Liu Mingkang, Chairman of China Banking Regulatory Commission

With friends like this, who needs enemies?

That trite saying is far too simplistic in defining the diverse and convoluted nature of U.S.-Chinese relations. That said, as President Obama prepares to arrive in the People’s Republic of China for the first time during his Presidency, he is faced with an extremely aggressive overture from Liu Mingkang, China’s chief banking regulator.

What does Mr. Mingkang have to say? Well, let’s just say he has a drastically different opinion on U.S. monetary and fiscal policy than his counterparts in Washington. While our wizards in Washington, Messrs. Bernanke, Geithner, and Summers would lead us to believe that the rebound in markets is a precursor to a rebound in our economy, Mr. Mingkang has a decidedly different take.

The Financial Times sheds light on this topic in writing, China Says Fed Policy Threatens Recovery:

The US Federal Reserve is fueling “speculative investments” and endangering global recovery through loose monetary policy, a senior Chinese official warned just hours before President Barack Obama arrived in China for his first visit.

Liu Mingkang , China’s chief banking regulator, said the combination of a weak dollar and low interest rates had encouraged a “huge carry trade” that was having a “massive impact on global asset prices”.

The comments came as China and the US sparred at the Asia Pacific Economic Co-operation summit over exchange rate policies amid rising international criticism that China’s currency is undervalued.

Mr Liu’s unusually blunt remarks underscore how China – the largest US creditor because of its massive holdings of Treasury bonds – has become a trenchant critic of monetary and fiscal policy in the US.

Since the start of the financial crisis, China has issued a number of warnings that the US should not inflate its mounting debt burden. Before these latest comments, however, Beijing had generally been most critical of US fiscal policy, urging Washington to spend less.

But speaking at a conference in Beijing, Mr Liu said the Fed’s policy of maintaining low interest rates together with the weak dollar posed a threat to the global economic recovery.

Why so aggressive on Mr. Mingkang’s part? Two reasons. The weakening greenback negatively impact’s China’s massive dollar-denominated holdings, primarily in U.S. Treasury securities. Additionally, the weak greenback negatively impacts China’s balance of trade.

Despite assertions by Secretary Geithner to the contrary, I firmly believe a weakening greenback is a central tenet of the Obama administration’s economic policy. In fact, our government officials would never say it but they are likely somewhat envious of the benefits of the weak and undervalued currency policy practiced in China.

While those on Wall Street and Washington are reluctant to address ‘huge carry trades’ and ‘asset bubbles,’ our largest creditor pulls no punches on these topics and provides a healthy dose of ’sense on cents’ in the process.

Welcome to China, Mr. President. How nice to see you. About your currency, we are not so happy.

LD

Economic Data

>Leading economic indicators rose .6 with July’s reading revised upward from .6 to .9 . . . we put this in the net plus category . . .

>Durable Goods Orders posted a -2.4% reading vs. a consensus expectation of a 1% gain. The bulk of the decline was in transportation which is further indication that the Cash for Clunkers program pulled demand forward only to be followed by a big dropoff . . . a real negative

>New Home Sales also disappointed. The WSJ highlights,

Momentum in the housing market has slowed, indicated by yesterday’s dip in existing home sales and by today’s weaker-than-expected report on new home sales. New home sales edged 0.7 percent higher in August to a 429,000 annual rate that compares unfavorably with expectations for 445,000. August’s level would have been below July’s level were it not for a downward revision with July now reading 426,000 vs. an initial 433,000.

How did the markets handle the Fed, the data, and technical flows? Let’s continue navigating. The figures I provide are the weekly close and the month-to-date returns on a percentage basis.

Commentary: the overall U.S. Dollar Index increased by approximately .45% on the week. I do think there is a high negative correlation between the dollar index and our equity markets (dollar improves, equities weaken) as a large number of hedge funds and market speculators have sold dollars to buy global equities, a form of a ‘positive carry‘ trade. I would encourage people to track the U.S. Dollar Index closely as a good sign as to the near term direction of the equity markets.

I should highlight that the dollar did continue to weaken vs. the Japanese yen. MarketWatch reports:

The dollar remained down more than 1% versus the Japanese yen after Japan’s Finance Minister Hirohisa Fujii said he opposes intervening in the currency markets to curb the rise in the yen, according to media reports.

I feel compelled to repeat my statement of the last few weeks:

This ‘positive carry’ trade is nothing more than implementing leverage. Do not confuse leverage with brains when a market is rising because as I said the other day, leverage is death when that bull becomes a bear. As I think of market developments, I am convinced that this ultimate unwind of leverage trades currently being implemented is Jeff Gundlach’s reasoning for being bullish on the dollar. How will this work? Investors will look to exit their risk based investments (emerging market stocks and the like) and buy back the dollars which they have borrowed. In the process, the dollar may rally significantly. The timing of this unwind is the critical question.

Commodities

Oil: $66.09/barrel vs. $69.93 at August month end
Gold: $992.4/oz. vs. $952.4 at August month end
DJ-UBS Commodity Index: 123.37 vs. 125.73 at August month end

Commentary: I view this segment of the market to be the STRONGEST indicator of the global economic pulse. Additionally, the price action in commodities is likely a strong indication of the ‘positive carry’ trade put on by hedge funds and other traders.

The overall commodity index is DOWN 2% on the month. What are equity markets, especially emerging markets, doing up in the face of this price action? Great question.

Additionally, the Baltic Dry Index moved lower this week by approximately 4%. I view that movement as reason for concern. Can global equities in general and commodities specifically increase in value if the major indicator of global trade, that being the BDI (Baltic Dry Index), is in a downtrend? I think not.

Summary/Conclusion

With September almost in the rear view mirror and a number of market participants having salvaged very respectable returns on a year-to-date basis, I believe many fund managers and other market participants will look to lock in profits and returns and mitigate risk positions. What does that mean? I think cash will exit some of the riskier parts of the market and look for a safe harbor.

While the global government wizards meeting in Pittsburgh at the G-20 may have ’smiled for the cameras,’ the released communique has ZERO enforcement capabilities and thus, I continue to maintain:

The overriding fact remains that the ‘Uncle Sam economy’ is continuing to adapt to the very changed nature of our underlying market and economic dynamics. That dynamic in which the securitization of assets remains a distant memory will force credit to remain tight. Consumers need to adapt accordingly.

Thoughts, comments, questions always appreciated. Have a great day and weekend.

LD

Given the prevailing major shortcomings in the international financial and monetary system, UNCTAD draws attention to some elements of reform of the international financial architecture, which is long overdue. These include effective capital account management, strengthening the role of special drawing rights (LD’s highlight), and a multilaterally agreed framework for exchange rate management. These reforms imply a fundamental rethinking of global financial governance to stabilize trade and financial relations by reducing the potential for gains from speculative capital flows. This will reduce the likelihood of similar crises in the future and help create a stable macroeconomic environment conducive to growth and smooth structural change in developing countries.

I purposely highlight the UN’s desire to strengthen the role of special drawing rights. In layman’s terms, that means the UN wants to promote the currency of the IMF at the expense of the U.S. dollar.

When BRIC nations promote a move away from the U.S. dollar, one may view it as the competitive nature of international trade. When an entity such as the United Nations is also promoting a move away from the U.S. dollar as the international reserve currency, we are embarking on an entirely new slope along our economic landscape.

The fact that we have heard little to nothing from our power base in Washington leads me to believe that Obama, Geithner, Bernanke, Summers, et al are comfortable with a decline in the value of our currency.

In my opinion, that comfort can be a very dangerous long term maneuver. How so? Economic growth requires capital. If investors deem our currency to be weakening, the capital will flow elsewhere . . . and elements of our quality of life may go right along with it.

LD

Join me from 8:00 to 9:00 p.m. ET on NoQuarter Radio for Sense on Cents with Larry Doyle. These are truly historic times in the global economy. Let’s “navigate the economic landscape” without the pandering or nonsense found elsewhere!

Tonight I have a very special guest: Dr. Paulo Vieira da Cunha, renowned emerging market economist of Tandem Global Partners.

Former Deputy Governor of the Central Bank of Brazil and one of three Monetary Policy Committee Members, Dr. Vieira da Cunha was Brazil’s representative at the G-20 meeting of Central Bank Governors and Finance Ministers until January 2008. Dr. Vieira da Cunha is a visiting scholar at Columbia University and a consultant to the International Monetary Fund (IMF).

For nearly a decade, he produced and managed research on Latin America for the global securities industry, first at Lehman Brothers and later at HSBC where he managed research teams in Buenos Aires, Mexico City, New York, and Sao Paulo.

Dr. Vieira da Cunha had a distinguished career at the World Bank where he was Senior Adviser to the Chief Economist, Nobel Laureate Joe Stiglitz from 1993 to 1996. From 1996 to 1998 he was the Lead Economist for Mexico and also had operational assignments on Russia, Turkey, and Uganda.

Prior to joining the World Bank, he was the CFO of a large state enterprise in the state of Sao Paolo (Prodesp) as well as advisor to the Secretary of Budget and Finances on the issues of renegotiation of domestic and foreign debt. Earlier in his career he held senior positions in the government of the State of Sao Paolo.

With the emerging markets leading the world at this juncture, there is much to navigate in this sector of our economic landscape. Dr. Vieira is uniquely qualified to provide perspectives and insights not commonly found.

Call in to share your thoughts or ask questions at (377) 647-0792. I look forward to having you join me for NoQuarter Radio’s Sense on Cents with Larry Doyle.

LD

John Batchelor: From my blog. Don’t miss Larry Johnson on my show Sunday nights. Watch for NoQuarter’s promo on Sundays.

UPDATE: It’s remarkable that the following comes from the very liberal, Soros-funded Think Progress, in its “Under The Radar” section:

ECONOMY — TARP OVERSIGHT PANEL: TREASURY MAY NOT BE ACKNOWLEDGING THE DOWNTURN’S ‘DEPTH’:

According to new forecasts set to be released by the International Monetary Fund (IMF), “toxic debts racked up by banks and insurers could spiral to $4 trillion.” With that harrowing number hanging overhead, the Troubled Asset Relief Program’s Congressional Oversight Panel released its six-month report today. The panel, chaired by Harvard Law School professor Elizabeth Warren, questioned Treasury Secretary Timothy Geithner’s assumption that the toxic assets clogging the banks are merely economically depressed, noting that Treasury’s response “fails to acknowledge the depth of the current downturn.”

“If the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability,” wrote the panel. The Warren panel also noted that
Treasury “has not explained its assumption that the proper values for these assets are their book values.” As estimates regarding the number of toxic assets climb higher and higher — with Nouriel Roubini claiming there are $3.6 trillion worth — it is becoming clearer just how much depends on Treasury finding a workable plan for cleaning up the banks. As IMF managing director Dominique Strauss-Kahn said, “[Y]ou never recover before the cleaning up of the banking sector has been done.” And right now, Geithner’s clean up is premised on an assumption with which more and more people are taking issue.

Let’s review the objectives and commitments, each followed by questions and/or comments that I have:

1. Address countries providing tax havens.
My question: who will police?

2. Develop a Financial Accounting Stability Board to regulate currently unregulated financial entities, primarily hedge funds.
My questions: how will it be staffed, operated, and judgments adjudicated? (I don’t like FASB as the acronym to be confused with Federal Accounting Standards Board)

3. Develop global policies and outline to address compensation
My questions: who and how will this be implemented? how will it be regulated? will there be punishments for those not participating?

4. Develop a global systemic risk oversight body.
My Question: who and how?

5. Develop a common global approach to address toxic assets within the banks.
My Questions: will this approach be akin to the FASB relaxation of the mark-to-market? How will it be implemented? Will it employ free market principles or manipulate those principles?

6. Utlilize a global growth and recovery stimulus plan of $5 trillion via global central banks.
My Question: will every country and region go along with this?

7. Global central banks will maintain a fiscal expansionary posture.
My Question: what if inflation increases?

8. The IMF and other international agencies will receive $1 trillion. $750 billion directed to the IMF, $250 billion of which will be in the form of Special Drawing Rights. The G-20 will look for these international institutions to strengthen their independence. The G-20 looks for emerging economies and developing countries to get a greater voice in these international institutions.
My Comment: China just won BIG RIGHT HERE!!

9. The G-20 countries will look to kickstart international trade.
My Question/Comment: Congratulations!! How do they plan on doing this in the face of the global protectionist measures and financial protectionism being enacted everywhere?

10. The G-20 will meet in New York City again in September.
My Comment: is this really a very good idea? Can you imagine the rioting that may ensue there? I wonder if body piercing is optional to get involved in the fun?

In summary, the global equity markets are responding positively to these commitments along with the relaxation of the mark-to- market. I am concerned that free market principles have taken a back seat to potentially excessive political and accounting manipulation. That said, the global economy and global banking system will receive significant hard dollars along with significant accounting cover to help itself heal. My personal opinion is world leaders are trying to buy time but will risk real inflation to heal the global recession.

I will say, though, there will certainly not be a dearth of material for Sense on Cents to address as we navigate the economic landscape!!

LD

There’s been a lot of finger wagging at the unruly class recently. It seems we, the Main Street Taxpayers, have it all wrong. Our outrage over the AIG bonuses is class warfare. Our ignorance over the workings of government and finance is self evident. Our anger over our lost jobs, homes and 401k’s is understandable, but misplaced. Our bus tours are inappropriate. Our pitchforks and tea parties are political theater. Our whining over unfairness is unbecoming.

So, basically we’ve been told to sit down, shut up, and be patient. Because this was all our fault. We the underfunded, overspent, and irresponsible taxpayers are to blame for this financial crisis. Or so the story goes according to the Wall Street pork masters, politicians and pundits (a.k.a. the cowardly, corrupt and clueless.).

But strangely enough, some other voices are starting to be heard above the din. And equally strange they are telling a far different story. One that points the fingers of blame not so much at the Main Street Taxpayers (although none of us remain completely blameless), as at the Wall Street Oligarchs.

And in case you don’t remember from your long ago civics classes… An Oligarchy, according to Merriam-Webster, is a government in which a small group exercises control especially for corrupt and selfish purposes.

In The Nation, Christopher Hayes warns us of what happens when Experts of the World Unite and weigh down one side of the balance sheet.

The outrage over the AIG bonuses occasioned a great deal of commentary about a resurgent populism, often in cluck-clucking tones of disapproval. But the rage, frustration and visceral sense of injustice associated with the bailouts are only part of the story. There’s also the sense that an implicit social contract–by which we assign complicated technical matters to a class of talented experts and in return they figure things out–has been torn to bits.

Remarkably, the small class of (mostly) men running these failed financial institutions seem just as aggrieved. Instead of reacting to their failure with shame or apologies, many exude distrust of and contempt for the great unwashed who don’t understand their brilliance.

-snip-

… the financial elites are ideologically bankrupt, intellectually discredited and morally debased. They have no reputational capital and inspire no confidence. And yet, just as the deftly named “legacy assets” continue to pollute the balance sheets of the major financial institutions, so too do these legacy elites continue to lurk on one side of the balance sheet of democracy. In other words, even if they aren’t worth listening to, they still wield power. They can still bring the whole thing down.

Which begs the question – if the financial elites are bankrupt, discredited and debased, why do they still wield so much power?

Well, it seems the key to their power is in the very nature of an Oligarchy. Oligarchs need enablers. Particularly, government and media enablers. The enablers are built into the foundation of the Oligarchy and then become embedded in the building blocks of all that transpires. So in the end, the enablers’ own survival requires that they endless serve and protect the Oligarchs.

And in the US, the Wall Street Oligarchs took over during The Quiet Coup explains Simon Johnson, former chief economist of the International Monetary Fund, in The Atlantic.

Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. …Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, … Henry Paulson, … John Snow, …Dan Quayle … Alan Greenspan.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. …

…Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. …

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. …

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. …To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. … This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.

And so the experts were all in place and the Wall Street Oligarchs took hold. Embedding themselves in the culture at large. Spinning a mystique of Wall Street that became celebrated and enshrined in books, movies and songs.

…In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;
• the repeal of Depression-era regulations separating commercial and investment banking;
• a congressional ban on the regulation of credit-default swaps;
• major increases in the amount of leverage allowed to investment banks;
• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;
• an international agreement to allow banks to measure their own riskiness;
• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

A party mood settled in and the congo line was formed, sweeping everyone along in its wake. Occasionally someone stubbed a toe or stumbled briefly, but the rest of the revelers hardly noticed. The congo line grew bigger and bolder. The music player faster. The step became quicker. And then the inevitable happened. The line of thrill-seeking revelers became too large to manage and too unweildly to maintain. It began to swing wildly in every direction. The revelers could not keep up and congo line bust open spewing revelers in every direction.

And in the aftermath, we are facing signs that say Welcome to America, the World’s Scariest Emerging Market explains former deputy director of the International Monetary Fund’s Policy and Review Department, Desmond Lachman in The Washington Post. (The term Emerging Markets is used to describe a nation’s social or business activity in the process of rapid growth and industrialization. Political scientist Ian Bremmer defines an emerging market as “a country where politics matters at least as much as economics to the markets.”)

… despite their supreme arrogance, the country’s leaders never had a coherent economic strategy and that major decisions were always made on the run. I never thought that was how policy was made in the United States — until, that is, I saw how totally at sea Treasury Secretaries Henry Paulson and Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke have appeared so many times during our country’s ongoing economic and financial storm.

The parallels between U.S. policymaking and what we see in emerging markets are clearest in how we’ve mishandled the banking crisis. We delude ourselves that our banks face liquidity problems, rather than deeper solvency problems, and we try to fix it all on the cheap just like any run-of-the-mill emerging market economy would try to do. And after years of lecturing Asian and Latin American leaders about the importance of consistency and transparency in sorting out financial crises, we fail on both counts…

…I thought then, that the United States was not similarly plagued by crony capitalism! However, watching Goldman Sachs’s seeming lock on high-level U.S. Treasury jobs as well as the way that Republicans and Democrats alike tiptoed around reforming Freddie Mac and Fannie Mae — among the largest campaign contributors to Congress — made me wonder if the differences between the United States and the Asian economies were only a matter of degree.

Yet how often do U.S. leaders respond to growing signs of economic dysfunctionality by spouting nationalistic rhetoric … instead of facing our problems we extol the resilience of the U.S. economy, praise the most productive workers in the world, and go on and on about America’s inherent ability to extricate itself from any crisis. And we ignore our proclivity as a nation to spend, year in year out, more than we produce, to put off dealing with long-term problems, and to engage in grandiose long-term programs that as a nation we can ill afford.

A singular characteristic of an emerging market heading for deep trouble is a seemingly suicidal tendency to become overly indebted to foreign creditors.

In part two, Facing Down the Wall Street Oligarchs, I’ll recap where the US now stands in this financial crisis and explore what needs to happen next with both the Main Street Taxpayers and the Wall Street Oligarchs.

Major H/T to LisaB and Mountainaires for bringing to my attention many of the articles used both directly and indirectly in part one & part two. All of these articles are well worth a full reading and I respectfully urge readers to find the time if at all possible.

1) At BriefingRoom.TheHill.com, Judd Gregg says the U.S. couldn’t even join the E.U. because of the U.S.’s debt levels.

“We won’t even be able to get into the E.U. if we wanted to,” Gregg said this morning on MSNBC, “because our government is so large and so huge.”

The European Union’s Stability and Growth Pact (SGP) adopted in 1997 requires a budget deficit to be less than three percent, and requires a national debt beneath 60 percent of Gross Domestic Product (GDP).

“We’ve been lectured by France on the fact that we’re not fiscally responsible right now,” Gregg, the would-be commerce secretary, noted with incredulity.

That hurts.

2) The Weeklystandard.com notes that Obama’s been indulging in “just words.”

Some of what Obama says is just pablum and isn’t supposed to be taken as serious economic thought. At least I hope not. Rather, it might be called economic morale-boosting. Nothing wrong with that, unless he actually believes what he’s saying.
———-
Nor is Obama up to speed on tax incentives. He dismissed the fear of charities that a proposed reduction in the tax deductibility of donations by upper middle class and wealthy Americans would curb giving. “If it’s really a charitable contribution, I’m assuming that that shouldn’t be a determining factor as to whether you’re giving that $100 to the homeless shelter down the street.”

That’s easy for him to say. Every charity from museums and arts groups to hospitals is terrified by the proposed tax change. And it’s a fair assumption that they know a tax disincentive when they see one. The question is whether Obama does. Perhaps not.

Perhaps charities better front load all they can get from donors now. Obama seems to think a tax deduction doesn’t matter AT ALL. Maybe not for him. Last I heard, his tax returns showed very little charitable giving.

3) The Atlantic has a stunning piece about the financial mess. Here’s the summary:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

I’ve often wondered if oligarchy isn’t the right term for what and/or who is driving U.S. policy.

4) Realclearpolitics has an interesting piece about the current economy and the lessons learned from the 30s.

Anybody who wants to pontificate about the economy, or the budget, or the deficit right now should think about three questions:

1. What changed the Depression from an ordinary recession into a worldwide catastrophe? (And how bad was it, anyway?)

2. Is this crisis the same or different?

3. If there’s risk of another depression, how do we stop it?

Interesting stuff.

– From my site, The John Batchelor Show.

::::::::::::

Editor’s Postscript: Be sure to catch Larry Johnson on John Batchelor’s radio show Sunday nights just after 7 p.m. PT, on Los Angeles’s KFI-AM. Here’s our most recent Sunday reminder with all the links and details. Stop by NoQuarterUSA.net on Sunday to read the topics and linked stories for Sunday night’s programming.

I hope and believe people who have been reading my work for a while appreciate that I am not an alarmist. Whether working on Wall Street as a trader and salesman or now writing for Sense on Cents, a measured, analytical approach has always generated the best results. In that vein, I discount speculators and salesmen who attempt to make a buck from heightened levels of anxiety. That said, the elevated levels of risk in our economy, markets, and global finance require an equally elevated sense of risk analysis and historical analysis.

Given some of the economic saber rattling emanating from China and the lessened fiscal support emanating from Europe, the threats of global protectionism are clearly growing. That scenario also occurred during the Depression.

I plan to continue reviewing The Great Depression in the days and weeks ahead. As with any analysis, I am always leery of the source of information. To that end, I read material today from Dr. Edwin Vieira. Here is his bio:

Edwin Vieira, Jr., holds four degrees from Harvard: A.B. (Harvard College), A.M. and Ph.D. (Harvard Graduate School of Arts and Sciences), and J.D. (Harvard Law School).

For more than thirty years he has practiced law, with emphasis on constitutional issues. In the Supreme Court of the United States he successfully argued or briefed the cases leading to the landmark decisions Abood v. Detroit Board of Education, Chicago Teachers Union v. Hudson, and Communications Workers of America v. Beck, which established constitutional and statutory limitations on the uses to which labor unions, in both the private and the public sectors, may apply fees extracted from nonunion workers as a condition of their employment.

I will not blindly accept his bio, but he strikes me as a very credible source. In reading separate research today, I became aware that our government under FDR seized gold and silver holdings of the American populace during The Great Depression. I will admit that I was totally unaware of that phenomena. It has caused me to ponder if a similar situation could possibly occur in our current scenario.

I’ll admit that I am startled by the depth and prescient nature of Vieira’s message and the timing of it. Vieira’s piece, A New Gold Seizure: Possibility or Paranoia was written on March 2, 2006. Here is an excerpt:

[d]uring the time of war, the President may * * * investigate, regulate, or prohibit, any transactions in foreign exchange, transfers of credit or payments between, by, through, or to any banking institution, and the importing, exporting, hoarding, melting, or earmarking of gold or silver coin or bullion, currency or securities * * *.

I thank our loyal reader in Michigan, Mr. Fiscal Liberal, for sharing with us a piece written by Simon Johnson, the former chief economist of the International Monetary Fund, a professor at the MIT Sloan School of Management, and a senior fellow at the Peterson Institute for International Economics.

Mr. Johnson writes about the growing problems in Europe. I am hard pressed to see how the European situation, both in the East and West, can not end badly. There are too many economies that are effectively insolvent or on the brink of insolvency. I believe this is the region of the world which will experience increased economic strife leading to social unrest and political change. Can the problems in Europe be contained given the massively interconnected world of global finance?

Thank you again FL for sharing this very enlightening piece from Simon Johnson!!

G-20s Real Agenda Should be Saving Europe from Itself
By Simon Johnson
Last Updated: 10:28AM GMT 16 Mar 2009

The media coverage of the G20 finance ministers meeting this weekend was dominated by the apparent battle between those who support more fiscal stimulus and those who want to impose more regulations on the financial system.

This, we are led to believe, is the big debate facing the full G20 heads of government summit early next month: the US is pushing for a bigger global fiscal stimulus (2pc extra government spending from everyone, to be monitored by the IMF), while the continental Europeans are holding out for greater regulation. Gordon Brown is trying hard to cast himself as the broker for any apparent deal.

However, don’t be fooled by all this sound and fury. The rival agendas of fiscal stimulus and regulation are both red herrings at this point in time.

The reality is much less promising, for three reasons.

First, co-ordinated fiscal expansion made sense early in 2008, when it was first proposed by the IMF. But the severe downturn that followed the onset of financial panic last September means that very few countries can now afford to spend more or tax less.

And while the hard-headed redesign of regulation should be a top priority going forward, the G20 regulation agenda is weak.

Who really believes that establishing an international “college of supervisors” would achieve anything in terms of reigning in the power of major banks? Always a good principle to keep in mind when evaluating international reform proposals: anything that sounds meaningless is meaningless.

Second, while the conventional official reluctance to discuss unpleasant truths is always awkward, during a major global crisis it’s downright dangerous. Across the industrialised world, the financial sector has become too large and too politically powerful.

How do we break this power and move resources into something more productive and less inherently unstable? How do we deal with the failures of risk management, CEO leadership, and corporate governance in our still massive banks? Can we break them up before they break our economies?

There is not even an inkling of these major issues on the G20 agenda.

Third, politicians keep repeating something along the lines of “we face a global problem that needs a global solution” – this was Gordon Brown’s refrain in Washington recently. But the most pressing problems in 2009 are not so much global as European.

Back in the 1990s, much of east central Europe put itself on a high risk debt-fuelled growth path, egged on by Brussels. European Union accession countries were told that they could afford to import far more than they export – and that this difference would be financed by capital coming in from Western Europe. This was true, for a while, but now the crash in Eastern Europe threatens to bring down banks in Austria, Greece, Italy and other places that bet big on Hungary and its neighbours getting rich quick.

As Eastern Europe has plummeted into crisis, the West European response has been further bad advice. Countries with fixed exchange rates, such as Latvia, are told to cut wages and prices by 20-30pc, rather than devalue their currency.

Never mind that this is political suicide and bad economics. Brussels considers it better for the West European banks with capital at risk. Almost all of Eastern Europe is in trouble and will need to borrow from the IMF; the massive over-representation of Western Europe on the IMF’s board suggests that this will end badly.

And that’s not all. The crash of real estate in Ireland, Spain, and the UK worsens bank balance sheets that are already damaged from losses incurred in the crazy casino that was the American mortgage market.

The financial sector globally is shrinking, and this will lead to significant job losses in countries like the UK and Switzerland.

It gets worse. The US has banks that can plausibly claim they are Too Big To Fail, and this is bad enough – because it lets them get big bailouts. But Europe has banks that may be Too Big To Rescue – ask Iceland or, more recently, Ireland.

Far from being able to afford government expansion, European economies with big banks see the prospect of budget cutbacks – to persuade the financial markets that their governments are still good credit risks.

European countries face two types of future. On the one hand, countries that still control their own currencies can engage in creative monetary measures, pushing down the exchange rate and raising inflation; the Bank of England leads the way in this regard. Inflation will reduce debt burdens but of course comes with other costs. Think of it as the worst of all possible policy choices, apart from the alternatives.

And those most unpleasant alternatives are faced by Eurozone countries. Their economies are slowing dramatically, their banks are impaired, their budgets are constrained, and their monetary policy is in the hands of the European Central Bank (ECB).

These countries face the prospect of falling wages and prices. Most central bankers would recoil in horror as this deflation threatens further defaults and a deeper recession, but Jean-Claude Trichet, head of the ECB, is actually welcoming this development in Ireland and elsewhere.

The real agenda of the G20 should be helping save Europe from itself, for example by encouraging the creation of a €2-trillion European emergency economic stabilisation fund, funded primarily by richer Eurozone countries, and a major relaxation of Eurozone monetary policy.

Without such measures, we are likely on the path to a bigger slowdown in global growth and a more difficult recovery.

Simon Johnson, former chief economist of the International Monetary Fund, is a professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He co-founded and contributes to the economics blog The Baseline Scenario.

I truly relish the honest perspectives offered by a number of our Thought Leaders. A recent piece posted by Professor Ken Rogoff, a former chief economist for the International Monetary Fund, and currently a professor of Economics and Public Policy at Harvard, lays out a logical road map for global interest rates, economic growth, sovereign defaults, and inflation. Let me preface Rogoff’s piece by stating the road will be long and steep!

What does Rogoff think about the prospects here in the United States under the Obama administration? He writes, “US long-term growth could be particularly dismal, as the Obama administration steers the country toward more European levels of welfare assistance and income redistribution.”

I strongly recommend Rogoff’s What is the Deficit Endgame? Please access a wealth of other global perspectives at the Thought Leaders link (in the left sidebar of Sense on Cents), which provides access to leading global economists and over 400 periodicals from around the world.

LD

On January 31st, I wrote a lighthearted piece, Know Your Customer, about my personal experience with an Asian counterparty. The lesson I learned from that experience back in the late 1980’s was that business dealings in Asia are ultimately “a question of honor.” Are you honorable in your manner? Are you honorable in your engagement? Are you honorable on a going forward basis? Are you honorable in both word and deed? Obviously in a meaningful relationship, this code of honor must run both ways.

Our relationship with the People’s Republic of China hinges on American consumers’ purchase of Chinese exports and ongoing Chinese purchase of U.S. government debt. As I just highlighted in my most recent piece, Chinese exports fell 26% in February 2009. Numbers like that will make any government uneasy. During challenging economic periods, the tenuous nature of any economic relationship is captured in understanding the nuances of the Prisoner’s Dilemma.

Well, the Chinese occupant of the cell next door appears to be getting increasingly nervous. He just slipped us a note inquiring whether we will “honor” our promises in protecting his investments. The full note reads, China’s Premier Wen Worried on Safety of Treasuries.

Is this a mere sign of a nervous investor? Hardly. There is no doubt that the Chinese Premier is launching a shot across our bow prior to the highly anticipated G-20 Meeting in the U.K early next month. Please recall that the surplus nations in our global economy, primarily China, have very limited voting power in our global financial intermediaries, such as the IMF. This Chinese statement is an attempt to create increased leverage over the negotiations which will transform the global economic landscape.

How honorable!!

LD

I was struck a month ago by the incriminating statements put forth by Senator Chuck Hagel and CIA head Leon Panetta, which I highlighted on February 16th in Legalized Bribery. Those statements bluntly indict our massive system of lobbying, political fundraising, and the quality of those running for elected office! In light of that article, I am more and more convinced that our elected officials have turned their offices into massive for profit machines at the expense of our public well being.

I commend the authors of this report, Roger Weissman and James Donahue, for taking the time and making the extensive effort to expose the truth. The full report, 231 pages in length, spares no detail. In studying it, I found the information and analysis riveting. Let me try to summarize it for you.

The report chronicles in real detail how Wall Street showered Washington with $1.7 billion in campaign contributions and $3.4 billion upon lobbyists over the last ten years. That money went from the lowest members of Congress to the President of the United States. 55% of the contributions went to Republicans and 45% went to Democrats. Yes, a truly bipartisan effort.

The authors are beyond thorough in laying out how the . . .

financial sector showered campaign contributions on politicians from both parties, invested heavily in a legion of lobbyists, paid academics and think tanks to justify their preferred policy positions, and cultivated a pliant media — especially a cheerleading business media complex.

The report highlights the electricity crisis in California in 2000 and the Enron debacle as precursors of our current situation.

They quote FDR in his statement, “our enemies of today are the forces of privilege and greed within our own borders.” The same clearly holds true today.

Where were our leaders with the vision and foresight to protect the public? Feeding at the Wall Street trough!! Let’s review what the $5.1 billion bought Wall Street and who in Washington facilitated the process. Later I will highlight a number of politicians who collected substantial amounts of these dollars.

Part I : What Did the Money Buy?

1. the repeal of the Glass-Steagall Act which separated commercial and investment banking activities. This act came out of the Great Depression. Former Fed chair Paul Volker supported Glass-Steagall in the late 90’s and still does today. The expected repeal of this Act allowed for the merger of Citibank and Travelers Insurance even before the formal repeal. President Clinton, Treasury Secretary Robert Rubin, Congressman Phil Gramm, and Fed Chair Alan Greenspan were the primary supporters of this repeal.

2. the allowance of off-balance sheet accounting which promoted the increased leverage in banks.

3. the executive branch rejects financial derivative regulation. The CFTC (Commodities Futures Trading Corp), led by Brooksley Born’s effort, sought to exert regulatory control over derivatives. The CFTC was squashed by Robert Rubin and Alan Greenspan. Then Deputy Treasury Secretary Larry Summers told Congress that CFTC proposals would cast regulatory uncertainty over a thriving market. Aside from Rubin, Greenspan, and Summers, Senator Richard Lugar and SEC Chair Arthur Levitt also supported the Clinton administration’s lack of regulatory oversight.

4. Congress also blocked financial derivative regulation through legislation engineered by Senator Phil Gramm.

5. in 2004, the SEC succumbed to massive lobbying by Wall Street allowing for voluntary regulation. This acquiescence is the grossest example of the inmates running the asylum. In 1975, the SEC ruled that debt to net capital ratios had to be less than 12 to 1. This “voluntary regulation” led by Goldman Sachs and then CEO Henry Paulson allowed investment banks to develop their own net capital requirements. Merrill Lynch went to a 40:1 ratio. Then SEC chair Chris Cox acknowledged this voluntary regulation was a complete failure!

6. the bank self-regulation goes global.

7. the total failure to police the mortgage banking industry and its predatory lending. People may never have heard of outfits such as Aames Financial, Delta Funding, Ameriquest, Long Beach, and many more. These firms propagated massive frauds in lending to unqualified borrowers. They need to be brought to justice.

8. the federal government preempted a number of state consumer protection laws which would have mitigated a lot of the predatory lending.

9. the government allowed for purchasers of loans to escape accountability. Only the original mortgage lender would be liable for the predatory and illegal features embedded in the mortgages. This immunization of the investment banks eliminated their legal exposures and facilitated the continuation of fraudulent lending practices.

10. Fannie Mae and Freddie Mac expand their footprints into the non-prime mortgage market. Many politicians fed from the Freddie and Fannie troughs, but nobody more than Chris Dodd and Barack Obama.

11. the merger mania in the banking industry has led to institutions now deemed “too big to fail.” This report believes these institutions should now be treated like highly regulated public utilities.

12. the debacle that played out with the rating agencies only further facilitated this mess. These agencies were and still are massively conflicted.

Part II: Who Paid What and Who Collected How Much 1998-2008?

– Commercial Banks spent $154 million in campaign contributions and $383 million on lobbyists.

— Accounting Firms spent $81 million in campaign contributions and $122 million on lobbyists.

— Insurance Companies spent $220 million in campaign contributions and $1.1 billion on lobbyists!!

— Investment Banks spent $512 million in campaign contributions and $600 million on lobbyists.

A very large percentage of the lobbyists were former government officials!!

While the report makes a number of recommendations, a few strike me as self-evident and vitally necessary:

1. derivatives must be regulated.
2. limited leverage within financial institutions
3. revise the compensation system for financial institutions so timing of reward is linked to elimination of risk
4. consumer advocacy groups

The list of politicians receiving the largesse runs approximately 80 pages and covers the Presidency to seemingly every member of Congress. I was also struck by the consistency of contributions received during each election cycle by Senators Schumer (D-NY) and Dodd (D-CT). Schumer represents the Wall Street territory while Dodd has been a longtime senior ranking official on the Senate Banking committee.

As I perused the financial data specifically for 2008, I paused and reflected on the fact that these institutions were, and to a large extent still are in dire financial straits. While in the process of receiving government support, they had made or were making campaign contributions. As the government has haphazardly reviewed expenditures at these organizations, let’s shed the floodlight right back on these campaigns. It is not difficult to track campaign contributions to politicians back to taxpayer funds injected into these firms. In light of that, I know it will never happen but I believe the political campaigns should return those dollars to the public. Who received how much money in 2008? While not totally comprehensive, my back of the envelope analysis shows the following:

Barack Obama: $3.9 million
John McCain: $2.1 million
Hillary Clinton: $2.5 million
Rudolph Giuliani: $1.1 million
Chris Dodd: $650k
Mitt Romney: $1.060 million
Rham Emanuel: 160k

President Obama, Madame Secretary and gentlemen, please make those checks payable to “American Taxpayer” and let’s begin to return some integrity to our political process.

Where’s the media to shed light on this travesty? Oh yes, they are compliant and cheerleading.

Robert Rubin, he’s our man, if he can’t do it, Greenspan can,
Alan Greenspan, he’s our man, if he can’t do it, Paulson can,
Henry Paulson, he’s our man, if he can’t do it, Dodd can,
Chris Dodd, he’s our man, if he can’t do it, Gramm can,
Phil Gramm, he’s our man, if he can’t do it, Obama can…

Uh, oh!! We got real problems!!

LD

**Cross-posted from my blog, Sense on Cents. Come by and visit!

Former Australian Prime Minister and Treasurer Paul Keating

Well, Mr. Keating has spoken again and I am listening to him very closely as I strongly believe I am more educated and informed as a result. Our domestic officials and media outlets should take heed.

In an article published in this past Saturday’s Sydney Morning Herald, Obama’s Economic Saviour Savaged as Keating Let’s Rip. Keating offers a piercing review of then Treasury Officer Geithner’s structuring of an IMF led rescue plan of the Southeast Asian crisis in 1997-98.

For those unaware, many countries in SE Asia had massive infusions of foreign capital in the form of debt to facilitate infrastructure development. Geithner and then IMF Chief Michael Camdessus structured a plan that injected $200 billion dollars in the form of IMF loans to refloat the economy. Keating maintains that Geithner and Camdessus totally misdiagnosed the problem and in turn the solution.

Keating further maintains that the manner in which that package was handled dramatically impacted the way Asian countries have managed their finances since. The massive surpluses emanating from that region have been a major factor in the massive capital inflows into the U.S. over the last ten years. We do not need to replay that disaster.

I sincerely appreciate the integrity displayed by Paul Keating in connecting the dots.

Those who do not learn from history are doomed to repeat it!!

LD

**Cross-posted from my blog, Sense on Cents. Come by and visit!