Archive for January, 2011

January 25, 2011

ILLUSION LINKS

# billy blog » Blog Archive » Ricardians in UK have a wonderful Xmas

# Washington’s Blog ~ QE

# World needs $100 trillion more credit, says World Economic Forum – QE

# Bill Black: Why our Fundamental Approach to Banking Regulation is Inherently Unsound « naked capitalism Bill Black

January 23, 2011

ILLUSION LINKS

# Jesse’s Café Américain: America Appears To Be Trapped in a Massive Coverup of Control Fraud and Corruption

# Debt Bondage From The Economic Treason of Banks | International Forecaster Weekly | Bob Chapman | The International Forecaster

January 16, 2011

BREAKDOWN OF THE CREDIT – OIL – FINANCIAL SYSTEM EQUATION

January 12, 2011

SUFFER THE MENTAL HEALTH OF A NATION BY ENTRAPMENT IN RELENTLESS INCOMPETENCE AND CORRUPTION

Amazon.com: The Looting of America: How Wall Street’s Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity—and What We Can Do About It (9781603582056): Les Leopold: Books

So what to do ; sink the free market economy into a cesspit of corruption and smash and grab and the nation becomes entrapped into a scenario of relentless corruption effecting its mental health.

The scenario constructs itself around the demolishing of nation sovereignty to instigate deficit hysteria and the perverse rewards for a financial system run amok crashing and burning the free market free enterprise system over and over.

January 7, 2011

FT ON 2000 BILLION CONTINGENCY

FT Alphaville » Buiter’s €2,000bn solution for the Eurozone

Buiter’s €2,000bn solution for the Eurozone

Posted by Izabella Kaminska on Jan 07 13:16.

The latest (and as usual, substantial) note from Willem Buiter, chief economist at Citigroup, has landed in the FT Alphaville inbox.

The bulk of its 84 pages can be summarized in one line though: “no sovereign is really safe” and there are “likely to be several sovereign debt restructurings in the euro area in the next few years”.

Which, of course, is interesting — but not really all that helpful.

Still, Buiter wouldn’t be Buiter without pronouncing his own opinion on what needs to be done. And as usual, his thinking goes beyond the conventional.

Without further ado, we present Buiter’s three-pronged solution for the Eurozone mess. In summary:

EA requires i) a much larger liquidity support facility, ii)
restructuring of the unsecured debt of EU zombie banks and recapitalisation of the systemically important ones among them, iii) restructuring of the debt of insolvent EA sovereigns.

Digging a little deeper into his thoughts, we begin to see the controversy.

For a start, Buiter wants the size of the liquidity facilities providing financial support to vulnerable nations to be immediately increased to $2,000bn.

Right now the current facilities — including the EFSM, the EFSF, the Greek package and the ECB purchases under the SMP — amount to between €737bn and €787bn. As he notes, that might be enough to tide over Greece, Ireland, and Portugal until mid-2013. But it’s nowhere near enough to fund the potential requirements of a troubled Spanish economy — especially if private liabilities there end up being absorbed by the government. And it’s because the market knows this that the crisis continues.

Furthermore:

The existing facilities also fall well short of what would be needed to fund the countries like Italy, Belgium and France, should they be frozen out of the markets by self-fulfilling speculative attacks or flight of investors — and it certainly is not enough to deter such attacks.

The problem is that the members of the euro area and even the European Union as a whole cannot in practice come up with an immediate €1,000bn extra to fulfill such an elaborate liquidity plan. Neither, it seems, could the IMF, since its mandates disqualify them from pre-funding.

So that leaves on two possible sources of funds, says Buiter:

The first is non-EU sovereign wealth funds, or bilateral sovereign support from outside the EU. The second is the ECB. And given the first option is likely to be politically unattractive, that only leaves the ECB. In principle, the ECB could provide €1,000bn (or even the entire €2,000bn) directly to the countries that need them, by expanding the scope of its purchases of their sovereign debt.

But, in case you thought that meant some sort of mega eurozone QE, it doesn’t have to. As Buiter explains, there is no need for the monetary base to be increased for the ECB to dish out another €1,000bn:

The ECB could instead expand its non-monetary liabilities, including term deposits, or by issuing ECB bills or bonds. With the short-term interest rate in the EA at or near the effective lower bound, there is no material economic difference between outright purchases of government securities financed by increases in the monetary base (in practice excess reserves, that is, overnight deposits by eligible banks with the Eurosystem) and outright purchases financed by increasing the stock of one-week term deposits.

However, it appears to be important to the self-image of the ECB that it not be technically engaged in quantitative easing (QE), that is, the monetisation of public debt or deficits. That wish can be granted without diminishing the effectiveness of their intervention in any way, through semantic sterilisation rather than substantive sterilisation.

So the key could be semantic sterilisation. Another subtle asset switch. The ECB increasing the stock of one-week term deposits to fund its asset purchases, rather than banks’ excess reserves outright. The term-nature of the manoeuvre would (technically) stop it from being seen as outright monetisation.

And yet, the move could inject enough liquidity to allow for a successful ECB bond programme.

One could call it ‘Enhanced Credit Support’, says Buiter.

Alas, he concludes, it’s unlikely the ECB would go for it. It would still be seen as too fiscally emotive.

But there is one other way. The ECB could, he says, focus on EFSF purchases rather than individual sovereign bond purchases.

As Buiter explains:

Instead of direct, unconditional support to fiscally impaired sovereigns, the ECB could provide indirect support to a conditional facility, either by lending to the EFSF or by purchasing securities issued by the EFSF directly, or in the secondary markets.

The EFSF is a private entity (a limited liability company incorporated in Luxembourg). It could be turned into a bank, making it an eligible counterparty to the ECB’s operations. Any debt sold by the EFSF to the ECB, or any loans provided by the ECB to the EFSF, could then be guaranteed by the euro area member states. Granting the EFSF (or its successor, the ESM) seniority over all other sovereign creditors other than the IMF would further limit the exposure of the contributing sovereigns to possible ex-post burden sharing should a sovereign default occur after a member state has borrowed from the facility.

The ability of the EFSF or its successor facility to borrow from the markets on acceptable terms, and thus to minimise the demands it would have to make on the ECB, could be further enhanced by making the guarantees of the EA sovereigns for the debt issued by the facility joint and several rather than pro rata (according to their shares in the ECB’s paid-in capital). This would effectively turn the debt issued by the facility into Ebonds or its loans into E-loans.

The difference from other proposals to issue Ebonds (such as the one launched by Eurogroup Chairman Jean-Claude Juncker and Italian Finance Minister Giulio Tremonti on 5 December 2010) is that the issuance of E-bonds or E-loans by the EFSF or the ESM would be capped, that is subject to a strict upper limit, rather than open-ended, as under the Juncker-Tremonti proposal.

Of course, this would still require a major Treaty revision, and might even encourage moral hazard. Nevertheless, with the lack of any other workable alternatives on the table, this move looks increasingly unavoidable to Buiter. Furthermore, it’s certainly a more palatable option to something like eurozone dissolution.

The liquidity expansion alone, however,  is not enough to stifle the crisis, says Buiter. It’s essential other actions are also taken.  For example, in his opinion, the €2,000bn liquidity scheme must also be accompanied by another round of stress tests, much more rigourous than the last. Ideally the notion of burden-sharing should also be nipped in the bud completely. If not — as is seemingly likely — the move should be imposed as swiftly and comprehensively as possible. Ideally in a coordinated and synchronised manner.

Lastly, for all this to work, a new mechanism for the orderly resolution of sovereign debt defaults is also needed. Without it, the fear of what might happen in a default scenario will continue to haunt the market.

All in all, some big thoughts from the Citigroup man on Friday.

 

January 7, 2011

LINKS UPDATING PAPER MONEY TRICKERY FOR JAN 2011

#The Rise of the New Global Elite – Magazine – The Atlantic

Barry O’Leary: Resurrecting the Celtic Tiger – the man selling Ireland to the world | Business | The Guardian

ACCOUNTABLE ACCOUNTANTS: LEHMAN FRAUD — ERNST AND YOUNG AIDED AND ABETTED « Livinglies’s Weblog

YouTube – Economic Collapse: Bank Runs, China, Peter Schiff, Gerald Celente, Max Keiser

The Tyranny of Oil: Antonia Juhasz on “The World’s Most Powerful Industry — What We Must Do to Stop It”

A Historic Moment, As Western Europe Sovereign Debt Now Riskier Than Emerging Markets

Bank Of America Just Admitted That Its Fannie And Freddie Settlement Was A Bailout

How Many Economists Does it Take to See an Trillion Housing Bubble? | Op-Eds & Columns

DOF NAMA treatment. | Finance

Swiss central bank refuses to touch Irish state bonds – Irish, Business – Independent.ie

Vast Inequalities in Wealth Undermine Democracy | BuzzFlash.org

Portugal Pays More to Borrow in First Test of Investor Demand: Euro Credit – Bloomberg

Umair Haque / Bubblegeneration

New Policy Paradigms for a New World by Dominique Strauss-Kahn – Project Syndicate

January 7, 2011

FT ARTICLE ON GLOBAL IMBALANCE MYTH

FT.com / Comment / Op-Ed Columnists – Look behind the myth of global imbalances

Please respect FT.com’s ts&cs and copyright policy which allow you to: share links; copy content for personal use; & redistribute limited extracts. Email ftsales.support@ft.com to buy additional rights or use this link to reference the article –

Nigel Lawson was the longest serving as well as the most controversial of Margaret Thatcher’s chancellors. His inaugural Adam Smith Lecture (reprinted in the January issue of Standpoint) shows him true to form. It is entitled “Five Myths and a Menace”. His menace is – or should be to Financial Times readers – the least controversial of his assertions. It is that of a “recrudescence of protectionist sentiment that threatens to repeat the disaster of the 1930s”. The “myth” on which I wish to concentrate is his fifth – that big current account imbalances are unnatural and dangerous. He is broadly right, but the argument needs to be taken further.

The essential point is that current account imbalances are the mirror image of international investment flows. These move, not always from rich to poor countries, but from high-saving economies such as China to those such as the US with a high propensity to consume. Lord Lawson instances the old Halifax building society, which in its heyday channelled savings from the north of the UK to the more free-spending south. The difficulty with this analogy is that the UK has been for centuries under one political jurisdiction employing a common currency. Internationally, everything depends on what the surplus countries do with their surpluses.

Many commentators have surmised that as countries such as China become richer and develop a consumer culture, their savings surpluses will diminish. But it will take time. The International Monetary Fund estimates total current account surpluses in 2010 at just over 2 per cent of world gross national product, less than often supposed. Nearly 1 percentage point is attributed to a group of east Asian countries in which China preponderates. Another ½ percentage point is accounted for by Germany and Japan. The remainder is mostly the oil exporting countries.

These estimates also suggest that “Asian” countries held official reserves of about $5,000bn, or more than 60 per cent of the world total. Nearly all of these are held in dollar securities of one kind or another. The wisdom of such a high dependence on what might be a vulnerable currency has often been questioned. A precarious equilibrium has been secured by a financial form of MAD – mutually assured destruction. If China were to indulge in a fire-sale of dollar assets, it would devalue its own reserves and probably precipitate a sharp rise in US interest rates. Knowledge of Chinese firepower in turn discourages US protectionist threats.

But none of this prevents the Chinese authorities from diversifying new reserve accretions. Indeed, China may have ceased purchasing official dollar assets altogether in 2010. Where then are the surpluses going? Into productive assets worldwide, sometimes in direct investment, but increasingly in the form of sovereign wealth funds. These funds – worldwide, not merely Chinese – were said by McKinsey to amount in 2008 to $12,000bn, much larger than official reserve holdings. They got off the ground much earlier in the Gulf states than in China, which is fast catching up. But one of the earliest sovereign wealth funds was established by oil-rich Norway.

A remarkable amount of piecemeal information on them has been unearthed by the US journalist Eric Weiner in his book The Shadow Market, already published in the US and to be published in the UK next month. Mr Weiner reminds his readers of some familiar facts such as Persian Gulf involvement in the London skyscraper designed to be the tallest building in western Europe and some less familiar ones, such as the estimate that the Middle East accounts for 70 per cent of London high-end property deals.

The author remarks that these funds of diverse national origin are reluctant to work together, but therein lies their saving grace. For it makes it unlikely that they would gang up in a global financial war of the kind “lost” by the US in an official computer simulation two years ago. Of course it is idle to expect funds owned by authoritarian governments to play by the Queensberry rules. China’s top priority is obviously to secure access to energy sources; and most of these funds have no use for the western pretence of separating commerce from politics. But a remarkable number of their investments make commercial sense and contribute to world development, for instance the Chinese offer to fund infrastructure in south-east Asia or its finance of the African private sector. Beijing’s efforts to save peripheral European economies may be as much a commercial as a political speculation.

Norway nothwithstanding, the rise of sovereign wealth funds is part of the much-analysed transfer of political and economic power away from the old industrial west. The present debate is marred by treating countries as if they were individuals. That China and India are expected to “overtake” the US at some point is mainly a matter of relative population. We should rejoice that their citizens become better off.

 

January 1, 2011

SHADOW BANKING

 

Interview with Gary Gorton – The Region – Publications & Papers | The Federal Reserve Bank of Minneapolis