One of the scams that the rich use the government for in order to stop less wealthy people from getting richer is to promote the lie that, since venture capital is “riskier” than investing in public securities on the NYSE (another lie), individuals with less than a certain minimum net worth should not be allowed to invest in these “riskier” VC investments.
LILA RAJIVA: The Mind-Body Politic
Individuals Not Ideologies
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Archive of "Finance" Category
Deconstructing Soros: “A New World Architecture”
From George Soros on Project-Syndicate.org. (Nov. 4, 2009), his vision of the new world order.
My comments are in italics.NEW YORK – Twenty years after the fall of the Berlin Wall and the collapse of communism, the world is facing another stark choice between two fundamentally different forms of organization: international capitalism and state capitalism.
Soros Blames Germans For Being Fiscally Responsible
Reuters reports (June 23, 3010) that Soros is wringing his hands over Germany’s savings policy:
“Germany’s budget savings policy risks destroying the European project and a collapse of the euro cannot be ruled out, billionaire investor George Soros said in a newspaper interview released on Wednesday.
Eric Janszen On The Bubble In Economic Fallacies
Eric Janszen at iTulip on how the masses never connect an excess of past circuses with a deficit of current bread:
“Ten years from now, when the full impact of the U.S. asset bubbles of 1998 to 2008 are fully felt, the dot com era, when money flowed like oil from a geyser, before the wars and financial crisis, will be remembered as the good old days, the high water mark for American power and influence. Not one in a million Americans will connect the antecedents to financial crisis and excessive government borrowing to the inflation that we will experience in the future. Not our readers, of course.
World Gold Council, Rothschild-backed Fund Buy Stakes In BullionVault
London’s BullionVault, an Agora friend and possible partner/affiliate, and, so far as I know, a very reputable firm has recently announced that the World Gold Council and Augmentum Capital (backed by Jacob Rothschild’s RIT Capital) has bought stakes in it, in return for a 12.5 million P. investment. I must say I’m not too happy about the news and may look into James Turk’s Gold Money as an alternative. The World Gold Council has been an integral part of the gold-suppression scheme that is at the heart of the financialization of the economy from 1970 onward. (Full disclosure: I have an account at BV). (more…)
Gold Reacting To Anxiety, Says ECRI Chief
Lakshman Achuthan, managing director of the influential Economic Cycle Research Institute, has said he’s sure the economy is “rolling over” but can’t definitively call it a recession yet. Today he adds that the elevated price of gold signals anxiety more than inflation concerns. ECRI has a good track record as a trend predictor, from all accounts. On the other hand, it’s also true that gold is hitting new highs and the financial media has to put a good spin on that. Wall Street doesn’t like physical gold, because whenever it dominates the news stories, it undermines the stock and fund selling on which the Street mainly depends. (more…)
The Huggable Hedgie: Einhorn, Fairy-Tales, And The “Activist” Gravy Train
Mark Mitchell at Deep Capture on well-known hedge-fund “activist,” David Einhorn:
“In addition, Allied was not, as Einhorn claimed, a massive Ponzi scheme. Einhorn had made the smarmy suggestion that Allied was a Ponzi because it supposedly raised money from the markets to pay its dividends. An SEC official told the inspector general that this claim was patently false – it was perfectly obvious that Allied legitimately paid dividends out of earnings.
Sudha Shenoy: The Evolution Of Accounting (Bibiliography)
Organizations and Markets has a brief bibliography of the evolution of accounting by the distinguished libertarian economic historian, Sudha Shenoy. Accounting emerged without state intervention as a type of Hayekian spontaneous order:
“Someone asked whether accounting conventions can be interpreted as a kind of “spontaneous order,” in Hayek’s sense, or if the standard rules are the result mainly of state intervention. Sudha replied with these reading suggestions (lightly edited by me):
Jamie Dimon Weighs In On “Too Hot” Former Citi Employee?
Update:
The case gets stranger. Lorenzana was on a 2003 TV serial, giggling about breast implant surgery she’d had. Knowing that, would any lawyer have framed her case the way it was? Of course, this doesn’t mean she wasn’t the target of harassment. The surgery itself says nothing. It’s commonplace. Do men who take viagra or steroids lose their civil rights? No. And a competent corporate lawyer would, of course, make it the first order of business to establish that the plaintiff in a harassment suit was a slut and “asking for it.” That’s quite usual. But I remain suspicious why this story, like the Helen Thomas story, has suddenly become so prominent….Maybe to create a little sympathy for the banks? Take the focus off the Gaza flotilla? (more…)
Rothschild (Dec. 2008): Buy Bonds, Oil, and Raw Materials
Video 1: An interesting interview by Maria Bartiromo of Sir Evelyn de Rothschild on the financial crisis (December 2008). Here’s a quick break down of his main points: (more…)
Citigroup Fires Banker For Being Too Hot
Update:
Ms. Lorenzana apparently had some pictures of herself on facebook…Doesn’t sound so professional…
And Citi seems to be claiming that her allegations are false. The ostensible reason for her firing is that she was incompetent - behind on sales.
So let’s wait for more information…
9-11 Related Stock Fraudster Elgindy Tipped Off By SEC Officers
“Two U.S. Securities and Exchange enforcement officers released nonpublic SEC information to a Federal Bureau of Investigation agent and a short seller who were convicted of securities fraud and conspiracy in 2005, an SEC watchdog’s report said Tuesday. One SEC officer on several occasions talked with the FBI special agent about the progress of agency probes of companies, Inspector General David Kotz said in his semi
Germans Ban Naked Short-Selling/CDS Swaps Of Euro Bonds
Bloomberg reports a surprise move from Germany:
“Germany will temporarily ban naked short selling and naked credit-default swaps of euro-area government bonds at midnight after politicians blamed the practice for exacerbating the European debt crisis.
Copper Heads South
“Dr. Copper” seems to be telling us something:
“Copper dropped sharply Monday as the general sour mood about Europe and the global economic rebound was heightened by news of rising copper inventories.
Copper for July delivery lost 20 cents, or 6.5%, to $2.93 a pound on Comex. That’s the lowest price for a most-active contract since early February.
The LME reported Monday a rise in copper stocks in South Korea, the first in that country since January, applying further pressure on prices, analysts at Commerzbank said in a report.”
John Hussman: Not Concerned About Inflation
“The bottom line is that we can expect real wages to stagnate for several years, as a predictable reflection of slack capacity in the labor market. While credit concerns will be helpful in augmenting the demand for U.S. government liabilities as a default-(food poisoning)-free alternative to other assets, there is a continued prospect for significant price inflation beginning in the second half of this decade. With the ECB surrendering monetary discipline for the sake of short-term expedience, that prospect has become even more hostile.
IMF Global Currency (SDR) Likely In Next Two Years
From Giordano Bruno at Neithcorp Press:
“Goldman’s involvement in the Greek snafu is assuredly not isolated. Goldman deals with many countries and has likely pulled the same scam everywhere. But why would a large international bank deliberately sabotage the economies of the countries it does business with? Would this not ruin the banks as well in the long run? Not if you consider the possibility that Goldman is destabilizing countries deliberately to help the IMF…
Where In The World Is Iraq’s Gold?
A thought occurred to me late at night. Do you remember these stories from the Iraq war?
WASHINGTON (CNN) –For the second time in a week, U.S. troops have discovered what appears to be a cache of gold bars hidden in a truck, which could be worth just less than a quarter of a billion dollars, according to a Pentagon official.
Radio Interview: CFUV.UVIC.CA, May 10, 2010
Update: Here’s Chris Cook’s radio interview of me on University of Victoria Radio, May 10, 2010.
I’m in the last third. As it was, we didn’t talk much about the crisis, except a bit at the end. We talked mostly about how libertarians suddenly became too dangerous to be allowed across the border.
ORIGINAL POST:
I’ll be talking with Chris Cook of The Peace and Earth Justice website and University of Victoria Gorilla radio show about the financial crisis and the call for regulation; also, about Canada’s increasing unfriendliness to free speech on political matters.
A Preview of the Program:
GR 05-50 101.9 FM 104.3 Cable ‘cfuv.uvic.ca
Monday May 10, 2010
5:00:00 3:00 Welcome to GR, etc. Gordon Campbell’s Liberal party has promised it will enact the Harmonized Sales Tax, or HST come hell or high water; and he may get plenty of both. To call the opposition to the tax popular in B.C. merely scratches the surface of the deep dissatisfaction felt in Canada’s westernmost province. After watching nearly a decade of service cuts, and relentless tax relief to corporations and the wealthiest of British Columbia’s citizens, more tax rises for the working class is about as welcome here as as communicable disease. Resistance to the proposed HST has organized, and petitions currently making the rounds in every voting jurisdiction are piling up signatures, hoping to reach a level that will force the government to back down. Brad Slade is a long-time labor activist and he’s the Regional Organizer for the South Island and the Islands with Fight The HST. Brad Slade in the first half.
And; what lies behind the recent economic meltdown in the United States?
Years of deregulation on high-flying financiers and the introduction of increasingly exotic investment vehicles created a bubble economy whose collapse now threatens the entire global economy, but who is to blame? Lila Rajiva is a journalist and author, whose book titles include: ‘The Language of Empire: Abu Ghraib and the American Media,‘ and ‘Mobs, Messiahs, and Markets’, co-written with Bill Bonner. Her articles are available on the internet at CounterPunch, Dissident Voice, and Lew Rockwell.com, and in mainstream sources such as The Washington Post and The Hindu.
Lila Rajiva and the politics behind financial calamity in the second half.
And; Victoria Street Newz publisher and CFUV broadcaster, Janine Bandcroft will be here at the bottom of the hour to bring us up to speed on the view from Victoria’s burgeoning street society. But first, Brad Slade and B.C.’s tax revolt in the making.
5:03:00 21:00 Discussion w/ Brad Slade
“Welcome back to the show, Brad; it’s been a few months since your last visit here; what’s the latest on the Fight the HST front?”
5:24:00 1:00 Cart(s)
5:25:00 10:00 Janine Bandcroft
5:35:00 3:00 Music
5:38:00 21:00 Discussion w/ Lila Rajiva
Welcome back to GR, etc.
Just what lies behind the recent economic meltdown in the United States? Years of deregulation on high-flying financiers and the introduction of increasingly exotic investment vehicles created a bubble economy whose collapse now threatens the entire global economy, but who is to blame?
Lila Rajiva is a journalist and author, whose book titles include: ‘The Language of Empire: Abu Ghraib and the American Media,‘ and ‘Mobs, Messiahs, and Markets’, co-written with Bill Bonner. Her articles are available on the internet at CounterPunch, Dissident Voice, and Lew Rockwell.com, and in mainstream sources such as The Washington Post and The Hindu.
“Welcome back to the program, Lila; we initially planned to discuss an economics forum that took place in Vancouver over the weekend. What is that forum about, and why were you not in attendance?”
Vote Against Dodd Bill, Corker-Merkley Provision
Mish Shedlock, May 4, 2010A bill sponsored by Ron Paul and Alan Grayson to thoroughly audit the Fed, passed the House. However in a brazen move that ought to offend the sensibilities of every citizen, the Fed is lobbying Senate members to water down the bill so that it is meaningless.
Leveraged Buy-Outs Make Come Back In Private Equity Market
The report I’ve posted below illustrates why most regulatory efforts are completely counterproductive.
By the time enough bureaucrats are convinced there’s a problem, by the time enough of the public has been educated…or miseducated about it..so there’s enough public pressure to call for hearings, by the time the SEC and the DOJ have been able to gather enough evidence to cobble together charges, the swindles move onto some other part of the system, the crooks cover over their tracks, reinvent themselves, put old wine in new bottles and new wine in old, and, in general, outpace the local flatfoots about 100-1, so that they’re nearly always playing catch-up and dissecting history, rather than actually safeguarding the public from the current perils of the market.
Goldman Sachs is the outrage du jour. But much of the really bad stuff Goldman’s been involved in over several decades has nothing to do with the technicality on which it’s being grilled now, a deal that’s no different from hundreds done on Wall Street by every other bank. Meanwhile, what about the dirty laundry of the hedge-funds, of private equity, of sovereign wealth funds - to take just the private sector? And what of the government’s own culpability in financial wrong-doing? And worse yet, its blunders in financial “right-doing”? Don’t count on the SEC to look at all that.
That’s the intrinsic problem of a statist solution…it’s always a day late and a dollar short.
Thus the LA Times reports on where the action is in the financial world, as evidenced in the glee of some participants at the Milken Institute’s Global Conference [that’s Michael Milken, former convicted junk bond financier turned philanthropist and alleged master mind of global market manipulation}:
“Unemployment is high and the housing market remains weak. But in Beverly Hills on Tuesday, private equity players could hardly be more upbeat.
A panel of private equity fund managers at the Milken Institute’s annual Global Conference celebrated the comeback of highly leveraged deals – which had ground almost to a halt during the financial crisis.
“What a difference a year makes,” enthused Leon Black, head of Apollo Management in New York.
Black and the other buyout honchos attributed the return of debt-financed acquisitions to the recovery in the credit markets and the overall economy.
“The high-yield market is probably better today than it ever has been,” said Scott Sperling, co-president of Thomas H. Lee Partners in Boston, referring to the junk bonds that finance many private equity transactions.
A new problem faces private equity investors now: The prices of target companies have shot up faster than fund managers have been able to scoop up bargains.
“A lot of the low-hanging fruit, frankly, is gone,” Black said. “The snapback has been unbelievably dramatic.”
Not surprisingly, the managers bemoaned what Black termed the “populist wave” helping to fuel the Obama administration’s effort to boost oversight of the financial industry.
“You’re seeing some wacky regulation, which makes running our business a lot more difficult,” said Ted Virtue, chief executive of MidOcean Partners, which buys midsize companies.
Still, the private equity business has largely escaped the scrutiny aimed at other areas of Wall Street. “I’m glad I’m not Goldman Sachs today,” Black said with a wide smile.”Soros And Shock Therapy In Poland
From William Engdhal, “The Secret Financial Network Behind George Soros,” 1996 (Executive Intelligence Review):
[Note I: I mentioned Engdahl's piece about Soros and Rothschild earlier, with the disclaimer that EIR is a Larouche outfit often labeled conspiracist and anti-Semitic, but nonetheless acknowledged to have produced good research. This piece, as I found it on the net, is not extensively sourced, which is why I've not previously linked it. However, having recently found old newspaper articles substantiating at least a part of the material, I'm going ahead and posting it.
Note II: Soros has a variety of interesting business associations. He has ties with Jim Rogers, through the Quantum Fund, which Rogers left to form his own group; with Rees-Mogg, the British journalist and Agora associate/writer; and with James Goldsmith, the Anglo-French financier, who was at one time Rees-Mogg's primary financial backer. But, Goldsmith, a speculator and corporate raider in the 1980s, was vehemently opposed to GATT and the drive to globalize in teh 1990s, which seems to rather complicate the economic hit-man narrative. Rogers' pronouncements, as much as I've followed them, often directly contradict Soros' public statements.
Thus, in my opinion, while there could well be collusion at work among some (or even all) of these entities, from the record, at least, the situation is much muddier. For instance, if you look at what Goldsmith has to say about globalization in the 1990s, he is anti-agribusiness, anti-nuclear power, and anti-GATT. That diverges sharply from Engdahl's general premise, which is best exemplified in the shock-doctrine advocated by Soros in Russia, via economist Jeffrey Sachs (the best account of which is by journalist Ann Williamson, who testified on the matter to Congress).
The truth is, many people advocate many kinds of things from ideology. That ideology is often shared by their business associates, since people with shared ideologies usually end up working in the same place. That doesn't automatically mean they are all working hand-in-glove, or even know each other more than superficially. Even the joint ownership of a fund or corporation, unless it is over a long period of time, does not have to imply that the owners are all in agreement with each other's financial goals. That said, there are suggestive connections noted in this piece that are relevant both to the debt crisis in Europe and to the ongoing manipulation of the markets, which is why I want to link the piece, despite the problems with it that I've noted.
Here's an excerpt relevant to the situation in Poland:
"Poland: In late 1989, Soros organized a secret meeting between the "reform" communist government of Prime Minister Mieczyslaw Rakowski and the leaders of the then-illegal Solidarnosc trade union organization. According to well-informed Polish sources, at that 1989 meeting, Soros unveiled his "plan" for Poland: The communists must let Solidarnosc take over the government, so as to gain the confidence of the population. Then, said Soros, the state must act to bankrupt its own industrial and agricultural enterprises, using astronomical interest rates, withholding state credits, and burdening firms with unpayable debt. Once this were done, Soros promised that he would encourage his wealthy international business friends to come into Poland, as prospective buyers of the privatized state enterprises. A recent example of this privatization plan is the case of the large steel facility Huta Warsawa. According to steel experts, this modern complex would cost $3-4 billion for a western company to build new. Several months ago, the Polish government agreed to assume the debts of Huta Warsawa, and to sell the debt-free enterprise to a Milan company, Lucchini, for $30 million!.
Soros recruited his friend, Harvard University economist Jeffery Sachs, who had previously advised the Bolivian government in economic policy, leading to the takeover of that nation's economy by the cocaine trade. To further his plan in Poland, Soros set up one of his numerous foundations, the Stefan Batory Foundation, the official sponsor of Sach's work in Poland in 1989-90.
Soros boasts, "I established close personal contact with Walesa's chief adviser, Bronislaw Geremek. I was also received by [President Gen Wojciech] Jaruzelski, the head of State, to obtain his blessing for my foundation.” He worked closely with the eminence gris of Polish shock therapy, Witold Trzeciakowski, a shadow adviser to Finance Minister Leszek Balcerowicz. Soros also cultivated relations with Balcerowicz, the man who would first impose Sach’s shock therapy on Poland. Soros says when Walesa was elected President, that “largely because of western pressure, Walesa retained Balcerowicz as minister.” Balcerowicz imposed a freeze on wages while industry was to be bankrupted by a cutoff of state credits. Industrial output fell by more than 30% over two years.
Soros admits he knew in advance that his shock therapy would cause huge unemployment, closing of factories, and social unrest. For this reason, he insisted that Solidarnosc be brought into the government, to help deal with the unrest. Through the Batory Foundation, Soros coopted key media opinion makers such as Adam Michnik, and through cooperation with the U.S. Embassy in Warsaw, imposed a media censorship favorable to Soros’s shock therapy, and hostile to all critics.
Russia and the Community of Independent States (CIS): Soros headed a delegation to Russia, where he had worked together with Raisa Gorbachova since the late 1980s, to establish the Cultural Initiative Foundation. As with his other “charitable foundations,” this was a tax-free vehicle for Soros and his influential Western friends to enter the top policymaking levels of the country, and for tiny sums of scarce hard currency, buy up important political and intellectual figures. After a false start under Mikhail Gorbachov in 1988-91, Soros shifted to the new Yeltsin circle. It was Soros who introduced Jeffery Sachs and shock therapy into Russia, in late 1991. Soros describes his effort: “I started mobilizing a group of economists to take to the Soviet Union (July 1990). Professor Jeffery Sachs, with whom I had worked in Poland, was ready and eager to participate. He suggested a number of other participants: Romano Prodi from Italy; David Finch, a retired official from the IMF [International Monetary Fund]. I wanted to include Stanley Fischer and Jacob Frenkel, heads of research of the World Bank and IMF, respectively; Larry Summers from Harvard and Michael Bruno of the Central Bank of Israel.”
Since Jan. 2, 1992, shock therapy has introduced chaos and hyperinflation into Russia. Irreplaceable groups from advanced scientific research institutes have fled in pursuit of jobs in the West. Yegor Gaidar and the Yeltsin government imposed draconian cuts in state spending to industry and agriculture, even though the entire economy was state-owned. A goal of a zero deficit budget within three months was announced. Credit to industry was ended, and enterprises piled up astronomical debts, as inflation of the ruble went out of control.
The friends of Soros lost no time in capitalizing on this situation. Marc Rich began buying Russian aluminum at absurdly cheap prices, with his hard currency. Rich then dumped the aluminum onto western industrial markets last year, causing a 30% collapse in the price of the metal, as western industry had no way to compete. There was such an outflow of aluminum last year from Russia, that there were shortages of aluminum for Russian fish canneries. At the same time, Rich reportedly moved in to secure export control over the supply of most West Siberian crude oil to western markets. Rich’s companies have been under investigation for fraud in Russia, according to a report in the Wall Street Journal of May 13, 1993.
Another Soros silent partner who has moved in to exploit the chaos in the former Soviet Union, is Shaul Eisenberg. Eisenberg, reportedly with a letter of introduction from then-European Bank chief Jacques Attali, managed to secure an exclusive concession for textiles and other trade in Uzbekistan. When Uzbek officials confirmed defrauding of the government by Eisenberg, his concessions were summarily abrogated. The incident has reportedly caused a major loss for Israeli Mossad strategic interests throughout the Central Asian republics.
Soros has extensive influence in Hungary. When nationalist opposition parliamentarian Istvan Csurka tried to protest what was being done to ruin the Hungarian economy, under the policies of Soros and friends, Csurka was labeled an “anti-Semite,” and in June 1993, he was forced out of the governing Democratic Forum, as a result of pressure from Soros-linked circles in Hungary and abroad, including Soros’s close friend, U.S. Rep. Tom Lantos.”
Michael Hudson On The Basic Problem Of the EU
From an interview of economist Michael Hudson at iTulip:
“EJ: Who wins the political battle shaping up here between the PIIGS and their creditors? Within the structure of the euro?
MH: I guess whoever has the most guns politically. The Greeks are out on the streets. The French are out on the streets. They’re not like Americans. They’re really protesting and the class war is back in business over there. Same thing in Ireland.
EJ: My French friends will tell me they’re barbarians over there. We’re very civilized here in the United States.
MH: That’s our problem, as Freud said in “Civilization and its Discontents.”
EJ: I remember reading that book in college. He explained the conflict between the demands of society for individuals to stifle the animalistic behavioral foundations of human nature. Is there a way to diffuse the conflict? A muddle-through option? The IMF has been in and out of the Greek rescue.
Debtor versus creditor nations split the EU
MH: The IMF cannot be part of the solution. It’s part of the problem. The EU basically is part of the problem because it’s pro-financial. So the whole way in which the European Union is structured, basically in a centralized way to be run by the financial lobbyists, obviously isn’t working. The EU isn’t really like the United States. It doesn’t really have it’s own parliament and systematic taxes. The Germans are saying today that in the old days, a century ago, if a problem like this came up in, say, Latin America, the United States would send in the marines. They’d occupy the custom’s houses and as these governments made most of their money on charging customs on imports and exports the marines would collect it and pay the creditors.
But now what are the creditors going to do today? Are, let’s say, the Germans going to take over in Greece? Who will act as the equivalent of the Internal Revenue Service to collect the money? The Germans would have to promote not a military dictatorship as the colonel powers did in the old days but a popular government that would tax the rich and the Germans aren’t going to do that. The European Union, the creditors, because they support the right wing not the left wing, are preventing these governments from collecting taxes progressively to balance the budget and pay the debts. That’s the problem: it’s a right-wing versus left-wing problem. Unfortunately, there isn’t really a left wing in Europe to make this case very well. The social democrats have more or less abandoned what used to be an economic policy at the outset. They are now concerned more with political and social issues than economic issues. So there isn’t really a party in Europe that is taking the side of progressive economic policies. They’ve left economics and finance, and debt and credit policy, to the right wing to discuss among each other rather than making it a left-wing topic like it used to be a hundred years ago.
EJ: Isn’t that something of a global phenomenon?
MH: Yes.
EJ: I don’t see it as being terribly different here in the US.
MH: Or in Australia. The Labor Parties all over the world. The most right-wing parties that you can see are the labor parties of Australia and New Zealand where they were leading the privatization sell-offs and leading the tax shift favoring the financial sector. And they didn’t even realize it! They’ve somehow “decoupled” financial analysis from the social analysis that characterizes social democratic and labor parties from their outset a hundred years ago.”
My Comment:
Hudson is always interesting to read, as long as you keep in mind his basic Marxist orientation. So he gets the details right, and then he goes on about the old demon “right-wing” in rhetoric that doesn’t make sense to me, and that even his own writing betrays.
“So Old Europe is quite culpable for having promoted a kind of neo-liberalism that was so right-wing as never to have been able to get a foothold at all either in Western Europe or in the United States. In Latvia there is a flat tax on labor of over 50% and less than a 1% tax on property.”
But right-wingers are the ones arguing the hardest to abolish taxes, especially in this country….
So, with the acknowledgment that I’m an alert student of economics who’s been reading/researching the economic crisis for a few years, but whose main training is in history and politics, let me note the puzzling discrepancies I find in the writing of a man whose knowledge and industry experience are said to be impeccable by even people who don’t agree with him:
1. Why does MH blame “right wingers,” when it was Austrians and right-wingers who were vehemently opposed to the bail-out and to TARP that saddled the country with the banks’ debts? Since when are social-democrats right-wingers?
2. Monetarism and monetary intervention are uniformly advocated by all economists, from the so-called left to the so-called right. Indeed, it’s only the extreme right (to the right of the statist Chicago school) that criticizes all monetary intervention.
3. Why does Hudson argue against deflation? Deflation is the one thing that will ultimately put the economy back on track. All those overpriced houses would fall in price to within reach of the average citizen. Deflation might reduce wages but it will save pensioners and support savers (who have taken the brunt of the damage done by the boom).
4. A default by Greece would have helped the Euro, ultimately.
5. Why does Hudson think that inflating away a country’s debt is good for the working man or for pensioners or for small business? Inflation will whittle away at the currency, at savings, and at real income. None of which is good for ordinary people.
6. Hudson is right that Social Security and Medicare in the US are not entitlements, since people have all contributed to them. One solution to funding them is to dismantle the war machine. Convert all bases to peaceful uses. That requires no extra funding. Why is it that Hudson doesn’t raise that as an option?
7. Hudson claims that Latvian taxes are of a kind no Western nation would levy (50%) on labor. Really? Adding up all income taxes and sales taxes, taxes in the northern European countries are surely that high, and taxes in the US and UK are well on their way there.
8. Despite talking about “social culture” Hudson says nothing about whether the Eastern European countries have the same kind of business and social culture that have made the northern countries creditor countries. What are the rates of savings, of corruption, of business creation? What are the laws regarding property rights? What are the incentives, or lack thereof, for business?
Rahm And The Killer Hedgie
Yves Smith has a piece at naked capitalism related to the extended Pro Publica (http://www.propublica.org/special/the-timeline-of-magnetars-deals) report by Jake Bernstein, Jesse Eisinger, and Krista Kjellman Schmidt that describes how hedgies manipulated subprime CDOs:
“Magnetar
1) A neutron star with an intense magnetic field, capable of emitting toxic radiation across galaxies
2) A hedge fund, the single market player most responsible for the severity of the 2008 financial crisis, through the toxic instruments it createdMore On Einhorn’s Rumor-Mongering About Lehman
Matthew Goldstein and Steven Eder
(Hat-tip to Sean at Deep Capture):
“In forwarding Starr’s email to the SEC, former Lehman General Auditor Beth Rudofker wrote: “I phoned you earlier to review and pass on some recent rumor activity and information that is concerning to us.”
In June, Rudofker sent another email to lawyers at the SEC, pointing out additional “rumors” about Lehman that she said “continue to be destructive.” In her long email to the SEC, she said: “We have been able to prevent 3 stories containing these specific rumors that were set to run.”
Also included in the documents is a back-and-forth email exchange between Einhorn and Callan, in which Callan accused him of being “very disingenuous.” Callan said she would not have talked to Einhorn if she knew he was going to make a speech criticizing the firm’s finances.
“I can only feel that you set me up and you will now cherry pick what you like out of the conversation to your thesis,” she wrote in an May 19, 2008 email.
Einhorn defended himself in a lengthy response, saying that Callan knew Greenlight was “short” the stock when she reached out to talk to him.
“You had no reason to expect that our discussion was confidential in any way,” Einhorn wrote in response. “In fact, you knew that I do not want to be restricted in trading the stock and I did not request any information that you would not provide to any other investor who asked.”
A few days later, Einhorn gave another speech blasting the email exchange.
A spokesman for Einhorn declined to comment on Wednesday evening.
For his part, Starr now says, “obviously I was wrong” about Lehman. But he isn’t backing down on his criticism of Einhorn.
“I still stand by those words,” said Starr, who noted that his fund has $50 million under management. “I think that manipulating the market and running a high publicity business is just not appropriate behavior and disruptive to free and open markets.”
My Comment:
Goldstein is the excellent Reuters reporter whose story on Steven Cohen was reportedly spiked…
(more later)
Soros Says Eight More Years Before Next Crash
George Soros sings the siren song of “government,” while admitting that government is the problem: (more…)
Refuting Kucinich’s Funny Money Platform
Kaj Grussner, a tax-adviser in Finland, has a piece at the Mises blog that responds to Stephen Zarlenga. Zarlenga is the director of the American Monetary Institute and the author of “The Lost Science of Money.” He had previously criticized the Austrian position at Gnostic Media.
The critique is important because Zarlenga’s ideas have been adopted by Dennis Kucinich and they may very well bear fruit in policies (the American Monetary Act) that could make things worse (if you can imagine that). Here’s Grussner:
“Zarlenga criticizes economists for many things. One of these is that economists have taken morality out of the science of economics. He also says that economists have tried to hide this exclusion of morality, because if people were told about this atrocity they would be outraged.
Of course, morality has no place in the science of economics.
[Lila: I see where Grussner is coming from, but actually he's mistaken, mainly because economics isn't a science, but also for other reasons].
Science is, by its very nature, value-free.
[Lila: Actually, this too isn't quite right. Science has a different set of values, but I take his point].
When you try to explain why action A had consequence B, you should examine theory and fact. It is only when you start too advocate certain actions or programs, such as the 100-percent-reserve solution, that morality comes into play. Let us therefore examine the moral aspects of Zarlenga’s monetary reform.
From the very outset, printing dollars out of thin air, declaring them legal tender, and purchasing goods and services with them is tantamount to theft. The printer acquires property without giving anything of real value in return. After all, the money is merely ink on paper with no value of its own except what it derives from the violent force of the government.In addition, it is always those who get the new money first who benefit the most. In this instance, it would be the government. But those who are second in line will benefit too, while the new money still has most of its value. The recipients of the new money can turn around and again acquire something for nothing. The amount that can be acquired diminishes over time, so those who get the money last are the ones who pay for the early recipients’ gains.
Zarlenga explicitly mentions healthcare and education as being areas of government spending, as this would benefit the masses, who otherwise couldn’t afford such services. What he fails to understand is that it isn’t the students and patients who benefit, but the hospitals and universities. It is the medical professionals and academics who are the true recipients of the money. It is to them that the money is paid for the services they provide, and the constant influx of new money into these sectors will of course raise prices significantly over time.
[Lila: All this is true, and, in addition, cheapening will actually strengthen big business, because it is big business that takes on the most debt. This is an act that will win the approval of the underclass that doesn't pay taxes; debtors, who get to see their debts diluted; the governing class and all its clients, who live on public money; and the corporate class that pays taxes, but extracts much more back from the government in the form of subsidies and the use of infrastructure].
Every bout of new money will draw value from the existing amount of money, which means that after the initial theft of property by the government and its preferred interest groups, the debasement of the currency will continue at an ever-increasing rate; the more devalued the dollar gets every year, the more dollars must be printed every year to pay for the same things. For people far away from the printing press, this means that the value of their savings and income is transferred to the money printers and first recipients of the new money, much as it is today.
Another obvious problem with having the government print money is that it creates rent-seeking behavior. With fresh supplies of money coming from the government at an increasing rate, it becomes more and more reasonable for private corporations to lobby for a part of the public-spending cake than to appeal to consumers. In the long run, this means that an ever-increasing part of the private sector will become dependent on the influx of new government money.
From a moral point of view, it makes no difference who counterfeits the money and acquires property for nothing. It is still fraud and theft.
ConclusionThere is no point in making the Austrian case for commodity money here. There are many easily read books that do that. The purpose of this article is to explain that no matter how bad a system is, it can always get worse. Not all reforms are improvements. As we have seen, the 100-percent-reserve solution is ripe with unintended consequences.
When this economic crisis evolves into a currency crisis, which it most probably will, reform will become inevitable. The question then is what ideas for reform are lying around for the people and the politicians to choose from.
The reform advocated by Zarlenga and introduced to the Congress by Dennis Kucinich may very well appeal to politicians and bureaucrats. Also, the increasing animosity toward both the Fed and the banking establishment as a whole will likely encourage ordinary Americans to support Zarlenga and Kucinich’s initiative. On the face of it, the solution sounds rather reasonable and has the support of a very popular congressman.
Just think about it. It would strip the banks of their privileges and put the money power back into the hands of the people through their elected representatives; it would break the bankers’ secretive monopoly racket, which enables them to pay out billions in bonuses while ordinary people suffer. Doesn’t that sound familiar? Isn’t that how the Federal Reserve system was sold to the American public following the Panic of 1907?
For Austrians, it is easy to dismiss Zarlenga as a crank, which, based on the ridiculous claims he makes, he undoubtedly is. So why should we pay attention to someone like him? Because if we don’t, we increase the risk of him being successful in making the American Monetary Act become law. After all, similar monetary systems have been tried before.
This is why Austrians need to expose the real dangers of such a system. It would be a mistake to simply assume that that everyone will recognize its inherent problems and reject it. If the government can pass a constitutional amendment to sign the Federal Reserve Act into law and thus create a private central bank, they can certainly do this too.
So in addition to making the case for the free-market solution in money and banking, Austrians need to take up the debate with all their intellectual opponents. Zarlenga is one of them, and he should not be taken lightly.”
I’m posting a response to Grussner I saw here.
I can’t say I was impressed by Zarlenga’s original criticism of the Austrians or the response to Grussner. The monetarists seem completely mistaken on fundamental economic principles, and I’m appalled that they are being taken so seriously.
In the first place, Zarlenga does not seem to understand that both money and debt represent claims to real goods. But while debt is a claim to real goods not yet produced, money is a claim to those goods in the present. That is, money represents production.
If a bank (either private or public) issues money without sufficient real goods to back that, the money is essentially “funny money” and it represents a theft from people who have savings based on real production. That’s what’s happened already. Savers have lost the high interest rate they ought to have received for the past two decades, and have subsidized an orgy of debt and spending by other people. Now the “other people” are using the force of the law (the gun, really) to make the savers give up more, so that the debtors can walk away from their debts. If the debts were fraudulently contracted, the defrauders should pay, not innocent savers who had nothing to do with the fraud. And if the debts were fairly contracted, the debtors should pay up.
Invoking imaginary golden ages where “the people” simply gave themselves whatever they wanted doesn’t cut it. Ain’t no such thing. Proof? Look at countries where there is “public” money. Inflation runs even higher in India than in the US. Corruption is rampant. A resource-laden, skilled and manpower-rich country has a per capita income no better than some of the poorest countries in sub-Saharan Africa.
The banking mafia is a symptom, not the root cause of our problems. The root cause is the state, and the philosophy that allows the state to set aside natural law because it is “the lawgiver.”
Peter Schiff said it in a nice way:
“We Americans also must be honest with ourselves and recognize that we have been living beyond our means and that our lifestyle has been largely financed by austerity in China.”
And here, Peter Gorenstein (who, amazingly, seems to approve) states the obvious - the Fed wants to inflate away debt because it believes it will grow the economy (I kid you not):
“The Fed can’t admit that one reason it wants high inflation is to reduce the real burden of our debt, but you can bet that that’s one of its objectives. What’s more, says Nobel-winning economist Paul Krugman, inflation should be one of the Fed’s objectives. Because that’s how we’ve gotten out from under debt burdens in the past.
So how did the U.S. government manage to pay off its [World War 2] wartime debt? Actually, it didn’t. At the end of 1946, the federal government owed $271 billion; by the end of 1956 that figure had risen slightly, to $274 billion. The ratio of debt to G.D.P. fell not because debt went down, but because G.D.P. went up, roughly doubling in dollar terms over the course of a decade.
In other words, after World War 2, we didn’t “pay down” our debt. We grew into it.
And, importantly, this growth came from a combination of real growth AND inflation:
The rise in G.D.P. in dollar terms was almost equally the result of economic growth and inflation, with both real G.D.P. and the overall level of prices rising about 40 percent from 1946 to 1956.
So inflation is an important tool in getting us out of this mess. It’s painful and unfair–those who have been responsible and saved money will pay the price for those who borrowed money, racked up huge debts, and spent more than they could afford. But it’s what the Fed is (quietly) aiming for.”
Someone might say that the system where I do the borrowing and spending, and you do the saving and working is a version of slavery.
[That isn't an anti-American statement either. It was made by a rather plain-speaking CEO of an American company...]
Debtors are demanding that savers work for them, through foregoing their own consumption and the market- price of money. Monetarists are demanding that people walk away from the obligations of their government with a slow-motion dilution of the currency. People on fixed income will be destroyed. People dependent on wages in industries where wages are not rising (nearly every industry) will find prices rising beyond them. Responsible workers and savers, here and around the world, will get stiffed. Future borrowing costs will soar. The US will suffer retaliatory treatment from foreign countries. Other countries will default on their debt or renege on their contracts. So will citizens everywhere. Corruption will rise. Gamblers in the stock market will benefit, as their portfolios of cash now get plumped up. That is banana-republicanism.
Possible Mossad Links to Killing of Syrian Man In Hungary?
Last, week there was another killing suspected to be the work of the Israeli intelligence agency, Mossad. This one was in Budapest, Hungary. The dead man was supposedly involved in money laundering. Hungarian officials have since played down the connection, but it was widely reported there, as well as in Israel and Russia.
“On Wednesday March 17, just after seven in the morning, Dr Bassam Trache, a 52-year-old veterinary surgeon with dual Syrian and Hungarian citizenship, was shot dead in his black Mercedes at a junction in Budapest’s 16th district. The killer grabbed a black briefcase from the car and made off on foot.
Dr Trache, it was revealed, operated a money-changing business. A few years ago he was acquitted in court of attempting to bribe - with jewellery and Arab cakes - the head of the Budapest police’s money-changing investigation division.
At first, his murder was regarded as yet another killing connected with the shady world of money-changing; in the past ten years, there have been no fewer than 123 murders connected with the business in Budapest.
But then a more fantastic theory to explain Dr Trache’s murder emerged.
It transpired that on the very day that Trache was killed, two Israeli Gulfstream V-type jets were spotted flying low over the Hungarian capital, leading to speculation that, just two months after the assassination in Dubai of Hamas commander Mahmoud al-Mabhouh, the Syrian might have been the victim of a Mossad hit…..”
That’s from The First Post ( UK), which goes on to list some of the puzzling inconsistencies in the government’s statements that have been fueling the rumor.
“Last week, however, it was announced that a leading official of the NKH had been sacked, with a further four members of staff disciplined, over their failure to consult Hungary’s secret services before issuing a permit for the Israeli aircraft to enter Hungarian airspace.
And while Szollar claimed that Israel’s flying manoeuvres were merely “routine”, Hungary’s transport minister, Peter Honig, conceded that they were not fully in line with Hungarian laws. Then the Hungary’s HirTV claimed that the Israeli ambassador to Hungary, though denying the term “spy planes”, had referred to the planes as reconnaissance jets.”
The New York Post has reported that the Israeli ambassador told the Hungarian news agency MTI that the jets were on a diplomatic mission and were not spying. The NY Post said the Hungarian government had declined to comment on this response.
Another newspaper, MY Sun, reported that it was Hungarian officials who claimed the jets were on a diplomatic mission.
In a Reuters report, Hungarian spokesman Domokos Szollar stated that the jets were in “routine training” and Israel had cleared the overflights with Hungary two months in advance. Szollar explained the earlier confusion by officials as a case of bad internal communications. Apparently, the Hungarian defense department hadn’t been notified, and so, on first hearing of the flights, PM Gordon Bajnai had ordered an investigation.
The head of Budapest’s criminal investigations team, Zsolt Bodnar, reportedly dismissed allegations about a Mossad link as “fiction.”
I’m going ahead, nonetheless, and posting this video, because it happens to follow two far more substantial stories I’m also watching: the story about documented Mossad links to the murder of a Hamas operative in Dubai, as well as the possible Mossad ties of David Headley, the CIA operative who admitted to being guilty of the Mumbai terror attack of November 2008, at the time blamed on Islamicists. All three events together form a news story that’s quite riveting, especially since it accompanies the continual drum-beat for war with Iran. This story also suggests that any arrests for domestic terrorism need to be looked at with a great deal of skepticism, at this point.
At this point, I should repeat, the forgery of the passports in the killing of the Hamas official is documented; any ties to Headley are very plausible but so far unproven (and have not been reported in the mainstream press, for that’s worth); and the Hungarian story seems to be still in the “allegations” stage.
Arms and Mark Thatcher..
Mark Thatcher, son of the former UK PM, seems to have been dogged with accusations of financial impropriety. I bring him up, because of a comment on this blog about his direct involvement in an international conspiracy to cover up the manipulation of precious metals that was apparently outed in 2002 in the UK, but was covered up. In researching the comment, I began with some background on Mark Thatcher.
Here’s a brief summary of some financial “improprieties” as they show up in a Guardian article from 2004.
“But hit controversy in 1984 when the Observer alleged that he benefited from his mother’s position when a large construction deal in Oman was awarded to a building firm, Cementation, with which he was involved, after Mrs Thatcher visited the tiny Gulf state. The accusations were never proven.
Further controversy dogged him through his friendship with the Middle East businessman Wafic Said - a quiet-spoken Syrian with close links with Saudi royalty.
Among other business ventures in the 1980s, he was involved in several large-scale arms deals, most notably a £20bn contract between British Aerospace and Saudi Arabia.
Although rumours of impropriety have dogged his business career, he largely disappeared off Fleet Street’s radar after moving to the US.
But it is recorded that his wealth grew to the point where he spent periods as a tax exile in Switzerland.
In the 1990s he helped secure the multimillion pound contract for his mother’s Downing Street memoirs, but after the failure of a security alarm business in the US and a prosecution for tax evasion, Mark, his wife and their two children moved again - this time to South Africa.
Three years after the move to Cape Town, in 1998, he was investigated by South African police over a money-lending business to police officers. He counter-claimed that officers working for him as agents had defrauded him and the investigation was eventually dropped.
He returned to the UK last July for the funeral of his father, Sir Denis, a former oil businessman, who died aged 88. He inherited his father’s hereditary baronetcy to become Sir Mark.
Sir Mark, who was known as “Thickie Mork” among other nicknames at Harrow and who has been criticised for his lack of charm, was once described by the Financial Times as “a sort of Harrovian Arthur Daley with a famous Mum”.
A devoted Lady Thatcher, however, has always had faith in him. “Mark could sell snow to the Eskimos, and sand to the Arabs,” she is reported to have said.
His notoriety was not welcomed by Sir Bernard Ingham, Lady Thatcher’s former press secretary.
Asked by Sir Mark how he could best help his mother win the 1987 general election, Ingham reportedly replied: “Leave the country.”
Gerald Celente: Greece Finished, USA To Follow
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Gerald Celente interviewed by Judge Andrew Neapolitano. Central banks are bailing out the private sector all over the world.
Roubini: Significant Risks Of Gold Correction
Downside risks to gold, writes Nouriel Roubini at The Globe and Mail:
“But, since gold has no intrinsic value, there are significant risks of a downward correction. Eventually, central banks will need to exit quantitative easing and zero-interest rates, putting downward pressure on risky assets, including commodities. Or the global recovery may turn out to be fragile and anemic, leading to a rise in bearish sentiment on commodities – and in bullishness about the U.S. dollar.
Another downside risk is that the dollar-funded carry trade may unravel, crashing the global asset bubble that it, with the wave of monetary liquidity, has caused. And since the carry trade and the wave of liquidity are causing a global asset bubble, some of gold’s recent rise is also bubble-driven, with herding behaviour and “momentum trading” by investors pushing gold higher and higher. But all bubbles eventually burst. The bigger the bubble, the greater the collapse.
Gold’s rise is only partially justified by fundamentals. And it is not clear why investors should stock up on gold if the global economy dips into recession again and concerns about a near depression and rampant deflation rise sharply. If you truly fear a global economic meltdown, you should stock up on guns, canned food and other commodities that you can actually use in your log cabin.”
Harvard Undergrad & Perlman Student, Intern Beats Wall Street Whizzes
Update (March 30):
If anyone claims that looking at gender and the way it inflects culture is inherently collectivist, I’d say they need to define collectivism more accurately. The way libertarians define it now, it’s more a term of abuse than a credible unit of analysis, unless it’s qualified pretty heavily.
There is a body of evidence that males are over-represented in highly aggressive behaviors of certain kinds. That isn’t an argument that men are “less moral” or that women are “more moral.” Not at all. For instance, women predominate in certain other kinds of crimes. In studies of child-killing/infanticide, women killers are often represented more heavily when considering certain age groups. Why? Perhaps because children are weaker than women physically and because women spend more time around them and usually have primary care of them. On the other hand, there are fewer female serial killers than male.
The richest financiers in the world are males. That’s a fact. Males are heavily over-represented in the financial industry and it’s a very male-dominated culture. There are complex reasons for that.
But they’re irrelevant to this post.
Do women benefit from welfare-state programs and set-asides and does that affect voting patterns, consumer culture, tax policy, and welfare policy? I’d say, with some caveats, probably yes.
[But conversely, men might benefit from crony capitalism on Wall Street and defense boondoggles, and indirectly, through set-asides from women that benefits families].
But, again, that doesn’t have much to do with this post…
For all I know, some of these financiers were pushed into reckless behavior because their wives were shopaholics or suing them for everything they had.
But, once again, that’s not this post.
So, this isn’t gender bigotry. It’s simply one way of looking at the influence of our own collectivist tendencies (masculinity as it’s constructed, as well as masculinity as a biological reality) on Wall Street culture.
Original Post
Deal Journal tracks down another outsider who spotted Wall Street’s corrupt practices ahead of the pros. Turns out she’s a woman too. There’s something about estrogen that doesn’t lend itself to mega financial swindles. We’re waiting for the Harvard thesis on the gender behind Wall Street’s agenda.
I hate to come to this conclusion, but a lot of the hot-air, recklessness, ego, hype, aggression, and cut-throat competition really does sound like the product of a culture that conflates masculinity with viciousness and braggadocio. Paulson, Weill, Rubin, Dimon…no women in the top sharks. But when you look at whistle-blowers and expose writers, women stand out: Ann Williamson, Padma Desai (both on the Russian crisis) Lucy Komisar, Meredith Whitney, Janet Tavakoli….
“Deal Journal has yet to read “The Big Short,” Michael Lewis’s yarn on the financial crisis that hit stores today. We did, however, read his acknowledgments, where Lewis praises “A.K. Barnett-Hart, a Harvard undergraduate who had just written a thesis about the market for subprime mortgage-backed CDOs that remains more interesting than any single piece of Wall Street research on the subject.”
“Barnett-Hart’s interest in CDOs stemmed from a summer job at an investment bank in the summer of 2008 between junior and senior years. During a rotation on the mortgage securitization desk, she noticed everyone was in a complete panic. “These CDOs had contaminated everything,” she said. “The stock market was collapsing and these securities were affecting the broader economy. At that moment I became obsessed and decided I wanted to write about the financial crisis.”
Back at Harvard, against the backdrop of the financial system’s near-total collapse, Barnett-Hart approached professors with an idea of writing a thesis about CDOs and their role in the crisis. “Everyone discouraged me because they said I’d never be able to find the data,” she said. “I was urged to do something more narrow, more focused, more knowable. That made me more determined.”
She emailed scores of Harvard alumni. One pointed her toward LehmanLive, a comprehensive database on CDOs. She received scores of other data leads. She began putting together charts and visuals, holding off on analysis until she began to see patterns–how Merrill Lynch and Citigroup were the top originators, how collateral became heavily concentrated in subprime mortgages and other CDOs, how the credit ratings procedures were flawed, etc.
“If you just randomly start regressing everything, you can end up doing an unlimited amount of regressions,” she said, rolling her eyes. She says nearly all the work was in the research; once completed, she jammed out the paper in a couple of weeks.”
More here about the young lady whose research probably played a big part in Michael Lewis’ new book, “The Big Short.”
[At least, Lewis acknowledged the research. That puts him several rungs above most celebrity authors].
Meanwhile, I really like that a violinist was involved in this. My own father was a very gifted amateur violinist and Perlman, Zukerman, Oistrakh, Elman, Kreisler, Menuhin and many others defined my childhood.
Perhaps a lifetime of being immersed in real virtuosity and creativity left Barnett-Hart immune to the glamor of the phony maestros of Wall Street …
More Capital Controls Hidden In Obama Stimulus Act
Zerohedge notes the tightening of capital controls in the hiring incentives act (HIRE) passed on March 18 by the Obama administration. A more sober summary of the changes introduced can actually be found at Lexology. Salient points from Lexology’s summary:
1. Withholding Tax on Payments to Foreign Financial Institutions, Trusts and Corporations. Effective January 1, 2013, the HIRE Act essentially forces foreign financial institutions, trusts, and corporations to choose between either agreeing to provide the IRS with information about their U.S. account holders, grantors and owners, or subjecting themselves to a 30% withholding tax on almost any payment they receive from a U.S. payor. The rules applicable to foreign financial institutions differ from those that apply to foreign trusts and corporations……….
….In general, “withholdable payments” to an FFI are subject to the 30% withholding tax unless the FFI enters into an agreement with the Treasury Secretary requiring the FFI to:
- Obtain sufficient information from every holder of every account maintained by the FFI to determine whether the account is a United States account.
- Comply with the verification and due diligence procedures that the IRS and U.S. Treasury may require regarding identification of United States accounts.
- Provide annual reports on each United States account maintained by the FFI, which must include:
- The name, address, and TIN of each account holder which is a specified U.S. person and, in the case of any account holder which is a U.S.-owned foreign entity, the name, address, and TIN of each substantial U.S. owner of such entity;
- The account number;
- The account balance or value; and
- Except as provided by the Treasury Secretary, the gross receipts and gross withdrawals or payments from the account.
- Deduct and withhold a tax equal to 30% of any “passthru” payment by the FFI to either a “recalcitrant account holder,” which is a U.S. account holder who withholds information from the FFI, or another FFI that does not meet the requirements necessary to avoid the 30% withholding tax.
- Comply with requests by the Treasury Secretary for additional information about any United States account held by the FFI.
- If foreign law would prevent the required reporting on United States accounts, attempt to get a valid waiver, if one is available under the applicable foreign law, from the account holder, and close the account if a waiver is not obtained within a reasonable period of time…………..
Foreign Entities that are not Foreign Financial Institutions. The new Code Section 1472 also requires 30% withholding on withholdable payments made to nonfinancial foreign entities, unless the withholding agent is provided with certification either (1) that the foreign entity has no substantial U.S. owners or (2) that identifies the name, address, and TIN of each substantial U.S. owner.
Payments to corporations whose stock is regularly traded on an established securities market or of (Lila: correction, “to”) an expanded affiliated group of such corporations, to entities organized under the laws of a U.S. possession and owned entirely by bona fide residents of that U.S. possession, to foreign governments and central banks, and to international organizations are not subject to 30% withholding under Code Section 1472.
[Lila: File under Crikey, What Does This Gobbledygook Mean?]
2. Required Disclosure by Individuals of Foreign Financial Accounts, Increased Penalties, and Extension of Statute of Limitations.The HIRE Act requires individual taxpayers who have an interest in a “specified foreign financial asset” to attach a statement to their income tax return if the aggregate value of all such assets during any year is greater than $50,000………
Required Disclosure. The taxpayer must disclose: In the case of any account, the name and address of the financial institution in which such account is maintained and the number of such account.
- In the case of any stock or security, the name and address of the issuer and such information as is necessary to identify the class or issue of which such stock or security is a part.
- In the case of any other instrument, contract, or interest, such information as is necessary to identify such instrument, contract, or interest, and the names and addresses of all issuers and counterparties with respect to such instrument, contract or interest.
- The maximum value of the asset during the taxable year.
Penalties. There are new penalties for both the failure to disclose a foreign financial account and for understatements of tax attributable to undisclosed foreign financial assets.
The HIRE Act imposes a $10,000 penalty for failure to furnish the required information when due. If the taxpayer fails to correct such failure for more than 90 days after receiving notice of the failure, an additional $10,000 penalty is imposed for each 30-day period (or fraction thereof) during which the failure continues after the expiration of the 90-day period following the notice, up to a maximum penalty of $50,000.
In addition, the HIRE Act increases the penalty on of any portion of an underpayment of tax that is attributable to any undisclosed foreign financial asset understatement from 20% of the understatement to 40% of the understatement.
Extended Statute of Limitations for Undisclosed Foreign Accounts. The HIRE Act extends the statute of limitations for audits of certain unreported income from a foreign financial account from three years to six years.
3. Repeal of Foreign Exceptions to Registered Bond Requirement. The HIRE Act denies an interest deduction for interest on any unregistered bond (typically these will be bearer bonds), effective for bonds issued after second anniversary of the date of enactment.
4. PFIC Reporting. In addition to the reporting already required from shareholders of a passive foreign investment company (PFIC), effective as of March 18, 2010 the HIRE Act requires that each United States person who is a shareholder of a PFIC file an annual report containing such information as the Secretary may require. A foreign corporation that generates passive income (typically interest and/or dividends) is classified as a PFIC if (a) 75% or more of the corporation’s gross income is passive income for purposes of the CFC rules or (b) 50% or more of the average value of the corporation’s assets produce, or are held for the production of, passive income.
5. Electronic Reporting by Financial Institution Withholding Agents. The HIRE Act authorizes the IRS to impose electronic reporting requirements on financial institutions that are withholding agents, even if the institution files less than 250 information returns (the current threshold).
6. Foreign Trust Changes. The HIRE Act makes a number of changes in the rules governing foreign trusts. A transferor to a foreign trust that has a U.S. beneficiary is treated as owner for U.S. tax purposes of the portion of the trust payable to or accumulated for the benefit of a U.S. beneficiary. The HIRE Act provides that an amount is treated as being accumulated for the benefit of a U.S. beneficiary even if the U.S. person is only a contingent beneficiary or if any person has the discretion to distribute from the trust to any person unless the trust specifically identifies the class of permitted beneficiaries and none of the members of the class are U.S. persons.
Loans to a U.S. person or allowing a U.S. person to use trust property are also treated as payments to or accumulations for the benefit of a U.S. person unless the U.S. person repays the loan at a market rate of interest within a reasonable period of time or pays fair market value for the use of the property.
The HIRE Act also requires that any person who is taxable as the owner of a foreign trust must provide such information about the trust as the IRS may require. Penalties for failure to comply with the foreign trust reporting requirements were also increased, effective for returns required to be filed after December 31, 2009.
7. Taxation of Dividend Equivalents. The HIRE Act provides that dividend equivalents used in lieu of dividends to avoid 30% withholding on FDAP income, such as securities lending transactions, sales-repurchase agreements, and notional principal contracts, are treated as U.S.-source dividends for U.S. tax purposes………..”
My Comment:
The Zerohedge headline is rather alarmist, but on closer inspection, despite the dreadful sneakiness of sticking this into some apparently minor stimulus legislation, the controls are only a continuation of a trend already well under way.
The 30% withholding for refusal to disclose US account holder information is pretty high and so are the new penalties, and I’ll post on what I find out about them, but the disclosure rules are already in effect.
Most of this seems to be part of the administration’s attempt to go after off-shore business accounts suspected of money-laundering, tax-evasion, or criminal activity.
The proximate causes of the financial crisis lie in the off-shore and re-insurance racket. And the Obama administration is determined to end banking secrecy in order to end that. I can sympathize, because indeed multinational corporations do siphon off most of their profits through shell accounts in tax-havens, paying little or nothing to the jurisdictions in which they actually work and use public services. Meanwhile, the havens have become festering centers of crime, drugs, and arms sales, and also the home of penny-stock fraud , as well as of naked short-selling scams.
The European Union Bank, chartered in Antigua in the Caribbean, for example, which boasted of being the first online bank, and which offered secrecy to account holders, was chartered as a subsidiary of Menatep, a large Russian bank, notorious for involvement with organized crime, as this Washington Post piece by Douglas Farah in 1996 noted.
The outfit Tax Justice.net is a global effort to deal with this huge relatively unrecognized problem, initiated by veteran off-shore investigator Lucy Komisar. It seeks banking transparency and an end to the off-shore racket.
This is a laudable goal. And so far as exposure of the crimes and corruptions of these havens help us understand poverty, development, and the impact of globalization, neo-liberalism, and various tax and regulatory regimes, I’m sympathetic.
But, beyond that, I’m wary of the methods and underlying premise. Strengthening the government regulatory and enforcement apparatus has more potential for abuse than use, this late in the crony capitalist game. There’s a much simpler and more libertarian approach to the underlying problems. And that is to reduce income taxes to the lowest level compatible with paying incurred obligations. A simple flat tax should do it.
Abolish pay-roll, personal income, and corporate taxes. Make up the short-fall where it should be made up - in the kind of user fees and sales taxes described at Fair Tax.org, which are targeted at the biggest users.
Roads, for instance, are largely used..and damaged…by commercial trucks. Yet, these trucks pay far less than they ought, because of the lobbying of their trade associations. Fix these sorts of leakages and then cut income taxes and taxes on investment and job-creating activities, as illustrated in this WSJ piece on people moving to low income tax states. Then go back to sound money and a market interest rate.
You’ll get rid of the incentives for corruption, encourage small businesses to compete more easily, and keep big business onshore. But that’s unlikely to happen any time soon….
Instead, we’re going to have deeper infringements on privacy.
We already knew that private bank accounts were a thing of the past for most ordinary people. Not for the very rich, of course. But we already knew that too..
It remains to be seen whether the new controls will change that.
Hanky-Panky At The Counting House
I thought I’d repost a piece that I wrote in Dissident Voice, way back in 2006. It helps give some background to the JP Morgan manipulation story.
And it also adds some background to the ongoing re-valorization of the once discredited IMF. Along with that re-valorization, is the hyping of anyone supporting even further central regulation, although the financial crisis occurred in all sorts of places that have plenty of it.
All this centralization and global government is supposedly for the welfare of the world - but there is no “welfare of the world” that can be safely accepted as gospel from the mouths of the financial industry and its political and media allies.
Note the date of the piece below - back on June 6, 2006, when, dare I say it, most of the financial talking- heads and blogs now being treated as the only legitimate interpreters of reality were doing…well, they weren’t reading GATA or supporting its work, I’m pretty sure. To have done so then would have made them persona non grata in the very same liberal media that is now embracing this research and that GATA, in turn, seems to be endorsing….for its own reasons..
Check it out for yourself.
Here’s an excerpt from the piece: “Hanky-Panky at the Counting House” (June 6, 2006)
Also, at Dissident Voice, you can find “Was The IMF Involved in Gold Price Manipulation” (June 8, 2006) which was also posted at Daily Reckoning and on one of the gold sites. I think it’s been taken off Daily Reckoning since.
“The unofficial theory is naturally a lot juicier, although described by even sworn enemies of paper currency as conspiratorial. Still, it’s managed to rear its head in the Wall Street Journal, so it can’t be all wet. Here is what widely respected libertarian Congressman Ron Paul had to say on Feb 14, 2002:
While the Treasury denies it is dealing in gold, the Gold Anti-Trust Action Committee (GATA) has uncovered evidence suggesting that the Federal Reserve and the Treasury, operating through the Exchange-Stabilization Fund and in cooperation with major banks and the International Monetary Fund, have been interfering in the gold market with the goal of lowering the price of gold. The purpose of this policy has been to disguise the true effects of the monetary bubble responsible for the artificial prosperity of the 1990s, and to protect the politically-powerful banks that are heavy invested in gold derivatives. GATA believes federal actions to drive down the price of gold help protect the profits of these banks at the expense of investors, consumers, and taxpayers around the world.
GATA has also produced evidence that American officials are involved in gold transactions. Alan Greenspan himself referred to the federal government’s power to manipulate the price of gold at hearings before the House Banking Committee and the Senate Agricultural Committee in July, 1998: Nor can private counterparts restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise. [Emphasis added] (3)
More specifically:
Gold is borrowed by Morgan Chase from the Bank of England at 1 percent interest and then Morgan Chase sells the gold on the open market, then reinvests the proceeds into interest-bearing vehicles at maybe 6 percent.
At some point, though, Morgan Chase must return the borrowed gold to the Bank of England, and if the price of gold were significantly to increase during any point in this process, it would make it prohibitive and potentially ruinous to repay the gold. (4)
In plain English, the strong dollar policy that put the sizzle in the stock market under Clinton was made possible only by manipulating the gold market to keep prices low. The low interest rates which kept the economy on the boil went hand in hand with low gold prices. Investment banks used the low rates to borrow gold from the central banks and sold them short (short selling being the technique of selling assets you don’t actually own in the hope of buying back at a cheaper price because you anticipate a fall in the price). This allowed the banks to make billions from a market rigged to take the risk out of their shorting. And it kept the dollar pumped up. And who was the architect of this strong dollar policy? Why, none other than Robert Rubin of Goldman Sachs — one of the bullion banks most implicated in the gold fixing scenarios.
So, the appearance of another Gold-man at this critical moment is all the proof the gold cartel theorists need that more manipulation is in store to keep the dollar up, gold down, and the bullion banks from losing their . . . er . . . shorts. (5)
And if this seems conspiratorial, consider what Paul Mylchreest, investment analyst at Cheuvreux, top ranked for its research in Western Europe and part of Credit Agricole, the largest bank in France says today, “Central banks have 10-15,000 tonnes of gold less than their officially reported reserves of 31,000. This gold has been lent to bullion banks and their counterparties and has already been sold for jewellery, etc. Non-gold producers account for most and may be unable to cover shorts without causing a spike in the gold price…” (6)
Or what the Wall Street Journal itself wrote about what took place in the seventies:
Worried the falling dollar was undermining its anti-inflation efforts, the Carter administration announced a multi-part support package on Nov. 1, 1978: The Treasury would use gold sales and foreign borrowing and draw on its reserves with the International Monetary Fund to defend the dollar. At the same time the Federal Reserve raised its discount rate a full point. (7)
And that was in the ’70s, when there was no credible alternative to the dollar, India and China were sleeping giants, Russia was still the Soviet Union, and the United States was not threatening to nuke the Middle East.
How bad is the situation?
[A]s of June 2000, J.P. Morgan reported nearly $30 billion of gold derivatives and Chase Manhattan Corp., although merged with J.P. Morgan, still reported separately in 2000 that it had $35 billion in gold derivatives. Analysts agree that the derivatives have exploded at this bank and that both positions are enormous relative to the capital of the bank and the size of the gold market.
It gets worse. J.P. Morgan’s total derivatives position reportedly now stands at nearly $29 trillion, or three times the U.S. annual gross domestic product. Wall Street insiders speculate that if the gold market were to rise, Morgan Chase could be in serious financial difficulty because of its “short positions” in gold. In other words, if the price of gold were to increase substantially, Morgan Chase and other bullion banks that are highly leveraged in gold would have trouble covering their liabilities. (8)
That was 2000. This is 2006.
So long as gold remains a mere relic . . . a yellow reminder of what used to be money . . . no harm done. Unless something absurd happens, that is. Something absurd like, say, gold doubling to $573 an ounce inside 5 years. If that happened, then the “carry trade” of borrowing gold to invest in paper could become a very expensive way to bankrupt the entire global financial system. (9)
This spring gold hit over $700. And that’s why the hanky-panky is likely to begin in earnest now.
Lila Rajiva is a freelance writer in Baltimore, and the author of the must-read book The Language of Empire: Abu Ghraib and the US Media (Monthly Review Press, 2005) She can be reached at: lrajiva@hotmail.com. Copyright (c) 2006 by Lila Rajiva
NOTES
(1) “Good as Goldman: Bush drafts Hank to bat third,” Daniel Gross, Slate, Tuesday, May 30, 2006.
(2) “Please, Sir, I Want Some More. How Goldman Sachs is carving up its $11 billion money pie,” Duff Mcdonald, New York Metro, Dec 21, 2005.
(3) Speech of Congressman Ron Paul, U.S. House of Representatives, February 14, 2002, www.house.gov/paul
(4) “All That Glitters Is Not Gold,” Kelly Patricia O’Meara, Insight Magazine, March 4, 2000.
(5) According to GATA, the cartel includes J.P. Morgan Chase, Deutsche Bank, Citigroup, Goldman Sachs, Bank for International Settlements (BIS), the U.S. Treasury, and the Federal Reserve
(6) “How Central Banks Have Kept Gold Down,” Adrian Ash, Money Week, February 9, 2006.
(7) “As Dollar Weakens, Hidden Strengths May Stave off Crisis,” Wall Street Journal, January 17 2005.
(8) See Note 4.
(9) See Note 6.Whistleblower Reports Precious Metals Manipulation By JP Morgan
Bill Murphy, chairman of The Gold Anti-Trust Action Committee (GATA) reports that on March 23,2010, GATA director, Adrian Douglas, was contacted by a London metals trader, Andrew Maguire, who had been told directly by JP Morgan traders how they manipulate the precious metals (PM) markets on non farm payroll data release, COMEX contracts rollover, and similar recurring occasions, to make money.
Maguire had previously contacted the enforcement division of the CFTC (Commodity Futures Trading Commission) to report this. On February 3, 2010, he gave a two-day advance warning of PM manipulation on the release of the non-farm payroll data on February 5 that took place as predicted.
Read more at GATA.
China Bubble: State Firms Bid Up Land Prices To Record Levels
“In spite of all the government’s tough talk against excessive home price hikes, the record land price for residential housing in Beijing was broken twice on Monday thanks to aggressive bids by State-owned enterprises.
The weeklong postponement of the land auction seemingly served to save policymakers, who were explaining to the National People’s Congress how they would prevent housing bubbles, from trouble.
Yet, the jaw-dropping results only underscored how differently these cash-rich State firms think about housing prices. It seems that all the measures that the government adopted to raise capital requirements and leverage restrictions have so far worked only to discourage private property developers while doing little to restrain the appetite of State firms for a bigger market share.
The record land sales on Monday certainly cast doubts on a previous official claim that not a single cent of the country’s 4-trillion-yuan stimulus package has flowed into the real estate sector. Worse, they fueled expectations of more price hikes to undermine government efforts to prevent housing bubbles.”
Obama Goes After Upper Middle-Class Savers
“Congressional leaders are raising to 3.8 percent their proposed new Medicare tax on investment income in the final health-care overhaul plan, a Democratic leadership aide said.
The rate is higher than the 2.9 percent President Barack Obama proposed in February. Under Obama’s proposal, the new tax would apply to income from interest, dividends, annuities, royalties, capital gains, and rents for individuals who earn more than $200,000 and joint filers reporting more than $250,000.
House Speaker Nancy Pelosi, asked today if the tax applied to capital gains, said it would be imposed on unearned income “whatever category it is.”
It would be the first time Medicare taxes would cover investment income. The current 2.9 percent Medicare levy currently applies only to salaries and is split evenly between workers and their employees.”
My Comment:
No redistribution of the ill-gotten loot of the corrupt mega banks and their government and speculator associates …loot that runs to billions. Instead, the administration goes after middle-class investment income. This is a first, and it sets an unholy precedent for the future. Does this government not get that we need to increase capital formation, not slow it down?
Vatican Moves Away from Frankenfoods
The head of the Pontifical Council for Justice and Peace, Cardinal Peter Turkson, has moved away from his predecessor’s support for developing genetically modified food to alleviate hunger in poor countries. Instead, he argues that adoption of the “precautionary principle” is warranted:
“There are a lot of claims that are disputed (like) that GMOs never call for the use of pesticides or insecticides or anything because they are resistant,” he said. Such claims have been challenged, he said, and some say “at a certain point (these crops) require insecticides whose chemicals break up later in the soil and render the soil less fertile.”
Given the disputed claims and doubts, “I think that we should go easy and probably satisfy all of these objections to the full satisfaction of those who raise these objections,” he said.
Because of the companies’ control over the patented seeds, “what is meant to alleviate hunger and poverty may actually in the hands of some people become really weapons of infliction of poverty and hunger,” Cardinal Turkson said.
Previously, opponents of GM carried the burden of proving that some harm was being inflicted. Under the PP, companies that planned on introducing genetic changes into an organism would have to bear the burden of proving that it was safe.
While this might seem counter-libertarian, I would argue it is not.
1. Since changes in genetics are impossible to regulate post facto, they cannot be subject to the usual economic arguments available to libertarians. The potential devastation is so irreparable that the principle of liberty demands that the bar be raised ahead of the event.
2. Biotechnology as an industry is concentrated in so few and such large companies, that free market conditions do not prevail at all in other respects. The companies owe their position in the market to their influence on government regulations and laws, to begin with. That suggests that there will be little in the way of normal market forces to check their natural profit-seeking from turning into rent-seeking based on preferential treatment, captive markets/monopoly, and government enforcement. PP is simply a thoughtful mechanism to prevent profit from careening into plunder.
Bottom line, PP prevents looting or theft.
That makes it libertarian.
Cryptogon On Everbank Gold Story
An odd little story today about well-regarded online bank and metals vendor, Everbank, that I came across at Cryptogon.
Apparently, they unilaterally changed the terms and conditions of their ‘metals select’ program recently. Everbank president, Frank Trotter, responded in a letter to Cryptogon author, Kevin Flaherty, that the changes were subsequently deleted. Still, if you’re a client, you might want to be on top of that. From all I’ve heard, they’re a reliable bank, but banks change hands and terms very frequently these days (for eg. BrownCo to Harris Direct to E-trade).
Portugal and Spain In Trouble Too…
Will Frankfurt (the European Central Bank) come to the rescue of Greece, or Spain, or Portugal? Maybe in the end, but not now, reports Ambrose Evans-Pritchard in The Telegraph:
“Mr Callow of Barclays said EU leaders will come to the rescue in the end, but Germany has yet to blink in this game of “brinkmanship”. The core issue is that EMU’s credit bubble has left southern Europe with huge foreign liabilities: Spain at 91pc of GDP (€950bn); Portugal 108pc (€177bn). This compares with 87pc for Greece (€208bn). By this gauge, Iberian imbalances are worse than those of Greece, and the sums are far greater. The danger is that foreign creditors will cut off funding, setting off an internal EMU version of the Asian financial crisis in 1998.
Jean-Claude Trichet, head of the European Central Bank, gave no hint yesterday that Frankfurt will bend to help these countries, either through loans or a more subtle form of bail-out through looser monetary policy or lax rules on collateral. The ultra-hawkish ECB has instead let the M3 money supply contract over recent months.”
Mr Trichet said euro members drew down their benefits in advance — “ex ante” — when they joined EMU and enjoyed “very easy financing” for their current account deficits. They cannot expect “ex post” help if they get into trouble later. These are the rules of the club.”
Europe Thumbs Its Nose At G-Sax, Banksters
“For the first time in five years, no big US investment bank appears among the top nine sovereign bond bookrunners in Europe, according to Dealogic data compiled for the Guardian. Only Morgan Stanley ranks at number 10.
Goldman Sachs doesn’t make the table. Goldman made it to number five last year and in 2006, and number eight in 2007, the data shows. JP Morgan was in the top ten last year and in 2007 and 2006 but doesn’t appear this year.
“Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit,” said Arlene McCarthy, vice chair of the European parliament’s economic and monetary affairs committee. “It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments.”
Rogers Tells Greeks To Go Bust
Rogers gets it right, as usual. From the Wall Street Pit:
“Commodities legend Jim Rogers talks in this Bloomberg interview about Greece’s fiscal problems which needless to say are hardly a new development. According to Rogers, a bankruptcy for Greece would benefit the euro.
“They should let Greece go bankrupt,” said Rogers. “It would be good for the euro. It would be good for Greece. It would be good for everybody. If Greece went bankrupt then everybody would say, boy, the euro is serious, is going to be a sound currency and the euro would go straight up. Is not gonna happen that way, but that’s what should happen.”
Exactly right. Currencies go under because the governments behind them behave imprudently, as Cato’s Dan Mitchell points out.
Robert Wenzel, who has been right on top of the Greek story, writes:
“In fact, a Greek bankruptcy would be the best thing for the euro. It would show that the European monetary union is less subject to political pressures than individual sovereign states, for most assuredly the PIIGS, if they still managed their own moneys right now, would certainly be printing away right now.”
Had the US let the financial industry go under and refused to bail them out, the dollar would immediately have shot up. The decline of the dollar reflects the market’s loss of faith in the US and its reserve currency.
When governments act like genuine market participants - i.e. take their medicine - their currencies strengthen. Greece, acting on its own, showing independence of European bureaucratic constraints or bail-outs, would have to be a positive for the euro, because it indicates an end to the bottomless pit of financial irresponsibility..
Rogers is also right that speculation isn’t the prime mover of these events.
In the Greek case, I understand the notional value of the CDS’s (credit default swaps) involved are not big enough to impact the debt. However, for whatever reason, Rogers avoids talking about the larger issue of fraud in the use of currency swaps, fraud in the original contracts, and fraud in short-attacks, which are quite a different matter from market participants voicing their “opinion.” (the notional value of CDS in relation to debt is apparently not large in this case, though it’s important in other cases, like AIG)
Rogers, like the rest of the financial industry, is thus talking the professional ideology of the financial industry, and you can see all the others - from Mish Shedlock to Zerohedge to Chanos - lining up to defend that ideology.
It’s unfortunate, but it’s also something I feared…that some of the “citizen journalist” sites would corral popular outrage over Goldman Sachs and its allied hedge funds….and then steer that outrage in ways that protect the industry. And that they would finally end in support of the big players, while defusing the original anger into essentially useless diatribes. Meanwhile, those engaged in any action that might actually weaken the powers-that-be would be demonized and marginalized.
That’s seems to be what’s happened. Which is why the call for a ban of CDS contracts strikes me as not (necessarily) terribly useful.
My point is that that while it’s true that CDS’s have been gamed, a ban on them distracts from all the other issues of fraud. CDS’s are sold as if they’re insurance….and they’re used to gamble on price-movements. A player intent on fraud doesn’t need to rely on CDS contracts alone to commit a fraud. Ban CDS contracts, and he will just use another technique. Again, the problem is not the CDS contracts themselves, but the fraud involving them.
To recognize this, you just need to go back a bit. If you rewind twenty-five years, to Milken’s junk-bond innovations, there too what ought to have been an instrument of financing became an instrument of gambling.
Read Michael Lewis’ Liar’s Poker for a brilliant account from a former insider. Yet, today, it is Lewis, with Einhorn, who’s arguing to ban CDS’s. You’d think Lewis of all people would know it isn’t the gun that’s the problem, it’s the people who use guns to commit crimes. (Felix Salmon has a good criticism of Lewis on CDS’s at Portfolio.com).
Indeed, Lewis himself makes that point in his book:
Quote:
“Junk bonds behave much more like equity, in shares, than old-fashioned corporate bonds…… Therein lies one of the surprisingly well-kept secrets of Milken’s market. Drexel’s research department , because of its close relationships with companies, was privy to raw inside corporate data that somehow never found its way to Salomon Brothers. **When Milken trades junk bonds, he has inside information. Now it is quite illegal to trade in stocks on inside information, as former Drexel client Ivan Boesky has ably demonstrated. But there is no such law regarding bonds*** (My emphasis)
……Not surprisingly, the line between debt and equity, so sharply drawn in the mind of a Salomon bond trader (Equities in Dallas!) becomes blurred in the mind of a Drexel bond trader…” (p. 217)
Lila: Eventually, the flood of money attracted to junk bonds had to find new places to go. From that, sprang the leveraged buy-outs (LBO’s), the corporate raids of the 1980s.
Quote:
“The new and exciting job of invading corporate boardrooms appealed mainly to men of modest experience in business and a great deal of interest in becoming rich. Milken funded the dreams of every corporate raider of note: Ronald Perelman, Boone Pickens, Carl Icahn, Irwin Jacobs, Sir James Goldsmith, Nelson Peltz, Samuel Heyman, Saul Steinberg, and Asher Edelman….” (P. 220)
Lila: Transpose an octave….fast forward twenty-five years…and you could be describing CDS’s…. And just as the problem then was not the junk bonds themselves, but the use made of them (to gamble and raid companies), so too with CDSs.
Of course, the raiders saw themselves as performing a valuable service in cutting out fat from management…and in many cases, that was so. But, killing someone to cure him isn’t usually regarded as the most brilliant of remedies. Why should it be different in the financial industry?
Again, the problem is the actors and the activity, not the instrument. We need to differentiate between them. We also need to differentiate clearly between short-selling (legitimate) and naked short-selling (fraudulent); between speculation (helpful to the markets proportionate to economic activity), versus casino capitalism (extremely game-changing and dangerous where it is now); between investment (socially productive) and gambling (socially destructive); between legal and fraudulent activity.
Now they’re all mashed up and argued fungibly.
People blame either the government..or the speculators, black and white, forgetting that in many cases the speculators ARE the governments…in the sense that they’re in collusion with some of the banks that have their functionaries creating government policies, and have their advocates in the media, influencing public opinion as they wish.
More on this later….
Meanwhile, sift through the opinion-making carefully…looking for a confusion of all the terms I’ve listed. Wherever you find that confusion, be wary. Sometimes the confusion is just honest error. The rest of the time it seems to show an intent to mislead.
What China Wants
The Financial Times points out the quirks in the Chinese market that have Western companies racking their brains to stay on top of sales:
“The big spender in China, in years past and even more so today, is the state: private consumption as a percentage of gross domestic product has fallen from 60 per cent in 1968 to 36 per cent last year and could be as low as one-fifth in 2009 as the government ramps up capital investment.
In fact, the Chinese, who already have a world-beating savings rate of nearly 40 per cent of their income, tend to become more frugal when times are tough. As bank deposit rates decline, most of us spend more. The Chinese tend to stash away even greater sums to make up for the lost interest. The reason for this conservatism is the lack of a social safety net in China – citizens have to provide for their own medical care, old age and possible unemployment.
This makes them “penny pinching, ruthless, suspicious shoppers”, says Tom Doctoroff, north Asia director of advertising agency JWT and a writer on Chinese consumer trends. In a recession this behaviour only grows worse. “The downturn has made people keener on finding the cheapest deal,” says Yuval Atsmon, an associate principal in McKinsey’s Shanghai office. Even when they can easily afford it, buying a PC typically involves six visits to a store, and more often than not, customers will wait six months before making their decision after consulting blogs, online comparison sites and – the most important source of information in China – friends and family. Sales of copycat mobile phones, with all the functions of top models but a lower price, have soared from 17 million units in 2006 to 62 million units last year.
Brand consciousness is high, at least in the big cities, but brand loyalty is much lower than in the west. A price cut or good in-store promotion can often sway shoppers. And for cultural reasons, appealing to an individual’s taste or personal comfort typically doesn’t work, Doctoroff points out. A purchase either has to publicly signal status or wealth, like a flashy car does. Or provide a practical benefit: the latest craze in China is chocolate with added calcium, eaten not for pleasure but for the health benefits. The growing appeal of diamonds to women is not based on romance, but as a financial signal of a man’s commitment. Trust is another key issue in a country where so many consumer products are faked. Chinese mothers, for example, will pay 30 per cent more for safe baby milk – and this should favour foreign brands.
But foreign retailers and manufacturers have to cope with vast regional differences in demographics, language and culture that make it hard to plan a single marketing strategy – indeed treating China like a single country is usually a mistake. Natives of Zhejiang on the east coast like “toilet roll as rough as sandpaper”, the former head of Wal-Mart China liked to observe, a penchant thankfully absent elsewhere. Atsmon points out that cities even an hour apart can be entirely different: in southern Shenzhen, more than four-fifths of the population consists of migrant workers, mostly under the age of 35, who speak Mandarin and drink in bars. In nearby Guangzhou, migrants number just over a quarter, more people are older, enjoy watching Cantonese TV and go out to restaurants to drink with family members. Adequately addressing such niches requires an army of local suppliers, costly infrastructure and several layers of wholesalers and intermediaries. Even then, success may remain as elusive as it always has been: “No matter what you may be selling, your business in China should be enormous, if the Chinese who should buy your goods would only do so,” lamented Carl Crow, an advertising executive in Shanghai and author of the original book on how to sell to the Chinese … more than 70 years ago.”
Soros: Gold In Bubble; But Keep Stimulus Going…..
Always nice to see people talk out of both sides of their mouth.
Here is currency speculator George Soros (ex of legendary hedge-fund Quantum) at the World Economic Forum at Davos:
“When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold.”
So far so good. Mis-price money (cheap interest rates) and people don’t want to keep their savings in it. They want it in something that isn’t subject to mis-pricing (so they hope) - hence gold.
But then Soros shows how disingenuous he’s being by adding this:
“I think that since the adjustment process to the recession is incomplete, there is a need for additional stimulus. Some countries, like the US and European countries, have plenty of room to increase their deficits. The political resistance to doing so increases the chances of a double dip in the economy in 2011 and after that.”
That is, he’s suggesting running more deficits and keeping the money spigot going, just the thing that’s caused the gold price to rise.
So how do we understand this?
Gold is due for a technical correction, but it’s also probably responding to deflation in the general economy. It’s not going down that fast, because a lot of people are also buying it speculatively.
That’s the tug of war.
Meanwhile, who know what Soros’ holdings are and who knows what his motivations are in making such contradictory statements.
But anyone who takes these sorts of pronouncements as any kind of lead for their own investments/speculations, should be prepared to part fairly soon from their money.
David Tice On King World News: Trouble Ahead….
David Tice on Eric King’s King World News, December 23, 2009
- This is not another inventory recession; this is unprecedented
- There’s trouble all over the globe - Europe, China, Japan..
- Hunker down, cut back expenditures, get out of stocks, own gold
- Look for deflation followed by competitive currency devaluation, then inflation.
Executive Order 12425: Interpol Brings Global Police State to US
John Whitehead of the Rutherford Institute (via Lew Rockwell) sounds the alarm over executive order 12425, which places the International Criminal Police Organization (Interpol) beyond the reach of domestic laws, freedom of information act requests and constitutional checks.
“It’s hard to know exactly what the fallout from this executive order will be, but the ramifications for the American people could be ominous. For instance, if Interpol engages in illegal and/or unconstitutional activities against American citizens, it will be impossible for U.S. citizens to obtain information – via subpoena or other commonly used legal methods – regarding its records or activities.
Adrian Ash: Here Comes Stagflation
The whole inflation-deflation debate has always struck me as misbegotten. People use the terms to mean things so varied that it’s pointless to argue. But such as it is, I’m a firm believer in the deflationary thesis on the macro level… influenced in this by the economist Antal Fekete , and his theory of how capital is destroyed in a fiat money regime.
Nonetheless, I do see consumer prices rising.
In other words, asset prices fall, industry contracts, and unemployment levels stay high, while the stuff on the shelves costs more, insurance and tuition rates climb, and living in general becomes more expensive. (more…)
Bill Anderson On The New KKK: Kleptocrats, Kartels, and Kon Men
“As I see it, the bankers are not clueless at all. They understand the game, they understand that the government is going to clean up the mess that they and their friends in Congress and the Bush and Obama administrations have created, and they understand that their antics are going to give them what they always have wanted: a nice, cozy, financial cartel which will provide sweet political contributions for the political classes, bonuses and high pay for themselves, and very little for everyone else.
Sith-Lord Sweep: AG’s Pending Indictments Cover Major Hedgies, Journalists, and Regulators
Corporate finance generalist, investment banker and expert in derivatives, Austin Burrell, sums up last week’s announcement by Attorney-General Eric Holder that there are 5000 pending indictments [sic] arising out of the investigation of fraud in the capital markets:
[Note: the DOJ is involved in some 5000 odd cases of fraud related to the financial industry… (more…)
Hedge Funds: Top Ten Earners in 2007/2008
New York Magazine had a piece in 2007 that sorted the hedge-fund elites into categories like “brainiacs” (like James Simon and Jim Chanos) and “bad boys” (like Daniel Loeb).
The category “Top dogs” (that is, the very best hedgies) includes SAC Capital Advisers/Steven Cohen ($12 b); Cerberus Capital/Stephen Feinberg ($19.5 b); Appaloosa Mgt/David Tepper ($5.3 b); ESL/Eddie Lampert ($18 b); Citadel Investment Group/Kenneth Griffin ($13.5 b); Manhattan/Michael Novogratz ($4.6b).
[Note: the figures were as of 2007].
This is the short list of the managers whom the industry thinks are top dogs, and of these six, one (Feinberg) is directly connected to Drexel Burnham Lambert, convicted junk bond financier Michael Milken’s bank; another (Cohen) is connected indirectly to Milken through Gruntal & Co.; and three are alumni of Goldman Sachs(Tepper, Lampert, Novogratz).
Five out of six and that’s just a cursory examination. I didn’t do anything more than google to get that.
And the financial press thinks there are no Sith Lords?
A more conventional ranking is found below: (more…)
Lanka Needs Soros Like A Hole In The Head
“In 1992, Soros earned the epithet “the man who broke the Bank of England” by demanding the Bank to raise its interest rates or to float the currency (so that he could make more money). The Bank did neither. He retaliated by selling “short” more than $10 billion worth of pound sterling, forcing the Bank of England to depreciate the pound: Soros amassed an estimated US$ 1.1 billion in the process.
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