syariat kita, kemudian Baginda akan wafat.
ii. Al-Qurtubi berkata: "Pada akhir ayat ini di mana Allah SWT menjadikan golongan yang mengikut Rasulullah SAW mengatasi orang-orang kafir dengan hujah dan mendatangkan bukti".
Ada pendapat dengan kemuliaan dan kemenangan. Al-Dhahaq dan Muhammad Ibn Abban berkata: "Dengan pembantu atau hawariyyin".
iii. Ayat ini secara harfiyyahnya, bermaksud kewafatan (penyelamatan) adalah kematian biasa. Sedangkan diangkat sesudah wafat bermaksud diangkat rohnya.
Tidak hairan jika dalam perbincangan disebut perkataan 'orang' tetapi maksud di sini hanya 'roh' sahaja kerana roh yang sebenarnya menjadi hakikat orang. Sedangkan tubuh adalah sebagai ibarat baju pinjaman, boleh bertambah, berkurangan dan berubah.
Manusia itu tetap manusia selagi rohnya itu tetap ada. Jadi menurut pendapat kedua ini, ayat di atas bermaksud, "Sesungguhnya Aku mematikanmu, dan sesudah kematian itu Aku tempatkan engkau di tempat yang tinggi di sisi-Ku," sebagaimana firman Allah SWT kepada Nabi Idris a.s bermaksud: Dan Kami telah mengangkatnya ke tempat yang tinggi darjatnya.
Ibn Ishaq berkata: "Kristian menyangka bahawa Allah SWT mematikan Nabi Isa a.s selama tujuh jam kemudian menghidupkannya".
Matar al-Warraq berkata: "Sesungguhnya aku mematikan kamu daripada dunia dan bukan dengan mati sebagai kematian".
Ibn Juraij berkata: "Maksud mati ialah mengangkatnya".
Kebanyakan ulama berpendapat dikehendaki dengan wafat di sini dengan maksud tidur berdasarkan kepada beberapa ayat al-Quran antaranya:
l Ayat 60 surah al-An'am firman Allah SWT yang bermaksud: Dan Dialah yang menidurkan kamu pada waktu malam, dan mengetahui apa yang kamu kerjakan pada siang hari, kemudian ia bangunkan kamu (dari tidur) padanya, untuk disempurnakan ajal (masa umur kamu) yang telah ditetapkan. Kemudian kepada-Nyalah tempat kamu kembali, kemudian ia menyatakan kepada kamu apa yang kamu lakukan.
l Ayat 42 surah al-Zumar firman Allah SWT yang bermaksud: Allah (yang Menguasai segala-galanya), ia mengambil dan memisahkan satu-satu jiwa dari badannya, jiwa orang yang sampai ajalnya semasa matinya, dan jiwa orang yang tidak mati dalam masa tidurnya, kemudian ia menahan jiwa orang yang ia tetapkan matinya dan melepaskan balik jiwa yang lain (ke badannya) sehingga sampai ajalnya yang ditentukan. Sesungguhnya yang demikian itu mengandungi tanda-tanda yang membuktikan kekuasaan Allah bagi kaum yang berfikir (untuk memahaminya).
l Ayat 156-159 surah al-Nisa' firman Allah SWT yang bermaksud: Demikian juga (Kami laknatkan mereka) dengan sebab kekufuran mereka dan tuduhan mereka terhadap Maryam (dengan tuduhan yang amat dustanya. Dan juga (disebabkan) dakwaan mereka dengan mengatakan: "Sesungguhnya kami telah membunuh al-Masih Isa Ibni Maryam, Rasul Allah".
Padahal mereka tidak membunuhnya dan tidak memalangnya (di kayu palang - salib), tetapi diserupakan bagi mereka (orang yang mereka bunuh itu seperti Nabi Isa). Dan sesungguhnya orang-orang yang telah berselisih faham, mengenai Nabi Isa, sebenarnya mereka berada dalam keadaan syak (ragu-ragu) tentang menentukan (pembunuhannya).
Tiada sesuatu pengetahuan pun bagi mereka mengenainya selain daripada mengikut sangkaan semata-mata, dan mereka tidak membunuhnya dengan yakin.
Bahkan Allah telah mengangkat Nabi Isa kepadanya, dan adalah Allah Maha Kuasa, lagi Maha Bijaksana. Dan tidak ada seorang pun dari kalangan ahli Kitab melainkan ia akan beriman kepada Nabi Isa sebelum matinya dan pada hari kiamat kelak Nabi Isa akan menjadi saksi terhadap mereka.
bangsa Yahudi
Al-Maraghi berkata: "Ayat ini mengkhabarkan adanya unsur-unsur kehinaan dan kerendahan darjat bangsa Yahudi yang berlanjutan sehingga hari akhirat. Perkara ini memang terbukti sehingga tidak didapati orang Yahudi yang menjadi raja atau memiliki sebuah negeri sendiri.
"Perkara ini berbeza dengan kaum Nasrani tetapi para pengikut al-Masih belum lagi membuktikan kenyataan ini pada zaman hidup Baginda. Ini disebabkan mereka dikuasai oleh orang Yahudi.
"Oleh itu, pengertian kemenangan yang pertama (kemenangan rohaniah keagamaan) yang lebih sesuai dijadikan cermin".
Sesungguhnya kedatangan Nabi Isa kepada bangsa Yahudi dengan tidak membawa syariat baru. Bahkan kedatangan baginda adalah untuk menghapuskan sikap kolot dalam memahami syariat Nabi Musa a.s yang dilakukan secara formal.
Tujuan kedatangan baginda juga adalah untuk memberi kefahaman yang benar kepada mereka. Dari itu, ia bermaksud penganut agama Ahli Kitab terhadap beku kepada kata-kata formal ayat suci.
Justeru, mahu tidak mahu mereka memerlukan seorang pembaharu seperti Nabi Isa yang menjelaskan kepada mereka rahsia syariat dan jiwa agama. Dan semuanya itu ada dalam al-Quran, tetapi mereka telah tertutup lantaran taklid.
Masa kehidupan Nabi Isa a.s merupakan zaman yang mana manusia telah berpegang teguh pada roh agama dan syariat Islam untuk memperbaiki jiwa dan bukan hanya berpegang kepada tulisan dan kata-kata formal ayat suci.
Sebaliknya, golongan dajjal adalah simbol terhadap kaum pembuat khurafat iaitu kebohongan dan kebusukan. Di mana perbuatan ini akan hilang apabila syariat hidup dengan sewajarnya termasuk jiwa dan hikmahnya. Sedangkan kitab al-Quran merupakan penyuluh terbesar kepada hikmah dan jiwa agama. Begitu pula sunnah Rasul yang penuh dengan penjelasan seperti ini.
Muhammad Quraish Shihab berkata: "Kata mutawaffika diambil dari kata yang bermakna sempurna. Al-Quran menggunakannya antara lain untuk makna mati dan tidur. Dia bermakna mati kerana siapa yang wafat maka umurnya di dunia telah sempurna dan kerana tidur mirip dengan mati dari sisi hilangnya kesedaran maka tidur pun dinamai mati oleh al-Quran dan sunnah".
Hamka berkata: "Adalah satu kenyataan bahawa kita terdiri dari berbagai golongan. Kadang-kadang kita bertukar pandangan dan fikiran, kadang-kadang berebut pasaran dan pengaruh.
"Lantaran bertengkar kita lupa kewajipan kita mengabdikan diri kepada Allah SWT. Lupa bahawa hidup di dunia fana yang pendek ini hendaklah diisi dengan amal yang baik, jasa yang berguna dan ilmu yang berfaedah.
"Janganlah kamu terlalu banyak berselisih faham. Hanya membazirkan waktu yang terluang dengan bertengkar dan bermusuhan sesama sendiri".
Akhirnya penulis ingin mengemukakan sekali lagi pendapat Ibn Kathir berkenaan hal ini. Katanya: "Sesungguhnya Isa al-Masih tatkala Allah SWT mengangkatnya ke langit, rakan-rakan dan pengikutnya berpecah ketika itu:
i. Ada yang beriman dengan apa yang Allah bangkitkannya bahawa Nabi Isa adalah hamba Allah, Rasul-Nya dan anak kepada Maryam.
ii. Ada di kalangan mereka yang melampaui sehingga menjadikan Isa sebagai anak Allah.
iii. Lebih teruk lagi ada di kalangan mereka menganggap Nabi Isa adalah Allah SWT.
iv. Seterusnya di kalangan mereka mendakwa Nabi Isa adalah salah satu daripada tiga Tuhan.
Semuanya itu dihikayatkan Allah dalam al-Quran serta membangkang dan membidas puak mereka. Mereka berkeadaan begini hampir 300 tahun, kemudian mereka telah dipimpin oleh Raja Yunan digelar dengan nama Qustantin yang bertujuan untuk merosakkan agama Kristian kerana ia asalnya seorang ahli falsafah.
Dikatakan beliau amat jahil tentang agama dan mengubah ajaran al-Masih, menambah dan meminda, menggubah undang-undang serta khianat yang amat berat. Antara tindakannya, beliau menghalalkan daging khinzir dan solat ke arah timur, meletakkan gambar-gambar dalam gereja, menambah puasa 10 hari kerana dosa yang dilakukannya sehingga jadilah agama al-Masih bertukar kepada agama Qustantin.
Beliau telah membina banyak gereja dan tempat ibadat melebihi 12,000 gereja, di samping menisbahkan nama kota kepadanya. Untuk keterangan lanjut boleh rujuk kitab tafsir Ibn Kathir dan al-Firaq Wa Adyan.
Semoga Allah menjadikan kita di kalangan orang Islam yang beriman kepada Nabi-nabi dan Rasul-rasul termasuk Nabi Isa a.s.
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Jangkitan kuman di paru-paru
SISTEM pernafasan manusia terbahagi kepada bahagian atas dan bahagian bawah. Bahagian bawah terletak di dalam dada dan terdiri daripada saluran pernafasan dan pundi-pundi udara (air sacs). Jangkitan kuman di paru-paru boleh melibatkan saluran pernafasan (bronchitis) dan pundi-pundi udara (pneumonia).
Secara amnya, jangkitan kuman di tisu paru-paru dikenali sebagai pneumonia. Ia adalah jangkitan kuman yang biasa di kalangan kanak-kanak kecil dan orang-orang tua. Ia disebabkan oleh virus atau bakteria. Kadangkala ia juga disebabkan oleh jangkitan awal pada sistem pernafasan di bahagian atas (batuk dan selsema) yang merebak ke bahagian bawah sistem pernafasan. Jangkitan kuman ini boleh melibatkan keadaan yang tidak serius hinggalah kepada keadaan yang membahayakan nyawa.
Tanda-tanda dan gejala
Ini bergantung kepada sebab, umur dan penyakit-penyakit yang berkaitan dengan seseorang kanak-kanak itu. Secara amnya, kanak-kanak akan mengalami :
- Demam panas
- Batuk dengan atau tanpa kahak
- Sakit dada
- Tiada selera makan, tidak mahu makan
- Rasa tidak sihat, sering merengek
- Pernafasan laju atau susah bernafas
- Muntah atau cirit-birit
Adakah jangkitan kuman paru-paru ini serius?
Jangkitan kuman paru-paru boleh menjadi sangat serius dalam masa yang singkat terutamanya di kalangan kanak-kanak kecil.
Kanak-kanak boleh mengalami kekurangan air (dehidrasi) atau kekurangan oksigen.
Kanak-kanak yang mengalami tanda-tanda berikut perlu dimasukkan ke hospital:
- Pernafasan laju
- Sukar untuk bernafas
- Bibir menjadi biru
- Batuk berdarah
- Tidak boleh makan atau minum atau tidak kencing
Apakah rawatan untuk jangkitan di paru-paru?
Jenis rawatan bergantung kepada tahap jangkitan.
Kebanyakannya adalah tidak serius dan disebabkan oleh virus, oleh itu sistem pertahanan badan memainkan peranan utama untuk melawan penyakit ini. Apabila jangkitan kuman ini disebabkan oleh bakteria, antibiotik akan diberi oleh doktor.
Untuk jangkitan yang tidak serius, ubat boleh diberi dalam bentuk pil.
Anda Boleh mencuba rawatan ini di rumah:
- Paracetamol
- Rehat yang secukupnya
- Minum air yang banyak
- Sekiranya jangkitan menjadi lebih serius ubat akan diberikan melalui suntikan.
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Jika jangkitan kuman di paru-paru ini berlarutan atau menjadi kritikal,
anak anda perlu dimasukkan ke hospital untuk mendapatkan oksigen,
antibiotik dan sokongan perubatan yang lain.
Apakah langkah-langkah yang boleh diambil untuk mengelakkan jangkitan kuman ini?
- Mengekalkan amalan cara hidup sihat. Amalan kebersihan diri dan persekitaran yang baik. Teruskan penyusuan susu ibu.
- Mengambil imunisasi boleh mencegah jangkitan kuman di paru-paru. Contohnya:
* Vaksin batuk kokol (pertussis) dan demam campak (measles) - wajib untuk semua kanak-kanak di bawah Program Immunisasi Kanak-Kanak Negara.
* Vaksin influenza (untuk kanak-kanak tertentu yang berisiko tinggi contohnya masalah pernafasan yang kronik, penyakit jantung dan masalah kurang pertahanan badan)
* Vaksin pneumococcal (juga untuk kanak-kanak yang berisiko tinggi contohnya kanak-kanak yang tiada limpa, sakit buah pinggang yang kronik dan kanak-kanak yang menerima rawatan yang melemahkan sistem pertahanan badan).
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Mulakan hari dengan oat organik
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PIZA panas, segar dan lazat melengkapkan perayaan bagi 32 kanak-kanak kurang bernasib baik dari Agathians Shelter baru-baru ini. Jamuan piza ini adalah sebahagian daripada tanggungjawab sosial korporat Domino's Pizza's .
Ketua Pegawai Operasi Dommal Food Services Sdn. Bhd., Ba U Shan-Ting berkata, Domino's telah menghantar piza kepada kanak-kanak kurang bernasib baik pada musim perayaan sejak tahun 2002 lagi.
"Lawatan Domino's Pizza's ke Agathians Shelter adalah yang terakhir dalam siri lawatan ke-38 rumah dan pertubuhan kebajikan sempena perayaan Deepavali, Hari Raya Aidilfitri dan Tahun Baru Cina.
Secara keseluruhan, seramai 3,000 kanak-kanak kurang bernasib baik yang berusia antara tiga hingga 18 tahun telah berpeluang menikmati kelazatan piza Domino's yang dihantar dalam keadaan panas dan segar ke rumah kebajikan masing-masing.
KEHIDUPAN masyarakat zaman sekarang yang sentiasa mengejar masa menyebabkan ramai rakyat Malaysia tidak sempat mengambil sarapan.
Ini adalah tabiat yang tidak sihat kerana sarapan adalah sajian paling penting dalam sehari. Selain itu, kajian menunjukkan bahawa pengambilan sarapan yang sihat membolehkan individu memberikan prestasi yang lebih baik sepanjang hari.
Untuk itu, GBA Corporation Sdn. Bhd. memperkenalkan Anzen, jenama emping oat organik yang sihat dan berkhasiat.
Paling penting, oat yang kaya dengan tiamina dan zat besi yang diperlukan untuk kesihatan sistem saraf. Ia juga membantu menurunkan tahap kolestrol dalam saluran darah, melindungi sistem peredaran darah, mengawal tahap gula darah dan menguatkan sistem imun.
Emping Oat Organik Anzen unik ini tidak mengandungi organisma yang digubah secara genetik, pengawet kimia atau pewarna.
Ia disahkan oleh Pro-Cert, salah sebuah badan organik berpangkalan di Kanada. Ia juga diperkuatkan dengan vitamin A dan C dan zat galian seperti kalsium dan zat besi.
Produk ini boleh dinikmati oleh semua kerana sesuai untuk mereka yang hanya makan sayuran dan masyarakat Islam kerana ia disahkan halal oleh Lembaga Pensijilan Halal Asia Tenggara.
Pengguna boleh memilih antara emping oat organik segera Anzen yang hanya perlu ditambah air panas atau emping oat biasa Anzen yang perlu direbus dengan air atau dimasak dalam ketuhar gelombang mikro atau digunakan dalam masakan, kuih, biskut dan sebagainya.
Emping oat organik Anzen boleh didapati pada hara RM7.90 untuk pek 500g.
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Kehidupan tergendala sebelum 40 tahun
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Sazlina Zamalluddin
(berkerusi roda) ditemani bapa (kiri) dan ibunya (kanan) ketika
mendaftar untuk mengikuti terapi di Nasam, Petaling Jaya, baru-baru
ini.
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UMPAMA bom jangka yang berdetik, serangan angin ahmar atau strok merupakan antara penyebab kematian tertinggi di kalangan rakyat tempatan yang menunggu masa untuk meletus dalam diri mangsanya.
Penyebab kematian ketiga tertinggi di Malaysia, strok juga mengakibatkan lebih 40,000 rakyat mengalami kehilangan upaya setiap tahun tanpa mengira usia. Pun begitu, majoriti pesakit angin ahmar lazimnya membabitkan golongan lanjut usia.
Namun, apa yang membimbangkan, bilangan pesakit strok semakin meningkat di kalangan lelaki dan wanita di bawah usia 40 tahun. Mereka ialah majoriti tenaga penggerak ekonomi negara iaitu golongan profesional dan bukan profesional yang sedang membina kerjaya masing-masing.
Mohd. Razif Razman, 38, aktif bersukan
Seperti kebanyakan lelaki seusianya, Mohd. Razif Razman gemar bermain futsal sekurang-kurangnya sekali setiap minggu bersama rakan-rakan.
Di samping aktif, dia tidak lupa mengamalkan diet makan normal tiga kali sehari meskipun sesekali terpaksa bekerja hingga ke dinihari apabila sibuk dengan syarikat pengurusan acara miliknya sendiri.
Cuma Razif sesekali merokok dan sering dikelilingi rakan-rakan sepejabat yang kuat merokok disebabkan tekanan dan waktu kerja tidak menentu.
Sehinggalah pada Ogos tahun lalu, kehidupannya berubah dalam sekelip mata apabila tiba-tiba diserang angin ahmar ketika sedang melakukan urusan di bank. Disebabkan kejadian itu, Razif disahkan mengalami darah beku pada belakang otaknya.
''Doktor kata stres,'' katanya dengan perlahan kerana baru menemui 'suara' semula selepas kehilangan kemampuan untuk bergerak dan bercakap akibat serangan strok itu.
Walaupun dalam penuh kepayahan, dia bersungguh-sungguh menceritakan keperitan yang terpaksa dilalui termasuk membesarkan dua anak perempuannya berusia tujuh dan lapan tahun.
Itu belum kos perbelanjaan mencecah hampir RM30,000 bagi menjalani pelbagai jenis rawatan termasuk hospital pakar, fisioterapi, perubatan alternatif akupuntur dan urutan untuk mengurangkan kesan penderitaan dialami Razif.
Kini, dia ditemani Syed Jamalil Syed Rahmat, 38, rakan baiknya sejak kecil yang mengorbankan masa dan tenaga apabila termampu untuk membawa Razif menjalani fisioterapi dan terapi pertuturan di Persatuan Angin Ahmar Kebangsaan (Nasam) Petaling Jaya, Selangor.
Jika tiada hal lain, setiap hari dua sahabat ini akan datang ke Nasam dan menjalani aktiviti harian. Lama- kelamaan Razif mula menunjukkan reaksi gembira dengan tersenyum serta ketawa.
Keadaannya jauh berbeza tiga bulan lalu apabila dia hanya mampu terbaring dan kedua-dua belah anggota tubuhnya tidak boleh digerakkan langsung.
Kata Razif, serangan angin ahmar itu membuatkannya kehilangan setahun daripada hayatnya lebih-lebih lagi masa bermanja bersama anak-anak yang masih kecil.
Kini, dia bertekad untuk menjalani fisioterapi sekerap yang termampu dan menggagahkan diri walaupun terpaksa berusaha keras berbanding pesakit strok lain yang jauh lebih tua daripadanya.
Sazlina Zamalluddin, 38, 'gila kerja'
''Mak cik syak sesuatu apabila dia mengadu lidahnya kebas, suaranya ketika itu sudah berubah, kakinya terus lemah dan terjatuh apabila cuba berjalan.
''Apabila kami bawa dia ke hospital, dia sudah tidak boleh bergerak dan tidak mampu keluar dari kereta, dia hanya mampu memandang kami,'' kata Saadiah Salleh, 58, ibu kepada Sazlina Zamalluddin.
Sazlina yang masih belum berkahwin memegang jawatan Penolong Setiausaha Suruhanjaya Perkhidmatan Awam (SPA), tinggal seorang diri di Serdang agar mudah berulang-alik ke tempat kerjanya di Putrajaya.
Rutin hariannya yang sentiasa sibuk di samping memberi ceramah dua kali seminggu di Institut Tadbiran Awam Negara (Intan), Bukit Kiara, menyebabkan dia hanya meluangkan masa sebulan sekali melawat ibu bapanya di Kampung Pasir, Ulu Klang, Selangor.
Menurut Saadiah, anaknya itu terlalu kuat bekerja sehingga mengabaikan waktu makan sepanjang hari malah cuti tahunan sebanyak 50 hari juga tidak digunakan dan ini turut diakui rakan sekerja serta majikannya.
Malah Sazlina pernah dimasukkan ke hospital kerana mengadu tangan kebas tetapi berkeras kembali ke tempat kerja atas alasan banyak kerja yang perlu disiapkan.
Bagaimanapun, akhirnya dia terpaksa mengalah apabila diserang angin ahmar pada 20 Disember lalu ketika berada di rumah ibu bapanya.
Selama 24 hari, Sazlina terlantar di Pusat Perubatan Universiti Malaya (PPUM) sebelum kemudiannya terpaksa menjalani terapi pertuturan dan fisioterapi kerana kehilangan upaya untuk bergerak serta bercakap.
Kini hanya sepatah dua perkataan mampu dituturkan setiap hari sehinggakan ada ketika dia menangis kerana tidak seorang pun faham apa yang cuba dikatakannya.
N. Bashkeran, 40, gemar bersosial
Juruperunding khidmat pelanggan ini agak bernasib baik kerana kesan yang dialami akibat serangan strok tidak terlalu teruk seperti kebanyakan pesakit lain.
Namun N.Bashkeran tetap kehilangan fungsi sebelah kiri anggotanya setelah mengalami episod serangan pada 10 Julai tahun lalu ketika sedang memandu ke Putrajaya.
Mujur bapa kepada empat orang anak ini tidak ditimpa kemalangan, sebaliknya dia sempat pulang ke rumah dan berehat kerana diserang sakit kepala teruk.
Jelasnya, dia pernah disahkan menghidap darah beku pada pergelangan kakinya tidak lama sebelum diserang strok. Akibatnya, Bashkeran menghabiskan masa seminggu di hospital dalam keadaan lumpuh separuh badan.
''Isteri cukup sedih dan marah kerana tabiat minum arak antara penyebab saya diserang angin ahmar.
''Saya juga gemar mengambil makanan Barat selain mengambil alkohol beberapa hari seminggu,'' katanya.
Menurut Bashkeran, sebelum ini dia sering bersenam dan gemar bermain bola sepak selain mengikuti pemeriksaan kesihatan tiga hingga enam bulan sekali. Malah paras tekanan darahnya juga didapati normal sehingga dia diserang strok.
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Awasi pilihan makanan di tempat kerja
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berwaspada dengan pengambilan makanan seharian bagi mengurangkan risiko penyakit. - Gambar hiasan
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BERPULUH-puluh jenis juadah dan masakan yang lazat terhidang di kaunter kantin tempat kerja bagi membolehkan para pekerja membuat pilihan.
Memang rambang mata untuk memilihnya. Semuanya lazat dan membuat air liur kecur sekiranya tidak dapat merasakannya. Hendak mengambil satu dua lauk, rasanya rugi sebab tidak dapat merasa yang lain. Akhirnya bertimbun lauk di atas nasi. Hampir semuanya berminyak dan berlemak.
Difahamkan rakyat Malaysia sememangnya suka makan sesuka hati dan tidak menjaga pemakanan mereka. Akibatnya masalah obesiti dan penyakit kronik ekoran daripada pengambilan makanan yang tidak berkhasiat kini semakin meningkat di kalangan masyarakat.
Perkembangan tidak sihat ini pastinya membimbangkan. Lebih membingungkan ialah mengapa rakyat Malaysia sanggup memudaratkan kesihatan mereka dengan makan sesuka hati?
Satu daripada faktor yang boleh mendorong kepada keadaan ini ialah sikap rakyat Malaysia yang gemar makan pelbagai makanan dan malas bersenam.
Lebih memburukkan keadaan, kedai-kedai makan yang tumbuh bagaikan cendawan selepas hujan menyebabkan rakyat Malaysia lupa yang mereka perlu mengamalkan pemakanan baik untuk kekal sihat .
Lagi malang apabila tabiat pekerja yang menjadi aset syarikat tidak mengendahkan pilihan makanan yang sihat, boleh memberi kesan kepada produktiviti dan kecekapan dalam pekerjaan.
Selain itu, kerana pelbagai penyakit yang dihadapi oleh pekerja, syarikat juga terpaksa menanggung perbelanjaan perubatan yang semakin menggunung, hanya semata-mata tiada kesedaran bahawa pemakanan tidak sihat hanya mengundang penyakit kronik seperti diabetes dan strok.
Adalah baik rakyat mangambil iktibar bahawa diabetes, strok, darah tinggi dan kanser adalah penyakit kemewahan, lazimnya produk gaya hidup tidak sihat . Jika orang ramai lebih berwaspada dalam apa yang masuk dalam mulut mereka, peluang adalah cerah bagi statistik berkaitan penyakit-penyakit ini berkurang.
Panduan menikmati pelbagai jenis makanan
- Makan berpandukan Piramid Makanan Malaysia.
- Pelbagaikan jenis makanan daripada setiap aras Piramid Makanan.
- Digalakkan memilih menu yang berlainan dari hari ke hari.
- Cuba makanan yang anda tidak biasa makan.
Panduan menikmati lebih buah dan sayur
- Makan sekurang-kurangnya 1/2 cawan sayur pada setiap waktu makan.
- Makan sekurang-kurangnya satu jenis buah pada setiap waktu makan.
- Pelbagaikan jenis buah dan sayur.
- Pilih hidangan yang mengandungi buah dan sayur. (Contoh: nasi kerabu, nasi ulam, puding buah, rojak buah/sayur, pecal).
- Jadikan buah sebagai snek.- Makanlah ulam dan salad bersama hidangan anda.
Panduan mengurangkan makanan bergoreng dan berlemak
- Pilih nasi putih berbanding nasi beriani, nasi minyak atau nasi lemak.
- Pilih makanan yang dipanggang, dibakar, dikukus atau direbus berbanding makanan bergoreng.
- Kurangkan mengambil kuah yang berlemak. Asingkan lebihan minyak dari kuah.
- Hadkan pengambilan organ dalaman haiwan (hati, limpa, paru, otak, perut) dan kuning telur.
- Makan daging tanpa lemak dan ayam tanpa kulit.
- Utamakan makanan tanpa santan.
- Kurangkan sapuan mentega atau marjerin pada roti/ biskut/ jagung.
- Minta dikurangkan mentega/marjerin pada hidangan apabila membuat pesanan.
Panduan menikmati bijirin penuh, legum, kekacang dan biji-bijian
- Makan sarapan berasaskan bijirin penuh seperti oat, jagung dan capati.
- Pilih roti, roti pita, bijirin sarapan pagi dan biskut yang berasaskan bijirin penuh.
- Cuba gantikan atau campurkan nasi putih dengan nasi beras perang.
- Makan makanan berasaskan legum seperti tauhu, tempe dan kacang panggang beberapa kali seminggu.
- Makan kekacang/biji-bijian beberapa kali seminggu. (contoh: biji selasih dalam minuman, kuih yang ditabur bijan).
Panduan mengurangkan pengambilan gula
- Minum air kosong untuk menggantikan minuman yang manis, sirap, kordial dan minuman berkarbonat.
- Pilih buah-buahan segar untuk menggantikan kuih muih yang manis, biskut berkrim, gula-gula atau coklat.
- Pilih makanan yang kurang gula. Baca label untuk mengetahui kandungan gula.
- Minta dikurangkan gula atau susu pekat manis apabila membuat pesanan minuman.
Panduan memilih makanan yang selamat
- Pilih tempat makan yang bersih.
- Pastikan pengendali makanan mengamalkan kebersihan diri.
- Pastikan makanan dikendalikan dengan bersih dan selamat.
- Elakkan makanan yang tercemar.
- Pilih makanan yang segar atau baru dimasak.
- Elakkan pengambilan makanan hangus.
- Pastikan pembungkusan, kotak dan tin makanan dalam keadaan baik.
- Hadkan pengambilan makanan yang mengandungi bahan pengawet.
- Hadkan pengambilan makanan yang mengandungi pewarna tiruan.
- Elakkan makanan yang digoreng dengan minyak masak yang telah digunakan berulangkali.
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Kemurungan perlu dirawat
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Lesu dan sakit seluruh badan merupakan antara simptom kemurungan. - Gambar hiasan
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RASA sakit dan lesu seluruh badan biasanya disebabkan keletihan dan kerja keras, namun tidak ramai daripada kita yang mengaitkannya dengan masalah kemurungan.
Keadaan itu menyebabkan ramai mereka yang mengalami kemurungan tidak menyedari mereka mempunyai masalah tersebut kerana menyangkakan sakit badan yang dialami adalah sakit biasa.
Presiden Persekutuan Psikiatri dan Kesihatan Mental Asean (AFPMH), Profesor Dr. Mohamad Hussain Habil, berkata, sememangnya ramai yang tidak sedar bahawa kesakitan yang tidak dapat dijelaskan ini sebenarnya berkait rapat dengan kemurungan
Katanya, para penyelidik mendapati bahawa 82 peratus daripada pesakit murung yang datang mendapat rawatan daripada pengamal perubatan pada awalnya tidak mengetahui mereka mengalami gejala kemurungan.
Ini menyebabkan mereka tidak mendapat rawatan sewajarnya, sementara 18 peratus lagi hanya menerima ubat anti kemurungan.
Beliau yang juga Ketua Pakar Ketagihan dan Perunding Psikiatri di Jabatan Perubatan Psikologi di Pusat Perubatan Universiti Malaya (PPUM), berkata, pemahaman mengenai hubung kait kesakitan dan kemurungan amat penting bagi memudahkan proses rawatan penyakit tersebut.
"Ini terutama bagi pesakit yang berada di tahap yang lebih kronik sehingga terdorong kepada perasaan ingin membunuh diri," katanya ketika menyampaikan ceramah di Bengkel Kesakitan dan Kemurungan, di Petaling Jaya, Selangor, baru-baru ini.
Bengkel tersebut ditaja oleh Eli Lilly (M) Sdn. Bhd., dengan kerjasama AFPMH dan Persatuan Psikiatri Malaysia (MPA)
Dr. Mohammad Hussain berkata, kemurungan merupakan penyakit yang melanda kira-kira 121 juta manusia di seluruh dunia.
Malam menurut Laporan Kesihatan Sedunia 1999 yang diterbitkan oleh Pertubuhan Kesihatan Sedunia (WHO), kemurungan merupakan penyakit keempat paling ramai dihidapi di dunia yang boleh menimbulkan ketidakupayaan individu.
"Perlu untuk diberitahu kepada masyarakat juga bahawa kemurungan bukan penyakit yang sengaja diada-adakan.
"Ia adalah satu penyakit yang memerlukan rawatan dan banyak mempengaruhi kehidupan lebih-lebih lagi dalam negara yang mengalami krisis ekonomi," katanya.
Dalam pada itu, Presiden Persatuan Psikiatri Malaysia (MPA), Dr. Yen Teck Hoe berkata, terdapat beberapa simptom kemurungan yang boleh dikenalpasti secara mata kasar.
Ini termasuk hilang minat atau keinginan terhadap aktiviti yang lazim dilakukan seperti bersukan, riadah bersama keluarga, seks dan sebagainya.
"Pesakit juga mudah dilanda rasa sedih, cepat marah, hilang tumpuan dan lebih teruk lagi timbul rasa ingin bunuh diri.
"Kemurungan tidak mengenal mangsa, ia boleh terjadi kepada kanak-kanak semuda usia lima tahun dengan simptom yang berbeza," tambah beliau.
Dr. Teck Hoe berkata, mengikut kajian, kejadian kemurungan di kalangan wanita adalah lebih tinggi berbanding lelaki dengan nisbah 2:1.
"Antara sebabnya ialah perubahan peringkat hormon yang dialami wanita. Itu sebabnya, kemurungan berlaku ketika wanita mengalami peredaran haid, hamil selepas bersalin dan putus haid.
"Biasanya wanita akan menunjukkan tanda-tanda kemurungan seperti putus asa dan tidak berupaya manakala lelaki pula bersikap berang atau cepat marah," jelas beliau.
Dari segi saintifiknya, penyelidikan mendapati kemurungan disebabkan ketidakseimbangan dua bahan kimia dalam otak dan badan iaitu serotonin dan noradrenalin.
Serotonin ialah sejenis bahan kimia yang wujud dalam sistem saraf pusat dan perubahan paras serotonin dalam otak boleh mengubah mood seseorang.
Begitu pun, kajian turut mendapati bahawa kemurungan boleh diwarisi yang bermaksud ia mempunyai hubung kait dengan faktor genetik.
Sementara itu, perunding psikiatri Pusat Perubatan Universiti Malaya, Profesor Dr. Nor Zuraida Zainal, dalam kertas kerjanya yang bertajuk Penyakit Kronik dan Hubung Kaitnya dengan Kemurungan dan Kesakitan pula menjelaskan, kemurungan di kalangan pesakit yang menghidapi penyakit kronik seperti barah, jantung, strok dan parkinson boleh memburukkan lagi keadaan kesihatan mereka.
"Hubung kait kemurungan dan penyakit kronik amat tinggi. Kesakitan menyebabkan kemurungan dan kemurungan menyebabkan kesakitan.
"Penyakit kronik menyebabkan jiwa tertekan dan menjejaskan keadaan psikologi pesakit, seterusnya membawa kepada kemurungan.
"Kemurungan pula boleh memburukkan lagi keadaan kesakitan dan menjejaskan keadaan fizikal yang mengganggu keberkesanan rawatan penyakit tersebut," jelas beliau.
Sementara itu, pensyarah kanan Jabatan Perubatan Psikologi Pusat Perubatan Universiti Malaya (PPUM), Dr. Jesjeet Singh Gill berkata, cabaran sebenar dalam mengenal pasti kesakitan dan kemurungan ini ialah untuk mengatasi stigma yang berkait rapat dengan diagnosis dan rawatan penyakit tersebut.
"Tinjauan Kesihatan dan Morbiditi Kebangsaan kedua pada tahun 1996 menyatakan 10.7 peratus daripada orang dewasa Malaysia berusia 16 tahun ke atas menghadapi masalah kesihatan mental.
"Kemurungan menyumbang 11.8 peratus kepada masalah psikologi paling umum dihadapi oleh para responden. Walaupun peratusan itu tidak tinggi, ia telah menunjukkan tanda-tanda amaran.
"Didapati hanya sebilangan kecil pesakit yang berjumpa dengan pengamal perubatan am untuk mengatasi masalah kemurungan manakala hanya segelintir yang terus berjumpa dengan pakar psikiatri," jelas beliau.
Dr. Jesjeet menambah, masalah kemurungan ini boleh dirawat namun ramai pesakit yang enggan atau keberatan untuk berjumpa pengalam perubatan.
"Kami mendapati para pesakit enggan mendapatkan rawatan kerana mereka bimbang akan dipulaukan. Mereka juga takut dipandang rendah di tempat kerja dan mereka yang menghidapi masalah ini masih dianggap sebagai mempunyai masalah emosi atau kurang keazaman," ujar Dr. Jesjeet.
Pensyarah kanan Jabatan Perubatan Psikologi, Universiti Malaya, Dr. Ting Joe Hang menegaskan kemurungan bukan satu kelemahan peribadi tetapi penyakit yang menjejaskan otak dan memerlukan rawatan segera.
"Sekiranya pesakit mempunyai empat atau lima simptom tetapi tidak tahu apakah sebabnya berkemungkinan mereka menghidap kemurungan.
"Pesakit tidak harus berdiam diri, mereka perlu berjumpa dengan doktor dan utarakan kemungkinan menghidapi kemurungan supaya mereka boleh dirujuk kepada doktor pakar. Perkara yang tidak harus dilakukan oleh doktor ialah dengan menganggap kesakitan fizikal ini sebagai sakit biasa," ujar beliau.
Menerusi satu kajian kes yang dijalankan, beliau mendapati bahawa seorang suri rumah yang mengadu mengalami sakit gigi masih mengalami kesakitan tersebut walaupun giginya telah dicabut.
"Menerusi perbualan dengan pakar psikiatri, menemukan hasil bahawa wanita tersebut sebenarnya mengalami kemurungan sejak tiga tahun lalu iaitu sebelum dia mengalami kesakitan gigi.
"Wanita itu juga mengakui sukar tidur, hilang selera makan, tidak lagi gemar berkebun seperti dahulu dan mudah sensitif.
Setelah diagnosis dijalankan, rawatan melibatkan ubat, terapi dan sokongan sosial terbukti membantu wanita tersebut mengembalikan keceriaan hidupnya. Bukannya kesakitan gigi yang menyebabkan beliau sakit, tetapi apa yang dipendam menjadi punca kemurungan tersebut," kata beliau.
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Madoff pleads guilty to vast fraud and is jailed
By Diana B. Henriques and Jack HealyPublished: March 12, 2009
NEW YORK: Bernard Madoff pleaded guilty Thursday to all the charges against him and expressed remorse for a vast Ponzi scheme that bilked investors out of billions of dollars.
Standing before Judge Denny Chin in U.S. District Court in New York, Madoff was sworn in and reminded that he was under oath. Noting that he had waived indictment, Judge Chin asked, "How do you now plead," guilty or not guilty? "Guilty," Madoff responded.
His formal confession will cost him his liberty.
Rather than letting him remain free on bail and return to his apartment in New York, Chin ordered Madoff immediately jailed as he awaited sentencing.
"He has incentive to flee, he has the means to flee, and thus he presents the risk of flight," Chin said. "Bail is revoked."
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The 11 counts of fraud, money laundering, perjury and theft to which Madoff pleaded guilty carry maximum terms totaling 150 years. Sentencing was scheduled for June 16.
Dressed in a gray suit, Madoff, 70, appeared in a courtroom packed with journalists, lawyers and some of his victims.
Flanked by his lawyers, he stood up and began to answer questions from Chin about whether he understood the ramifications of his guilty plea, whether he was satisfied with his legal representation and whether he was competent to enter the guilty plea.
At first, Madoff's voice was barely audible as he acknowledged the litany of crimes.
"Try to keep your voice up so that I can hear you, please," Chin said. At one point, Madoff asked for water.
In recounting how he sustained a 20-year fraud whose collapse erased as much as $65 billion that his customers thought they had in their accounts, Madoff said, "I believed it would end shortly and I would be able to extricate myself and my clients from the scheme."
He added, "I cannot adequately express how sorry I am for what I have done."
Although Madoff admitted to operating what he called "a Ponzi scheme through the investment advisory side of my business," he said all other aspects of his enterprise, operated by his sons and brother, were legitimate, profitable and successful.
The court session was the first time since his arrest by U.S. government agents on Dec. 11 that Madoff had spoken publicly about how he ran what was perhaps the largest fraud in Wall Street history, a global scheme that ensnared hedge funds, nonprofit groups and celebrities, and wiped out the life savings of thousands of people.
During the 75-minute court hearing, a few victims were permitted to speak up against accepting the plea.
One was Maureen Ebel, who said: "If we go to trial we have more of a chance to comprehend the global scope of this horrendous crime. We can hear and bear witness to the pain that Madoff has inflicted on the young, the old and the infirm."
It remains unclear where the billions of dollars that his victims lost has gone, and whether those victims will ever see any meaningful restitution. Prosecutors have said the government is seeking $170 billion in forfeited assets from Madoff, apparently representing all the money that ran through Madoff accounts traceable to the crimes.
A court-appointed trustee liquidating Madoff's business has so far only been able to identify about $1 billion in assets to satisfy claims.
This week, the government said Madoff had 4,800 client accounts at the end of November supposedly containing $64.8 billion in customer savings. But the government said Madoff's business "held only a small fraction of that balance."
As Madoff arrived at the courthouse early Thursday morning, helicopters buzzed overhead and television news trucks lined the street. The day's events marked a coda in the saga of a man whose name has become shorthand for an entire era of greed and deceit on Wall Street.
With the promise of steady, unwavering returns, Bernard L. Madoff Investment Securities enticed thousands of investors including such prominent people as Senator Frank Lautenberg of New Jersey, the Hall of Fame baseball pitcher Sandy Koufax and a charity run by the Nobel Peace Prize laureate Elie Wiesel.
This week, the government offered more details on how Madoff ran the fraud that had financed his lush lifestyle of a beachfront mansion in the exclusive Hamptons area on Long Island, east of New York City; an estate near the French Riviera; and yachts in New York, Florida and the Mediterranean.
Prosecutors said that Madoff concocted an elaborate charade to make it seem like he was running a legitimate investment business when, in reality, "no such business was actually being conducted."
He hired employees with little training or experience and directed them to generate false monthly account statements.
He shuttled millions of dollars between banks in New York and London to make it seem as if he was "conducting securities transactions in Europe on behalf of investors when, in fact, he was not conducting such transactions," prosecutors said.
And they said he repeatedly lied to regulators from the U.S. Securities and Exchange Commission to cover up his scheme.
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MUST-WATCH VIDEO: British Aid Convoy, Viva Palestina, Breaks Siege of Gaza - George Galloway Speaks to the People of Gaza - (12/3/09)
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Click to watch video below: - |
[Baca]
Citigroup Inspired Bear Market Suckers' Rally - There Are Still Lots of Gamblers Out There - Until These Manipulators Are Wiped Out, There Will Be No Recovery - By Matthias Chang (12/3/09)
So long as the filthy rich global gamblers are alive and able to manipulate the stock markets, the currency markets, the oil markets and the derivative markets, there can be no genuine recovery for the global economy.The reason is simple.
There has been such a massive and unprecedented malinvestment and misallocation of capital resources from productive endeavours to the global financial casino in the last twenty-five years, that when the global financial system collapsed in 2007, the real economy starved of essential capital and other resources went into a tailspin in 2008 throughout the Western developed economies. We are now witnessing the pernicious effects spreading throughout the global economy. No one and no economy has been spared!
The gamblers know that unless they can keep suckers coming back to the financial casino on the false promise that not only can they recover their losses, but more importantly, they have better than an even chance to make good money, these financial rapists would in turn be wiped out for good.
Vikram Pandit, Citigroup Chief Executive is a financial fraud par excellence and in testimonies to the US Congress has been lying about the bank’s balance sheet to the extent of short changing the US taxpayers of the value of securities that were pledged to secure the bailout to the tune of US$19 billion.
Financial analysts, including our idiots in Malaysia’s financial dailies and radio talk-show hosts were so taken up by the announcement of the alleged profits in the first two months of 2009 by this crook, that they have commented that the market has bottomed and this good news has sparked the rally and will continue to boost market sentiments.
If there is an example of a drowning man grasping at straws, this is it!
Anyone who believes in this trash is an idiot and I hope that every penny that they still have will be wiped out when this manipulated bear rally fizzles out in the next few days and that they will be forced into bankruptcy. They deserve no pity whatsoever.
Citigroup is bankrupt in law and in fact, notwithstanding the massive bailout by the US Treasury and the Fed. The fact that it has been “nationalised” does not change the financial status of the bank.
I will give a simple analogy.
You have a business which has gone into receivership (“conservatorship” in US jargon) and the receivers and managers are now winding up the affairs of the company. Creditors are all lining up to take whatever remaining of the company’s assets in part settlement of the credit extended (hopefully 5 cents to the dollar). Just because, the receivers and managers sold some assets and were able to obtain a better price than expected, would this good news change the status of the company?
So what is all this baloney that Citigroup is now on the road to recovery and this is an indication of a turn around in the US economy. The once mighty Citigroup had a market capitalisation of over $250 billion, just a year ago and it has now slumped to less that $8 billion, its share price hovering around $1.05.
Common sense tells me (and I am truly amazed why so many refuse to apply common sense) that if in fact Citigroup is on the road to recovery, this unscrupulous banker, Vikram Pandit would call for a global press conference to announce this fantastic news. Champagne would be flowing again at corporate headquarters.
Compare and contrast what Tiger Woods did when he had recovered from his knee operation. He gave a global press conference and went out to compete again in one of the most demanding match-play tournaments. And although he did not win the tournament, there was ample evidence that he had recovered, but it was also obvious that he needed more time and matches to get back to his normal groove!
But no, this Pandit sent out a so-called memo to his staff, which was conveniently leaked to the mass media (and knowing the gullibility of the stock market idiots) so as to lend credence that this confidential information must be true.
Surely the duty is first to inform officially the shareholders and taxpayers who have bailout the bank. But the preferred method of disclosure (and we are suppose to be in the age of transparency and good governance) is by way of a memo to the staff.
The actual memo has not been reproduced in full by the mass media. But surely the quoted words attributed to this financial crook is sufficient even to a first year student in economics and or finance that the so-called profit is bullshit and horseshit!
I quote:
“In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007. The bank had US$19 billion of revenue in January and February before disclosed write-downs.”
If you cannot detect the stupid nonsense from this quote, you have no business to be an economist, a banker, an accountant, an investor and or a regulator!
Firstly, two months revenue does not make a quarter.
Revenue is meaningless by itself if your debts are far, far greater than your revenue.
Revenue or income is only one side of the balance sheet.
The financial idiots who put out this piece of shit should be hounded down, hung from the street lamp-post and then tarred and feathered, the preferred punishment by the Irish Republican Army against traitors and other scumbags during the British colonial occupation of Ireland.
To the citizens of America: if you don’t bring a class action against Vikram Pandit, you bloody deserve to be financially raped and plundered by these crooks!
[Baca]
Barack Obama's Economic Recovery Plan - Interview with Prof. Jack Rasmus - By Shamus Cooke (10/3/09)
Global Research, March 8, 2009The following is an interview with Prof. Jack Rasmus by the Workers Emergency Relief Campaign (WERC). Rasmus is a professor of economics at St. Mary's College and Santa Clara University in Northern California. Below he outlines the details of Obama's economic recovery plan, showing the plan's inadequacies and the resulting implications.
WERC: What is your assessment of Obama's economic recovery plan? Can you describe it for our readers and tell us if you think it will deliver the jobs and benefits that people are anxiously awaiting?
Jack Rasmus: The Obama Plan has five major components, The first is the $787 billion stimulus plan that was adopted recently by the U.S. Congress. The second, third and fourth parts aim to resuscitate the financial markets: Part 2 is the PPIF, or Public-Private Investment Fund; Part 3 is the TALF, or Term Asset-Backed Securities Loan Facility; and Part 4 is the Homeowner Affordability and Stability Plan. The fifth component is Obama's proposed 2009 budget -- which is likely to be modified substantially by the Republicans before it is finally adopted.
As for the stimulus package: As I have stated repeatedly, it's too little too late. First, it's not a jobs bill. By the end of 2009, there could be a total of 20 million people unemployed. We are now at 14 million jobs lost, and the job losses are accelerating. Over the past three months, we lost one million jobs each month, when job losses are calculated correctly. This package is not going to regenerate the jobs that we are talking about -- and jobs are the most important thing, because job loss is what's driving the collapse of consumption and bringing down the economy.
Thirty-eight percent of the stimulus package goes to providing aid; that is, unemployment, food stamps, vets' benefits, medical aid, COBRA -- as well as aid to state and local governments. This is all necessary, but what it shows is that this plan is aimed at softening the collapse, not at creating jobs. This aid will have little effect in terms of job creation. As for the aid to state and local governments, it is nowhere near the amount needed to halt the massive job cuts in state after state.
WERC: This is clear. In California Republican Governor Arnold Schwarzenegger is demanding that public-sector workers across the state take two days off per month with no pay. His plan also calls for tens of thousands of layoffs statewide.
The Progressive States Network (PSN) reported that the Obama stimulus plan would cover less than half of projected state deficits. The authors of the PSN report note, "A new study by the Center on Budget and Policy Priorities details that state deficits are projected to be $350 billion over the next 30 months. But the stimulus recovery plan includes only about $150 billion that can be used to address those shortfalls, meaning that 55% to 60% of projected state deficits will remain."
Rasmus: Indeed. These "shortfalls" will mean millions of destroyed jobs, lives, families, and entire communities.
To continue with the stimulus plan: Another 38% of the package, or $300 billion, is tax cuts: (1) business tax cuts, (2) reversing the alternative minimum tax; and (3) payroll tax cuts. The business tax cuts will not have any effect in stimulating the economy. Some economists in fact are arguing they will have a negative effect that the spending from the tax cuts will be less than the amount of the tax cuts; they call this "negative multipliers."
When you're in a deep downturn like this, businesses sit on their tax cuts, waiting for better days ahead; they use the money to pay off their debts and that sort of thing. Even the payroll taxes will have virtually no effect in terms of consumption and stimulating the economy.
Only 24% of the stimulus plan, or $200 billion, will go to federal spending, with just $27 billion allocated this year to job-creating expenditures. The rest is long-term alternative energy technology and other similar projects, all of which are capital intensive.
The point is this: It's not a jobs bill. Obama says the plan will create 3 million to 4 million jobs. But over what time period? It's over multiple years, with the hope that the biggest impact will come in the second year.
This year the total spending impact of this bill, dollar-wise, is only $180 billion, which is roughly what 2008 stimulus package was last year. It had virtually no effect last year, and the conditions are even worse this year. We will continue to be gushing jobs this year at the continued rate of half a million to 1 million jobs per month.
We're going to be in very bad shape at the end of the year. The number one cause driving foreclosures is job loss. I was just reading a statistic today that 72% of all the sub-prime loans issued between 2005 and 2007 are going to default. In other words, we haven't seen the total impact of the housing price collapse. Housing prices will fall at least another 20%. There is no light at the end of this downturn tunnel.
With 20 million unemployed at the end of the year, with an additional 5 million to 7 million people losing their homes to foreclosure, the stimulus plan fails miserably when it comes to creating jobs -- so bad that I predict they will have to come up with a Stimulus Plan II at some point.
So if there not a program this year to deal with this situation, the odds go up significantly that what I call an epic recession will become a classic global depression in 2010. We are on the cusp of this now. The momentum is moving in that direction.
WERC: Let's look at the other components of Obama's program. You mentioned that the administration is putting most of its hopes into reviving the banking system as a means to jump-start the economy. What about the Public-Private Investment Fund, for example?
In mid-February Treasury Secretary Tim Geithner announced that up to $1 trillion would be provided by the Treasury to "provide financing for private investors to buy 'distressed securities.'" Geithner said the the goal is to clean up the banks' "toxic assets so that the credit crunch that is hobbling the economy can be ended." What is your take on the PPIF?
Rasmus: This is really Part Two of the big banks' rescue plan -- and the $1 trillion figure that Geithner presents is just for starters; the figure is going to increase significantly.
As you say, they plan to use taxpayer money to help the banks and investors buy bad assets that exist in these banks and financial institutions. It's the existence of these bad assets that prevent the banks from making loans to businesses and homeowners. It's what's been clogging up the system.
But the Treasury has refused to deal with these bad assets. If you go back to then-Treasury Secretary Henry Paulson and the Troubled Assets Relief Plan (TARP), you can see that we gave the banks $700 billion in bailout funding. But Paulson didn't buy up the bad assets, which was the whole idea behind the rescue plan. Why is that?
It's because the banks are on strike. The banks don't want to lend, or if they do, it's at ridiculously high rates. They don't want to sell all the bad assets on their books because they are essentially worthless now, and they don't want to sell at their worthless market price.
If they sold them at their market prices, they would have even greater losses than they have now. They don't want to loan when their balance sheets are so negative, because if they loan that reduces their reserves on hand. And this is freezing up the system.
Paulson and TARP could not buy them at above-market prices because Congress was looking over their shoulders and saying, "Hey! What are you doing, subsidizing these banks, giving them more than the market value of these assets?"
So, Paulson looked around, saw that he couldn't do anything, and did nothing in relation to these bad assets.
Today, with the PPIF, we have essentially the same situation, but with a little twist.
What they're trying to do with PPIF is to create a market price to sell these bad assets, thereby subsidizing not only the banks but the investors who would buy them. In other words, this $1 trillion is designed to give money incentives to the banks to make up the difference between what the price would be and what the market value would be. So, they are giving the banks a windfall to encourage them to sell at above-market price.
At the same time, they're giving an incentive to the investors; in other words, they are subsidizing the investors as well, with taxpayer money, to come in and buy. They hope this will create a new market price that will take off on its own and unblock the lending. It's going to cost well over $1 trillion to get that going, and it's really questionable whether investors will want to buy those bad assets at any price.
WERC: All the business media report that investors are not willing to buy these assets, even at higher rates. ...
Rasmus: That's right. And if the $1 trillion doesn't work, the government is prepared to throw more money at them. The investors know this, so they are going to sit and wait, saying that the price is not high enough and that you have to subsidize us even more. With the government already so committed to this effort, they will throw more money at the banks. Geithner and Obama are already saying that this is just a start, and that we may have to throw more money into this bad assets plan some time soon.
WERC: Some economists, and even some top-level financial gurus such as Former Federal Reserve chief Alan Greenspan, are saying that the government should simply take over and nationalize these bad assets. They say the Obama plan is doomed to fail.
Rasmus: The banks would love this. Keep in mind that Obama and Geithner are not talking about confiscating these bad assets. They are talking about is buying them. But they would have to buy at above-market price because the banks won't sell them. The bankers are holding out for even-higher prices. That's the crux of the problem.
And when Greenspan and the others talk about nationalization, we must be clear, that's a misnomer. They don't really mean nationalization. Buying preferred stock or even common stock does not amount to nationalization. It's just partial receivership, or subsidization, at taxpayer expense.
Seizure of private companies on behalf of investors is not nationalization. Their goal is to buy the bad assets and then sell them back to private investors at below-market prices -- all at taxpayers' expense.
WERC: What is the total amount of bad assets, assuming there's agreement on the amount?
Rasmus: Professor Rubini at New York University estimates that there's at least $3.6 trillion in bad assets. Fortune magazine says $4 trillion. Geithner, last June, indicated he thought there was about $6 trillion.
So to buy these bad assets, the taxpayers; would have to fork over $6 trillion.
WERC: The figure is staggering. Clearly, this situation calls out for true nationalization.
Rasmus: Yes, it does. But what is true nationalization? It means totally taking over these banks and financial institutions -- with bondholders and shareholders not just taking a haircut, but taking a scalping. It means getting rid of management. It means consolidating and running these banks on behalf of the interests of the working-class majority in the country. You don't pay dividends. You don't pay stock shares. you take full day-to-day operational control of all strategic decision-making. You run it and turn over the profits for public investment, not to line the pockets of private investors.
Without a doubt, what we need is a fully nationalized banking system.
WERC: Many of the initiators of the Workers Emergency Recovery Campaign are calling for the nationalization of the banks without compensation. They also say that the $700 billion in the Paulson plan -- funds that are simply sitting in the banks waiting to ride out the recession -- should be confiscated by the government and placed at the service of job creation.
Today, the government could nationalize the banks and use that $1 trillion in the PPIF fund -- just to give one example -- to put people back to work. If we assume a living wage of $50,000 per worker for one year, and we multiply this number by the 20 million projected unemployed workers, this gives us exactly $1 trillion. Shouldn't the Obama administration earmark that $1 trillion to provide unionized, living-wage jobs for one year to the 20 million unemployed? Isn't this a better way to jump-start the economy?
Rasmus: That's the point I have been making all along. People are referring to the Great Depression. But what got us out of the Depression? It was not the New Deal.
The New Deal did not really come on the scene till 1935, with some success. It stopped the decline, but it did not generate the recovery, and after two years, Roosevelt and others started dismantling the New Deal. Once they started doing this and trying to balance the budget, in mid-1937, we went right back into the Depression. We did not come out of the Depression till 1942. Why was this? It was because government spending, i.e., public investment, rose from 20 percent to 40 percent of annual Gross Domestic Product (GDP), the total annual spending in the economy.
WERC: How are they planning to finance the PPIF: Would it be through the Treasury?
Rasmus: Yes. They've got about $190 billion left over from that $700 billion TARP fund, and they will put in initially another $810 million, again, to subsidize the investors and the banks with the hope that they will come into the market to start buying and selling the bad assets at above the market price. They want to induce a market and a price, and they hope that once they do this, all the investors will step in and follow suit. But that's a big if. I don't see it coming.
Now the second part of the financial plan is designed to work in conjunction with the PPIF, and that's the TALF, or Term-Backed Securities Loan Facility. This will be run by the Federal Reserve.
The Fed had $200 billion assigned for this last November 2008, but it just held onto it. Now in about a week they are going to issue another $800 billion. So they'll have an addition $1 trillion for TALF.
WERC: Will this mean that the Federal Reserve will issue bonds for the TALF?
Rasmus: Not exactly. The idea is for Fed to lend money to investors, particularly investors in the hedge funds, money-marked mutual funds, and private equity funds -- that is, to the shadow banks that are responsible for so much of the speculation that got us into the mess we're in today -- so that they can buy the bad assets. As you see, they are coming at it from two directions.
But bad assets of what? The plan is to buy up the securitized bonds and loans associated with consumer credit. We are on the verge of another sub-prime-like bust in the consumer credit markets -- meaning auto loans, student loans, credit card loans, and commercial property loans.
The whole idea here is that the Fed will loan money to hedge funds and private equity funds to buy these bad assets that are about to collapse. Estimates are that defaults on credit cards alone are going to rise from their current 2% to 3% today to 8% to 10%.
It's ironic, when you think about it, that the government is going to try to resurrect this thing through the shadow banking system and securitized markets, which collapsed from more than a trillion dollars in credit a few years ago and which have lost close to $4 trillion total. The hedge funds have lost $1 trillion of their total value, and yet we are going to give them money to buy out all these bad assets ... all of this to try to stimulate and increase the lending to industry, to commerce, and the like.
This doesn't make any sense. It just shows that the government has absolutely no confidence that the commercial banks can lead a recovery.
The question is, Is anyone going to re-enter into these securitized markets that have collapsed and buy up these bad assets, even with these government loans? Does anyone want to touch the toxic securitized markets? I don't think so. Even with loans ... unless the government gives them interest-free loans -- and if that happens, the government should just enter and take over these consumer credit markets and provide credit directly through the Fed the auto, student, commercial property and other markets. Let the Fed provide the funds directly to, for instance, credit unions as the local loaning institutions. Why have middle-men come in and skim off the profits?
We must also keep in mind that the $2 trillion they are throwing at the banks with this plan is just the beginning. Everyone is lining up at the trough for a taxpayer payout.
WERC: Let's talk now about Homeowner Affordability and Stability Plan, which is both the third financial package and the fourth component of the Obama recovery plan.
Rasmus: There are two parts to it. The first is $200 billion to go to Fannie Mae and Freddie Mac, because they already ran through the $200 billion we gave them back in August 2008. They have bought up the bad housing loans, or mortgage loans -- and as their values continue to fall as housing prices fall, the values of the loans they bought up have collapsed. So they have run through their $200 billion, and they need $200 billion more.
It's not really going to improve anything when you just keep buying up these bad loans. That's the first part.
Regarding the second part, we have to keep in mind that Fannie Mae, Freddie Mac, and AIG, which is now supposedly "government owned," only constitute about 20% to 30% of the housing market. That leaves 70% to 80% of the bad housing mortgage market, which the government had not been addressing. It's this other portion that the Homeowner Affordability and Stability Plan now addresses -- but with only $75 billion, a paltry sum!
And even this $75 billion is targeting subsidies to mortgage lenders; in other words, it's trickle-down once again -- that is, give money to the mortgage lenders to have the government and taxpayers pay to lower the interest rates on new home loans -- up to $75 billion, which is not all the many home loans.
And what's even more outrageous, these loans are to go to new buyers -- not to those 5 million to 7 million homeowners who face foreclosure, delinquency, or default. The government is not attempting to do anything about people who are losing their homes. What they plan to do is subsidize the markets, so that the lenders can create new, affordable buyers to buy up some of the foreclosed homes.
This is a sop, a freebie, thrown to the mortgage lenders who are asked to come in buy some of the foreclosures and some of the huge stock of homes, to help them sell all the new homes. So really, it's a plan to benefit the mortgage lenders and construction firms holding all these new, unsold homes.
WERC: Now, let's get to the last item: the 2009 budget. This is the part that many are touting as New Deal and even "socialist," if we are to believe Rush Limbaugh.
Rasmus: This is a $3.6 trillion budget with a lot of spending. There is going to be a firestorm over it. Watch the Republicans, the corporations and the banking interests come out of the woodwork. The gloves are going to come off. This is where the big split in the capitalist class is going to reveal itself, because there are some proposals in this plan that would shift income. It's a shift that is insufficient, -- too little too late, once again -- but it is certainly moving in a better direction.
This is what we know so far about the budget:
It will increase taxes on the wealthiest 2% of households -- but it will only increase taxes from 35% to 39.5%. This will effect people making more than $250,000 per year. This amounts to a rollback to the Clinton period. But that tax increase on the top-margin rate does not take effect until 2011, when the Bush tax cuts expire. This is absurd. It should take effect in 2009. They shouldn't be putting it off, when funding is needed so desperately to stop teacher layoffs, prevent home foreclosures, or to stop autoworker layoffs.
What's more, they will not come close to obtaining the funding they need for a real economic recovery by only rolling back the capital gains' and capital incomes' tax cuts only to the 1990s levels. They have to roll them back to the pre-Reagan, pre-1980s, rates. They have to raise these rates back to 50%, minimum.
So there is some increase in the tax rate, but it is delayed and it is far less than what is needed. Again, 2009 is a critical juncture year. If the declining situation is not reversed, the odds are increasing that we will be moving in 2010 to a global recession. There really is no way out without a real re-distribution of income, reversing the redistribution of income from workers to investors and corporations that has been going on since 1980.
Second, on healthcare. The budget calls for $634 billion in healthcare funding, but this is only half of what is needed for single-payer. Also, if this funding goes to the private insurance companies, as appears to be the case, there will be no real solution to the healthcare crisis in our country. Only single-payer offers a solution.
Third, the budget calls for deprivatizing student loans. This is one point that is commendable in the plan.
The details of the plan are only emerging. We will have to monitor it closely. But one thing is certain: What has been proposed by the Obama administration is likely to be modified substantially by the Republicans and centrist Democrats. There is going to be a big fight, with major changes expected.
WERC: The government is talking about incurring a $1.75 trillion deficit with this budget. What does this mean? How will the deficit be financed?
Rasmus: First, it should be noted that the real deficit by 2010 will be $2.25 trillion.
One way they are talking about financing this deficit is with carbon credits. These are carbon pollution permits. The government is expecting a $526 billion revenue from this source, though it's questionable whether they will be able to raise this amount. Governments and corporations in Europe want to give corporations credits for free. They'll try that here too.
They will issue more Treasury bonds, and they will simply have go to the printing presses and print more money. Clearly, they are in a bind -- especially if the economy continues to tank.
WERC: You have made many predictions that have actually come true -- unlike just about every mainstream economist and forecaster. What are your predictions today?
Rasmus: We're on the knife's edge of a transition between this epic recession and a depression. The bank bailout will require trillions more dollars. And even then, the impact is likely to be marginal.
The depression could be triggered by one or more of the following factors: sovereign debt crises in Eastern Europe, deepening job losses in the United States, the collapse of the treasuries' markets; the collapse of the global bond markets. These are among the many possible scenarios.
WERC: What is to be done?
Rasmus: I have outlined some policy recommendations here. Readers who would like to delve into this question in greater depth can get my full set of proposals on my website, which is www.kyklosproductions.com. You can also see my latest article in the March 2009 of "Z" magazine, where I describe my full set of proposals for recovery as an alternative to the Obama program.
[Baca]
Everyone Is Fleeing The Falling Knives - By Jonathan Davis (11/3/09)
8 March 2009 FTThe metaphor that originally seemed to capture the global financial crisis best was Jeremy Grantham’s “slow motion train crash”, in which a world dominated by unsound monetary policies and reckless bankers headed inevitably towards its eventual demise, unable or unwilling to abandon the course that had led them to this point in the first place. (Some, like the UK Prime Minister Gordon Brown, appear to be still in denial that they were ever driving the train).
However, the market action of the first two months of 2009 brings to mind another metaphor, that of the “falling knife” that only the foolhardy will be trying to catch. The speed with which the markets have taken out the lows of November 2008 and headed further south in the past two weeks has been as breathtaking as it has been brutal. For the Dow Jones index to lose 20 per cent of its value in two months is some going.
Clearly, when such powerful market momentum develops, there are dangers in trying to stand in the way. There is no obvious reason why the markets cannot now go on to test further new lows.
Valuations, though beginning to look attractive on a medium term view, are not yet anywhere near the level – dividend yields as high as 10 per cent, price/earnings ratios as low as six – which typically characterise the bottom of history’s worst bear markets.
In a world where the average institutional holding period for equities has fallen to an absurdly low nine months, and relative performance and career risk drive the behaviour of many investment institutions, such downward dynamics could become as lethally self-feeding as portfolio insurance was in 1987. Investors’ emotions are already being tested further by the exceptionally high levels of daily volatility, and if sentiment continues to buckle, the Dow at 5000 or even lower is by no means an impossibility.
By its nature, however, this is the kind of market in which value gets trampled by momentum, and by extension therefore a period in which fantastic returns will be made and lost by those with the liquidity and nerve to identify the worst cases of mispricing.
It is also the mechanism by which future generations who have been effectively excluded from the housing and equity markets by overvaluation will be priced back into their normal long-term real returns.
As usual, Warren Buffett almost certainly has it right when he says the markets have moved from underpricing to overpricing risk. In his latest annual report he confesses to Berkshire Hathaway’s worst annual performance since he first took control more than 44 years ago (this is based, it has to be said, on his chosen performance measure of book value per share, which would not be everyone’s choice, as its effect is to smooth out some of the volatility produced by year-on-year marking to market).
“In 75 per cent of those [44] years,” he writes, “the S&P stocks recorded a gain. I would guess that a roughly similar percentage of years will be positive in the next 44. But neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. [In our usual opinionated view, we don’t think anyone else can either.] We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.”
Those who criticise Mr Buffett for his bad timing, as many invariably do in a falling market, take comfort from the fact that the market has fallen since he first started making his comments about equities, inferring (to their own satisfaction, at least) that this makes them smarter than him and that he must therefore have been wrong. All it actually shows however is that their investment horizons are much shorter and that their investment philosophies are radically different.
If he were of the bragging kind, Mr Buffett could easily respond by pointing to his 20 per cent a year compound return over 40 years, his place at the top of the Fortune list of wealthiest individuals, his high-yielding investments in Goldman Sachs, Wrigley et al, and ask: “where’s your equivalent”?
In fact, one of the reasons Mr Buffett has always stood out from the investment herd is precisely because he is often happy to own up to his share of real howlers. What could he have been thinking, for example, when buying Irish bank shares in 2008 and Conoco Phillips when the oil price was above $100 a barrel? It is a useful reminder that even great stockpickers can behave like idiots at times.
[Baca]
Hedge Fund Hotel Yields Up Secrets - By Andrew Clark (11/3/09)
7 March 2009 Guardian UKIt is Mayfair's house of financial horrors. Owned by the Abu Dhabi royal family, One Curzon Street is among London's flashiest office blocks. But behind the elegant curves, polished white stone, sweeping windows and panoramic atrium lie billions of dollars in losses that have threatened the global financial system.
Popular with financial enterprises, the building is known as a hedge fund hotel. Its tenants include GLG Partners, one of the City's star funds, which has fallen on hard times, and the struggling Swiss bank UBS, but on the fifth floor can be found the most notorious of the property's troubled tenants - a formerly obscure financial products division of the sprawling American International Group (AIG).
It was in this London office of AIG that big-brained financial whiz-kids created a casino offshoot of the once-mighty insurer that spectacularly wrecked the company, racking up billions of dollars in losses on arcane derivatives, swaps and contracts. Fatally undermined by the unit's wheeler-dealing culture, AIG crashed to the US's biggest corporate loss of $61.7bn (£43bn) for the final quarter of 2008 and is limping along the brink of oblivion, saved from bankruptcy by an eye-watering $150bn of emergency aid from US taxpayers.
The Federal Reserve chairman, Ben Bernanke, wasted few words in condemning the division's antics, telling Congress this week: "This was a hedge fund, basically, that was attached to a large and stable insurance company."
The Serious Fraud Office is examining exactly what type of business took place on the fifth floor of One Curzon Street, where a team of some 225 staff were managed by a policeman's son from New York, Joseph Cassano, who boasted a degree in politics from Brooklyn College and lived in a company flat behind Harrods. He was scorned by one California congressman, Jackie Speier, as "the golden boy of the casino in London".
The division dates back to 1987, when a small group of former traders from the junk bond firm Drexel Burnham Lambert persuaded AIG's then chairman, Hank Greenberg, that there was a highly lucrative opportunity in offering insurance that would protect banks against default on debt or against fluctuations in the value of derivatives.
AIG had a sought-after selling point: a triple-A credit rating. For a fee, it would stand behind lesser institutions' credit obligations. By lending its gilt-edged rating, it could give clients' investments a higher value and make them easier to trade. Headquartered in Connecticut but largely run from London, the division transacted billions in credit default swaps (CDS) - instruments trading financial risk - which have been dubbed "acts of Satan" by a leading US credit analyst, Christopher Whalen.
"These people were deluded," says Whalen, who views the CDS as a phenomenon dreamt up by those whose obsession with the free market has caused them to lose their grip on reality. "In a world where people believe in market efficiency, in total market completion, things like CDSs make sense. It goes back to Milton Friedman."
Whalen views London's light-touch regulatory regime as enabling such ill-conceived shenanigans to run out of control: "A lot of this kind of structured product came out of London."
CDSs are priced on historical models. Lulled by rising property prices and relatively predictable economic cycles, the AIG bankers were convinced they had hit on a gold mine. Tom Savage, the financial products division's former president, told the Washington Post recently: "The models suggested that the risk was so remote that the fees were almost free money."
They were wrong. A collapse in the US property market, which began in 2007, left AIG's clients with portfolios of toxic mortgage-related securities, and calls on the insurer's guarantees against default rocketed. AIG lost its triple-A credit rating, triggering contractual requirements forcing it to provide billions of dollars in extra collateral it simply did not have. The unit exploded in a mass of red ink, recrimination and buck-passing.
So how did they misjudge the market so badly? Insiders say AIG has always pushed its people to the limit, some seeing Greenberg's legacy as part of the problem. Ron Shelp, a former AIG executive whose book, Fallen Giant, chronicles the insurer's rise and fall, describes AIG as an intense environment where staff were expected to devote much of their lives to business.
"Success bred phenomenal rewards," he says. "In general, it was a freewheeling environment - they'd look for different regulatory regimes and push it right to the edge, looking for something different."
Favoured employees were rewarded with trips to a Connecticut rural bolt hole, Morefar, and with shares held in Star International Co, an offshore company, which were often released only to those who stayed to 65. The head of every profit centre was expected to produce a 15% annual rise in profits and net worth or their position would be under threat.
Just how much AIG's senior executives knew, or understood, about the London office's activities is a moot point. "It's a damned good question," says Mark Keenan, an insurance analyst at Anderson Kill & Olick in New York. "Whatever risk controls were in place, if there even were any, the fact is that someone was not watching what was going on."
If AIG collapses, the US government fears that scores of banks on both sides of the Atlantic could be pushed over the brink. But propping up the company is proving enormously costly. Donn Vickrey, founder of the US research firm Gradient Analytics, reckons the cost to US taxpayers will reach $250bn.
"They thought they were smarter than everybody else - that they knew how to price risk and nobody else did," says Vickrey. "That's hubris. Instinct should have kicked in - the simple logic that there's no such thing as a free lunch."
AIG's new chief executive, Ed Liddy, faces a race against time to raise money by selling unaffected operations before they are fatally infected by association with Cassano's casino in London. Meanwhile, the blame game is running at full tilt. Greenberg, who was pushed out in a 2005 accounting scandal, is suing his successors for wiping out $2bn of value in his personal shareholding. His targets include the Essex-born Martin Sullivan, who began his career as an insurance clerk in London and ended up running AIG between 2005 and 2008.
Greenberg maintains that until his own departure, risk controls were robust. "It wasn't a freewheeling culture," he told CNBC television. "It was competitive, aggressive, but very, very controlled."
Sceptics point out that Greenberg himself left as a result of an accounting controversy that led to AIG restating five years' financial results - and that his regime established the financial products division and recruited its key staff.
Within AIG, the mood is said to be one of gloom and shell shock. Many have lost decades of wealth built up in AIG shares.
"The old-timers are really distressed," says Shelp, "not just about the money they've lost. One of them said to me the other day, 'I bought into the AIG dream.'"
Thanks to an outbreak of financial "innovation" that turned fatally sour, the dream has turned into a nightmare.
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Top U.S., European Banks Got $50 Billion in AIG Aid - By Serena Ng and Carrick Mollenkamp (11/3/09)
7 March 2009 WSJThe beneficiaries of the government's bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.
Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.
Covered Counterparties
Some banks that were paid by AIG after it was bailed out by the government:
Goldman Sachs
Deutsche Bank
Merrill Lynch
Société Générale
Calyon
Barclays
Rabobank
Danske
HSBC
Royal Bank of Scotland
Banco Santander
Morgan Stanley
Wachovia
Bank of America
Lloyds Banking Group
Source: WSJ research
Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Société Générale SA.
More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document.
The names of all of AIG's derivative counterparties and the money they have received from taxpayers still isn't known, but The Wall Street Journal has identified some of them and is publishing others here for the first time.
Lawmakers Want Names
The AIG bailout has become a political hot potato as the risk of losses to U.S. taxpayers rises. This past week, legislators demanded that the Federal Reserve disclose names of financial firms that have received money from AIG, which Fed officials have described as too systemically important in the financial system to be allowed to fail.
In a Senate Banking Committee hearing in Washington on Thursday, Fed Vice Chairman Donald Kohn declined to identify AIG's trading partners. He said doing so would make people wary of doing business with AIG.
But Mr. Kohn told lawmakers he would take their requests to his colleagues. The Fed, through a new committee led by Mr. Kohn to discuss transparency concerns, is now weighing whether to disclose more details about the AIG transactions.
The Fed rescued AIG in September with an $85 billion credit line when investment losses and collateral demands from banks threatened to send the firm into bankruptcy court. A bankruptcy filing would have caused losses and problems for financial institutions and policyholders globally that were relying on AIG to insure them against losses.
Since September, the government has had to extend more aid to AIG as its woes have deepened; the rescue package now has swelled to more than $173 billion.
The government's rescue of AIG helped prevent its counterparties from incurring immediate losses on mortgage-backed securities and other assets they had insured through AIG. The bailout provided AIG with cash to pay the banks collateral on the money-losing trades; it also bought out underlying mortgage-linked securities, many of which are currently worth less than half their original value.
Banks and other financial companies were trading partners of AIG's financial-products unit, which operated more like a Wall Street trading firm than a conservative insurer. This AIG unit sold credit-default swaps, which acted like insurance on complex securities backed by mortgages. When the securities plunged in value last year, AIG was forced to post billions of dollars in collateral to counterparties to back up its promises to insure them against losses.
More Problems
Now, other problems are popping up for AIG. The insurer generated a sizable business helping European banks lower the amount of regulatory capital required to cushion against losses on pools of assets such as mortgages and corporate debt. It did this by writing swaps that effectively insured those assets.
Values of some of those assets are declining, too, forcing AIG to also post collateral against those positions. And if the portfolios incur losses, AIG will have to compensate the banks.
AIG had seen this business as a relatively safe bet for the company and its investors. The structures were designed to allow European banks to shuck aside high capital costs. A change in capital rules has meant that the AIG protection no longer meets regulatory requirements.
The concern has been that if AIG defaulted, banks that made use of the insurer's business to reduce their regulatory capital, most of which were headquartered in Europe, would have been forced to bring $300 billion of assets back onto their balance sheets, according to a Merrill report.
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Too Big To Fail? 5 Biggest Banks Are "Dead Men Walking" - By Greg Gordon and Kevin G. Hall (11/3/09)
March 9, 2009 McClatchy NewspapersWASHINGTON — America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.
Citibank, Bank of America , HSBC Bank USA , Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31 . Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.
The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.
The banks' potentially huge losses, which could be contained if the economy quickly recovers, also shed new light on the hurdles that President Barack Obama's economic team must overcome to save institutions it deems too big to fail.
While the potential loss totals include risks reported by Wachovia Bank , which Wells Fargo agreed to acquire in October, they don't reflect another Pandora's Box: the impact of Bank of America's Jan. 1 acquisition of tottering investment bank Merrill Lynch , a major derivatives dealer.
Federal regulators portray the potential loss figures as worst-case. However, the risks of these off-balance sheet investments, once thought minimal, have risen sharply as the U.S. has fallen into the steepest economic downturn since World War II, and the big banks' share prices have plummeted to unimaginable lows.
With 12.5 million Americans unemployed and consumer spending in a freefall, fears are rising that a spate of corporate bankruptcies could deliver a new, crippling blow to major banks. Because of the trading in derivatives, corporate bankruptcies could cause a chain reaction that deprives the banks of hundreds of billions of dollars in insurance they bought on risky debt or forces them to shell out huge sums to cover debt they guaranteed.
The biggest concerns are the banks' holdings of contracts known as credit-default swaps, which can provide insurance against defaults on loans such as subprime mortgages or guarantee actual payments for borrowers who walk away from their debts.
The banks' credit-default swap holdings, with face values in the trillions of dollars, are "a ticking time bomb, and how bad it gets is going to depend on how bad the economy gets," said Christopher Whalen , a managing director of Institutional Risk Analytics, a company that grades banks on their degree of loss risk from complex investments.
J.P. Morgan is credited with launching the credit-default market and is one of the most sophisticated players. It remains highly profitable, even after acquiring the remains of failed investment banker dealer Bear Stearns , and says it has limited its exposure. The New York -based bank, however, also has received $25 billion in federal bailout money.
Gary Kopff , president of Everest Management and an expert witness in shareholder suits against banks, has scrutinized the big banks' financial reports. He noted that Citibank now lists 60 percent of its $301 billion in potential losses from its wheeling and dealing in derivatives in the highest-risk category, up from 40 percent in early 2007. Citibank is a unit of New York -based Citigroup . In Monday trading on the New York Stock Exchange , Citigroup shares closed at $1.05 .
Berkshire Hathaway Chairman Warren Buffett , a revered financial guru and America's second wealthiest person after Microsoft Chairman Bill Gates , ominously warned that derivatives "are dangerous" in a February letter to his company's shareholders. In it, he confessed that he cost his company hundreds of millions of dollars when he bought a re-insurance company burdened with bad derivatives bets.
These instruments, he wrote, "have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks . . . When I read the pages of 'disclosure' in (annual reports) of companies that are entangled with these instruments, all I end up knowing is that I don't know what is going on in their portfolios. And then I reach for some aspirin."
Most of the banks declined to comment, but Bank of America spokeswoman Eloise Hale said: "We do not believe our derivative exposure is a threat to the bank's solvency."
While Bank of America advised shareholders that its risks from these instruments are no more $13.5 billion , Wachovia last year similarly said it could overcome major risks. In reporting a $707 million first-quarter loss, Wachovia acknowledged that it faced heavy subprime mortgage risks, but said it was "well positioned" with "strong capital and liquidity." Within months, losses mushroomed and Wachovia submitted to a takeover by Wells Fargo , which soon got $25 billion in federal bailout money.
Trading in credit-default contracts has sparked investor fears because they are bought and sold in a murky, private market that is largely out of the reach of federal regulators. No one, except those holding the instruments, knows who owes what to whom. Not even banks and insurers can accurately calculate their risks.
"I don't trust any numbers on them," said David Wyss , the chief economist for the New York credit-rating agency Standard & Poor's.
The risks of these below-the-radar insurance policies became abundantly clear last September with the collapse of investment banker Lehman Brothers and global insurer American International Group , both major swap dealers. Their insolvencies threatened to zero out the value of billions of dollars in contracts held by banks and others.
Until then, "we assumed everyone makes good on the contracts," said Vincent Reinhart , a former top economist for the Federal Reserve Board.
Lehman's and AIG's failures put in doubt their guarantees on hundred of billions of dollars in contracts and unleashed a global pullback from risk, leading to the current credit crunch.
The government has since committed $182 billion to rescue AIG and, indirectly, investors on the other end of the firm's swap contracts. AIG posted a fourth quarter 2008 loss last week of more than $61 billion , the worst quarterly performance in U.S. corporate history.
The five major banks, which account for more than 95 percent of U.S. banks' trading in this array of complex derivatives, declined to say how much of the AIG bailout money flowed to them to make good on these contracts.
Banking industry officials stress that most of the exotic trades are less risky — such as interest-rate swaps, in which a bank might have tried to limit potential losses by trading the variable rate interest of one loan for the fixed-rate interest of another.
In their annual reports to shareholders, the banks say that parties insuring credit-default swaps or other derivatives are required to post substantial cash collateral.
However, even after subtracting collateralized risks, the banks' collective exposure is "a big, big number" and a matter for concern, said a senior official in a banking regulatory agency, speaking on condition of anonymity because agency policy restricts public comments.
In their reports, the banks said that their net current risks and potential future losses from derivatives surpass $1.2 trillion . The potential near-term losses of $587 billion easily exceed the banks' combined $497 billion in so-called "risk-based capital," the assets they hold in reserve for disaster scenarios.
Four of the banks' reserves already have been augmented by taxpayer bailout money, topped by Citibank — $50 billion — and Bank of America — $45 billion , plus a $100 billion loan guarantee.
The banks' quarterly financial reports show that as of Dec. 31 :
— J.P. Morgan had potential current derivatives losses of $241.2 billion , outstripping its $144 billion in reserves, and future exposure of $299 billion .
— Citibank had potential current losses of $140.3 billion , exceeding its $108 billion in reserves, and future losses of $161.2 billion .
— Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.
— HSBC Bank USA had current potential losses of $62 billion , more than triple its reserves, and potential total exposure of $95 billion .
— San Francisco -based Wells Fargo , which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion , below the banks' combined reserves of $104 billion , but total future risks of about $109 billion .
Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking."
The banks' credit-default portfolios have gotten little scrutiny because they're off-the-books entries that are largely unregulated. However, government officials said in late February that federal examiners would review the top 19 banks' swap exposures in the coming weeks as part of "stress tests" to evaluate the institutions' ability to withstand further deterioration in the economy.
Representatives for Citibank, J.P. Morgan and Wells Fargo declined to comment.
Hale, the Bank of America spokeswoman, said that the bank uses swaps as insurance against its loan portfolio — they "gain value when the loans they are hedging lose value."
She said that Bank of America requires thousands of parties that are guarantors on these insurance-like contracts to post "the most secure collateral — cash and U.S. Treasuries, minimizing risk roughly 35 percent." The collateral is adjusted daily.
Bank of America's report of an $80.4 billion exposure doesn't count the collateral and "also assumes the default of each of the thousands of counterparty customers, which isn't likely," Hale said. Counterparties are the investors on the other side of the deal, often other banks or investment banks.
In response to questions from McClatchy , HSBC spokesman Neil Brazil said that the bank closely manages its derivatives contracts "to ensure that credit risks are assessed accurately, approved properly (and) monitored regularly."
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The U.S. Financial System Is Effectively Insolvent - There Is A Grave Risk of A Global L-shaped Depression - By Nouriel Roubini (9/3/09)
March 5,2009 ForbesFor those who argue that the rate of growth of economic activity is turning positive--that economies are contracting but at a slower rate than in the fourth quarter of 2008--the latest data don't confirm this relative optimism. In 2008's fourth quarter, gross domestic product fell by about 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the U.S.
There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession. Here's why:
First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the U.S. and China. Some signals that the second derivative was turning positive for the U.S. and China turned out to be fake starts. For the U.S., the Empire State and Philly Fed indexes of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels, suggesting accelerating job losses; and January's sales increase is a fluke--more of a rebound from a very depressed December, after aggressive post-holiday sales, than a sustainable recovery.
For China, the growth of credit is only driven by firms borrowing cheap to invest in higher-returning deposits, not to invest, and steel prices in China have resumed their sharp fall. The more scary data are those for trade flows in Asia, with exports falling by about 40% to 50% in Japan, Taiwan and Korea.
Even correcting for the effect of the Chinese New Year, exports and imports are sharply down in China, with imports falling (-40%) more than exports. This is a scary signal, as Chinese imports are mostly raw materials and intermediate inputs. So while Chinese exports have fallen so far less than in the rest of Asia, they may fall much more sharply in the months ahead, as signaled by the free fall in imports.
With economic activity contracting in 2009's first quarter at the same rate as in 2008's fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe.
Fiscal and monetary stimulus is becoming more aggressive in the U.S. and China, and less so in the euro zone and Japan, where policymakers are frozen and behind the curve. But such stimulus is unlikely to lead to a sustained economic recovery. Monetary easing--even unorthodox--is like pushing on a string when (1) the problems of the economy are of insolvency/credit rather than just illiquidity; (2) there is a global glut of capacity (housing, autos and consumer durables and massive excess capacity, because of years of overinvestment by China, Asia and other emerging markets), while strapped firms and households don't react to lower interest rates, as it takes years to work out this glut; (3) deflation keeps real policy rates high and rising while nominal policy rates are close to zero; and (4) high yield spreads are still 2,000 basis points relative to safe Treasuries in spite of zero policy rates.
Fiscal policy in the U.S. and China also has its limits. Of the $800 billion of the U.S. fiscal stimulus, only $200 billion will be spent in 2009, with most of it being backloaded to 2010 and later. And of this $200 billion, half is tax cuts that will be mostly saved rather than spent, as households are worried about jobs and paying their credit card and mortgage bills. (Of last year's $100 billion tax cut, only 30% was spent and the rest saved.)
Thus, given the collapse of five out of six components of aggregate demand (consumption, residential investment, capital expenditure in the corporate sector, business inventories and exports), the stimulus from government spending will be puny this year.
Chinese fiscal stimulus will also provide much less bang for the headline buck ($480 billion). For one thing, you have an economy radically dependent on trade: a trade surplus of 12% of GDP, exports above 40% of GDP, and most investment (that is almost 50% of GDP) going to the production of more capacity/machinery to produce more exportable goods. The rest of investment is in residential construction (now falling sharply following the bursting of the Chinese housing bubble) and infrastructure investment (the only component of investment that is rising).
With massive excess capacity in the industrial/manufacturing sector and thousands of firms shutting down, why would private and state-owned firms invest more, even if interest rates are lower and credit is cheaper? Forcing state-owned banks and firms to, respectively, lend and spend/invest more will only increase the size of nonperforming loans and the amount of excess capacity. And with most economic activity and fiscal stimulus being capital- rather than labor-intensive, the drag on job creation will continue.
So without a recovery in the U.S. and global economy, there cannot be a sustainable recovery of Chinese growth. And with the U.S, recovery requiring lower consumption, higher private savings and lower trade deficits, a U.S. recovery requires China's and other surplus countries' (Japan, Germany, etc.) growth to depend more on domestic demand and less on net exports. But domestic-demand growth is anemic in surplus countries for cyclical and structural reasons. So a recovery of the global economy cannot occur without a rapid and orderly adjustment of global current account imbalances.
Meanwhile, the adjustment of U.S. consumption and savings is continuing. The January personal spending numbers were up for one month (a temporary fluke driven by transient factors), and personal savings were up to 5%. But that increase in savings is only illusory. There is a difference between the national income account (NIA) definition of household savings (disposable income minus consumption spending) and the economic definitions of savings as the change in wealth/net worth: savings as the change in wealth is equal to the NIA definition of savings plus capital gains/losses on the value of existing wealth (financial assets and real assets such as housing wealth).
In the years when stock markets and home values were going up, the apologists for the sharp rise in consumption and measured fall in savings were arguing that the measured savings were distorted downward by failing to account for the change in net worth due to the rise in home prices and the stock markets.
But now with stock prices down over 50% from peak and home prices down 25% from peak (and still to fall another 20%), the destruction of household net worth has become dramatic. Thus, correcting for the fall in net worth, personal savings is not 5%, as the official NIA definition suggests, but rather sharply negative.
In other terms, given the massive destruction of household wealth/net worth since 2006-07, the NIA measure of savings will have to increase much more sharply than has currently occurred to restore households' severely damaged balance sheets. Thus, the contraction of real consumption will have to continue for years to come before the adjustment is completed.
In the meanwhile the Dow Jones industrial average is down today below 7,000, and U.S. equity indexes are 20% down from the beginning of the year. I argued in early January that the 25% stock market rally from late November to the year's end was another bear market suckers' rally that would fizzle out completely once an onslaught of worse than expected macro and earnings news, and worse than expected financial shocks, occurs. And the same factors will put further downward pressures on U.S. and global equities for the rest of the year, as the recession will continue into 2010, if not longer (a rising risk of an L-shaped near-depression).
Of course, you cannot rule out another bear market suckers' rally in 2009, most likely in the second or third quarters. The drivers of this rally will be the improvement in second derivatives of economic growth and activity in the U.S. and China that the policy stimulus will provide on a temporary basis. But after the effects of a tax cut fizzle out in late summer, and after the shovel-ready infrastructure projects are done, the policy stimulus will slacken by the fourth quarter, as most infrastructure projects take years to be started, let alone finished.
Similarly in China, the fiscal stimulus will provide a fake boost to non-tradable productive activities while the traded sector and manufacturing continue to contract. But given the severity of macro, household, financial-firm and corporate imbalances in the U.S. and around the world, this second- or third-quarter suckers' market rally will fizzle out later in the year, like the previous five ones in the last 12 months.
In the meantime, the massacre in financial markets and among financial firms is continuing. The debate on "bank nationalization" is borderline surreal, with the U.S. government having already committed--between guarantees, investment, recapitalization and liquidity provision--about $9 trillion of government financial resources to the financial system (and having already spent $2 trillion of this staggering $9 trillion figure).
Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.
But even in this case, the distinction is only between partial nationalization and full nationalization: With 36% (and soon to be larger) ownership of Citi (nyse: C - news - people ), the U.S. government is already the largest shareholder there. So what is the non-sense about not nationalizing banks? Citi is already effectively partially nationalized; the only issue is whether it should be fully nationalized.
Ditto for AIG (nyse: AIG - news - people ), which lost $62 billion in the fourth quarter and $99 billion in all of 2008 and is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.
Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.
News and banks analysts' reports suggested that Goldman Sachs (nyse: GS - news - people ) got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)
But some things are known: Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.
So for the Treasury to hide behind the "systemic risk" excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.
And even with the $2 trillion of government support, most of these financial institutions are insolvent, as delinquency and charge-off rates are now rising at a rate--given the macro outlook--that means expected credit losses for U.S. financial firms will peak at $3.6 trillion. So, in simple words, the U.S. financial system is effectively insolvent.
Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global
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ECB’s Stark Says Rate Cuts Won’t End Crisis, May Backfire - By Simon Kennedy and Stephanie Bodoni
7 March 2009, BloombergEuropean Central Bank Executive Board member Juergen Stark said cutting interest rates won’t remedy the financial crisis and pushing them too low may backfire.
“The financial crisis can’t be solved with rate cuts,” Stark said in an interview to be published in Luxembourg’s Tageblatt newspaper on March 9. “Too low a rate level can even be counter-productive.”
The Frankfurt-based ECB this week lowered its key rate by a half point to a record low of 1.5 percent and President Jean- Claude Trichet indicated it may act again to combat the worst recession since World War II. At the same time, some central bankers are signaling unease with the prospect of rates falling much further for fear they may provoke future inflation and won’t do much to reverse the current economic and financial turmoil.
“The lower rates are, the less incentive banks have to clean up their balance sheets and carefully monitor their credit risks,” Stark said. Erkki Liikanen, who heads the Bank of Finland, told broadcaster YLE today that while the ECB has room to cut rates more “the impact is weakened” the closer they drop toward zero.
Such comments echo those made yesterday by ECB colleague Lorenzo Bini Smaghi, who cautioned against monetary policy makers “overshooting and cutting interest rates to too-low levels.”
Stark said the financial turbulence will be solved by a restructuring and recapitalizing of the banking sector. While he said there are no signs that inflation will accelerate in the medium-term, he urged governments not to fan it by running excessively easy fiscal policies for too long.
Money Markets
Stark said there are signs of improvement in money markets, noting that banks are borrowing less money from the ECB in its refinancing operations and that fewer institutions are participating in them.
The economy of the 16 euro nations is shrinking faster than the ECB expected just three months ago as the global slowdown curbs export demand and companies lay off workers. The bank this week cut its economic growth and inflation forecasts for this year and next.
The economy will contract about 2.7 percent this year and stagnate in 2010, according to the new forecasts. Inflation will average about 0.4 percent in 2009 and 1 percent next year, the projections show.
In another speech today, Bini Smaghi said banks need to increase their capital ratios. “The crisis keeps weighing on the banking system, increasing their bad loans and diminishing the confidence in the system,” he said at a conference in Cortina D’Ampezzo, Italy. “Banks need to increase their capital ratios to restore confidence in the financial system.”
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Bond King Prepares To Deal With New World Order - By Sophia Grene (11/3/09)
8 March 2009 FT“I would like to come back as the bond market. You can intimidate everybody.” This was allegedly the ambition of a political adviser to Bill Clinton, overawed by the power of the bond market to influence government.
The individual who has come closest to fulfilling this dream is Mohamed El-Erian, chief executive and co-chief investment officer of Pimco, the bond investment manager.
Despite being the man ultimately in charge of $747bn (£529bn, €596bn) worth of assets, mostly bonds, Mr El-Erian is dismissive of claims Pimco is worryingly powerful in the bond market.
“We don’t think in those terms. We live in a world of constructive paranoia,” he says, adding this is focused on continuing to add value for clients. “We have over 8m clients in the US and millions more around the world. We manage money for teachers, policemen, firefighters, across a whole range. If people entrust you with their assets, you have to continuously work at what the world will look like.”
That view of the world is not sunny at the moment. “2009 will be as bad as 2008,” predicts Mr El-Erian. This crisis has now morphed into “something much more sinister” than a market downturn. Pimco’s house view is that the world has changed fundamentally, and the firm is trying to position itself for the “new normal”, without knowing precisely what that will be.
“There are three things that are unambiguous about the new world,” says Mr El-Erian. First he predicts a shift in the balance of power between private and public sectors as governments step in, first to bail out collapsing markets and industries, then to regulate them in the future. “This is very consequential,” he says, because it will affect “price formation, risks and capital structure”.
Then there will be “massive consolidation in the financial industry, which is going to play out in every segment of the industry”. Finally, underlying all this is a major change in the global growth dynamics, as multiple growth engines, largely from the developing world, replace the single engine of growth of the US-centric twentieth century.
While the ride there may be very bumpy, Mr El-Erian is confident Pimco has the necessary skills to deal with the new world order. As governments get more involved in financial markets and regulation becomes a more high profile element of the framework of capital markets, investors will need an extra skillset, that of dealing with public policy.
Mr El-Erian’s background, including 12 years as an economist with the International Monetary Fund, should help a bit, but Pimco is not relying on this. Instead, it has beefed up its public policy expertise with recent appointments such as Andrew Balls, a former Financial Times journalist and brother of the UK education secretary.
The IMF background, and the fact that Mr El-Erian started his Pimco career as an emerging markets bond manager, should also be helpful with that other aspect of the brave new world, the increased importance of economies such as India and China.
He is adamant this is not the reason Pimco called him back from Harvard Management Company after just two years in the top job there. “There isn’t causality, but there is coincidence. It just happens I have that experience.”
Emerging markets experience will not just be helpful when the world finally reaches some form of stability, he says. It is useful now, during the crisis.
“Industrialised countries find themselves in a very unfamiliar situation. This crisis is happening at the centre of the global system, not on the periphery, and the centre is not wired for crisis management. The skillset we have found very useful at Pimco is our emerging markets team.”
Speaking during a press day where Allianz Global Investors, Pimco’s parent, announced its results, Mr El-Erian was notably calm for someone predicting gloom and doom.
This may in part be due to being a bond investor – the bond markets have not seen the terrible plunges of equity markets in the past 12 months – but is also due to Pimco’s foresightfulness, he claims.
During the past 10 years, while other commentators noted the moderation of volatility and interest rates on world markets, Pimco identified a “stable disequilibrium”, a temporary state that would be followed by market turmoil. In order to meet this rocky future, now realised, it developed what Mr El-Erian calls a “forward looking bond index”.
The Global Advantage Bond Index covers both sovereign and corporate debt and employs a methodology Pimco hopes will be less pro-cyclical than traditional indices.
Building an index like this is not traditionally the job of an investment manager, but Pimco felt that “because of our standing in the market, we had an obligation to put something out there to be discussed”, says Mr El-Erian, in the first hint of acceptance that his company is a powerful player in the financial world.
With the expectation that the global economy will be less centred on the US comes a need for such a large company to think of itself as global. With nine offices around the world, including a recently opened base in Hong Kong, Pimco is making that transition. But it will take it slowly, says Mr El-Erian, ensuring the company remains true to its values.
Among these values is a self-definition as an “investment manager” as opposed to an asset manager. The difference, he explains, is the focus on investment returns for clients, rather than gathering assets.
Mr El-Erian himself is part of the investment returns search – as well as being chief executive and co-chief investment officer, he recently announced he would be lead portfolio manager on a new fund based on the Global Advantage Bond index.
[Baca]
The Federal Reserve Is Bankrupt - How Did It Happen & The Ugly Consequences - By Matthias Chang (11/3/09)
I woke up this morning at 5.00 am blurry eyed and absolutely tired, because I spent the entire weekend on my feet thinking and thinking and putting the jigsaw puzzle together. I recheck and recheck the data and facts hoping that I had missed something and therefore my conclusions are way out, but to no avail. The reality cannot be denied.The Federal Reserve is bankrupt for all intents and purposes.
The same goes for the Bank of England!
But my article will focus on the Fed, because the Fed is the financial land-mine, and the shadow banking system [1] stepped on the land-mine some time ago. How long can someone who has stepped on a landmine, remain standing – hours, days? Eventually, when he is exhausted and his legs give way, the mine will just explode!
The shadow banking system has not only stepped on the land-mine but it is carrying such a heavy load (trillions of toxic wastes) that sooner or later it will tilt, give way and trigger off the land-mine!
Recently, I posted the remarks of Prime Minister Gordon Brown and President Obama calling for the shadow banking system to be outlawed. Even if the call was genuine, it is too late. The land-mine has been triggered and the explosion cannot be averted under any circumstances. The only issue is the extent of the damage to the global economy and how long it will take for the world to recover from this fiasco – a financial madness that has no precedent. The great depression is “Mary Poppins” in comparison!
For those who have not researched and are only too eager to heap their profanities on me for asserting such a view, may I remind them that the idea of a central bank going bankrupt is not that outlandish and I am not in fact the one who first gave this stark warning. However, I did say as far back as December 2006 that the crisis is the collapse of the global banking system, specifically the Shadow Money-Lenders.
Nouriel Roubini, the New York University professor said [2]:
“The process of socialising the private losses from this crisis has moved many of the liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case, the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued.”
Please read the underlined words again. “Sovereign bank” means central bank. When a central bank “cracks” i.e. goes into insolvency, all hell will break lose, because as the professor correctly pointed out, any government guarantees will ring hollow and will be useless.
If a central bank goes belly up, it is as good as the government going bankrupt. Period!
In another article, the said professor also admitted that the pressure on the land-mine is totally unbearable. He wrote: “The US Financial system is effectively insolvent”. It follows that if the financial system is bankrupt, it is a matter of time before the “sovereign bank” goes belly up. This is a given!
He stated further that:
“Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.
“AIG which lost $62 billion in the fourth quarter and $99 billion in all of 2008 is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.
“Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.
“News and banks analysts' reports suggested that Goldman Sachs got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)
“But some things are known: Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.
“So for the Treasury to hide behind the "systemic risk" excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.
“And even with the $2 trillion of government support, most of these financial institutions are insolvent, as delinquency and charge-off rates are now rising at a rate - given the macro outlook -that means expected credit losses for U.S. financial firms will peak at $3.6 trillion. So, in simple words, the U.S. financial system is effectively insolvent.”
(Emphasis Added)
McClatchy newspaper reported yesterday more bad news affecting the banks. It reported:
“America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.
“Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.
“The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.
“The government has since committed $182 billion to rescue AIG and, indirectly, investors on the other end of the firm's swap contracts. AIG posted a fourth quarter 2008 loss last week of more than $61 billion, the worst quarterly performance in U.S. corporate history.
“The five major banks, which account for more than 95 percent of U.S. banks' trading in this array of complex derivatives, declined to say how much of the AIG bailout money flowed to them to make good on these contracts.
“The banks' quarterly financial reports show that as of Dec. 31:
— J.P. Morgan had potential current derivatives losses of $241.2 billion, outstripping its $144 billion in reserves, and future exposure of $299 billion.
— Citibank had potential current losses of $140.3 billion, exceeding its $108 billion in reserves, and future losses of $161.2 billion.
— Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.
— HSBC Bank USA had current potential losses of $62 billion, more than triple its reserves, and potential total exposure of $95 billion.
— San Francisco-based Wells Fargo, which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion, below the banks' combined reserves of $104 billion, but total future risks of about $109 billion.
“Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking."
Berkshire Hathaway Chairman, Warren Buffet is so livid by the sheer magnitude of the financial mess that he said:
“These instruments [derivatives] have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks . . . When I read the pages of 'disclosure' in (annual reports) of companies that are entangled with these instruments, all I end up knowing is that I don't know what is going on in their portfolios. And then I reach for some aspirin."
The above bad news refers to the losses and potential losses that the big banks have suffered and will suffer in the near future.
But what is overlooked by many financial analysts is that these very same derivative products have caused another financial organ failure. And there is no way that the said organ can be resuscitated to its former state of health.
The Repo Market is gridlocked!
There has been an incestuous relationship between the traditional banking system and the shadow banking system and the link that joined the two together is the Repo Market.
This is in fact the weakest link in the entire financial system.
This is a very technical subject and I seek your indulgence and patience when reading the remaining part of this article. The gridlock of the repo market is the basis for my assertion that over and above the aforesaid dire financial facts, it is the major contributing factor to the bankruptcy of the Federal Reserve!
I want to use a simple analogy. This will make the issue easier to understand.
Picture a one-inch diameter thick rope. Such a rope is made up of a few strands of narrower ropes, say 1/10th inch which are twined together to make the thick one-inch diameter rope.
Picture again that all the outer strands have been burnt away, and what remains is the middle strand, still lifting the weight. But this strand cannot on its own, lift such a weight and sooner or later, it will snap. When that happens, the weight will come crashing down!
The middle strand is the repo market.
Alternatively, you can use the analogy that the repo market is the heart that pumps the blood (the cash flow). The financial system is the body and it has suffered a massive heart attack!
What is the repo market?
The repo market is the market whereby all financial institutions (regulated and unregulated) invariably go to obtain financing to meet reserve requirements, bridging finance, to lend or purchase securities, to hedge and or to invest on short-term basis.
It used to be that mainly US Treasuries (bear this in mind at all times) were used as security for the repo transactions, as it is considered as most secure i.e. as good as cash since it is backed by the credit of the US government!
This requirement is no longer the case. More of this issue later.
Before proceeding further, I would like to explain some technical issues.
1. In repo transactions, securities are exchanged for cash with an agreement to repurchase the securities at a future date. The securities serve as collateral for what is effectively a cash loan. A distinguishing feature of repos is that they can be used either to obtain funds or to obtain securities. As repos are short-maturity collateralised instruments, repo markets have strong linkages with securities markets, derivative markets and other short term markets such as inter-bank and money markets. [3]
2. Like other financial markets, repo markets are subject to credit risks, operational risks and liquidity risks. However, what distinguishes the credit risks on repos from that associated with uncollateralized instruments is that repos credit exposures arise from volatility (or market risk) in the value of collateral. Bear this in mind at all times.
3. Repos allow institutions to use leverage to take larger positions in financial markets which could add to systemic risks. Bear this in mind at all times.
4. And because of the close linkages between repo markets and securities markets, any shocks will be transmitted quickly, resulting in a gridlock. Bear this in mind at all times.
5. Transactions covered by definition of repos are as follows:
(A) Repurchase Agreement
A repurchase agreement involves the sale of an asset under an agreement to repurchase the asset from the same counterparty. Interest is paid on the repurchase agreement by adjusting the sale and purchase price. A reverse repo is the purchase of an asset with an agreement to re-sell the same or a similar asset.
A hold-in-custody repurchase agreement is a trade whereby the repoer (the borrower of cash) continues to hold the collateralizing securities in custody for the lender of cash. The risks are obvious!
A deliver-out repurchase agreement is where securities are delivered to the cash lender for custody in exchange for cash.
A tri-party repurchase agreement is similar to a deliver-out repurchase agreement, except that the security is placed in the custody of a third-party entity. The third-party ensures that the security meets the cash lender’s requirements and provides valuation and margining services. This is the primary form of repurchase agreement for securities dealers in the United States. Bank of New York and JP Morgan Chase are the two main custodians or clearing banks in the US and supervise the vast majority of the tri-party repos. Bear this in mind at all times.
(B) Sell/Buy-Back Agreement
A sell buy-back is two distinct outright cash market trades, one for forward settlement. The forward price is set relative to the spot price to yield a market rate of return.
(C) Securities Lending
This is where the owner of the security lends them to another person in return for a fee. The borrower of the security is contractually obliged to redeliver a like quantity of the same securities, or return precisely the same securities.
6. Repos can be of any duration but are most commonly over-night loans. Repos longer than over-night are called Term Repos. There are also Open Repos which are transactions which can be terminated by both parties on a day’s notice.
7. The largest players of repos and reverses are the dealers in government securities. There are about 20 primary dealers recognised by the Fed which are authorised to bid for new-issued treasury securities for resale in the market. The dealers are highly leveraged, 50 to 100 times their own capital. To finance the purchase of treasury securities, the dealers need to have repo monies in large amounts on a continuing basis. The institutions that supply such huge funds in the repo market are money funds, large corporations, state and local governments and foreign central banks.
As stated earlier when repo market first started, US treasuries were the preferred security. But when financial engineering exploded and many financial products (i.e. CDOs) were rated AAA by rating agencies, these securities were also traded as described above in the repo market. This was when problems started.
According to Gary Gorton [4], the repo market before the crisis was estimated to be worth a whopping $12 trillion as compared to the total assets in the entire US banking system of $10 trillion.
The former President of New York Fed and now the US Treasury Secretary , Tim Geithner observed in 2008:
“The structure of the financial system changed fundamentally during the boom, with dramatic growth in the share of assets outside the traditional banking system. This non-bank financial system grew to be very large, particularly in money and funding markets.
“This parallel system financed some of these very assets on a very short term basis in the bilateral or tri-party repo markets. As the volume of activity in repo markets grew, the variety of assets financed in this manner expanded beyond the most highly liquid securities to include less liquid securities, as well. Nonetheless, these assets were assumed to be readily sellable at fair values, in part because assets with similar credit ratings had generally been tradable during past periods of financial stress. And the liquidity supporting them was assumed to be continuous and essentially frictionless, because it had been so for a long time.
“The scale of long term risky and relatively illiquid assets financed by very short-term liabilities made many of the vehicles and institutions in this parallel financial system vulnerable to a classic type run, but without the protection such as deposit insurance that the banking system has in place to reduce such risks.”
Economic historians will argue for another century as to the cause for the run on the repo market. The collapse of Bear Stearns is as good a staring point as any. When the market discovered that its securities were duds, pure junk, shock waves ripped through the system.
Recall that I had mentioned earlier that Bank of New York and JP Morgan Chase were the primary clearing banks for repos. The Fed’s rescue of Bear Stearns through JP Morgan was not so much to save the former but rather to shore up the “clearing system” of the repos for which JP Morgan Chase and the Bank of New York were the main pillars. One of the functions of a “clearing bank” for repos is to value and match securities tendered for cash borrowings. If Bear Stearns securities are now valued as junks, the integrity of JP Morgan and Bank of New York as clearing banks in this market is as good as zero! And bearing in mind that the five major investment banks in the US rely heavily on the repo market for their funding, any gridlock in this part of the shadow banking system would tear wide open the entire banking system, including the traditional counter-part.
Hence, the FED intervention by the creation of the Primary Dealer Credit Facility (PDCF) which was in effect the backstop for all investment banking using tri-party repos!
This was what Bernanke said:
“We have been working with market participants to develop a contingency plan should there ever occur a loss of confidence in either of the two clearing banks that facilitate the settlement of tri-party repos.”
Louis Crandall, economist at Wrightson ICAP observed:
“The vulnerability of the tri-party repo system has been a recurring theme among Federal Reserve and Treasury officials in recent weeks.”
The inherent weakness of tri-party repos is that the counter-party risks of billions worth of funding agreements are shouldered by essentially two players – Bank of New York and JP Morgan Chase.
Yet, way back then, they were held up as rock solid. It is almost hilarious to read the then advert of the Bank of New York as to their expertise and service:
“Sophisticated collateral selection: enforce diversification and credit quality; control adequacy, volatility & liquidity.
“Cutting edge infrastructure: economies of scale facilitate extensive data warehousing, access to more asset classes and markets, auto-substitution, auto-allocation & optimisation technology, same day reporting.
“Introduction to new counterparts: A Global Collateral Clearing House.”
Panic swept across the entire repo market. No securities were considered safe enough for repos except US treasuries. Fundings in the repo market grind to a halt. Market players withdrew funds and began hoarding treasuries. The rest who own structured products were slaughtered.
I would like to quote Gary Gorton again:
“Imagine a firm that is levered 30:1, by borrowing in the repo market. If the haircut [5] doubles, or goes from zero to a positive amount, the required deleveraging is massive! Most investment banks were levered 30:1, equivalent to about a 3 per cent haircut. If the haircut rises to 6 per cent, at least half the assets will have to be sold.
“Another sign of trouble is a ‘repo fail’. A ‘repo fail’ occurs when one side of the agreement fails to abide by the contract. [Fail to deliver the security under the repurchase agreement.]
“Dealer banks would not accept collateral because they rightly believed that if they had to seize the collateral should the counter-party fail, then there would be no market in which to sell it. This was due to the absence of buyers because of the deleveraging. This led to an absence of prices for these securities. If the value cannot be determined because there is no market – no liquidity or there is the concern that if the asset is seized by the lender, it will not be saleable at all, then the dealer will not engage in repo. Repo dealers report that there was uncertainty about whether to believe the ratings on these structured products, and in a very fast moving environment, the response was to pull back from accepting anything structured. If no one would accept structured products for repo, then these bonds could not be traded – and then no one would want to accept them in repo transactions.”
This change led to a sharp increase in the demand for government securities for repo transactions, which was compounded by significantly higher safe-haven demand for US Treasuries and the increased unwillingness to lend such securities in repo transactions. As the crisis unfolded, this combination resulted in US government collateral becoming extremely scarce. [6]
I will now turn to the issue of the FED’s solvency.
As has been observed, the Fed intervened aggressively to check the run on the repo market. Various measures were taken, but in my view the most dangerous was the widening of the collaterals which the Fed was willing to accept to secure funding of the players in the repo market. The Fed also intervened by lending a huge chunk of its US treasuries in exchange for junks to facilitate credit expansion.
In the result, what happened was that the Fed’s present balance sheet of approximately $2 trillion is made up mostly of junk securities.
The Fed is no different from banks in that confidence in the quality of its assets is critical and that if and when the market recovers, there is in fact a market for the junk assets that it took on to unravel the gridlock in the financial markets.
By way of analogy, if your high street bank’s balance sheet is made up of junk, what would you do? There are just not enough assets to meet its liabilities.
But of course, one can argue that the Fed is not your high street bank. It is the central bank of the mighty USA. It will always be able to “print money” or “digitalise” money and keep the markets going.
But beware that the Federal Reserve Note is mere paper, fiat money which cannot be redeemed for anything tangible such as gold. And although it is stated boldly in the notes issued - “In God we trust” - you and I are not actually placing our trust in God when accepting the Federal Reserve Notes as “money”.
When Joe Six-Packs realises that the Federal Reserve Note is not even secured by US treasuries and or the FED has real tangible assets, but its balance sheet is littered with junks and toxic waste, there will be a run on the Fed i.e. when Americans and foreigners no longer have faith in the Federal Reserve Notes as “money”.
If confidence could vaporise in a second and cause a stampede in what was once considered solid security, the triple A rated bonds in the repo and money markets, the same confidence that is now reposed in the Federal Reserve Notes can likewise disappear into the memory hole.
All these years, the con was maintained by the Fed that it was solid because it has on its balance sheet over $800 billion of US treasuries i.e. its notes “were so-called backed by these treasuries”. It could sell its treasuries in the repo market for cash and thereby control the money flows in the economy and vice versa.
In their subconscious mind, Americans and stupid foreign central banks and their executives (brain-washed by the Chicago School of Economics) somehow believe in the infallibility of the Fed.
Now it has been exposed that the Fed’s “assets” comprise of junk bonds and toxic wastes.
The Emperor has no clothes!
Paul Volcker, former Chairman of the Federal Reserve may have given the ultimate epitaph: “The bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the market place.”
And it is any wonder that Professor Nouriel Roubini declared:
“The process of socialising the private losses from this crisis has already moved many liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued.”
It is my confident assertion that the Fed has already come unglued. Whatever guarantees given to secure the indebtedness of Citibank and others to prevent a run on these banks are useless.
It is bankrupt!
End Notes
[1] There are two banking systems in existence today. The Traditional Banking System – i.e. your High Street banks and the Shadow Banking System. But the players in both the system overlaps because, the major banks of the traditional system helped spawn the shadow banking system. In fact they are the key players in the use of the so-called “new financial products, the CDOs, CLOs, MBS” etc and which have now turned toxic – worthless, junk to be exact.
[2] See my website archives: Roubini Warns of Sovereign Bank Failure – February 20, 2009 www.theage.com.au
[3] See: Implications of repo markets for central banks, CGFS Publications No 10, March 1999.
[4] Gary Gorton, Information, Liquidity, and the (Ongoing) Panic of 2007 prepared for the Jackson Hole Conference 2008
[5] “haircut” here refers to the rate payable for the cash loan or the margin.
[6] Peter Hordahl and Martin R King, Developments in repo markets during the financial turmoil BIS Quarterly Review, December 2008
[Baca]
A Ticking Toxic Time Bomb - Who Will Get The Shits When It Explodes? - By Matthias Chang
Anwar’s Pakatan Rakyat and Badawi’s UMNO have one thing in common. They attract toxic waste in the same intensity as cow-dungs attract flies.When the two Pakatan Rakyat State Assemblymen for Perak, Jamaluddin Mohd Radzi and Mohd Osman Mohd Jailu, were charged with corruption, a ticking time bomb was set to go off.
The newspaper reported that the two State Assemblymen were caught red-handed in committing the offence of corruption. The public prosecutor would not proceed with a charge against anyone unless there was at the minimum, a prima facie case. In this case, the two accused were caught red-handed!
But Anwar hung on to the two accused even though they were toxic.
It would have secured Pakatan Rakyat’s credibility as a bastion against corruption had the coalition demanded the resignation of the two accused as State Assemblymen and held By-elections. Pakatan Rakyat chose instead to cling on to the stupid political strategy that everyone is innocent until proven guilty. This may well be the case for ordinary folks charged with a crime.
This standard cannot apply to a politician. While innocent until proven guilty, transparency demands that they resign from office and let the legal process take its course. But Anwar was too desperate for power. He has been charged for sodomy and he cannot demand of the two State Assemblymen what he was not prepared to do himself.
Herein lies the true character of Anwar.
Why did UMNO not wait for the prosecution of the two accused? If they were to be convicted, a By-election would be inevitable and the two parties could then go to the people for a fresh mandate.
But the Badawi regime is equally desperate for power. So they mindlessly adopted Anwar’s tactics of luring weak and corruptible representatives, men who have no principles at all.
As a result of the defections, Barisan Nasional is now back in power in Perak. But for how long?
The toxic time bomb is ticking!
If there are no prosecutions against the two accused until after the next general elections, it is a given that the rakyat will rebel in full force and accuse UMNO and Barisan Nasional of abusing the law and a massive cover-up to cling on to power.
If the two accused are convicted after a full trial, hopefully very soon, the status quo is back to square one. And there will have to be By-elections. Once again, Barisan Nasional would be at a disadvantage, because the rakyat would perceive the government of having mindlessly took on two corrupt politicians just so to regain power.
In both scenarios, Barisan Nasional would be perceived negatively.
What about Anwar and Pakatan Rakyat?
This will be a wake up call for the rakyat not to believe and fall for the theatrics of Anwar and Pakatan Rakyat.
Instead of consolidating their political power in the five states and help the people overcome the global financial tsunami, the power-crazy loonies in Pakatan Rakyat are only concerned with grabbing power so that they can have their turn to loot the national treasury.
With regard to the DAP representative, she is as good as a factory reject. The Chinese community will “lynch her politically” and she will be an outcast. MCA will suffer a backlash from the betrayal of this factory reject, even though MCA has nothing to do with the defection. The Chinese community will take it out on MCA. I sincerely hope that MCA will avoid her like a plague if its leaders are to survive in the next General Elections!
The toxic time bomb is ticking and it is only a matter of time before it explodes.
I would like to take this opportunity to suggest to the good people of Malaysia – ignore the political theatrics of both sides, focus on the financial crisis and save your family from unemployment, foreclosure and or bankruptcy if you are deep in debt. There is no time to waste. After March 2009, the economy will turn messy.
When that time comes, go out in full force and harass the politicians in Parliament, in the State Assemblies, in their service centres, and in their offices for answers and demand from them why they have wasted so much time, energy and money on grabbing power instead of saving the country.
When the country is in deep shits and no one seems to know anything and or able to do anything, be reminded that I was there to warn you of the dangers since 2006 and I will be there with my team to help you if need be.
[Baca]
Johor, The Bastion of UMNO Plunging Into Economic Free Fall By 3rd Quarter 2009 - The Iskandar Project - Johor UMNO’s Millstone - By Matthias Chang (17/2/09, Updated at 8:45 am 18th February 2009)
On the 4th of February 2009, I participated in a closed door forum on the global financial crisis organised by the National Chamber of Commerce and Industry of Malaysia (NCCIM). One of the Forum’s objectives was “Mapping A Blueprint For Survival” and representatives from the cross-section of our economy offered invaluable insights and comments on the challenges faced by the respective industries.However, there was a particular representative who had substantial investments in the Iskandar Project and was only too eager to trumpet his contribution to the region and how the project would benefit the entire Malaysian economy, specifically in two aspects, namely:
1) As the hinterland of Singapore.
2) As the wholesale centre for the distribution of Asia’s exports to the global markets.
It was clear from his very sincere comments that he was totally out of touch with reality and an obvious victim not only of his own corporate spin but that of Badawi regime’s flawed strategies in establishing the Iskandar project soon after the launch of the 9th Malaysia Plan.
During the discussions, I raised the issue of business cycles and pointed out that the last two peaks before the collapse was in 1987 and 1997 and that it was obvious that the next peak would be 2007 / 2008. [1] Hence, Malaysia and corporate leaders should be preparing for a downturn and not as was the case, preparing for a new era of economic prosperity as a result of Wall Street’s financial engineering. Obviously, the policy tools, management strategies and mindsets for an upturn will be different for a downturn.
The particular developer went on and on extolling his grand plans for Iskandar and how with the help of China, the Malaysian economy would be transformed!
One can be forgiven for the lack of foresight, but when a person with the benefit of hindsight, ignores reality and persists in his own spin, he deserves the financial catastrophe that is coming his way!
Since December 2006, I had been warning whosoever that cared to listen of the global financial tsunami. It is common sense and simple logic, that when the US and Europe collapse, all exporting economies would suffer grievously. But so-called experts gleefully boasted that Asia has been de-coupled from the vagaries of the developed economies and would be immune from any financial flu or worse, on account of huge foreign exchange reserves which will provide the necessary protection. Asians have learnt from the 1997 crisis!
Utter rubbish!
What Asian economies did after 1997 was to substitute dependence on hot capital inflows for dependence on global demand, specifically the US, for export led growth! External factors still dominate and determine Asia’s economic survival – “jumping from the frying pan into the fire!”
When the Badawi regime drew the blueprint for Iskandar, their entire strategy was anchored primarily on the financial health of Singapore. This is the fatal flaw, as Singapore’s strength in good times is also the Achilles heel in any downturn.
This was all too obvious since the last quarter of 2008. But any idiot would have noticed that when Singapore’s investment arm, Temasek was injecting huge sums of monies into Wall Street banks in 2007, all of which were insolvent, it was arrogance and misplaced confidence that ruled their minds and their vaunted research capabilities seem to have been put on a back burner.
And what a price Singapore paid for their arrogance – its worst financial crisis since separation from Malaysia in the early sixties!
The same arrogance and misplaced confidence of the Badawi regime, pushed to do the unthinkable by the immaturity and inexperience of the “4th Floor boys” and the various infantile consultancy outfits, have now created an economic nightmare in the Malay heartland of Johor, the bastion of UMNO.
Wall Street has reported that Singapore has admitted that it will experience the “deepest recession in its history.” Growth contracted 16.9% in the last quarter of 2008 and GDP growth in 2009 would decline by 5%. Massive unemployment has already set in. Finance Minister Mr. Tharman Shanmugaratnam even stated that “no one knows how prolonged or deep this recession is going to be. We are plugged into the markets that are largely in the rich countries and when we go through a global crisis like this, we come down very quickly.” The Minister also remarked that there was no Asian domestic demand to provide a cushion for Singapore.
It follows that if there is no cushion for Singapore, there will likewise be no cushion for Malaysia, specifically for the Johoreans who depend so much on Singapore.
Johor and Iskandar are dead meats. This is a given
Malaysia is also much dependent on Japan.
It was reported yesterday that Japan’s GDP was contracting at an annualized 12%. Experts have observed that the speed “of the decline embedded in the latest Asia data is on par with the collapse in the US during the 1930s Depression.”
A microcosm of Japan’s financial woes can be seen in the horrendous performance of Toyota Motors, the flagship of Japanese manufacturers and the world’s largest producer of cars. It has suffered the biggest loss and are shutting down factories and reducing drastically production in Japan. Japan was counting on a continuous growth of 3% in the US for her exports. Exports fell 35% in the 12 months to December 2008. The US consumer market has vaporized completely!
South Korea is in the same leaking boat. In the last quarter of 2008, GDP fell by an average annualized rate of around 15% in the Tiger economies of Hongkong, Singapore, South Korea and Taiwan. South Korea’s GDP in fact fell by 21%!
The collapse in exports has been exacerbated by the lack of credit, specifically trade financing of Asia’s customers i.e. importers. Even exporters are cautious of the letters of credit issued by the tottering banks.
The intra-regional trade is of no help because it disguises the fact that 60% of the final demand for Asian products still come from advanced economies – USA, Europe and Japan, and they are all bleeding and in intensive care!
The developer whom I had referred to earlier, had pinned his hopes for a rebound in Iskandar and the revival of his shrinking fortune on China’s ability to take up the export slack. He must be wandering in la la land to come to this conclusion. China, the world’s factory has been hard hit, its exports declined for the third consecutive month in January, falling 17.5%. Imports have plunged even further by a whopping 43.1% and bearing in mind that China’s imports are mainly inputs for manufacturing exports, this sharp decline means that China’s manufacturing is in a grid-lock.
So, if Malaysia and Iskandar are looking towards Asia and specifically Singapore for a lifeline, there is none. The Malaysian boat is leaking fast and we don’t even have a paddle. There is not even a focus attempt to plug the leak as the Badawi regime is just too busy retaining power and grabbing power from the Pakatan Rakyat controlled states and now in these critical months, indulging in fruitless campaigning in two silly By-elections in Perak and Kedah!
Malaysia’s exports have collapsed and will collapse further. This is a given.
Asia cannot replace the US / Europe markets.
The monies the Badawi regime has pumped into Iskandar have been wasted and there is no likelihood of any returns in the next ten years.
The Badawi regime had counted on the Arabs and their oil monies. But the stupid Arabs are all in a financial mess. Their dollars were put into the toxic wastes that are now deemed worthless. They were then lured by the fraudsters of Wall Street to invest in insolvent banks. These investments are not even worth ten cents to the dollar! The gleaming skyscrapers and man-made islands sprouting multi-million homes and multi-billion hotels will soon become the largest concrete jungle on planet earth.
The US and Europe are already turning to protectionism as a way to insulate their economies. “Buy America First” is the battle cry and the sooner we come to grips that these export markets are no longer sustainable and accessible for the next few years, the better will we be able to deliver a pragmatic blueprint for survival – one that will take into consideration that the next few years will be very painful.
I am now issuing another grim warning. As the only political / financial analyst who has the guts to do so, I am not confident that the ruling elites will take heed. But I hope that those who are reading this article in my website will put pressure on the Badawi regime.
What is this danger? It is the complete devastation of most if not all European banks. Yes, there can be no rescue of these banks. In an “for eyes-only” document prepared by the European Commission for the Finance Ministers of Europe, it was estimated that European banks must write down $25 trillion on account of gambling in toxic wastes products. This is not a typo, It is not billions. It is $25 trillion. A mind-boggling sum.
In the aforesaid Forum, I warned the delegates that a conservative estimate of total global write down for derivatives debts on the most conservative basis was $50 trillion, approximately 10% of the $565 Trillion derivative trade as at end 2008. The major banks in the US control 90% of this global market. Now, common sense and simple logic tells me that if the EU banks collectively represent the remaining 10% of the global derivative market and has to write off $25 trillion, the US of A is beyond salvage, specifically its banks. The write off in America would easily exceed $50 trillion. The combine write down would dwarf the global GDP of approximately $60 trillion.
If this is too outlandish for you to accept, then do your research – check it out from Google.
The fascist thugs at website “Malaysia Today”, the mouthpiece of Anwar Ibrahim and the Badawi regime, used to attack me for my warnings. They have all scattered but some die-hards remain. If you had listened to these idiots instead of taking my warnings to heart, now is the time to hunt them down and demand that they account for their actions. Demand from the webmaster to reveal their NRIC number and address and then sue their pants off!
If Johor cannot survive this financial turmoil because of Badawi regime’s and Khairy’s foolish schemes, UMNO as a political party will be finished for good. The Malays in Johor (the bastion of Malay nationalism) will be so disillusioned that mass rejection of UMNO as the defender and custodian of Malay rights will erupt into an avalanche! If UMNO cannot save the Malays in Johor, it will be buried in the next general elections.
Since last year, I had warned repeatedly that the first quarter of 2009 would be critical and time is of the essence, but all to no avail. Not one political leader took me seriously. It is only after the 4th February 2009 closed door forum organized by NCCIM that there is a discernable seriousness in acknowledging the need for a more dynamic and hands-on approach in addressing the consequences of the present financial meltdown.
But we may have left it too late. We are still on auto-pilot mode.
If a new pilot takes over at the end of March, he will not be able to stop the bleeding in Johor, and by the end of the third quarter, Johor will be in deep shits.
My advice to UMNO and Barisan Nasional is simple and the rakyat will thank you for this courageous and pragmatic initiative – give Pakatan Rakyat a walk over in the two By-elections as the outcome in any event will have no strategic significance to UMNO’s survival as a political party.
But if UMNO is distracted by the By-elections and waste precious time in resolving the growing financial crisis, it will lose the support of the Malay heartland and the bastion of Malay nationalism.
UMNO, you have been forewarned. Ignore this advice and UMNO will lose everything at stake! Barisan Nasional will not survive beyond 2010!
Follow my advice, and UMNO and the Barisan Nasional will be able to wipe out Pakatan Rakyat by the second quarter of 2010.
This is strategic thinking at the highest level.
I am playing the chess game. Why are you still playing marbles?
Badawi has asked his members of Parliament to come out with ideas as to how we can resolve this crisis. This is an open admission that he is devoid of any ideas and that Khairy and his much touted advisers are all intellectual bankrupts. The MPs have no idea whatsoever. They are all groping in the dark.
We in Malaysia have a major structural problem with regard to the Bumiputra economy. Stimulus packages no matter how massive cannot resolve inherent structural issues in the economy. I have the answers but until and unless Barisan Nasional is willing to listen and make changes, my lips are sealed.
This may sound arrogant to many. But I was the only one in the entire freaking country that got it right since December 2006. The entire nation was auto-pilot. The 9th Malaysia Plan got it wrong, the Mid-Term Review got it wrong, the 2008 budget got it wrong, the 2009 budget got it wrong and now the mini budget will also not get it right!
Time is running out. The rakyat has to decide as to who got it right and what needs to be done. I rest my case here.
Notes
1. I postulated that in Malaysia, our business cycles have a 10-year cycle. Obviously other markets’ business cycle will differ from Malaysia and therefore analysts must of necessity focus on their respective markets. The point I was making was that whatever the business cycle, there will always be ups and downs and therefore we should prepare accordingly at the critical junctures of the business cycle.
[Baca]
The "Geithner Put": It's Time To Break Up The Big Banks - Dumping $1 Trillion of Toxic Assets onto US Taxpayers - By Mike Whitney (28/2/09)
25 February 2009 Global ResearchTimothy Geithner is putting the finishing touches on a plan that will dump $1 trillion of toxic assets onto the US taxpayer. The plan, which goes by the opaque moniker the "Public-Private Investment Fund" (PPIF), is designed to provide lavish incentives to hedge funds and private equity firms to purchase bad assets from failing banks. It is a sweetheart deal that provides government financing and guarantees for illiquid mortgage-backed junk for which there is no active market. As one might expect, the charismatic President Obama has been called in to generate public support for this latest addition to the TARP bailout. In this week's address to Congress he said:
"This administration is moving swiftly and aggressively to restore confidence, and re-start lending.
We will do so in several ways. First, we are creating a new lending fund that represents the largest effort ever to help provide auto loans, college loans, and small business loans to the consumers and entrepreneurs who keep this economy running."
The Obama administration is clearly afraid to use the unpopular Geithner to sell this boondoggle to the American people. Geithner's last performance set off a political firestorm and put the equities markets into a swan-dive. No one wants to see that again.
Details of the plan remain sketchy, but the PPIF will work in concert with the Fed's new lending facility, the Term Asset-Backed Securities Loan Facility, or TALF, which will start operating in March and will provide up to $1 trillion of financing for buyers of new securities backed by credit card, auto and small-business loans. Geithner's financial rescue "partnership" will also focus on cleaning up banks balance sheets by purging mortgage-backed securities. (MBS)
In Monday's New york Times, Paul Krugman summed up the Geithner plan like this:
"Now the administration is talking about a “public-private partnership” to buy troubled assets from the banks, with the government lending money to private investors for that purpose. This would offer investors a one-way bet: if the assets rise in price, investors win; if they fall substantially, investors walk away and leave the government holding the bag. Again, heads they win, tails we lose.
Why not just go ahead and nationalize?"
Why not, indeed, except for the fact that Geithner's main objective is to "keep the banks in private hands" regardless of the cost to the taxpayer. The Treasury Secretary believes that if he presents his plan a "lending program" rather than another trillion dollar freebie from Uncle Sam, he'll have a better chance slipping it by Congress and thereby preserving the present management structure at the banks. Keeping the banking giants intact is "Job 1" at the Treasury.
The PPIF is a way of showering speculators with subsidies to purchase non-performing loans at bargain-basement prices. The Fed is using a similar strategy with the TALF which, according to the New York Times, could easily generate "annual returns of 20 percent or more" for those who borrow from the facility.
From the New York Times:
"Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.
Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.
In the initial phase, the Treasury will provide $20 billion and the Fed will provide $180 billion. Treasury Secretary Timothy Geithner said last week that the Treasury could increase its commitment to $100 billion to allow the Fed to lend up to $1 trillion." (NY Times)
This is a blatant ripoff, which is why the plan is being concealed behind abstruse acronyms and complex explanations of how the transactions actually work. The only way investors can lose money is if they hold on to the securities after they fall below 16 percent of their original value which, of course, is unlikely, since the buyers can bail out at any time leaving the taxpayer holding the bag. Call it the "Geithner Put", another gift from Uncle Sugar to Wall Street land-sharks.
Geithner thinks that by obfuscating the details of his plan, he'll be able to carry it off with no one the wiser. But he's mistaken. His credibility has already been badly battered by his chronic evasiveness. Now the pundits are blaming him for falling consumer confidence and the plummeting stock market. Whatever plan Geithner proposes, will be put under a microscope and dissected word by word. He won't get a second chance to pull the wool over the public's eyes. If he botches the rescue operation, Obama will be forced to give him the sack. The political furor would be too much to bear.
It is no surprize that the Fed announced its expansion of the TALF on the same day that Geithner presented his outline for a "public-private partnership". The two plans represent the Obama Team's strategy for "squaring the circle", that is, for keeping the big banks in private hands while purging their balance sheets of worthless assets at the public's expense. Here's how it's presented on the Fed's website:
"Under the TALF, the Federal Reserve Bank of New York will provide non-recourse funding to any eligible borrower owning eligible collateral... As the loan is non-recourse, if the borrower does not repay the loan, the New York Fed will enforce its rights in the collateral and sell the collateral to a special purpose vehicle (SPV) established specifically for the purpose of managing such assets... The TALF loan is non-recourse except for breaches of representations, warranties and covenants, as further specified in the MLSA"
Non-recourse funding? In other words, the loans will be like mortgages, where if the homeowner finds that he is underwater, he can just walk away and leave the bank to cover the losses? In this case, it is the taxpayer who will be left taking the loss.
The PPIF is basically the same deal, 90 percent government-funded "no risk" financing offered to the same speculators who just blew up the financial system. It's a complete scam. The process allows Geithner to avoid assigning a market value to these garbage assets that no one wants. That means that he's planning to pay inflated prices--up to $1 trillion-- to keep the banks happy. Once their balance sheets are scrubbed clean, the banks can begin engineering their next swindle. Meanwhile, the hedge funds and private equity firms will demand refunds for the toxic waste they bought but cannot offload on skeptical investors. Once again, the government will pick up the tab. No problem.
Does Geithner really think he can sneak this by the American people?
The markets aren't going to like the idea of recapitalizing the banks through the backdoor. Wall Street will see right through the smoke n' mirrors and hit the "sell" button. If the banks need recapitalizing, they will have to do it the old fashion way. They'll have to restructure their capital, which means that shareholders get the ax, bond holders get a haircut, management gets the door, and the American people become majority shareholders. That's how it works in a free market. When businesses are insolvent; they file for bankruptcy and the debts are written down. Period. No exceptions. Geithner thinks he can just make up the rules as he goes
along, but he's in for a big surprise. This plan is not going to fly. The banks are going to have to take their lumps and start over. Geithner could save us all a lot of trouble by just doing his job and nationalizing them now.
The Baseline Scenario's Simon Johnson put it perfectly when he said:
"Above all, we need to encourage or, most likely, force the large insolvent banks to break up. Their political power needs to be broken, and the only way to do that is to pull apart their economic empires. It doesn’t have to be done immediately, but it needs to be a clearly stated goal and metric for the entire reprivatization process."
[Baca]
James Galbraith: Obama Isn't Doing Enough to Solve the Financial Crisis - By Nick Baumann (28/2/09)
26 February 2009, Mother JonesThe financial crisis is even worse than people think (and people already think it's pretty bad), and we aren't doing enough to stop it, economist and Mother Jones contributor James K. Galbraith told the House Financial Services Committee on Thursday morning. From his prepared testimony:
In 1930, John Maynard Keynes wrote, "The world has been slow to realize that we are living this year in the shadow of one of the greatest economic catastrophes of modern history." That catastrophe was the Great Crash of 1929, the collapse of money values, the destruction of the banking system. The questions before us today are: is the crisis we are living through similar? And if so, are we taking adequate steps to deal with it? I believe the answers are substantially yes, and substantially no.
Galbraith pointed to six significant problems with the Obama administration's response to the financial crisis. First, he said, the White House is being way too optimistic:
Why is the price of oil so high? Because the Bush administration did to the commodities market what it did to housing.
...[B]ad news has been outrunning the forecasts for months. Professional economists, working with the normal models, failed to predict the crisis. In many important cases, including high officials, they actively denied it could happen. Chairman Bernanke was typical: through July of 2007, he argued that the Federal Reserve Board's predominant concern was inflation; thus the Federal Reserve was unable to give Congress a foretaste of a crisis that was to erupt within days. And as the crisis has unfolded, events have repeatedly come in worse than expected or caught us by surprise. This should tell us something.
Second, we know that the origins of the crisis lie in a breakdown of the banking and financial system, following a breakdown in the regulation of mortgage originations, in underwriting, and in credit default swaps. This is something we have not seen in our lifetimes. We know that the actions already taken in response - the TARP, the nationalization of the commercial paper market and the swap agreements with the ECB and other central banks - are unprecedented. We know that these measures have, at best, only averted a deeper catastrophe. And we know that the baseline forecast, which is a mechanical procedure based on statistical relationships between non-financial variables, for the most part, takes none of this into account.
We therefore have no basis for confidence in the baseline forecasts, and we should prepare ourselves, as Churchill said to Parliament at the time of Dunkirk, "for hard and heavy tidings."
The second problem Galbraith identified with the Obama administration's response to the crisis is an over-reliance on monetary policy:
[M]onetary policy today has little power to restore growth. In the Depression they called it "pushing on a string." With interest rates already at zero, there is little more the Federal Reserve can do.
The Obama administration's bank rescue plan is also fatally flawed, Galbraith says:
The bank plan appears to turn on a metaphor. Credit is "blocked" or "frozen." It must be made to "flow again." Take a plunger to the toxic assets, a blowtorch to the pipes, it's said, and credit will flow. This will make the recession essentially normal, validating the baseline forecast. Add the stimulus to a normalization of credit, and the crisis will end. That's the thinking, so far as I can tell, of the Treasury department in this new administration.
But common sense begins by noting that the metaphor is wrong. Credit is not a flow. It is not something that can be forced downstream by clearing a pipe. Credit is a contract. It requires a borrower as well as a lender, a customer as well as a bank. The borrower must meet two conditions ... [creditworthiness and willingness to borrow] ... The "credit-flow" metaphor implies that people came flocking to the auto showrooms last November and were turned away because there were no loans to be had. This is not true. What happened was that people stopped coming in. And they stopped coming in because, suddenly, they felt poor, uncertain and afraid.
In this situation, stuffing the banks with money will not change their behavior... [T]he bank chiefs have made it very clear, in testimony here and elsewhere: they will not return to ordinary commercial, industrial and residential lending until they can see a reasonable way to make money at it... More likely, they will hunker down, invest in Treasuries and prime corporate bonds, and rebuild capital for the long-term, as they did from 1989 to 1994. Only this time, with the yield curve as flat as it is and the insolvencies as deep as they are, it could take a decade or longer.
[...]
The Treasury plan, if put in place as described, would have a perverse effect on the distribution of wealth. To guarantee bad assets at rates above their market value is simply a transfer to those who hold those assets. It would enable them to convert those assets, sooner or later, to cash. The plan would thus preserve the wealth of bank insiders and financial investors, while failing to prevent the collapse of the wealth of almost everyone else. I cannot believe that the American public will tolerate this, for very long.
[...]
In short, the Treasury plan will not achieve its stated goals, and meanwhile risks both triggering inflation and obstructing growth.
Galbraith sees no alternative to putting "several very big banks" that are "deeply troubled" into receivership, breaking them up, firing existing management, and selling them in parts or relaunching them as "multiple mid-sized institutions. While that happens, he says, there should be a publicly-run bank "to provide the loans to businesses - small, medium and large - sufficient to keep them running through the crisis," as the Reconstruction Finance Corporation did during the Depression.
The fourth point that Galbraith emphasizes is that Social Security and Medicare are not causing our problems, and a "preoccupation" with the two programs is "actively dangerous to the prospects for economic recovery." He calls for a "permanent increase" in Social Security benefits, a payroll tax holiday, and a reduction in the age of eligibility for Medicare:
These measures are among the most promising available at this moment. Congress should be prepared to use them if and when it becomes clear that the present policies are insufficient.
"The housing crisis," Galbraith says, "is at the root of our difficulties," but "There is no way for public policy to stabilize housing prices as such in the near term." But there are other things we can do, and in this sphere, at least, Galbraith thinks the Obama team is on the right track:
The administration's plan of action in the housing sphere is a bright spot on the policy horizon. It meets, so far as I can tell, the tests of fairness and sustainability reasonably well. But it does so only for a limited class of borrowers, who are not too deeply underwater already on their homes. It will provide a measure of relief, but it will not, so far as I can tell, either stop the wave of foreclosures or prevent a continued decline in prices.
Galbraith points to two alternative housing plans that "might work." The first is a moratorium of new foreclosures and the creation of an organization like the depression-era Home Owners Loan Corporation "for triage and renegotiation on a case-by-case basis." (James Ridgeway, Mother Jones' senior Washington correspondent, called for a similar plan in September.) The other alternative would be to allow the normal foreclosure process to work but to have the government buy foreclosed homes and allow the previous owners to rent their houses while maintaining an option to repurchase their homes from the government at a later date. "This would have the advantage of protecting against moral hazard, while at the same time preserving occupancy, to the maximum extent possible," Galbraith says.
Finally, Galbraith says, the Obama administration has to think long-term, especially about infrastructure, energy, and the dollar. He calls for curtailing crude oil imports, instituting a national infrastructure fund, and conserve energy. On the dollar, he says:
[While] the world crisis has revealed the relative strength of the dollar and the structural weakness of the euro and of other major currencies, ... it awakens an equally serious danger, which is that instability between world currencies could produce a cumulative spiral of global economic collapse. This is an important danger, for which we are ill-prepared. There needs to be a new attention to the financial architecture, both to achieve a coordinated fiscal expansion and to admit the serious possibility of an even larger crisis.
The bottom line, Galbraith emphasizes, is that he believes "we are not in a temporary economic lull, an ordinary recession, from which we will emerge to return to business-as-usual." Instead, he says, "We are at the beginning of a long, profound, painful process of change." On that last bit, at least, Galbraith and the Obama administration can probably agree.
[Baca]
READ THIS FIRST: Guide To This Weekend's Posting On Financial Issues (28/2/09)
FF Editorial:This week we have adopted an unprecedented procedure in our posting.
There has been a rush of statements coming out of the White House and these are all KEY POLICY STATEMENTS FROM PRESIDENT OBAMA.
To assist your reading and understanding of the issues raised in these policy statements, I have posted them in a time sequence in the folder “Feature Article” as follows:
1) Remarks By The President and Vice President At Opening of the Fiscal Responsibility Summit - February 23, 2009
2) Remarks By The President in Question and Answer Session At the Closing of the Fiscal Responsibility Summit - February 23, 2009
3) Remarks By The President After The Regulatory Reform Meeting - February 25, 2009
4) Remarks By The President On The Fiscal Year 2010 Budget - February 26, 2009
I would like the readers to then GO TO THE FOLDER: Financial Analysis to read and evaluate some of the commentaries on the above stated policy issues in the sequence as follows:
1) James Glabraith: Obama Isn’t Doing Enough To Solve The Financial Crisis.
2) The Geithner Put: Its Time to Break Up The Big Banks
3) Banks To Get Nearly Unlimited Federal Funds
4) Recipe for Disaster: The Formula That Killed Wall Street
5) How the Lust for Money Powers The City
6) How The US Economy Was Lost
I hope these articles and documents will enable you to have a better understanding of the issues in relation to the financial crisis and the US government’s attempt to resolve them.
[Baca]
Nationalization Isn't The Worst Fear - By Bill Fleckenstein (4/3/09)
2 March 2009 MSN MoneyFor all the anxiety the idea brings, we accept something similar whenever the FDIC takes over a bank. The real worry is financial Armageddon.
Philosophically, I am opposed to government intervention, as longtime readers know. But we are faced with financial Armageddon.
It was precipitated, in essence, by (a) the Alan Greenspan Federal Reserve's insane meddling in the market for two decades, combined with its failure to do its regulatory job generically, and (b) the abdication of responsibility on the part of all regulators, including Congress.
When one looks at the litany of financial companies that have ended up in the trash heap, it's sort of hard to make the case that any regulators (with the exception of maybe some state insurance commissioners) did their jobs in anything approaching an acceptable manner over the past decade.
What lies before us now is the prospect of bank nationalization -- an idea that seems to arouse an awful lot of hysteria. Perhaps we should use the phrase "government-assisted reorganization," which is nothing new.
Near as I can tell, whenever the Federal Deposit Insurance Corp. steps in to take over a bank (as it did with Washington Mutual and Wachovia), a government-assisted reorganization has taken place. That is effectively what transpired at American International Group (AIG, news, msgs), Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs), and is likely to be the outcome for others, such as Citigroup (C, news, msgs), and possibly for Bank of America (BAC, news, msgs).
Can banks handle real stress?
In my opinion, the Treasury Department's idea of a stress test is a great one. That way, we would have some idea of which institutions may need to become wards of the state -- being either carved up or shut down.
Those capable of passing such a test obviously have a decent chance of surviving the recession and probably will be able to raise additional capital. In all likelihood, they will see their stock prices rally.
The sooner the stress test is performed and the reorganization of busted financial institutions completed, the sooner this phase of the financial crisis will be behind us, regardless of the outcome at various banks.
Unfortunately, the assumptions built into the Treasury's stress-test plan are a little disappointing. They look too optimistic for 2010 to be really useful, though I would think stock bulls would still embrace this process.
Citi tries to head off nationalization
Why is Citigroup so eager to sell 25% to 40% of itself to the government? Because it's afraid the government might take a 51% stake, MSN Money's Jim Jubak says.
The status quo is bearish. Addressing the problems head on is the first step in the healing process. However, I would caution people not to get too comfortable with the results of these somewhat sanguine tests.
Of course, to the extent that these broken financial entities require government money, that will create a funding problem down the road. That is not today's worry. Today's worry is financial Armageddon.
Defend yourself with gold
The funding problem is, however, a reason to own gold, as gold is the only defense against the money-printing press. Not that the gold market was too worried about the printing press last week.
I thought it might be worth making a couple of points about gold, given the rout it suffered last week. As gold dropped 8% (roughly $80 per ounce), the key gold exchange-traded fund, SPDR Gold Shares (GLD, news, msgs), saw no liquidation. But the double-short ETF ProShares UltraShort Gold (GLL, news, msgs) experienced record volume.
Thus, the recent decline in the price of gold has been precipitated by some combination of short-selling in the gold ETF (where the short interest has been rising quite aggressively) and/or the short-selling and liquidation of gold futures.
Those of us who believe gold belongs in one's portfolio need to remember that the folks who don't like it really don't like it. After all, gold is easy to hate. It's just a price, and it appears to many that today's price is too high.
A lot of people want to see stocks trade higher, and many of them believe a sinking gold price is a sign that stocks should go up. So they have a vested interest in rooting gold lower.
Gold mining stocks are even easier to hate because mining is a tough business and what the companies wind up with is gold, which, as noted above, stock bulls (and gold bears) already hate. So it's pretty easy to see why there's quite a contingent that wants to bet against gold. However, those doing so have every government of the world fighting against them, in the form of printing money.
Meanwhile, the physical market continues to show signs of people wanting to exchange their colored pieces of paper for gold. Interestingly, Brinks said Wednesday that it had been seeing "a large spike in clients shipping gold and silver" from the New York Mercantile Exchange and Commodity Exchange, or Comex, over the past few months.
Thus the battle continues. Folks need to be aware that gold will remain volatile. But I don't believe the run in gold will be over for quite some time. Gold has been rising sort of quickly for eight years, and I expect it should continue to do so.
[Baca]
Remarks of President Barack Obama Weekly Address
Saturday, 28th February 2009Washington, DC
Two years ago, we set out on a journey to change the way that Washington works.
We sought a government that served not the interests of powerful lobbyists or the wealthiest few, but the middle-class Americans I met every day in every community along the campaign trail – responsible men and women who are working harder than ever, worrying about their jobs, and struggling to raise their families. In so many town halls and backyards, they spoke of their hopes for a government that finally confronts the challenges that their families face every day; a government that treats their tax dollars as responsibly as they treat their own hard-earned paychecks.
That is the change I promised as a candidate for president. It is the change the American people voted for in November. And it is the change represented by the budget I sent to Congress this week.
During the campaign, I promised a fair and balanced tax code that would cut taxes for 95% of working Americans, roll back the tax breaks for those making over $250,000 a year, and end the tax breaks for corporations that ship our jobs overseas. This budget does that.
I promised an economy run on clean, renewable energy that will create new American jobs, new American industries, and free us from the dangerous grip of foreign oil. This budget puts us on that path, through a market-based cap on carbon pollution that will make renewable energy the profitable kind of energy; through investments in wind power and solar power; advanced biofuels, clean coal, and more fuel-efficient American cars and American trucks.
I promised to bring down the crushing cost of health care – a cost that bankrupts one American every thirty seconds, forces small businesses to close their doors, and saddles our government with more debt. This budget keeps that promise, with a historic commitment to reform that will lead to lower costs and quality, affordable health care for every American.
I promised an education system that will prepare every American to compete, so Americans can win in a global economy. This budget will help us meet that goal, with new incentives for teacher performance and pathways for advancement; new tax credits that will make college more affordable for all who want to go; and new support to ensure that those who do go finish their degree.
This budget also reflects the stark reality of what we’ve inherited – a trillion dollar deficit, a financial crisis, and a costly recession. Given this reality, we’ll have to be more vigilant than ever in eliminating the programs we don’t need in order to make room for the investments we do need. I promised to do this by going through the federal budget page by page, and line by line. That is a process we have already begun, and I am pleased to say that we’ve already identified two trillion dollars worth of deficit-reductions over the next decade. We’ve also restored a sense of honesty and transparency to our budget, which is why this one accounts for spending that was hidden or left out under the old rules.
I realize that passing this budget won’t be easy. Because it represents real and dramatic change, it also represents a threat to the status quo in Washington. I know that the insurance industry won’t like the idea that they’ll have to bid competitively to continue offering Medicare coverage, but that’s how we’ll help preserve and protect Medicare and lower health care costs for American families. I know that banks and big student lenders won’t like the idea that we’re ending their huge taxpayer subsidies, but that’s how we’ll save taxpayers nearly $50 billion and make college more affordable. I know that oil and gas companies won’t like us ending nearly $30 billion in tax breaks, but that’s how we’ll help fund a renewable energy economy that will create new jobs and new industries. In other words, I know these steps won’t sit well with the special interests and lobbyists who are invested in the old way of doing business, and I know they’re gearing up for a fight as we speak. My message to them is this:
So am I.
The system we have now might work for the powerful and well-connected interests that have run Washington for far too long, but I don’t. I work for the American people. I didn’t come here to do the same thing we’ve been doing or to take small steps forward, I came to provide the sweeping change that this country demanded when it went to the polls in November. That is the change this budget starts to make, and that is the change I’ll be fighting for in the weeks ahead – change that will grow our economy, expand our middle-class, and keep the American Dream alive for all those men and women who have believed in this journey from the day it began.
Thanks for listening.
[Baca]
A Week of Big Numbers - By Doug Noland (4/3/09)
Credit Bubble Bulletin“…the U.S. government has pledged more than $11.6 trillion on behalf of American taxpayers over the past 19 months, according to data compiled by Bloomberg. Changes from the previous table, published Feb. 9, include a $787 billion economic stimulus package. The Federal Reserve has new lending commitments totaling $1.8 trillion. It expanded the Term Asset-Backed Lending Facility, or TALF, by $800 billion to $1 trillion and announced a $1 trillion Public-Private Investment Fund to buy troubled assets from banks. The U.S. Treasury also added $200 billion to its support commitment for Fannie Mae and Freddie Mac…” Bloomberg, February 24, 2009 (Mark Pittman and Bob Ivry)
The Administration’s new budget projects an astounding $1.75 TN fiscal 2009 federal deficit - or about 12% of GDP. Federal outlays are expected to surge 32% this year to $3.94 TN. In nominal terms, the deficit is set to quadruple the previous all-time record. In percentage terms one has to return back to the war economy of the 1940s to find anything comparable.
Yesterday, Fannie Mae reported a fourth quarter loss of $25.2bn, bringing the company’s second-half 2008 shortfall to more than $50bn. Non-performing assets surged a stunning 87% during the quarter to $119.2bn, a three-fold increase in just 12 months. Having more than depleted its razor-thin capital base, Fannie requested $15.2bn of additional Treasury support (from the $200bn promised).
The FDIC announced yesterday a $26.2bn Q4 2008 loss for the banking system. The Office of Thrift Supervision reported that our nation’s Savings & Loans lost $3.0bn during the final quarter of the year, increasing 2008 losses to a record $13.4bn. General Motors announced a $9.6bn Q4 loss, increasing its annual loss to a staggering $30.9bn. Analysts are expecting even greater losses to be reported at AIG and Citigroup.
The dimensions of the reported deficits and losses are not easily digested; the scope of the today’s systemic problems not so easily comprehended. I’ll push ahead with efforts to use the Credit Bubble Framework as an analytical tool for making some sense of the historic nature of the unfolding bust.
Let’s try to place the various huge – and increasingly numbing – deficit/loss numbers (attendant with this bust) into coherent context. For such an endeavor it is imperative to first examine the preceding boom. This week, in particular, seems an appropriate time to summarize, in Credit terms, the incredible dimensions of the fateful inflationary Bubble.
From the Federal Reserve’s “flow of funds” report, we can see that Total System Credit (non-financial and financial) ended 1995 at $18.475 TN. By the end of 2007, this number had inflated to $49.882 TN, for growth of 170% in only 12 years. During this period, Household Debt swelled 184% to $8.959 TN; Non-farm Corporate Debt 130% to $3.832 TN; and State & Local Government borrowings 109% to $2.192 TN. Federal debt expanded “only” 41% to $5.122 TN. Rest of World holdings of U.S. assets inflated 365% to $16.048 TN. While significantly trailing Credit growth, GDP nonetheless bulged 87% during this period.
Over the past decade, the “optimists” often cited the federal government’s positive fiscal position as evidence of the health of the overall economy and soundness of our prosperity. It should be clear these days that the protracted boom's massive inflation of private-sector Credit had grossly inflated government receipts (among other things). Indeed, over the 12-year period Federal Receipts inflated 88% (to $2.651 TN) and State & Local receipts increased 92% (to $1.903bn). This crucial facet of the inflationary boom spurred federal and state & local spending growth of 80% and 93%, respectively.
State & Local governments will now attempt to maintain these inflated levels of expenditures, while the federal government will move aggressively to grossly inflate already inflated spending. The budget now calls for federal expenditures this year to approach $4.0 TN. This compares to spending of about $1.6 TN back in 1995. The federal deficit is projected to expand by a combined $3.0 TN during fiscal years ’09 and ’10. This would amount to a 60% increase in federal debt in only two years.
Today’s unparalleled expansion of federal debt and obligations is being dressed up as textbook “Keynesian.” It’s rather obvious that we are in dire need of some new books, curriculum and economic doctrine. But from a political perspective, the title is appropriate enough. From an analytical framework perspective such policymaking is more accurately labeled “inflationism” – a desperate attempt to prop inflated asset prices, incomes, business revenues, government receipts, and economic “output”. There have been many comparable sordid episodes throughout history, and I am not aware of any positive outcomes.
The Administration’s budget earmarks an additional $750 billion as a contingency for added financial sector bailouts. Fed data nicely illuminate the dimensions of the financial sector's problem. Between 1996 and 2007, Total Mortgage Debt expanded 220% to $10.061 TN. Total GSE Agency Securities (debt and MBS) tripled to $7.397 TN. The ABS market inflated 580% to $4.50 TN. Over this 12-year period, Bank Assets swelled 150% to $11.194 TN. Securities Broker/Dealer assets ballooned 440% to $3.10 TN. In 12 years, Total Financial Sector borrowings expanded 300% to $16.90 TN – in the process creating a Credit and liquidity junky out of U.S. asset markets and the real economy. Today, the deeply impaired financial sector is incapable of assuaging the system's bloated Credit needs.
For perspective, a little compare and contrast is in order. Total Mortgage Debt increased $188bn in 1995, compared to $1.437 TN growth in 2005, $1.410 TN in 2006, and $1.098 TN in 2007. Agency MBS increased $98bn in 1995, compared to $609bn growth last year. The ABS market grew $127bn in 1995, in contrast to the $725bn growth in 2005 and 2006’s $808bn. Bank Credit expanded $273bn in 1995, compared to 2007’s $788bn and 2008's $1.294 TN. Broker/Dealer assets expanded $113bn in 1995, a small fraction of 2007’s fateful $615bn growth.
This unprecedented Credit explosion inflated asset prices as well as incomes. Between 1996 and 2007 National Incomes inflated 90% to $12.271 TN. Compensation of Employees surged 86% to $7.812 TN. Bubble Impacts were even more dramatic with respect to the Household (including non-profits) Balance Sheet. In twelve short years, Household Sector Asset holdings inflated $43.685 TN, or 133%, to $76.549 TN. Despite Household Liabilities surging 185% to $14.379 TN, Household Net Worth (assets minus liabilities) inflated $34.360 TN, or 124%, to $62.170 TN. Importantly, this Massive Inflation of Perceived Financial Wealth over years glossly distorted the quantity and pattern of spending throughout the real economy.
This historic Credit-induced inflation of Household Incomes and Net Worth was at the core of deep structural maladjustment to the U.S. “Bubble” economy. The implosion of “Wall Street finance” (in particular the collapse of Broker/Dealer financing, private-label MBS and other ABS, and various methods of leveraging mortgage, corporate and other securities) marked the demise of various Bubbles, including ones in private-sector debt securities, residential and commercial real estate, equities, and Household Net Worth more generally. In the final analysis, the bust has left multi-Trillion dollar holes in various sector balance sheets. Moreover, Patterns of Spending throughout the economy have been forever altered. Year-after-year of reckless lending has quickly come home to roost in a Big way.
Our federal government has commenced the process of attempting to fill holes through the massive inflation of government Credit and obligations (by the Trillions). Depending on the reader’s perspective, I risk appearing either the master of the obvious or a rabid sensationalist. Yet the stakes associated with the current course of fiscal and monetary policy are absolutely momentous. And I am compelled to write that “if you’re not confused you don’t understand the nature of the problem.”
What are the ramifications and consequences associated with U.S. deficits approaching 12% of GDP? Over the short and intermediate terms? Will unprecedented fiscal and monetary measures stem financial sector implosion? Will Washington’s efforts work to bolster a faltering Bubble Economy, or will they instead only tend to delay unavoidable structural adjustment? Will the Treasury market continue to so easily accommodate reflationary efforts? How long will the dollar remain relatively stable in the face of massive growth in U.S. Non-Productive Credit? Will multi-Trillions of government debt and obligation expansion help to resuscitate private-sector Credit creation - or will it instead simply destroy the Creditworthiness of the entire economy?
Not uncharacteristically, I pose more questions than I have answers. But I do fear that we now face Trillion dollar deficits as far as the eye can see. I don’t expect “Keynesian” policies to have much success in reinvigorating busted asset markets. I’ll be surprised if private-sector Credit creation bounces back anytime soon. I fear policymaking will do more harm than good when it comes to needed economic restructuring. And my worst fears of policymaking (fiscal and monetary, democrat and republican, national and local) bankrupting the country are being anything but allayed. Similar to my belief that mortgage Credit growth should have been limited to, say, no more than 4 or 5% annually during the boom, there is today a very serious need to incorporate some reasonable limits on the expansion of federal debt and obligations.
[Baca]
B of A Carries Loans $44 billion Above Market Value - By Elinor Comlay (4/3/09)
27 February 2009 ReutersNEW YORK - Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) is carrying loans on its balance sheet marked at more than $44 billion above their fair value, the company said in its annual report filed with U.S. regulators on Friday.
The bank said it ended 2008 with $886.2 billion in loans, but estimated the fair value -- or market price -- for these loans as $841.6 billion.
The bank intends to hold these loans to maturity, not for sale, said spokesman Scott Silvestri, explaining why the loans are marked above market value.
The report showed the bank struggled throughout the year as losses on consumer debt including mortgages, home equity and credit cards piled up.
Falling home prices prompted the bank to modify more than 230,000 mortgages in 2008 to help homeowners stay in their homes -- but the value of these mortgages has continued to fall.
Along with losses from mortgages and other consumer loans, the bank said it holds $6.45 billion in impaired commercial loans, up from $2.14 billion at the end of 2007, according to the report.
Separately, Bank of America's investment bank lost more than $10 million on one in every four trading days in 2008.
The Charlotte, North Carolina-based bank has reported write-downs and credit losses of more than $60 billion since the credit crisis began in the middle of 2007.
Bank of America shares finished down more than 25 percent on Friday at $3.95, amid a broad rout of financial stocks after the announcement the government is converting its position in Citigroup Inc's (C.N: Quote, Profile, Research, Stock Buzz) preferred stock to common shares to help restore investor confidence in that bank's capital position. Shares in Bank of America have fallen 72 percent since the start of the year.
[Baca]
MI5 Alert On Bank Riots - By Geraint Jones (4/3/09)
1 March 2009 Sunday ExpressTOP secret contingency plans have been drawn up to counter the threat posed by a “summer of discontent” in Britain.
[FF Editorial: In the ground breaking book, the Shadow-Money Lenders and the Global Financial Tsunami, Matthias Chang has warned as far back as early 2007, that there will be blood on the streets when the impact of the crisis hits the real economy. The people disgusted with the bailouts of the rich and mighty, will take to the streets to demand justice and retribution.]
The “double-whammy” of the worst economic crisis in living memory and a motley crew of political extremists determined to stir up civil disorder has led to the ¬extraordinary step of the Army being put on ¬standby.
MI5 and Special Branch are targeting activists they fear could inflame anger over job losses and payouts to failed bankers.
One of the most notorious anarchist websites, Class War, asks: “How to keep warm ¬during the credit crunch? Burn a banker.”
Such remarks have rung alarm bells in Scotland Yard and the Ministry of Defence.
Intelligence sources said the police, backed by MI5, are determined to stay on top of a situation that could spiral out of control as the recession bites deep.
The chilling prospect of soldiers being drafted on to the streets has not been discounted, although it is regarded as a last resort.
What worries emergency planners most is that the middle classes, now struggling to cope with unemployment and repossessions, may take to the streets with the disenfranchised.
The source said “this potent cocktail is reminiscent of the poll tax riots which fatally wounded Margaret Thatcher’s government in 1990”.
Last night Scotland Yard vowed it was ready to face any threat. A source said: “We do have a policing plan in place and we have riot police officers trained for such measures.”
But other senior police leaders fear the force will be unable to cope.
Were that to be the case, the ¬Government has a contingency plan to deploy troops on the streets of Britain’s major cities.
A senior source said: “This is a very real, and very serious, problem.
“I can tell you there have been crisis talks in Whitehall about this.
“H