[SillyYun]

Asia markets sink amid pessimism over US
http://news.yahoo.com/s/ap/20080121/ap_on_...RN5VQYPKPeyBhIF

TOKYO - Stock markets across most of Asia fell Monday following declines on Wall Street last week amid investor pessimism over the U.S. government's stimulus plan to prevent a recession.

A contraction in the American economy would likely hurt profits at Asian exporters, although rising trade and investment within the region has made Asia less dependent on the U.S. economy than in the past.

Investors sold off shares, unimpressed by the economic stimulus plan President Bush announced Friday. The plan, which requires approval by Congress, calls for about $145 billion worth of tax relief to encourage consumer spending.

Japan's benchmark Nikkei 225 index slid 3.9 percent to close at 13,325.94 points, while Hong Kong's Hang Seng index was down 3.5 percent in afternoon trading at 24,323.44.

China's Shanghai Composite index plunged 5.1 percent and India's market was down 2.7 percent. Markets in South Korea, Australia, Singapore, Taiwan and the Philippines also sank.

"People are certainly nervous about a potential recession in the U.S. spilling over to the rest of the world," said David Cohen, Director of Asian Economic Forecasting at Action Economics in Singapore.

"Maybe there's still some wariness about politicians are able to come up with a compromise and act sufficiently quickly," Cohen said. "I think the impact would be marginal anyway."

On Friday, the Dow Jones industrial average slid 0.5 percent to 12,099.30, and some analysts warned that the U.S. market could be in for a period of protracted declines.

Investors also have shrugged assurances from Federal Reserve Chairman Ben Bernanke that the U.S. central bank is ready to act aggressively — which means a likely big interest rate cut later this month — to help support an economy pummeled by devastation in the housing and credit markets.

Jitters about the U.S. economy have dragged on Asian markets, many of which surged last year. Since the start of the year, Japan's benchmark index has declined 13 percent, while Hong Kong's blue-chip index is down more than 11 percent.

In Tokyo trading, exporters got hit hard, with Toyota Motor Corp. losing 3.3 percent and Honda Motor Co. sinking 3.4 percent. Banks also declined; Mizuho Financial Group lost 5.3 percent.

Still, increased trade within Asia has made the region less reliant on the United States than in the past, prompting some analysts to predict that Asia won't suffer dramatically from a U.S. recession.

Excluding Japan, 43 percent of Asia's exports go to other nations in the region, Lehman Brothers calculates — up from 37 percent in 1995.

A drop of 1 percentage point in U.S. economic growth would shave 1.3 percentage points from China's growth rate due to lower exports, Citigroup estimates. But China's economy will still likely expand 11 percent this year, the investment bank predicts.

Also, some strategists say Asian markets are now oversold and will rebound as investors snatch up stocks that have fallen to attractive levels.

"We hold our view that the rapid correction in the past two weeks is offering a good opportunity to buy quality stocks," Taifook Research in Hong Kong said in a note.

[TrainDriver]

damn the markets are going crazy these past few days. haha everything red everywhere. india had to close their market after crashing (10% down)

[cypherpunk]

Oh my god. This is terrible. Tomorrow might be a painful day for America: http://www.247wallst.com/2008/01/a-1000-point-dr.html

[TrainDriver]

^its a painful day for investors worldwide. for some of us young ppl, it wouldn't hurt to buy a few blue chips once the market has dropped further and just leave it for the very long term.

[SillyYun]

SEOUL, South Korea - South Korean shares fell sharply Tuesday, extending losses amid worries in global financial markets about weakness in the U.S. economy.


The Korea Composite Stock Price Index fell as much as 6.2 percent to 1,578.37 in afternoon trading, and later recovered slightly to 1587.19, down 5.7 percent. The Kospi fell 3.0 percent Monday.

Stocks in Asia and Europe fell sharply Monday following declines on Wall Street last week amid investor pessimism over the U.S. government's stimulus plan to prevent a recession, and Asian markets continued to drop Tuesday.

The Nikkei 225 index is down around 5 percent, while Hong Kong's Hang Seng is down more than 8 percent.

U.S. markets, closed for a national holiday, have so far escaped the turmoil, but they are expected to plunge when trade reopens there later Tuesday.

Among major blue chips in Seoul, Samsung Electronics Co., South Korea's biggest corporation, fell 3.9 percent to 542,000 won. Steelmaker Posco declined 4.1 percent to 469,500 won.

Hyundai Heavy Industries Co., the world's biggest shipbuilder, dropped 6.1 percent to 314,500 won.

The Kospi, which surged 32 percent last year, has fallen 16 percent so far this year.

[SillyYun]

^its a painful day for investors worldwide. for some of us young ppl, it wouldn't hurt to buy a few blue chips once the market has dropped further and just leave it for the very long term.

Erm..actually its good for investors and stock players..because u buy stocks when its dropping. And u watch it going up and earns money from there..its kinda hard to explain and its good news for asia stock markets..Thats how we played it..seeing money coming in now..yeap i agree with u that we gotta leave it and watch closely though

TOKYO - Asian stock indexes rose sharply Wednesday, rebounding from steep losses in the previous two days after a surprise interest rate cut by the U.S. Federal Reserve.


Japan's benchmark Nikkei 225 index gained as much as 3.9 percent before easing back to a gain of 421.27 points, or 3.4 percent, to end morning trading at 12,994.32 points on the Tokyo Stock Exchange. It had fallen 5.7 percent Tuesday — its biggest percentage drop in nearly 10 years — on fears of a recession in the U.S.

Hong Kong's blue chip Hang Seng index rose 1,621.87 points, or 7.5 percent, to 23,379.5 within minutes of opening. The benchmark index dropped 2,061.23 points or 8.7 percent Tuesday — the most points it ever lost in a single day.

The Korea Composite Stock Price Index was up 2.6 percent at 1,650.06, and Australia's benchmark S&P/ASX 200 index was up 5.1 percent by midday Wednesday, reversing a 12-day losing streak.

European stocks fell sharply at their opening Tuesday, then rose in volatile trading ahead of the Fed's decision to cut its key rate to 3.5 percent from 4.25 percent, and rose even more afterward. The U.K.'s FTSE 100 finished up 2.9 percent at 5,740.10, while France's CAC 40 gained 2.1 percent to 4,842.54. In Germany, the DAX ended barely down, off 0.3 percent at 6,769.47, as utilities RWE and E.On fell but financials such as Deutsche Bank rose.

The surprise Fed move was aimed at fears that trouble in financial markets from the U.S. subprime crisis was spreading to the broader economy. Interest rate cuts tend to boost stocks. The Canadian central bank quickly followed, lowering its key rate by a quarter of a percent to 4 percent.

Just hours before the Fed decision, Japan's central bank voted unanimously to leave its benchmark interest rate unchanged at 0.5 percent. The European Central Bank — highly sensitive to any suggestion that it is not fully independent — also held steady at 4 percent.

Some analysts now say the ECB — which has been worried about inflation — may have to follow the Fed and start cutting later this year.

European officials, however, insisted Tuesday that their economies would be able to weather the turbulence from the United States. The European Union's economic and monetary affairs commissioner, Joaquin Almunia, said that big U.S. trade and budget deficits were to blame. "The main reason why the equity markets have this extreme volatile situation these days is the risk of a recession in the U.S., it's not about a global recession," Almunia said.

British Prime Minister Gordon Brown's spokesman Michael Ellam said that "the fundamentals of the British economy have remained sound" and the government would do everything in its power "to maintain economic stability."

But Ellam would not comment on whether British interest rates should be cut in response. Many observers believe the Bank of England, which is independent of the British government, will cut rates at its next meeting Feb. 7.

Before the Fed's move, the Nikkei nose-dived to 12,573.05 Tuesday, a day after falling 3.9 percent, and the Hang Seng fell 8.7 percent, adding to its 5.5 percent drop on Monday. Australia's benchmark index sank 7.1 percent, its steepest one-day slide in nearly 20 years. In China, the Shanghai Composite index lost 7.2 percent to 4,559.75, its lowest close since August.

Indian Finance Minister P. Chidambaram urged investors to remain calm after trading in Mumbai was halted for an hour when the stock market there fell 10 percent within minutes of opening. The Sensex climbed back to close down 5 percent after plunging 7.4 percent Monday.

"There is no reason at all to allow the worries of the Western world to overwhelm us," Chidambaram said.

Investors had dumped shares in frenetic trading on worries that the U.S. economy, battered by a credit crisis and housing slump, will shrink in coming months, weakening demand for exports. There is also skepticism that American authorities will be able to prevent a recession.

The Federal Reserve has indicated it will lower interest rates further, and President Bush has proposed an economic stimulus package that includes about $150 billion in tax cuts — but investors around the world have been doubtful that the measures will lift the economy quickly.

Noritsugu Hirakawa, who monitors stock trading at Okasan Securities Co. in Tokyo, said investors were spooked by the drastic declines on Chinese and Indian markets — two emerging economies that are viewed as sustaining global growth even as the U.S. economy sputters.

___

Associated Press writers Ramola Talwar Badam in Mumbai, Toby Anderson in London and Cassie Biggs in Hong Kong contributed to this report.

[TrainDriver]

Erm..actually its good for investors and stock players..because u buy stocks when its dropping. And u watch it going up and earns money from there..its kinda hard to explain and its good news for asia stock markets..Thats how we played it..seeing money coming in now..yeap i agree with u that we gotta leave it and watch closely though

still, a lot of ppl lost big time yesterday. anyway, good to see today is green but for how long??

[ukyo116]

still, a lot of ppl lost big time yesterday. anyway, good to see today is green but for how long??

The federal reserve and the US government is already moving to put stimulus packages into place to keep the American consumer spending.

The fall in global markets was pricing in the future lack of US consumer spending which has been fueling production around the world.

Last Tuesday's .75 rate cut now leaves Bernanke with 13 25 bps cuts for the federal funds rate.


I would say it's going to go well until Q4... Then pain sets in...

[papabear]

Michael Shedlock, Mighty Mouse Bernanke Fails To Save The Day

http://www.counterpunch.org/martens01212008.html

January 21, 2008
$100 Billion and Counting
How Wall Street Blew Itself Up

By PAM MARTENS

The massive losses by big Wall Street firms, now topping those of the Great Depression in relative terms, have yet to be adequately explained. Wall Street power players are obfuscating and Congress is too embarrassed or frightened to ask, preferring to just throw money at the problem and hope it goes away. But as job losses and foreclosures mount and pensions and 401(k)s shrink, public policy measures to address the economic stresses require a full set of unembellished facts.

The proof that Wall Street is giving mainstream media a stage-managed version of what went wrong begins with a strange revelation by Gary Crittenden, CFO of Citigroup, on the November 5, 2007 conference call where he discusses what have now become the largest losses in the firm's 196-year history. Mr. Crittenden is asked by an analyst why the firm didn't hedge its risk. Here's his response:

"I mean I think it is a very fair question...we are the largest player in this [collateralized debt obligation; CDO] business and given that we are the largest player in the business, reducing the book by half and then putting on what at the time was three times more hedges than we had ever had at least in our recent history, seemed to be very aggressive actions given that we were a major manufacturer of this product...once this [decline in values] process started...the size was simply not there. The market is simply not there to do it in size in any way and it would have been uneconomic to do it."

What Mr. Crittenden really seems to be saying is that Wall Street, with Citigroup leading the pack, built a vast market of complex securities but neglected to put in place a liquid and efficient marketplace for hedging this risk. Say, for example, big, liquid, exchange traded indices and futures contracts that are routinely used to hedge everything from stocks to soy beans to crude oil by as diverse a group as Iowa farmers to Saudi princes.

In fact, the unabridged story is breathtaking in its callous disregard for the economic well being of this nation and its people. Exchange traded products did not emerge to hedge this risk because, behind the scenes, Citigroup, along with 12 other big banks and securities firms were funding a private company to gobble up all the necessary components to keep this burgeoning cash cow to themselves in the opaque, unregulated, over-the-counter (OTC) market, despite the fact that they knew it was dysfunctional.

The private company that would become Wall Street's ticker tape for pricing exotic credit instruments (derivatives on subprime mortgages and credit default swaps) started out as Mark-it Partners in 2001, the brain child of Lance Uggla while he was working for a division of Toronto Dominion Bank, TD Securities.
The official story goes like this: Mark-it Partners needed big broker dealers to submit daily price data. As an incentive, it offered 13 large security dealers options to buy shares in the company providing they would be regular providers of pricing data: ABN AMRO, Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Dresdner Kleinwort Wasserstein, Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, TD Securities, UBS. By 2004, according to an archived company press release, all of the companies had kicked in capital. The Financial Times would later report that these banks and brokerage firms held a majority interest of approximately 67%, hedge funds owned 13%, and employees 20%. The firm's web site currently says it has 16 banks as shareholders, without naming the banks.
Deutsche Bank, Goldman Sachs and JPMorgan were reportedly the first three firms to take an equity stake in Mark-it on or around August 29, 2003 when the three firms sold a proprietary database of credit derivative information to Mark-it. Since Mark-it is a private firm, financial terms have not been disclosed.
What would have been the incentive for three big Wall Street players to build a proprietary database and then, in a magnanimous gesture completely uncharacteristic of Wall Street greed, hand it over to be shared with their largest competitors?

One likely answer is that around this time regulators with a fetish for orderly paper trails (but myopic to the rapidly escalating financial hazard of this unregulated market) had stumbled upon the fact that there was a growing backlog of credit derivative trades that were never officially confirmed between the parties, reaching a peak of 153,860 unconfirmed trades by September 2005. Of this, 97,650 trades were more than 30 days overdue; 63,322 trades were a stunning 90 days past due according to a Government Accountability Office (GAO) report. (Although regulators knew about this spiraling trading nightmare as earlier as 2003, the GAO report did not come out until we were deep into the credit crisis in June 2007.) It was during this time that regulators got an agreement from the major dealers that Mark-it Partners would begin collecting and aggregating the data on unconfirmed trades, keeping individual dealer data confidential from other dealers and preparing a monthly report of aggregated data for regulators.
Who were the banks and brokerage houses responsible for this unmitigated mess? With only a few exceptions, the exact same firms with a majority ownership in Mark-it Partners.

To grasp the magnitude of this wild west world of trading, one needs to understand that we are not talking about a market of a few billion dollars. According to the International Swaps and Derivatives Association, the credit derivatives market has grown from an estimated total notional amount of nearly $1 trillion outstanding at year-end 2001 to over $34 trillion at year-end 2006.

According to the U.S. Office of the Comptroller of the Currency (OCC), JPMorgan, Citigroup and Bank of America handled about 90 percent of this trading among U.S. commercial banks in the fourth quarter of 2006. (These are the same three banks that were backing the scheme last year with the U.S. Treasury to create a $100 Billion bailout fund for exotic instruments that also had never seen the light of day of exchange trading. That plan failed when it appeared to be a thinly disguised artificial pricing mechanism to inflate values for the worst hit firms on Wall Street: namely, Citigroup.)

According to the GAO report, significant progress was achieved for a period in bringing down these unconfirmed trades but by November 2006, the numbers had climbed again: there were over 81,000 unconfirmed trades with around 31,000, or 54 percent, remaining unconfirmed for over 30 days. Raising images of the early 1900s curb market in lower Manhattan where traders posted securities for sale on lampposts, the report notes that this vast market is being handled manually to a significant extent. (Our nation has apparently devolved not only on torture and constitutional rights and habeas corpus and election integrity but we now seem to have wiped out 100 years of trading advances.)

The obvious solution, a transparent, regulated, automated, exchange traded model does not seem to have occurred to the Masters of the Universe or their timid regulators.

It did, however, occur to four Exchanges: Eurex, the Chicago Mercantile Exchange (Merc), the Chicago Board of Exchange (CBOE) and the Chicago Board of Trade (CBOT). In 2007, all four created exchange traded instruments to hedge the risk of credit defaults. Some traders call the response from the Wall Street firms a boycott; others call it a cabal that circled the wagons. According to a Bloomberg article in April 2007, "Banks and securities firms are keeping a stranglehold on the market, which has swelled to cover debt sold by more than 3,000 companies, governments and industries." A call to the CBOT on January 18, 2008 confirmed that they are still not seeing any business from the big Wall Street firms in their credit default product.

The track for this train wreck was put in place in December 2000 when Congress passed the Commodity Futures Modernization Act giving a free pass on regulation to the over-the-counter trading between sophisticated individuals and institutions. Brooksley Born, then Chairperson of the regulatory body, the Commodities Futures Trading Commission (CFTC), literally begged Congress to slow down the train and carefully consider the future ramifications of this legislation. Speaking before the House Committee on Banking and Financial Services on July 24, 1998, Ms. Born said:

"The CFTC or its predecessor agency, the Commodity Exchange Authority, has regulated derivative instruments for almost three-quarters of a century. Its authority is contained in the Commodity Exchange Act ("CEA" or "Act"), which is the primary federal law governing regulation of derivative transactions. The CEA vests the CFTC with exclusive jurisdiction over futures and commodity option transactions whether they occur on an exchange or over the counter. The Act generally contemplates that, unless exempted, futures and commodity options are to be sold through Commission-regulated exchanges which provide the safeguards of open and competitive trading, a continuous market, price discovery and dissemination, and protection against counterparty risk."

Alan Greenspan, Chair of the Federal Reserve Board at the time, testified before Congress in favor of this legislation and asked that it be "expedited." Last week, Mr. Greenspan joined the payroll of the hedge fund, Paulson & Company, which last year made $15 billion in profits betting that poor people's homes would be foreclosed on while using the unregulated over-the-counter contracts that Mr. Greenspan assisted in making possible.

The counter-party risk that Ms. Born highlighted in her testimony is now set to take center stage in 2008. As it turns out, this non-exchange based market of darkness totaling $34 trillion has done business with some parties that are unable to pay up or are teetering on a death spiral due to looming ratings downgrades. Last week, Merrill Lynch announced it was writing down over $3 Billion as a result of problems with its counter-parties.

As the threat of some antiseptic sunshine and competition from the exchanges reached the big Wall Street players late last year, Mark-it Partners, now known as Markit Group Ltd., had yet another amazing burst of good fortune. In November 2007, two consortiums owned by essentially the same group of banks and brokerage firms that were early investors in Mark-it Partners, who conveniently also owned the major credit default indices, CDS IndexCo and International Index Co., up and sold themselves to little Markit Group Ltd. Included in the deal by CDS IndexCo were the two subprime indices, ABX and TABX, along with the prominent CDX index which acquired much of its respectability by previously having the name Dow Jones in front of its three letters.

ABX and TABX were the indices Citigroup should have been able to hedge itself with if this over-the-counter market was liquid, functional and able to handle pesky details like proof the trade happened. Instead, 401(k) plans, endowments, public pensions and Citigroup employees' deferred compensation plans, loaded up to their eyeballs in Citigroup's bizarrely large float of 5 billion shares, have watched the stock value decline by 53% over the past 12 months as toxic debt that was never hedged comes home from holiday in the Caymans to blow up on Citigroup's books.

It was four years after the crash of 1929 before the major titans of Wall Street were forced to give testimony under oath to Congress and the full magnitude of the fraud emerged. That delay may well have contributed to the depth and duration of the Great Depression. The modern-day Wall Street corruption hearings in Congress were cut short by the tragedy of 9/11. They must now resume in earnest and with sworn testimony if we are to escape a similar fate.

Pam Martens worked on Wall Street for 21 years; she has no securities position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com

[papabear]

http://www.atimes.com/atimes/Global_Economy/JA25Dj02.html

Jan 25, 2008


Meltdown debunks delinkers
By Max Fraad Wolff

The last week has seen contagious and discontinuous market swoons rile global investors, policy makers and pundits. The Hang Seng and Shanghai gyrations have been stomach turning. European and Asian markets have delinked, relinked, delinked and tumbled. The only consistent trend is down, down, down.

Multiple theories have been fed through the meat grinder with the allocations they inspired. Trillions of yuan, US dollars, yen and euros in paper wealth have been transformed into fuel for a fear inferno. Of course this will not last forever. Time will salve wounds and leading firms and prudent long-term plays will eventually emerge. Our first order of business must be to understand what is



actually happening. The first casualty of fear is perspective. Let’s try to zoom out, take in the action and figure out what is going on.
For the past three years, non-US equity market’s returns have handily outperformed US returns. This is compounded by the prolonged slide in the dollar. Since US financial trouble began to dramatically unfold in the summer of 2007, many developing markets continued to trend higher. China has been a leader of this charge. The growth in Brazil, India, China and Russia - or BRIC - has been spectacular over the past few years. As a US-led global slowdown loomed, these traditionally delicate emerging markets continued to outperform.

If we use broad ETF (exchange traded funds) as proxies for emerging-market performance, we see clearly that these markets have been doing better than the US - even before adjustment is made for increases in their currencies against the US dollar. The 10% increase in value of the yuan against the dollar and the performances of the Hang Seng Index and Shanghai Composite Index are dramatic.

The ETF funds of Latin America, Asia ex-Japan and emerging Europe have all outstripped the US benchmark S&P 500.

Part and parcel of this outperformance has been belief that these economies are poised for rising international import and new era growth. IMF data make clear that in 2007, India and China accounted for more global growth than the US.

I don’t doubt that the future global economy will be far less US-centric. I don’t doubt that GDP growth will be more rapid in the emerging markets over many of the coming years. I do doubt they can magically delink from trouble in the US and Western Europe. The US, Western Europe and Japan still account for over 50% of world GDP and over 70% global market capitalization.

Part of the carnage of this week has been the realization that delinking theories are delinked from history, economic analysis and common sense.

At the same time as this decoupling fantasy was hit, further fallout from US financial and debt loss overhang became clear. This week we have also begun to see the first announcements of losses from Chinese banks. The Bank of China, Industrial and Commercial Bank of China and China Construction Bank are all believed to have losses from assets links to US mortgages. The US$7.9 billion being discussed now is clearly an early conservative estimate of value at risk.

The slide toward recession in America gained momentum as Treasury Secretary Henry Paulson and President George W Bush pushed fiscal policy stimulus and further weak corporate earnings were announced. Growth slowdowns call into question high energy prices, commodity price highs and asset bottom-feeding. We are clearly not done with credit-related problems and attendant economic weakness. This added fuel to fear’s fire and quickly spread.

Fears of further losses from credit market turmoil and asset write downs riled Asia, South America, Europe and beyond. Lower euro-zone growth estimates and downside risk awareness in Europe’s markets led to volume asset sales. This further spooked Asian investors as Europe has become an even larger trade partner with China than the US. Investors have been selling in Asia, Europe and the US at different rates for different but related reasons for the last week.

World central banks - save for the US Federal Reserve - have not responded for fear of stoking inflationary pressures and being seen as narrowly subservient to financial markets. Thus, there has been a delinking of coordinated central bank liquidity policy as global markets melt down. The loss of concerted action by central bankers has added more fuel to the fires.

Asset prices are burning down. Price movements have been bizarre since Friday January 18. Normal correlations and lock step movements in global markets have come unglued. Asian shares trade differently in NY and Hong Kong. European shares trade differently in Asia, New York and Europe. The divergence of course means that market openings are expected to price heavy action elsewhere and influence tomorrow’s action simultaneously.
The first sign of calming will be movement toward harmony across markets’ direction and magnitude of change. I will be scanning the smoky horizon for coupling of market movement.

Max Fraad Wolff is a doctoral candidate in economics at the University of Massachusetts, Amherst and managing director of GlobalMacroScope.


(Copyright 2006 Max Fraad Wolff)

[papabear]

http://www.atimes.com/atimes/Global_Economy/JA25Dj01.html

Jan 25, 2008


A $4.4 billion drop in the bucket
By The Mogambo Guru

As the 321Gold.com site titled it, "Merrill in emergency weekend talks", which I took to be a news report that Merrill Lynch, probably like all the other financial hustlers out there, is looking at a few zillions of dollars in collateralized losses, with the attendant angry customers and their snarling lawyers, who then look out of the windows of their fancy offices and notice there are buzzards circling overhead, and they know right then that they are just dead meat walking.

So I can see how they would be in "emergency talks", and I laughed at their predicament, but not the good "hahaha!" kind of laugh where everybody is having a good time, but the



"hahahahahahahahaha!" kind that has a lot of sneering scorn and Vicious Mogambo Schadenfreude (VMS), where I not only take delight in the suffering of these yahoos who deserve to suffer, but I positively revel in the stuff, and want to see them suffer more because of the sheer degree of misery they have caused, and I laugh derisively "hahaha!" out loud, and I send them hate mail ("Dear Financial Hustling Scumbag, I hate you!", which I sign as "Anonymous Yet Highly Disgruntled (AYHD)").

And I exhibit not only a lot of laughing revelry and scorn sprinkled liberally with cursing, but an episode of Vicious Mogambo Schadenfreude (VMS), usually concludes with some gut-wrenching coughing and trying to catch my breath, some more cursing, and a lot of rude gestures as a final, gratuitous dollop of deserved disdain and disrespect.

Naturally, I had planned something more dramatic in response to all the misery called by "financial innovation", like jumping up on the table, grabbing my crotch and yelling, "You want some financial innovation? I got your financial innovation right here, you thieving morons!"

Tragically, I had to cut that terrific piece of performance art out of my routine since my wife says I can't practice the jumping-on-top-of-table move anymore, unless I go get my own coffee table, because she says I am "ruining" the one in the living room. So I naturally tried to patiently explain it to her. I said, "All the other tables are too high, and when I try to jump on top of them, I bump my head on the ceiling! Are you too stupid to see it? Huh? Is that it? Are you too stupid? Or maybe you can't see it because you are so busy looking for every little fault of mine so that you can criticize me, in everything I say or do, always pick, pick, pick at me until I am sick, and I am talking sick to freaking death here, of it!"

But even after I carefully and calmly explain it to her like that, does she care? No! So to hell with it AND her!

As you can tell, this whole damn thing is, like all drama, emotionally draining. So much so, in fact, that I save it for those who are the most deserving, and there is hardly anyone in America who doesn't deserve to be taken out into the street and slapped silly for being so stupid (audience shouts out, "How stupid, Mogambo?") that they believed in the exquisite fairy tale that combines getting "something-for nothing" with "debts and deficits don't matter", and who allowed the government to get so big because the Federal Reserve was allowed to create more than enough money and credit to finance all the deficit spending!

Year after year of monetary inflation, decade after decade! More and more and more money until my throat is raw and bloody from screaming in outrage and fear, and the neighbors are yelling "For God's sake, will somebody please shut that Damned Mogambo Idiot (DMI) up so we can get some sleep around here?"

Insomniac neighbors aside, I figure that the sheer tonnage of new money being dumped into the economic system has got to be too much for simple stock markets, bond markets and housing markets to absorb, and derivatives were born to soak up all this damned money that was being created.

The Guardian.co.uk site uses the headline, "Merrill seeks more funds to avoid crisis" as the title of the article, with the subhead, "$4.4bn from Singapore's Temasek not enough", which is what I just finished saying, but I am not quoted anywhere in the article, the bastards.

Here is where I really started busting a gut laughing; as OF COURSE $4.4 billion is not enough! The economic system and the players in it have to absorb trillions of dollars of current and future losses! A piddly $4.4 billion? Hahahaha! Talk about your proverbial "drop in the bucket"! Hahaha! Ugh.

The Mogambo Sez: Life is sweet, indeed, for those who hold gold, silver and oil, and life will get sweeter yet, as the Fed and the Congress have not even gotten started cooking up their inevitable monetary and fiscal stupidities to "do something" to save the economy from their previous monetary and fiscal stupidities that have caused gold and commodity prices to get as high as they are.

And thus gold, silver and oil (and indeed all commodities) will make you and me rich without our lifting a finger, or even getting up off of our fat, stupid butts. And if you are even remotely like me, then you think, like I think, as all lazy people think, that this is the absolute best way to make money! And it is! Whee!

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.

[papabear]

http://www.usagold.com/gildedopinion/greenspan.html

GOLD AND ECONOMIC FREEDOM

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire -- that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth.

When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one -- so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists -- why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely -- it was claimed -- there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.

The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form -- from a growing number of welfare-state advocates -- was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which -- through a complex series of steps -- the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

by Alan Greenspan
1967

Reprinted by USAGOLD with editorial content on July

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http://www.atimes.com/atimes/Global_Economy/JA26Dj04.html

THE ROAD TO HYPERINFLATION
Fed helpless in its own crisis
By Henry C K Liu

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http://www.boston.com/bostonglobe/ideas/ar...ck_box_economy/

The black box economy
Behind the recent bad news lurks a much deeper concern: The world economy is now being driven by a vast, secretive web of investments that might be out of anyone's control.
(AP)
Email|Print| Text size – + By Stephen Mihm
January 27, 2008

THE PAST YEAR has been a harrowing one for the world's financial markets, shaken by subprime crises, credit crunches, and other ills. Things have only gotten stranger in the past week, with stock prices swinging wildly in every major market - drastically down, then back up.
more stories like this

Last week the Federal Reserve announced the biggest cut in overnight lending rates in more than two decades. Congress, not to be outdone, is slapping together a massive deficit spending package aimed at giving the economy an emergency booster shot.

Despite the anxiety, nobody is stockpiling canned goods just yet. The prevailing assumption in today's economy is that recessions and bear markets come and go, and that things will work out in the end, much as they have since the Great Depression. That's because there's a collective confidence that the market is strong enough to correct itself, and that experts in charge of the financial system will understand how to mount a vigorous defense.

Should we be so confident this time? A handful of financial theorists and thinkers are now saying we shouldn't. The drumbeat of bad news over the past year, they say, is only a symptom of something new and unsettling - a deeper change in the financial system that may leave regulators, and even Congress, powerless when they try to wield their usual tools.

That something is the immense shadow economy of novel and poorly understood financial instruments created by hedge funds and investment banks over the past decade - a web of extraordinarily complex securities and wagers that has made the world's financial system so opaque and entangled that even many experts confess that they no longer understand how it works.

Unlike the building blocks of the conventional economy - factories and firms, widgets and workers, stocks and bonds - these new financial arrangements are difficult to value, much less analyze. The money caught up in this web is now many times larger than the world's gross domestic product, and much of it exists outside the purview of regulators.

Some of these new-generation investments have been in the news, such as the securities implicated in the mortgage crisis that is still shaking the housing market. Others, involving auto loans, credit card debt, and corporate debt, are lurking in the shadows.

The scale and complexity of these new investments means that they don't just defy traditional economic rules, they may change the rules. So much of the world's capital is now tied up in this shadow economy that the traditional tools for fixing an economic downturn - moves that have averted serious disasters in the recent past - may not work as expected.

In tell-all books, financial blogs, and small-circulation newsletters, a handful of insiders have begun to sound the alarm, warning that governments and top bankers may simply no longer understand the financial system well enough to do anything about it.

"Central banks have only two tools," says Satyajit Das, author of "Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives," who has emerged as a voice of concern. "They can cut interest rates or they can regulate banks. But these are very old-fashioned tools, and are completely inadequate to the problems now confronting them."

Since the last financial crisis that genuinely threatened the fabric of our society, the Great Depression, the United States has built a system of regulatory checks and balances that has, for the most part, worked. The system has worked because the new regulations enforced some semblance of transparency. Companies abide by an extensive set of rules and file information on their profits, losses, and assets.

Obviously, there are limits to transparency: Without withholding some information from public view, it would be hard for companies to take advantage of opportunities in the marketplace. But a modicum of transparency can go a long way, enabling both regulators and investors to make informed decisions. The advantages of the system are many; the costs of even a single case of nontransparency, as with Enron, can be high.

But when the mortgage crisis broke last summer, it opened a window on something else: The existence of a huge wilderness of investments in the financial sector that are nearly impossible to track or measure, and which operate out of the view of both investors and regulators. It emerged that investment banks, hedge funds, and other financial players had issued, bought, and sold hundreds of billions of dollars' worth of esoteric securities backed in part by other securities, which in turn were backed by payments on high-risk mortgages.

When borrowers began defaulting on their loans, two things happened. One, banks, pension funds, and other institutional investors began revealing that they owned huge quantities of these unusual new securities, called collateralized debt obligations, or CDOs. The banks began writing them off, causing the massive losses that have buffeted the country's best-known financial companies. And two, without a market for these securities, brokers stopped wanting to issue risky mortgages to new home buyers. Home values began their plunge.

In other words, a staggeringly complex financial instrument that most Americans had never heard of, and which many financial writers still don't fully understand, became in a matter of months the most important influence on home values in America. That's not how the economy is supposed to work - or at least that's not what they teach students in Economics 101.

The reason this had been happening totally out of sight is not difficult to understand. Banks of all stripes chafe against the restraints that federal and state regulators place on their ability to make money. By cleverly exploiting regulatory loopholes, investment banks created new types of high-risk investments that did not appear on their balance sheets. Safe from the prying eyes of regulators, they allowed banks to dodge the requirement that they keep a certain amount of money in reserve. These reserves are a crucial safety net, but also began to seem like a drag to financiers, money that was just sitting on the sidelines.

"A lot of financial innovation is designed to get around regulation," says Richard Sylla, professor of economics and financial history at NYU's Stern School of Business. "The goal is to make more money, and you can make more money if you don't have to keep capital to back up your investments."

The hiding places for these financial instruments are called conduits. They go by various names - the SIV, or structured investment vehicle, is one that's been in the news a great deal the past few months. These conduits and the various esoteric investments they harbor constitute what Bill Gross, manager of the world's largest bond mutual fund, called a "Frankensteinian levered body of shadow banks" in his January newsletter.

"Our modern shadow banking system," Gross writes, "craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever."

The mortgage-driven securities that have been making headlines are but the tip of a much larger iceberg. Far larger categories of investment have sprung up, with just as much secrecy, and even less clarity into who holds them and how much they are truly worth.

Many of these began as conventional instruments of finance. For instance, derivatives - the broad category of investments whose value is somehow based on other assets, whether a stock, commodity, debt, or currency - have been traded for more than a century as a form of insurance, helping stabilize otherwise volatile markets.

But today, increasingly, a new generation of derivatives doesn't trade on markets at all. These so-called over-the-counter derivatives are highly customized agreements struck in private between two parties. No one else necessarily knows about such investments because they exist off the books, and don't show up in the reports or balance sheets of the parties who signed them.

As the derivatives business has grown more complex, it has also ballooned in scale. Broadly speaking, Das - author of a leading textbook on derivatives and complex securities - estimates that investors worldwide hold more than $500 trillion worth of derivatives. This number now dwarfs the global GDP, which tops out around $60 trillion.

Essentially unregulated and all but invisible, over-the-counter derivatives comprise a huge web of bets, touching every sector of the world economy, that entangles a massive amount of money. If they start to look shaky - or if investors need to start selling them to cover other losses - that value could vanish, with catastrophic results to the owner and unpredictable effects on financial markets.

Derivatives can ripple through the market and link players that might not otherwise be connected. With some types of new investments, that fusion takes place within the security itself.

For instance, some financial instruments are built of two or more different types of assets, linking together sectors of the economy that aren't supposed to move in tandem. In the name of transferring risk - and in the interest of creating an appealing new product to sell to aggressive investors seeking higher returns - a bank could create a CDO, for instance, that packaged subprime mortgages together with corporate bonds. An economist would expect those to move independently, but thanks to a large - and unseen - investment in such a linked package, problems with one could drive down the other. A bad apple can ruin an entire barrel of fruit.

Again, it's not as though anyone necessarily knows the composition of these structured securities. Nor do they know who has invested in them, thanks to the fact that they have not, until recently, counted as conventional assets subject to the normal rules of accounting. And because they don't trade on open markets, their values are essentially guesses, calculated by computer algorithms.

Das disparages much of this as the product of bankers creating "complexity for the sake of complexity," trying to wow their clients by inventing more sophisticated-seeming investments. "Financial innovation is a magical catch phrase," he explains. "It's very sophisticated and chi-chi."

"Investment bankers want to make them more complex, so that they won't be copied, and so that their clients won't understand them," he says. "When they ask whether they're paying the right amount, they won't know."

But when reality comes home to roost, things can get ugly pretty quickly: If an investor is forced to sell a CDO, the onetime price realized on the open market may bear no relationship to the theoretical value generated by a computer formula. That means that everyone holding CDOs can no longer sleep well at night: the same thing can happen to them.

T

hese risks are magnified, as they were during the stock bubble of the 1920s, by the fact that many of these assets are owned by investors who borrowed money to make the investments in the first place. When a market shock like the subprime crisis hits, it can send tremors through the system with incredible speed.

If the contagion spreads, the conventional wisdom holds that the Federal Reserve and other central banks around the world can step into the breach caused when consumers and investors start to lose their confidence. But what happens when all these complicated financial arrangements and instruments start to unravel? The market for one product alone - the credit default swap, or CDS - dwarfs this country's economy. The Fed has an uphill battle, made harder by the fact that it is grappling, to a large extent, with unseen forces.

In theory, additional regulation may help with this. The Financial Accounting Standards Board, which establishes corporate accounting procedures and guidelines, took a first step in that direction this past November, ordering investment banks and anyone else holding complicated securities to assign market values to so-called Level 3 assets - a fancy name for assets for which there is no prevailing market price. This meant assigning a market value to all those CDOs.

Banks promptly began writing down tens of billions of dollars of assets, and their investors are still trying to sort through the results. It's still too early to tell whether or not the effort will work, or whether the "market prices" that get reported are anything more than figments of in-house accountants' imaginations. For his part, Das is skeptical. "It will help that people will know the poison they're drinking," he says. "Whether it will help stabilize the system is another question."

It would be ideal if the financial markets became a bit less opaque and intelligible before that happens. That would be the job of regulators, but Das isn't sure that regulators have the intellectual horsepower to figure out what they need to do. "If you're bright and you can make $5 million a year on Wall Street," he asks, "why would you settle for making 50K as a regulator?"

And in any case, transparency isn't really what the denizens of Wall Street want, Das observes. "The regulators keep espousing things like clarity and transparency, but it's in the investment bankers' interest to keep things opaque." Das pauses for a moment.

"It's like a butcher. He doesn't want the buyer to know what goes into making the sausage." He chuckles, noting that it's the same with financiers. "That's what they're all about and always have been."

Stephen Mihm is an assistant professor of American history at the University of Georgia and the author of "A Nation of Counterfeiters."

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http://www.atimes.com/atimes/Global_Economy/JA29Dj01.html

COMMENTARY

It all began innocently enough: "The Federal Reserve, consistent with its responsibilities as the nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system."

The newly appointed Federal Reserve chairman, Alan Greenspan, released this statement prior to the opening of market trading on Tuesday, October 20, 1987. The previous day, "Black Monday", the Dow Jones Industrial Average crashed 508 points, or 22.6%. All the major indices were down in the neighborhood of 20%, with



S&P500 futures ending the historic trading session down 29%.

The 1987 stock market crash was contemporary Wall Street finance’s first serious market dislocation. Stock market speculation had been running rampant, at least partially fostered by new-fangled hedging and "portfolio insurance" trading strategies. When a highly speculative market began to buckle, the forced selling of S&P futures contracts to hedge the rapidly escalating exposure to market insurance ("dynamic trading") played an instrumental role in instigating illiquidity and a market panic.

Following Black Monday, there was of course considerable media attention directed at the event's causes and consequences. Some believed at the time that the stock market was discounting a severe economic downturn. Others recognized the reality that the situation had little to do with underlying economic forces. The economy was in the midst of a robust economic expansion, while credit was flowing (too) freely. Immediately post-crash, however, the financial system was extremely vulnerable and the Greenspan Fed acted decisively to ensure the marketplace understood clearly that the Federal Reserve was a willing and able liquidity provider.

Credit then really began to flow. Greenspan’s assurances came at a critical juncture for the fledging Wall Street securitization marketplace; for Michael Milken, Drexel Burnham and the junk bond market; for private equity, hostile takeovers and the leveraged buyout (LBO) boom; for the fraudulent savings and loan industry and for many banks' commercial lending operations. While it sounds a little silly after what we've witnessed since, there was a time when the eighties were known as the "decade of greed".

When the junk bonds, LBOs, S&Ls, and scores of commercial banks all came crashing down beginning in late-1989 to 1990, the Greenspan Fed initiated an historic easing cycle that saw Fed funds cut from 9.0% in November 1989 all the way to 3.0% by September 1992. In order to recapitalize the banking system, free up system credit growth and fight economic headwinds, the Greenspan Federal Reserve was more than content to garner outsized financial profits to the fledgling leveraged speculator community and a Wall Street keen to seize power from the frail banking system. Investment bankers, all facets of the securitization industry, the derivatives market, the hedge funds and the government-sponsored enterprises such as Fannie Mae and Freddie Mac never looked back - not for a second.

Birth of a 20-year myth
In the guise of "free markets", the Greenspan Fed sold its soul to unfettered and unregulated Wall Street-based credit creation. What proceeded was the perpetration of a 20-year myth: that an historic confluence of incredible technological advances, a productivity revolution and momentous financial innovation had fundamentally altered the course of economic and financial history. The ideology emerged (and became emboldened by each passing year of positive GDP growth and rising asset prices) that free market forces and enlightened policymaking raised the economy’s speed limit and increased its resiliency; conquered inflation; and fundamentally altered and revolutionized financial risk management/intermediation. It was one heck of a compelling - alluring - seductive story.

But, as they say, "there's always a catch". In order for New Age Finance to work, the Fed had to make a seemingly simple - yet outrageously dangerous - promise of "liquid and continuous" markets. Only with uninterrupted liquidity could much of securities-based contemporary risk intermediation come close to functioning as advertised. Those taking risky positions in various securitizations (especially when highly leveraged) needed confidence that they would always have the opportunity to offload risk (liquidate positions and/or easily hedge exposure). Those writing derivative "insurance" - accommodating the markets’ expanding appetite for hedging - required liquid markets whereby they could short securities to hedge their risk, as necessary.

There were numerous debacles that should have alerted policymakers to some of New Age Finance’s inherent flaws (1994's bond rout, Orange Co, Mexico, SE Asia, Russia, Argentina, LTCM, the tech bust, and Enron to name a few). Yet the bottom line was that the combination of the Fed’s flexibility to aggressively cut rates on demand; ballooning GSE balance sheets on demand; ballooning foreign official dollar reserve holdings on demand; and insatiable demand for the dollar as the world’s reserve currency all worked in powerful concert to sustain (until recently) the US credit bubble - through thick and thin.

Despite his (inflationist) academic leanings and some regrettable ("Helicopter Ben") speeches as Fed governor, I do believe Dr Bernanke aspired to adapt Fed policymaking. His preference was for a more "rules-based" policy approach of setting rates through some flexible "inflation targeting" regime, while ending Greenspan’s penchant for kowtowing to the markets. Today, it all seems hopelessly naive. Inflation is running above 4%, while the rate-setting Federal Open Market Committee (FOMC) is compelled to quickly slash the funds rate to 3%. And never - I repeat, never - have the financial markets been more convinced that the Federal Reserve fixates on stock prices when it comes to inflationary pressures.

Fed on a limb of its own
Today, the contrast to the European and other central bank could not be starker. The Fed has climbed way out on a limb, and it is difficult at this point to see how it can regain credibility as an inflation fighter or supporter of the value of our currency. It is not only trust in Wall Street-backed finance that is being shattered.

The greatest flaw in the Greenspan/Bernanke monetary policy doctrine was a dangerously misguided understanding of the risks inherent to their "risk management" approach.

Repeatedly, monetary policymaking was dictated by the Fed’s focus on what it considered the possibility of adverse consequences from relatively low probability ("tail") developments in the credit system and real economy. In other words, if the markets (certainly inclusive of New Age structured finance) were at risk of faltering, it was believed that aggressive accommodation was required. The avoidance of potentially severe real economic risks through "activist" monetary easing was accepted outright as a patently more attractive proposition compared with the (generally perceived minimal) inflationary risks that might arise from policy ease. As it was in the late 1920s, such an accommodative ("coin in the fuse box") policy approach is disastrous in bubble environments.

The Fed's complete misconception of the true nature of contemporary "inflation" risk was a historic blunder in monetary doctrine and analysis. To be sure, the consequences of accommodating the markets were anything but confined to consumer prices. Instead, the primary - and greatly unappreciated - risks were part and parcel to the perpetuation of dangerous credit bubble dynamics and myriad attendant excesses. Importantly, the Fed failed to recognize that obliging Wall Street finance ensured ever greater bubble-related distortions and fragilities - deeper structural impairment to both the financial system and real economy. In the end, the Fed’s focus on mitigating tail risk guaranteed a much more certain and problematic tail - a rather fat one at that.

Fundamentally, the Greenspan/Bernanke doctrine totally misconstrued the various risks inherent in their strategy of disregarding bubbles as they expanded - choosing instead the aggressive implementation of post-bubble mopping-up measures as necessary. They were almost as oblivious to the nature of escalating bubble risk as they were to present-day complexities incident to implementing mop up reflationary policies. Mopping up the technology bubble created a greatly more precarious mortgage finance bubble. Aggressively mopping up after the mortgage/housing carnage in an age of a debased and vulnerable dollar, US$90 oil, $900 gold, surging commodities and food costs, massive unwieldy pools of speculative global finance, myriad global bubbles, and a runaway Chinese boom is fraught with extraordinary risk.

Furthermore, the Fed's previously most potent reflationary mechanism - Wall Street-backed finance – is today largely inoperable.

I'm not going to jump on the criticism bandwagon and excoriate Dr Bernanke for his panicked 75 basis point inter-meeting rate cut. From my vantage point, the wheels were coming off and I would expect nothing less from our increasingly impotent central bank. Yet it is silly to blame today’s mess on recent indecisiveness. The Fed has not been behind the curve, unless one is referring to the learning curve. The unfolding financial and economic crisis has been more than 20 years in the making. It’s a creation of flawed monetary management; egregious lending, leveraging and speculating excess; unprecedented economic distortions and imbalances on a global basis. And I find it rather ironic that Wall Street is so fervidly lambasting the Fed. For 20 years now the Fed has basically done everything that Wall Street requested and more.

It is also as ironic as it was predictable that Alan Greenspan - Ayn Rand "disciple" and free-market ideologue - championed monetary policies and a financial apparatus that will ensure the greatest government intrusion into our nation’s financial and economic affairs since the New Deal. Articles berating contemporary capitalism are becoming commonplace. I fear that the most important lesson from this experience may fail to resonate: that to promote sustainable free-market capitalism for the real economy demands considerable general resolve to protect the soundness and stability of the underlying credit system.

Bears survive squeeze
And, speaking of the credit system, some brief market comments are in order. Stocks generally rallied last week, yet it was a backdrop that provided little comfort that the system has begun to stabilize. Sure, the banks rallied 10%, the homebuilders 20%, the retailers 7%, the transports almost 7%, and the restaurants 5%. One could easily assume that the bears were squeezed and leave it at that.

There are, however, surely more complex and problematic dynamics at work. Notably, many of the favorite sectors were hit this week - the utilities, technology and biotechs all posted notable weakness. Coupled with this week’s extreme volatility, I will assume that the huge "market-neutral" and "quant" components of the leveraged speculating community have suffered even greater losses so far this month than those from last August.
It is also worth noting that some important credit spreads have diverged markedly, most notably many corporate, junk and commercial mortgage-backed securities' spreads have widened as dollar swap spreads have narrowed. The spectacular Treasury melt-up must also be causing havoc for various strategies, ditto the recently strong yen and Swiss franc.

I'll stick with the view that an unfolding breakdown in various trading models and hedging strategies is at risk of precipitating a crisis of confidence for the leveraged speculating community. I suspect hedge fund trading was much more responsible for chaotic global securities markets this week than a rogue French equities trader. There is, unfortunately, little prospect for markets to calm down anytime soon. There is no quick or easy fix to any of the myriad current problems - seized-up securitization markets, sinking housing prices, faltering bond insurers, counterparty issues, a crisis in confidence for Wall Street finance, or acute economic vulnerability - to name only the most obvious. Again, they’ve been more than 20 years in the making.

[papabear]

http://www.counterpunch.org/whitney01292008.html

January 29, 2008
An Inverted Pyramid of Subprime Slop
The Great Credit Unwind of 2008

By MIKE WHITNEY

Global market turmoil continued into a second week as stock markets in Asia and Europe took another tumble on Monday on growing fears of a recession in the United States. China's benchmark index plummeted 7.2 per cent to its lowest point in six months, while Japan's Nikkei index slipped another 4.3 per cent. Equities markets across Asia recorded similar results and, by midmorning in Europe, all three major indexes---the UK FTSE "Footsie", France's CAC 40, and the German DAX---were all recording heavy losses. It's now clear that Fed Chairman Bernanke's 'surprise' announcement of a 75 basis points cut to the Fed Funds rate last Tuesday has neither stabilized the markets nor restored confidence among jittery investors.

In Monday's Financial Times, Harvard economics professor, Lawrence Summers, made an impassioned plea for further government action in addition to the Fed's rate cuts and Bush's $150 billion "stimulus plan". Summers believes that steps must be taken immediately to mitigate the damage from the sharp downturn in housing and persistent troubles in the credit markets. He suggests a "global coordination of policy", which is another way of admitting that the Fed has lost control of the system and cannot solve the problem by itself.

Summers is right, although it's easy to wonder why he remained silent while the markets were soaring and the investment banks were reaping trillions of dollars in profits on a "structured investment" swindle which has left the global financial system teetering on the brink of catastrophe. Now that the US economy is sliding towards recession; Summers is calling for "transparency". How convenient.

"Financial institutions are holding all sorts of credit instruments that are impaired but are difficult to value, creating uncertainty and freezing new lending. Without more visibility, the economy and financial system risk freezing up as Japan's did in the 1990s."

Right again. The banks are "capital impaired" because they are holding nearly $600 billion in mortgage-backed assets which are declining in value every month. This is forcing many banks to conceal their real condition from investors while they scour the planet for the extra capital they need to continue operations. As long as the banks are in distress, consumer and business lending will dwindle and the economy will continue to shrink. The main gear in the credit-generating mechanism is now broken. The rate cuts can provide liquidity, but they cannot bring insolvent banks back from the dead. Summers is expecting too much.

The US' current account deficit (nearly $800 billion) has been recycling into US Treasuries and securities from foreign investors. Up to this point, American markets were an attractive place to put one's savings. The dollar was strong, and the stock market had a proven record of profitability and transparency. But since President Bill Clinton repealed Glass-Steagall in 1999, the markets have been reconfigured according to an entirely new model, "structured finance".

Glass-Steagall was the last of the Depression-era bulwarks against the merging of commercial and investment banks. As a result banking has changed from a culture of "protection" (of deposits) to "risk taking", which is the securities business. Through "financial innovation" the investment banks created myriad structured debt instruments which they sold through their Enron-like "off balance" sheets operations (SIVs and Conduits) Now, trillions of dollars of these subprime and mortgage-backed bonds---many of which were rated triple A---are held by foreign banks, retirement funds, insurance companies, and hedge funds. They are steadily losing value with every rating's downgrade.

Summers, of course, understands the enormity of the swindle that has taken place beneath the noses of US regulators, but chooses not to point fingers. Instead, he draws our attention to a little known part of the market which will probably lead the way to a stock market crash and a system-wide meltdown.

Here's Summers:

"It is critical that sufficient capital is infused into the bond insurance industry as soon as possible. Their failure or loss of a AAA rating is a potential source of systemic risk. Probably it will be necessary to turn in part to those companies that have a stake in guarantees remaining credible because they have large holdings of guaranteed paper. It appears unlikely that repair will take place without some encouragement and involvement by financial authorities. Though there are many differences and the current problem is more complex, the Long-Term Capital Management work-out is an example of successful public sector involvement."

Some of the largest bond insurers are are currently unable to cover the losses that are piling up from the meltdown in mortgage-backed securities (MBS) and collateralized debt obligations (CDO). Their business model is hopelessly broken and they will require an immediate $143 billion bailout to maintain operations. The largest of the bond insurers is MBIA. Here's stock analyst Michael Lewitt, quoted in Bloomberg:

"MBIA's total exposure to bonds backed by mortgages and CDOs was disclosed to be $30.6 billion, including $8.14 billion of holdings of CDO-squareds (eds note; pure garbage). MBIA was being priced as a weak CCC-rated credit when it issued its bonds last week; it is now being priced for a bankruptcy. MBIA's stock, which traded just under $68 per share last October, dropped another $3.50 this morning to under $10.00 per share."

Barclay's estimates that the investment banks alone are holding as much as $615 billion of structured securities guaranteed by bond insurers. If the insurers default, hundreds of billions will be lost via downgrades.

So, in practical terms, what does it mean if the bond insurers go under?
It means that the system will freeze and the stock market will crash. Listen to TV stock guru Jim Cramer summed it up last week in an interview with MSNBC's Chris Matthews:

"But, Chris, there is something I would urge all the candidates to think about and our Treasury Secretary, which is that there are a group of insurance companies which insure all these bad mortgages and, Cris, I think they are all about to go belly-up, and that will cause the Dow Jones to decline 2,000 points. They've got to be shut down and the insurance given to a New Resolution Trust. This is going to happen in maybe two or three weeks, Chris, it going to on the front of every newspaper and no one in Washington is even willing to admit it."

Chris Matthews: "So who are you including in these mortgage companies that are going to go belly-up; give me a description?"

"These are MBIA and Ambac. Remember the companies that Merrill Lynch and Citigroup wrote down a lot of stuff the other day? All these companies are relying on insurance to save them. The insurers don't have the money. There's also personal mortgage insurance; that's PMI, is one company; MGIC is another. Chris, I am telling you that these companies do not have the capital to "make good". And when they do fall, and I believe it is when---if the government does not have a plan in action; you will not be able to open the stock market when they collapse." No one is even talking about the fact that these major insurers, who insure $450 billion of mortgages are all about to go under."

Cramer is correct in assuming that the market won't open. And yet, so far, nothing has been done to avert the disaster just ahead. Maybe nothing can be done?

So, how did things get so bad, so fast? How could the world's most resilient, reliable and profitable markets be transformed into a carnival show peddling poisonous "mortgage-backed" snake-oil to every gullible investor?
Author and stock market soothsayer Pam Martens puts it like this

"How could a layered concoction of questionable debt pools, many of dubious origin, achieve the equivalent AAA rating as U.S. Treasury securities, backed by the full faith and credit of the U.S. government, and time-tested over a century of panics, crashes and the Great Depression?

How did a 200-year old "efficient" market model that priced its securities based on regular price discovery through transparent trading morph into an opaque manufacturing and warehousing complex of products that didn't trade or rarely traded, necessitating pricing based on statistical models?"

The answer to all these questions is "deregulation". The financial system has been handed over to scam-artists and fraudsters who've created a multi-trillion dollar inverted pyramid of shaky, hyper-inflated, subprime slop that they've sold around the world with the tacit support of the ratings agencies and the US political establishment."

[papabear]

http://www.atimes.com/atimes/Global_Economy/JA30Dj02.html
A failure of central banking
Before 1913, there was no US central bank to bail out troubled commercial and financial institutions or to keep inflation in check. The near 2,000% rise in prices since then underlines the dismal failure of the Fed to fulfill its role as the nation's monetary guardian. - Henry C K Liu

[papabear]

http://www.counterpunch.org/whitney01312008.html

January 31, 2008
Rate Cut as Dagger
America's Teetering Banking System

By MIKE WHITNEY

Somebody goofed. When Fed chairman Ben Bernanke cut interest rates to 3 per cent yesterday, the price of a new mortgage went up. How does that help the flagging housing industry?

About an hour after Bernanke made the announcement that the Fed Funds rate would be cut by 50 basis points the yield on the 30-year Treasury nudged up a tenth of a percent to 4.42 per cent. The same thing happened to the 10 year Treasury which went from a low of 3.28 per cent to 3.73 per cent in less than a week. That means that mortgages, which are priced off long-term government bonds, will be going up too.

Is that what Bernanke had in mind; to stick another dagger into the already-moribund real estate market?

The Fed sets short-term interest rates (the Fed Funds rate) but long-term rates are market-driven. So, when investors see slow growth and inflationary pressures building up; long-term rates start to rise.

Bernanke knew that the price of a mortgage would increase if he slashed rates, but went ahead anyway.

How did he know?

Because 8 days ago, when he cut rates by 75 basis points, the ten-year didn't budge from its perch at 3.64 per cent. It just shrugged it off the cuts as meaningless. But a couple days later, when Congress passed Bush's $150 stimulus package, the ten year spiked with a vengeance, up 20 basis points on the day. In other words, the bond market doesn't like inflation-generating government handouts. So, why did Bernanke cut rates when he knew it would just add to the housing woes?

The fact is, Bernanke had no choice. He's facing a challenge so huge and potentially catastrophic; that cutting rates must have seemed like the only option he had. The banks are "capital impaired" and borrowing at a rate unprecedented in history.

The capital that the banks do have is quickly being depleted.

Banks are forced to borrow reserves from the Fed in order to keep lending.

A careful review of these graphs should convince even the hardened skeptic that the banking system is basically underwater. The sudden and shocking depletion of bank reserves is due to the huge losses inflicted by the meltdown in subprime loans and other similar structured investments.

"When US homeowners default on their mortgages en-mass, they destroy money faster than the Fed can replace it through normal channels. The result is a liquidity crisis which deflates asset prices and reduces monetized wealth," says economist Henry Liu.

The debt-securitization process is in a state of collapse. The market for structured investments -- MBSs, CDOs, and Commercial Paper -- has evaporated, leaving the banks with astronomical losses. They are incapable of rolling over their short-term debt or finding new revenue streams to buoy them through the hard times ahead. As the foreclosure-avalanche intensifies; bank collateral continues to be down-graded which is likely to trigger bank failures.

Henry Liu sums it up like this: "Proposed government plans to bail out distressed home owners can slow down the destruction of money, but it would shift the destruction of money as expressed by falling home prices to the destruction of wealth through inflation masking falling home value." ("The Road to Hyperinflation", Henry Liu, Asia Times) It's a vicious cycle. The Fed is caught between the dual millstones of hyperinflation and mass defaults.

The pace at which money is currently being destroyed will greatly accelerate as trillions of dollars in derivatives are consumed in the flames of a falling market. As GDP shrinks from diminishing liquidity, the Fed will have to create more credit and the government will have to provide more fiscal stimulus. But in a deflationary environment; public attitudes towards spending quickly change and the pool of worthy loan applicants dries up. Even at 0 per cent interest rates, Bernanke will be stymied by the unwillingness of under-capitalized banks to lend or over-extended consumers to borrow. He'll be frustrated in his effort to restart the sluggish consumer economy or stop the downward spiral. In fact, the slowdown has already begun and the trend is probably irreversible.

The financial markets are deteriorating at a faster pace than anyone could have imagined. Mega-billion dollar private equity deals have either been shelved or are unable to refinance. Asset-backed Commercial Paper (short-term notes backed by sketchy mortgage-backed collateral) has shrunk by $400 billion (one-third) since August. Also, the market for corporate bonds has fallen off a cliff in a matter of months. According to the Wall Street Journal, a paltry $850 million in high-yield debt has been issued for January, while in January 2007 that figure was $8.5 billion---ten times bigger. That's a hefty loss of revenue for the banks. How will they make it up?

Judging by the Fed's graphs; they won't!

Bernanke's rate cuts sent stocks climbing on Wall Street, yesterday, but by early afternoon the rally fizzled on news that Financial Guaranty, one of the nation's biggest bond insurers, would be downgraded. The Dow lost 37 points by the closing bell.

The plight of other major bond insurers, MBIA and Ambac, could be known as early as today, but it is reasonable to expect that they will lose their Triple A rating. According to Bloomberg:

"MBIA Inc, the world's largest bond insurer, posted its biggest-ever quarterly loss and said it is considering new ways to raise capital after a slump in the value of subprime-mortgage securities the company guarantee". The insurer lost $2.3 billion in the fourth-quarter. Its downgrading from AAA will "cripple its business and throw ratings on $652 billion of debt into doubt." Many of the investment banks have assets that will get a haircut.

The New York State Insurance Department tried to work out a bailout plan but the banks could not agree on the terms (ed note: "They don't have the money")

"Bond insurers guarantee $2.4 trillion of debt combined and are sitting on losses of as much as $41 billion, according to JPMorgan Chase & Co. analysts. Their downgrades could force banks to write down $70 billion, Oppenheimer & Co. analyst Meredith Whitney said yesterday in a report." (Bloomberg)

The bond insurers were working the same scam as the investment banks. They found a loophole in the law that allowed them to deal in the risky world of derivatives; and they dove in headfirst. They set up shell companies called "transformers", (the same way the investment banks established SIVs; structured investment vehicles) which they use as "off balance" sheets operations where they sell "credit default swaps , which are derivative instruments where one party, for a fee, assumes the risk that a bond or loan will go bad". ("The Bond Transformers", Wall Street Journal) The bond insurers have written about $100 billion of these swaps in the last few years. Now they're all blowing up at once.

Credit default swaps (CDS) have turned out to be a gold-mine for the bond insurers and they've given a boost to the banks too, by freeing up capital they use in other ventures. "The banks profited on the interest rate difference between the CDOs (collateralized debt obligations) they bought and the payments they made to transformers...The banks sometimes booked profits upfront on the streams of income they expected to receive." (WSJ)

Neat trick, eh?

Even now that the whole swindle is beginning to unravel, and tens of billions of dollars are headed for the shredder; industry spokesmen still praise credit default swaps as "financial innovation".

"It's too early to say we're going to ban all these products," said Guenther Ruch, administrator for Wisconsin's insurance regulation and enforcement division. (WSJ)

Maybe Ruch is right. Maybe it is too early to ban all these dicey financial inventions. But he may change his tune when Wall Street gets a whiff of the billions that'll be lost in downgrades and the markets start to tumble.

[papabear]

http://www.counterpunch.org/martens02022008.html

Weekend Edition
February 2 / 3, 2008
Bankers Gone Bonkers
Global Finance and the Insanity Defense

By PAM MARTENS

With Wall Street capital disappearing as fast as foreclosures are climbing, one foreign head of state had an epiphany. French President Nicholas Sarkozy advanced the idea recently that the global financial system is "out of its mind."

To develop this theory further, I've reconstructed below some of the mileposts on our journey to this financial loony bin.

Exhibit One: Commit-a-Felony-Get-a-Bonus Contract.

Back in 2002, Mark Belnick, who had previously been one of the legal go-to guys for Wall Street as a rising star at corporate law firm Paul,Weiss, Rifkind, Wharton & Garrison, found himself transplanted as General Counsel at fraud-infested Tyco International. Mr. Belnick inked a retention agreement for himself and it was duly filed without fanfare at the top corporate cop's web site, the Securities and Exchange Commission (SEC). The agreement guaranteed Mr. Belnick a payment of at least $10.6 million should he commit a felony and be fired before October 2003.

Very prescient fellow, Mr. Belnick was indeed charged with a few felonies like grand larceny and securities fraud by the Manhattan District Attorney's office. Mr. Belnick was acquitted of those charges and the SEC let him off the hook for aiding and abetting federal violations of securities laws with a $100,000 penalty payment and a prohibition against serving as an officer or director of a public company for five years. Mr. Belnick agreed to the SEC settlement without admitting or denying the charges. Mr. Belnick did not lose his law license and continues to practice law.

While Mr. Belnick was drafting his "felony bonus" agreement with Tyco, he was also teaching a law course at Cornell on ethics. Today, his agreement is available at the FindLaw.com web site as a "sample business contract," raising the suspicion that we as a society have become desensitized to financial insanity.

Exhibit Two: Supreme Insanity.

On December 7, 2006, Wall Street was elated to learn that the U.S. Supreme Court had agreed to hear its case requesting that a no-law zone be drawn around its financial borders for acts of collusion and commercial bribery, such as those so well documented in the issuance of new stock offerings during the tech/dotcom bubble. Calling the matter an alleged "epic Wall Street conspiracy," the U.S Federal Court of Appeals for the Second Circuit had earlier turned down Wall Street for its requested grant of immunity.

The Wall Street firms and their legions of lawyers appealed to the Supreme Court, arguing that the SEC (which, by the way, has no criminal powers) should have sole authority to regulate it and, therefore, it should be immune from other U.S. laws governing collusion and commercial bribery. (Credit Suisse First Boston Ltd. v. Billings.)

On June 18, 2007, the Supreme Court issued its opinion giving Wall Street everything it wanted, concluding that the SEC was doing a good job. The Court wrote: "...there is here no question of the existence of appropriate regulatory authority, nor is there doubt as to whether the regulators have exercised that authority."

The sweeping ignorance of that statement is breathtaking. Whether it was Wall Street firms price fixing on NASDAQ for decades or the orchestrated rigging of the market for new stock issues in the late 90s or the current institutionalized system of credit fraud, the SEC always has its lens fogged until some college professors or investigative reporters publish a step by step playbook, disseminate it widely, and force the SEC to take action to save face.

Worse yet, when the SEC finally does take action, it imposes fines of millions for stealing billions, making crime one of the most productive profit centers on Wall Street.

This 2007 decision from the Supreme Court comes exactly 20 years and 10 days after the 1987 Supreme Court decision in Shearson/American Express Inc. v. McMahon. Under this ruling, Wall Street has been able to run a private justice system called mandatory arbitration to hear the cases of the investors or employees it defrauds (with the exception of class actions). The instruction manual for this private justice system explains that adherence to the law is not required; arbitration panel members, many on Wall Street's payroll, can just go with their gut.

In other words, the highest court in our land is telling Americans that the reward for serial lawlessness is immunity from the law.

Exhibit Three: Banks' Secret Profit Center: Your Death.

Few Americans are aware that for at least 16 years big business and banks have been secretly taking out millions of life insurance policies on their rank and file workers and naming the corporation the beneficiary of the death benefit without the knowledge of the worker. The individual policies are frequently in the hundreds of thousands of dollars. If the employee leaves the company, no problem; big business is still allowed to collect the death benefit and they track the employee through the Social Security Administration to keep tabs on when they die. These policies are commonly known as "dead peasant" or "janitor" policies because they insure low-wage earners including janitors. Some of the largest corporations in America have been boosting their income statements by including cash buildup in the policies as well as receiving the death benefit tax free.

In 2003, the General Accountability Office (GAO) released a study with the startling findings that companies were taking out multiple policies on the same individual and that 3,209 banks and thrifts had current cash values in these policies totaling $56.3 Billion.

But instead of a congressional revolt against this revolting practice, it remained in place for at least 16 years after Congress first learned about it.
Then along comes the worker-friendly sounding Pension Protection Act of 2006 submitted by our Congress and signed by the President. Buried deep within this massive document was the grandfathering of the millions of previously issued policies with a little tinkering at the edges of tax and reporting issues on newly issued policies.

Exhibit Four: They Keep the Money; You Get the Slogan.

Around the time the stock market was in the process of losing $7 trillion of investor wealth in ill-conceived techs, dotcoms and telecoms, aided and abetted by Citigroup and its Wall Street cronies, I was driving on Charles Lindbergh Blvd. in Uniondale, Long Island when a bizarre billboard caught my eye. The giant billboard read:

He who dies with the most toys is still dead.
Live Richly.

(Citigroup logo: "Citi" and angelic red halo.)

I had never worked on Madison Avenue but I knew a lot of ad folks and I was pretty sure advertisements typically involved children, pets or other warm and fuzzy things. Citigroup telling me to ponder my own death seemed, well, "out of its mind."

I knew there had to be more behind this campaign. According to Citigroup's web site, the "Live Richly" campaign was meant to communicate "that Citi is an advocate for a healthy approach to money. Citi is an active partner in achieving perspective, balance, and peace of mind in finances and in life for its customers."

The ad agency was Fallon Worldwide and it clearly had Citigroup confused with a social responsibility fund, not the firm that named its trades after its real motives like the "Dr. Evil" trade that disrupted the European bond markets or the "Black Hole" mechanism associated with the bankrupting of Italian dairy giant, Parmalat.

Here's a sampling of the insanity taking place inside Citigroup as they spent millions extolling the public to evolve as better human beings and, more subtly, pay no mind to the $7 trillion of investor wealth that's evaporating behind our curtain of kindness.

Citigroup slogan: People with fat wallets are not necessarily more jolly.

Citigroup reality: Sandy Weill, Citigroup's CEO, earned "$785 million in total compensation over five years: more than any chief executive in America, and by a wide margin." Dan Ackman, Forbes, April 26, 2001.

Citigroup slogan: Holding shares shouldn't be your only form of affection.
Citigroup reality: "A recently unearthed 'highly confidential' Citigroup memo openly discussed the 'pressures' keeping research analysts from providing investors with honest research. In the 2002 memo, John Hoffman, then global research chief for Citi's Salomon Smith Barney division, advised Salomon Smith Barney CEO Michael Carpenter of the internal view that 'implementation and enforcement of clearer and more accurate ratings is in conflict with certain paramount goals of our firm'-namely, maximizing underwriting fees." Peter Elkind, Fortune, November 23, 2005

The memo was obtained as a Florida law firm attempted to get restitution for what Salomon Smith Barney clients were increasingly holding: worthless shares.
Cumulatively, all of these examples suggest that a strong argument could be made that unfettered greed finds its ultimate expression in systemic corruption which is frequently indistinguishable from insanity.

Please note just how much of this insanity can be placed at the doorstep of self-regulation.

[papabear]

http://www.atimes.com/atimes/Global_Economy/JB21Dj02.html
THE ROAD TO HYPERINFLATION, Part 3
Inflation targeting
By Henry C K Liu