Naturally, we all seek to explain what we perceive in terms of the phase we have been in rather than in terms of the phase we are moving towards. We are like water molecules trying to understand the process of boiling and evaporation in the absence of any concept of being in a gaseous (vapour) state.
What is important is that we understand that we are in a controlled Phase Transition. It may seem chaotic to us but there is an underlying order to it. We are being taken to a new economic phase or Economic Order. The separation between the state and big business is long gone, we find ourselves with increasingly narrow options as our environment changes around us in ways increasingly unfamiliar. We have to apply ourselves in seeking to understand as exactly as possible the new economic environment so as to be better able to navigate our way through it.
We are moving, without doubt, towards totalitarian government first on a national, then regional and ultimately global scale. Totalitarianism has to be resisted on the street, in the market place and in our hearts and minds. Protest is crucial to resistance for it shows us that we are not alone. Similarly economic boycotts at an individual level seem as a drop in the ocean but when added together the economic actions we all take are the economy; if we all boycott a country's products then there will be no market for them; if we all take our bank deposits from the banks there will be a real banking crisis.
In our hearts and minds we have to overcome confusion and fear. To do this we need knowledge, to gain knowledge we need understanding and acceptance. In many ways we can change the world but in many others we cannot; we have to face that reality and stop allowing it to scare us to death. The world we experience over the next weeks, months and years is likely to be beyond most people's wildest imaginations. To navigate it successfully we cannot allow fear to immobilize us. To do this we have to work on those things that really matter, the things that cannot be effected by economic collapse.
The people of the world desperately want change, we want a different system, we want to stop the suffering. One look at the global attention to the inauguration of Barack Obama shows just how strong and widespread this desire is. However Obama isn't going to deliver any such change, he said so himself, "We will not apologize for our way of life, nor will we waver in its defense". This means more wars, the unwavering support of genocide by Israel and the perpetuation of economic slavery and abuse across the globe.
The American way of life, and its clones around the world, is built on the theft of resources both material and labour from us all but mostly from the weakest. The "defense" of that way of life has been the assassination of nearly forty democratically elected heads of state; the imposition of murderous dictatorships; the imprisonment, torture and murder of hundreds of thousands; the murder and starvation of millions and the enslavement of entire nations; a state of almost continuous war and the trampling of international law and universal morality.
As the world wide depression deepened last week, oil prices surged nearly 26% having dropped 10 % the week before. This is worrying because as demand slumps across the globe the source of price increases can be either a reduction in supply or speculation of such a reduction. OPEC production cuts announced in the last quarter of 2008 failed to lift prices during December perhaps because nobody believed that the announced cuts would take place. Now however, the future swap price differential between OPEC's principally heavy sour crude and the international benchmark Brent oil shrank to zero having been $5/barrel in September, signaling that perhaps the cuts in production are actually happening.
Similarly, the number of supertankers estimated to be in use as storage vessels has been estimated to be 37% less than previously thought with just 2 million barrels stored in this manner.
Despite these assurances from market watchers we are not wholly convinced. The fall in production announced by OPEC seems to be matched by the precipitous fall in global demand, which should therefore broadly cancel out the price effect. The storing/hoarding of oil is not on a sufficient scale to have a significant effect on price and it more likely driven by speculative behaviour as oil futures are trading above the current (spot) price, a situation known as Contango. A more plausible explanation for the sudden rise on oil prices is that an escalation and widening of the war in the Middle East and Western Asia is anticipated.
The continued rise in the US dollar against other benchmark currencies is perplexing given the parlous state of the US economy, banking system and state and federal finances. Granted, sterling is now treated as a basket case following what we see as a masterly manipulation of Gordon Brown, the British Prime Minister, into a well executed trap. The Eurozone has its issues but these do not outweigh the critical nature of the US situation. The market agrees, at least in part, with a flight towards the Yen and Gold which both rose in the last two weeks.
We are continually reminded that the increasingly large bailouts of banks are needed to, variously, get them to do business with each other and to lend to businesses and individuals. It seems that the situation is somewhat more complicated and inevitably more opaque. On the surface there have been obvious abuses such as John Thain, ex-CEO of Merril Lynch, using $1.2 million to remodel his office and the payment of massive bonuses to bankers across Wall Street and no doubt in banks elsewhere. Needless to say this is where much of the focus of the mainstream media has been directed.
What is being allowed to leak out in dribs and drabs is the immense scale of losses inside the banks; losses so staggeringly large that they give the lie to the previous ten or even twenty years of banking growth. It is now possible to see just how the phenomenal growth of the previous ten years was achieved - it was essentially a lie, a ponzi scheme that puts Bernard Madoff's $50 billion in the shade. It was a lie perpetrated through a changing of regulatory rules and a reduction in regulatory oversight that was at once discreet and seemingly innocuous yet so broad and deep as to be beyond chance.
We have it on good authority that banks are in fact doing businesses with each other in substantial volumes but that, as a result of the fact that they can no longer trust each other's financial strength, much of the resulting credit risk is collateralized using US Treasury instruments. We cannot properly assess how widespread this activity is but we have heard that some banks are having trouble sourcing sufficient suitable collateral which may well explain the extraordinary demand for US Treasuries. This suggests then that much of the public money being funneled into banks in both the US and Europe, money raised by the issuing of government debt is being fed back to the very governments injecting it which of course gives the lie to the exalted claims of US and Western European political leaders that the funds being doled out to the banks are to get the banks lending to individuals and business again.
In a very interesting article, Naufal Sanaullah, identified a number of pieces of data that may shed light on some of what is happening behind the scenes.
On September 17, the Treasury announced the creation of the "Supplementary Financing Account" in the Federal Reserve. This is a capital reserve in Fed financed by the Treasury selling new debt and it greatly expands the Federal Reserve's balance sheet, albeit stealthily. The excess capital is trapped in this Fed account and does not reach currency in circulation. As of January 2, $259 billion is in this Treasury-financed cash pool and counting the Treasury's "General Account" with the Fed, there is a total of $365 billion sitting at the FedIn addition, Sanaullah argues, as we have suggested above, that there is evidence of banks preferring to keep cash with the Fed resulting in the absurdity that they are arbitraging the rate at which the Fed is lending them money and the rates it is paying them on the same money lent back to the Fed. Less than $40 billion a year ago, the excess reserve deposits held by the Federal Reserve [have] ballooned to $860 billion. Both the reserve and non-reserve deposits comprise another huge pool of excess liquidity on the Fed's balance sheet that doesn't immediately affect circulated currency. He also points to reverse repurchase agreements (a common means for the Fed to manage liquidity in the markets by buying assets from banks in exchange for cash) being "up to $88 billion", although the magnitude of the use of such agreements is shrouded in some mystery since they are part of M3 Money and therefore no longer published by the Fed. His point being that he sees the Fed sucking liquidity from the system in direct contradiction to its stated policy.
We don't have the data access, resources or tools to prove what is happening but if our hunch is right then we have an extraordinary situation. The Fed is having the US government borrow vast sums through the issuance of Treasury Securities issued to the Fed by the government in exchange not for cash but for a data entry in the government's accounts with the Fed, the Fed then takes this non-cash money, this data entry, from the government's account and credit's it to the accounts of it's crony banks who immediately give it back to the Fed in exchange for the Treasury Securities issued by the government to "fund" the injection into the banks. So the US government runs up vast debts, the banks get to rebuild their balance sheets and, to the extent this is fully mirrored at all levels, absolutely no money goes into the economy whatsoever. America is being scammed and, ironically, Obama's "tough restrictions" may only exacerbate the scam.
The highly perplexing strength of US Treasuries would be explained by this activity. It certainly seems more reasonable than the idea that vast volumes of international capital are seeking refuge in US government debt. What seems like an immense supply of Treasuries is in fact substantially less in real terms, how much less might be indicated by the rise in US Treasuries against rational expectations. We certainly view rational pricing of US Treasuries to be very much less than current market pricing. We may of course be wildly wrong and there may be vast volumes of international liquidity unable to find a home other than the financially and morally bankrupt US. Recent dollar strength may be indicative of efforts to railroad foreign investors into buy US Treasuries as the value of non-dollar holdings drops; this may however have a converse effect as the Euro and particularly sterling start to look cheap.
Certainly our speculative/hunch scenario would explain a great deal including where all the money is going and also the unseemly haste and total lack of transparency of the Bush administration. Given Timothy Geithner is up to his ears in whatever is happening we shouldn't expect any sudden revelations in this direction. It will be telling when Obama starts to want to use real money to pay for "the roads and bridges, the electric grids and digital lines" he intends to build if we see a sudden change in the apparent demand for US Treasuries when perpetually circulating accounting entries will no longer work.
Naufal Sanaullah's analysis of just who will lend to the US is to the point:-
But who is going to keep funding this expansion [of] Treasury debt issuance? The American public is broke and cannot offer its capital in return for terrible yields. Foreign nations don't have the means or will to continue financing our debt. Commodity prices have collapsed, cutting deeply into foreigners' export revenues. Oil is down from highs around $150/barrel this past summer to around $40/barrel now.The debts that are being created today are as real as the bankers for whose benefit they are being created and who will enforce their terms thereby taking the last vestiges of political power into their grasping hands. The appalling policy excesses and resulting social destruction visited by the IMF on debtor nations to date will seem like a walk in the park compared to the price that will have to be paid by us and all future generations should the plans of those running the world fall into place as they hope.
According to the CIA World Factbook, China has a $6 billion budget surplus. However, it announced a $585 billion economic stimulus package in early November to be invested by the end of 2010. The Chinese government agreed to provide only $170 billion of the funds, in an effort to prevent an unreconcilable deficit. How will China raise the other $415 billion for continuous use until the end of 2010? Surely, local governments and private banks and businesses can't finance such a large package in the midst of a historic recession.
The only reserve China can tap into to finance its stimulus package is its $1.9 trillion foreign exchange reserves, $585 billion of which is in US Treasury securities. Also, according to the Guangzhou Daily, in mid November, the People's Bank of China began an effort to increase its gold reserves from 600 tons to 4500 tons to diversify risk held by its huge dollar debt reserves. Financing its stimulus package and gold purchases would require selling Treasury securities, but becoming a net seller of US debt could have disastrous economic, political, and even militaristic consequences for China, so it will be interesting to see how events unfold. What seems for certain, however, is that China can no longer purchase more American debt to finance the US Treasury (and consequently the Fed).
This is a problem echoed by the rest of the big creditor nations. After China, the biggest holders of American debt securities are Japan, the UK, Caribbean banking centers, and OPEC nations. Japan is facing enormous headwinds as its quality-focused exports are suffering massive demand destruction as its consumers abroad lose wealth at epic proportions in the economic crisis. Japan was a net seller of US Treasuries in 2008 and with the current wealth destruction, it is highly unlikely it will switch to a net buyer of American debt. The British demand for American debt represented Middle Eastern oil-financed investment, but with oil prices collapsing, it will be next to impossible for this proxy demand from the UK to rise and finance additional debt. The demand for US debt by Caribbean banking centers is because of their tax laws and because of the dollar's status as the international reserve currency. As the credit crunch leads to liquidity destruction in Caribbean banks and the dollar slowly loses its reserve status, these tax haven banking centers will no longer be able to buy additional US debt. OPEC nations' US debt demand, similar to the UK's, is tied to Middle Eastern oil revenues financing American consumption (of their oil exports). As oil prices tank, as will OPEC nations' economies and they too will have no wealth to buy up more American debt.
Bernie Madoff is well-recognized as the biggest Ponzi scheme in history, at $50 billion. I beg to differ with that claim. The United States has financed debt with debt since the late 80s, when its external debt/GDP broke the 0 mark. Since then, it has risen to over 100% of its GDP (which in itself is quite artificially inflated because of manipulated hedonics-adjusted inflation figures), and now stands at $13 trillion. That is what's called a debt bubble. Bernie who?
But the debt bubble appears ready to collapse. The literal pyramid scheme is finally running out of investors, and many Treasury ETFs (like SHY, TLT, IEF, and IEI) are showing classic parabolic topping patterns and the next few weeks should confirm or deny my suspicions. Interest rates are at an obvious floor at zero, so there is nowhere to go but up. That means bond prices have nowhere to go but down, and the way bubbles burst, the falling prices will cascade into more selling until the debt bubble deflates and all the spending is financed by quantitative easing. The minute the Treasury finishes its current funding activity, the debt bubble will begin its collapse. Judging by gold backwardation (discussed later) and the bearish charts on the bubbly debt ETFs, I think the debt monetization and dollar devaluation will begin within the next six weeks.
Even if we are only half right what we are witnessing is a financial, economic and political fraud of colossal proportions; a fraud that is supremely masterful as it is dragging every major economic nation into a financial black hole from which, just like cosmic black holes, nothing, not even light, can escape.
|Previous week's close||This week's close||Change||% change|
|USD / EUR||0.7538 / 1.3266||0.7711 / 1.2969||0.0173 / 0.0297||2.30% / 2.24%|
|USD / GBP||0.6786 / 1.4736||0.7249 / 1.3795||0.0463 / 0.0941||6.82% / 6.39%|
|USD / JPY||90.740 / 0.0110||88.779 / 0.0113||1.961 / 0.0003||2.16% / 2.73%|
|US Fed Funds||0.19%||0.19%||0.00||0.00%|
|$ 10 year||2.32%||2.62%||0.03||12.93%|
South Africa's currency, the Rand, declined for the third week in a row on a slowing national economy.
The Yen rose further due to its role as a haven currency. Fourth quarter growth in China may have been the lowest in seven years, according to estimates. China, Japan and S. Korea agreed to a $120 billion pool of funds to be used to protect their currencies, if necessary.
The creation of this pool, after all the G20 rhetoric in the last four months of 2008 regarding it being essential that competitive currency devaluations not be allowed to happen, suggests that the Asian's know a thing or two about the likely events of the next few months.
Meanwhile, Timothy Geithner has reignited the tired but effective flaming of China over its currency the Yuan saying that Obama believes that China is manipulating its currency. From the arch manipulator of the Treasury and the Fed that is just Machiavellian rhetoric to which China responded robustly:-
The Chinese government has never used so-called currency manipulation to gain benefits in its international trade," the Chinese commerce ministry said in a statement faxed to Agence France Presse late Friday.Western Europe and the U.K.
Denmark is the latest country to expand its bailout of banks, agreeing to spend nearly $18 billion. While housing prices fell 9.4% in the U.K in January.
Eastern Europe & Russia
Russia and Ukraine finalized their agreement on natural gas. It appears that Ukraine capitulated to Putin and is preparing to default on its bonds. This represents another defeat for the United States, as the IMF bailout given to Ukraine didn't shore up its finances and its cozying up to the west did not protect it against pressure from Russia. Many have speculated that Russia's defeat of the U.S. and Israeli-armed Georgia was intended to send a message to the Ukraine.
Ukraine Bonds Signal Default as Russia Has 'Upper Hand' on GasIndustrial output fell for the third consecutive month in Poland.
Four years after Ukraine embraced the West with the election of President Viktor Yushchenko in the Orange Revolution, the former Soviet nation's economy is collapsing and investors expect the country to default.
Even with the International Monetary Fund's $16.5 billion bailout, Ukraine's finances are deteriorating as the country battles with Russia over natural gas prices and the cost of steel, its biggest export, sinks.
Yields on Ukraine's $105 billion of government and company bonds are the highest of any country with dollar-denominated debt except Ecuador, which defaulted in December. The currency, the hryvnia, weakened 40 percent in the past 12 months against the dollar. The benchmark stock index lost 85 percent, the biggest drop in the world after Iceland, data compiled by Bloomberg show.
"The market is telling us there is a high probability of a default," said Tom Fallon, head of emerging-markets at La Francaise des Placements in Paris, which manages $11 billion and sold its Ukrainian holdings six months ago. "It's an advantage that the country is committed to policy measures that the IMF is prepared to back, but that is no guarantee it won't default..."
Ukraine is getting battered after European steel prices plummeted 56 percent since August, according to data from Metal Bulletin. Industrial production fell 48.8 percent in November, the steepest decline in Europe, as the global economic slowdown cut international demand.
The country's dispute with Russia over natural gas prices disrupted supplies across Europe and will probably increase fuel costs for Ukraine, slowing industry, analysts led by Vienna-based Martin Blum at UniCredit SpA wrote in a research note this month.
Russian Prime Minister Vladimir Putin and his Ukrainian counterpart, Yulia Timoshenko, are scheduled to sign the terms of an agreement today [Jan 19th] in Moscow in which Ukraine will pay higher European prices for Russian gas from 2010, after a 20 percent discount this year. In return, 2009 transit fees for Russia will remain at last year's level. The European Union said it will reserve judgment on the deal until the resumption of flows to the 27-nation bloc after a halt of almost two weeks.
"Russia does have a bit of an upper hand, but an excessively weak Ukraine would not be a benefit to Moscow either," said Ivailo Vesselinov, a senior economist at Dresdner Kleinwort in London. "The Kremlin has to balance keeping Ukraine stable so that does not spill over into a chaotic break-up, and preventing a move away from Russia politically."
The nation's 46 million people are 45 percent ethnic Russians and 55 percent ethnic Ukrainians. While the U.S. is supporting membership to the North Atlantic Treaty Organization, Russia has warned the move would break the country into two states and prompt Moscow to aim missiles at Ukraine.
A feud between Yushchenko and Timoshenko has made matters worse as the collapse of their coalition government in September hampered policies to reassure investors. The central bank seized Prominvestbank, Ukraine's sixth-biggest lender by assets, in October.
The crisis led the IMF to provide $4.5 billion of emergency loans in November. Conditions for the credit include moving toward a flexible exchange rate, tackling inflation and running a balanced budget even though Ukraine's parliament approved a 2009 deficit of 2.96 percent of gross national product. The government will partly cover the shortfall by selling bonds, according to the plan reached last month. Ukraine's inflation rate is the highest in Europe at 22.3 percent.
An IMF mission is scheduled to visit Kiev this month before it provides a second payment in February.
"Without rapid correction, this could undermine the outlook for the second tranche," said Ali Al-Eyd, an economist at Citigroup Inc. in London.
Ukraine's economy, which expanded at an average annual rate of 7 percent since 2000, grew 2.1 percent last year. Gross domestic product may shrink 5 percent this year, Oleksandr Shlapak, the president's deputy chief of staff said in November...
In Russia the ruble continued its decline and industrial production fell 10% in December.
Unrest is spreading in Eastern Europe in reaction to economic difficulties:
Economic crisis unleashes violent protests across Eastern EuropeLatin America
The international economic crisis has hit Eastern Europe with full force and brought long-simmering social and political tensions to the surface.
Last week approximately 10,000 people protested in Latvia against the rampant corruption and incompetence of those in the highest public offices. The demonstration, which had been called by the opposition parties and trade unions, was followed by scenes of violence, with over 100 arrested.
In the Bulgarian capital Sofia, approximately 2,000 demonstrated against the government. Anger with the grand coalition under Prime Minister Sergei Stanishev has been strengthened by the acute gas crisis; this Balkan state is entirely dependent on Russian supplies of gas via Ukraine. When supplies were cut off last week, Bulgarians suffered under the icy temperatures.
Last Friday there were also violent protests in Lithuania. Protests also took place in five other Lithuanian cities, as well as the capital, with more than 20,000 taking part.
In Lithuania anger was directed against the conservative government of Andrius Kubilius. His party, the Homeland Union-Lithuanian Christian Democrats, which governs in a four-party coalition, ecently agreed measures to deal with the financial and economic crisis that are entirely at the expense of the general population. The government wants to cut expenditure in the public sector and on social security by 12 to 15 percent, at the same time raising taxes while cutting subsidies for medicine and heating.
Any end to this series of protests is not in sight, and observers are predicting similar protests for Estonia, where the government of Andrus Ansip is rapidly losing support, and also in Romania.
Last week thousands of workers at the Renault subsidiary Dacia in the southern Romanian city of Pitesti demonstrated in defence of their jobs.......
Management are considering sacking a quarter of the workforce due to the collapse of demand in January. ...... If the "plan to deal with the consequences of the crisis" does not bear fruit by the spring, [Francois Fourmont] said, some 3,000 to 4,000 of Dacia's 13,000 workers will be dismissed.
[ ] Workers at the Nokia factory, opened only last year in Klausenburg, are facing dismissals. According to trade union sources, Nokia has already sacked about 600 workers.
Anger here is also being directed ever more directly against the government in Bucharest. ......
The struggle between the population and the political elite will inevitably increase because of the mounting economic crisis. The governments in Hungary, Bulgaria and Romania have already announced they will implement further austerity measures to stabilize the state finances. All political parties, whether nominally calling themselves socialist or right-wing reformist, are agreed that the burden of the crisis must be placed upon the general population.
Eastern Europe - "source of the fire-storm"
Over the recent past, the economies in the former Eastern bloc countries have experienced a rapid growth, reaching double-digits in some places. Following the "high-altitude flight," however, instead of the "soft landing" experts had hoped for, an abrupt crash is predicted.
After the collapse of the Soviet Union and the Stalinist regimes in Eastern Europe in the early 1990s, local industries were largely shut down or sold off at bargain basement prices to foreign investors. Transnational corporations such as Volkswagen, Renault and Nokia tried to reduce their costs by developing factories in the low-wage countries of Eastern Europe. They were supported by a corrupt, compliant elite that mainly stemmed from the old Stalinist cadres, which provided a crucial element to removing all political obstacles to exploitation.
Economic success depended entirely on the supply of capital from abroad. The sudden drying up of these capital flows as a result of the international financial crisis caused massive problems for the Eastern Europe states. Only international support has enabled a complete collapse to be avoided, so far.
Last year Hungary was saved from bankruptcy by a cash infusion from the IMF. And now Latvia has also been granted a credit package. Poland and Estonia, whose economies face imminent failure, have been assured a total of $400 million. The failure of any Eastern European state would inevitably have dramatic consequences for the entire region.
The situation of Ukraine is particularly precarious. [ ]
Under the headline, "The Next Source of the Fire-storm is Eastern Europe," Financial Times Deutschland pointed to the consequences for Western Europe. If European Union members such as Hungary or Estonia get into a predicament, FTD writes, this will also affect the state budgets, banks and investors in the other EU countries.
"A dramatic meltdown of wealth," reports FTD, and points to the example of the Griffin Eastern Europe Fund, which has lost 63 percent in value within one year. "The Julius Bär Black Sea Fund, which invests in stock markets around the Black Sea, has even managed to destroy 80 percent of investors' capital in 12 months."
According to the article, Eastern Europe business presently ranks among the greatest risks for Western banks. The banks' commitment in these countries amounts to some $1,500 billion. Financial institutions from Austria, Italy, France, Sweden and Greece are particularly affected. Austrian banks alone have outstanding credits of €224 billion in Eastern Europe, corresponding to 78 percent of Austria's entire economic output.
Ecuadorean president Rafael Correa announced agreement with business leaders to cut imports by $1.5 billion to protect the country's use of the U.S. dollar as currency, despite Correa's characterization of the dollar as currency policy as a "barbarity."
With crude oil prices plunging about three-quarters from a record $147.27 a barrel in July, Ecuador, the smallest member of OPEC, had a trade deficit of $499.74 million in November and a non-oil trade deficit of $6.9 billion through the end of November, according to the central bank. Unable to print currency, Ecuador risks running out of dollars if it doesn't reduce money spent on imports, Correa said.Brazil announced a $174 billion spending plan for its national oil company, Petrobras, to take advantage of new finds and of cutbacks by other oil companies following the recent drop in oil prices.
Correa repeated his criticism of dollarization as "a barbarity," though he said the government won't consider introducing a new currency to replace the dollar.
Last week we wrote that those who are calling recent bank bailouts "socialist" are mistaken. In fact, it resembles nothing more than fascism, a form of government dreamed of by pathocrats. Dmitry Orlov:
A nationalization of the private sector can indeed be called socialist, but only when it is carried out by a socialist government. In absence of this key ingredient, a perfect melding of government and private business is, in fact, the gold standard of fascism. But nobody is crying "Fascism!" over what has been happening in the US. Not only would this seem ridiculously theatrical, but, the trouble is, we here in the US have traditionally liked fascists. We had liked Mussolini well enough, until he allied with Hitler, whom we only eventually grew to dislike once he started hindering transatlantic trade. We liked Spain's Franco well enough too. We liked Chile's Pinochet after having a hand in bumping off his Socialist predecessor Allende (on September 11, 1973; on the same date some years later, I was very briefly seized with the odd notion that the Chileans had finally exacted their revenge). In general, a business-friendly fascist generalissimo or president-for-life with no ties to Hitler is someone we could almost always work with. So much for political honesty.Debate continues in the United States on what the government can do to stimulate the economy. Policy makers have a dilemma. The previous bailouts of the financial industry were extremely unpopular. The consensus, both among the public and the media, is that the "didn't work." Despite what we have said above as regards the seemingly fraudulent merry-go-round of money between the Fed and the banks, there is evidence that the credit markets for large bond issuers has opened up, albeit with a large part of the volume being government guaranteed. Perhaps not an inconsiderable achievement, but at what future cost?
Add to that the news last week that the banks that were relatively healthy, such as Bank of America, used the funds from the government, and therefore by definition from all present and future US citizens, to acquire troubled firms such as Merrill Lynch, thereby turning themselves into troubled firms. When it was revealed that Merrill Lynch's CEO John Thain hid massive fourth quarter losses then spent over a million dollars renovating his office after being acquired by Bank of America, public anger has boiled up. No wonder, according to Tom Eley:
The rise and fall of Wall Street's John ThainThain represents the fact that beyond a certain level within the US capitalist class it is not merit that determines how high one rises. There are two fundamental arguments put forward in defense of capitalism; that it is the best system available for the efficient allocation of capital and that it is naturally meritocratic. Both are lies, the form of capitalism practiced in the US and spread worldwide does not allocate capital efficiently, the credit derivatives and mortgage backed securities markets being but two glaring examples; nor is it meritocratic, Thain being but one of thousands of examples.
John Thain, the CEO of brokerage house Merrill Lynch, who guided his firm's absorption by Bank of America, was fired yesterday by BOA head Ken Lewis after it was learned that Merrill had brought $15.31 billion in fourth quarter losses onto the bank's balance sheet. Bank of America stock has lost 83 percent of its value since the Merrill acquisition was announced on September 21, and analysts believe that the banking giant is, for all intents and purposes, insolvent.
Merrill was one of the five major brokerage firms that only a year ago were considered pillars of the US financial system - the others being Goldman Sachs, Lehman Brothers, Bear Stearns and Morgan Stanley. Since then, Bear Stearns and Lehman Brothers have gone into liquidation, while Morgan Stanley - like Merrill - was absorbed by a large bank - Mitsubishi UFJ Financial Group of Japan.
Thain was widely celebrated for shepherding Merrill's sale to BOA. But the honeymoon did not last long when it became known that Thain had "failed to tell the bank about mounting losses at Merrill late last year," according to Marketwatch. Merrill's exposure to toxic debt has thrown into doubt BOA's own survival. It is widely assumed that Lewis sacrificed Thain in order to mollify stockholder anger - and save his own position, at least for the moment.
For now, BOA carries on only due to taxpayer handouts to the tune of $45 billion through TARP (Troubled Asset Relief Program) and billions more from the Federal Reserve. The US government has also committed itself to sharing losses on as much as $118 billion of BOA toxic assets. The bank will need tens of billions more to survive, analysts say.
Up to the moment of his forced resignation, Thain was a darling on Wall Street. He served as president and co-chief operating officer of Goldman Sachs from May 1999 to June 2003, and as president and chief operating officer of the firm from July 2003 to January 2004. (Media accounts indicate that Thain received some $300 million in Goldman stock.) After leaving Goldman, Thain assumed the top office at the New York Stock Exchange (NYSE), where he replaced the previous CEO, Dick Grasso, who was fired after it was revealed that he had essentially rewarded himself $140 million in deferred compensation.
In that position Thain was paid "only" about $4 million a year. During his three years at the helm of the NYSE, he converted it from a privately held company to a publicly traded one, and arranged for two mergers. Since his departure early in 2007, NYSE stock has plummeted 72 percent.
Thain was celebrated as a Wall Street turnaround artist who could dictate his own terms at his next job. In 2007 he was won by the highest-bidding suitor, Merrill, where he replaced another disgraced CEO, Stanley O'Neal - who left the brokerage with a severance package valued at over $160 million. O'Neal was sacked in the initial phases of the subprime mortgage crisis, after it was revealed that Merrill had suffered $8.4 billion in mortgage-related write-downs.
Thain's Merrill pay package made him the second highest-paid executive in 2007, according to the Associated Press, amounting to more than $83 million.
The salary was not based on Thain's foresight. In a January 2008 interview, while he allowed that the financial crisis was "not a zero," he assured the Wall Street Journal that it "is for the most part behind us."
Thain's efforts to resurrect Merrill resembled an above-the-board Ponzi scheme. According to the Journal, Thain "promised a number of shareholders who invested in Merrill in December 2007 and January 2008 that if additional common stock were issued at a lower price, the firm would compensate them. Within months the firm had to raise more cash ... Merrill issued additional shares to pay off its earlier investors, diluting its common shares by 39 percent. The dilution essentially cost shareholders about $5 billion" ("'Mr. Fix-It' Failed to Take Measure of Mess," January 23).
While the financial position of Merrill eroded in 2007 and 2008, Thain - who lives with his wife on a large estate in exclusive Rye, New York, reportedly purchased for $10 million - continued to lavish money upon himself and a group of cronies he brought over with him from Goldman Sachs.
In early 2008, for example, Thain squandered $1.22 million on the remodeling of his office suite. Among other purchases, he spent $131,000 on rugs, $87,000 for guest chairs, $68,000 for a credenza, $35,000 for a commode and $1,400 for a waste paper basket. To do the job he hired celebrity interior designer Michael Smith, now at work on the Obama White House.
Through December, Thain lobbied Merrill's compensation committee to pay him his multimillion bonus early, before the closing date on the sale to BOA. According to insiders, his initial demands were for a bonus between $30 million and $40 million, and later $10 million. Thain has had to content himself with $16 million in compensation for 2008, according to a Forbes estimate, even as his company collapsed.
Then, after Merrill's enormous fourth-quarter losses became public, Thain went on vacation in Vail, Colorado and issued a directive accelerating executive bonus payments before the BOA deal closed.
While Thain has been grasping for every last million dollars, tens of thousands of workers have been laid off from Merrill and BOA, or will soon be dismissed. Ridiculously expensive rugs aside, the looting of companies such as Merrill has played a role in helping to bring down the financial system and resulted in millions more jobless around the globe.
The financial aristocracy's unquenchable mania for personal enrichment, that Thain so thoroughly embodies, is not the source of the collapse of capitalism. Nonetheless, this socially destructive and parasitic quality is characteristic of historically doomed ruling classes. America's wealthy seem organically incapable of restraining themselves from committing outright larceny. They behave as though, on some level, they do not anticipate being around for very long.
It is interesting to see this process at work in real time with the revolving door between US law firm Latham & Watkins and the US Justice Department.
Will the public's anger at the financial bailout extend to the stimulus package being prepared? Probably not, but the media and the right wing of the political class have been testing those waters. The Republican Party has been trying to discredit infrastructure spending, one of the better ideas in the current stimulus package, while talking up tax cuts and "entitlement reform" (meaning cuts in social insurance). Here is the blogger "Badtux" with the opposing point of view:-
Of tax cuts and stimulus
I will preach "common wisdom" heresy here: A middle class (or above) tax cut will do nothing -- zero -- nada -- to stimulate the economy. Why is that? Simple. Because what we have right now is a solvency crisis, not a fiscal crisis. Middle class America is insolvent right now due to unpayable debts, and incapable of buying things. Giving $2K to every middle-class American won't stimulate the economy, because it'll just get sucked towards payments on their debt load. Give me $2K, and it goes to pay down on one of my credit cards, not towards buying new "stuff".
The operative term here is what John Maynard Keynes called the propensity to spend. The point of modern economics is to balance supply and demand such that a) there is sufficient supply to avoid inflation, and b) sufficient demand to ensure full employment. Full employment is desirable in an economy because it maximizes your use of human capital -- you don't have useless people languishing around on the dole. And you better damned well have a dole (welfare) if you don't have full employment, because otherwise you get food riots, high crime as desperate people break into homes to steal food, and maybe, if you have enough unemployed, revolution and the mass slitting of throats and blood running in the gutters.
So anyhow, what we have right now is supply, but no demand. No demand because of the solvency crisis. So what can we do about this? Let's look back at our tool kit and see:
1. Jobs. Unemployed people don't buy stuff. They're protecting what little capital they have until they find a job. Unfortunately, private enterprise won't -- can't -- provide jobs until there is demand. And unemployed people aren't providing that demand for obvious reasons -- they have no job. So we have a chicken-and-egg problem that isn't solvable by a free enterprise system. Hmm, now it seems to me that we have this other entity that we formed for handling those things where free enterprise doesn't work. This other entity that provides things like, oh, roads, libraries, and the common defense. This other entity that we call government. As in, the CCC, WPA, and other alphabet soup jobs programs of the Great Depression.
2. A return to traditional bankruptcy. The bankruptcy "reform" act was an attempt to maintain the solvency of the banking system. Unfortunately, insolvent people can't pay their debts whether they're allowed to declare bankruptcy or not, and thus the banking system is insolvent anyhow. Except now it's taking the whole economy down with it, since insolvent people can't wipe out their debts, become solvent again, and start buying again (albeit hopefully more responsibly this time!). The bankruptcy "reform" act has killed way more solvency than it has preserved, and needs to go. In fact, I'd make bankruptcy *easier*. If more than 75% of your income goes for debt payments, you get to declare bankruptcy and wipe it out.
3. Nationalization of the banking system. Whether people are allowed to declare bankruptcy or no, they're insolvent and unable to pay their debts, and thus the banking system is insolvent too. We might as well just allow them to declare bankruptcy and get it over with. The banks and their assets can be taken over by a Banking Trust Corporation, the bad debts written off, the banks re-capitalized via freshly printed money from the Federal Reserve, and then sold back off to private ownership after everything has shaken out. Otherwise we're just throwing money at an insolvent system to try to paper over the fact that the banking system has failed rather than addressing the fact that, well, it's insolvent.
4. A massive hike in the minimum wage, and indexing the minimum wage to inflation. Contrary to popular belief, minimum wage hikes don't cause any real loss of jobs. Anybody who can replace a minimum wage worker with machinery has already done so. The minimum wage is a form of wealth transferal from the middle classes (mostly) and upper classes(somewhat) to the lower classes, but it's one that rewards work, rather than direct payments from the government which reward not-work. The minimum wage primarily gets paid to two groups of people: a) Teenagers, who, being teenagers, *will* spend the money thereby increasing demand, and b) poor people, who, if they get more money, *will* spend the money, since they rarely have any debt and have a long list of things they'd like to buy if they only had the money.
5. An increase in the Earned Income Tax Credit. Once again, this goes primarily to poor people, and will immediately be spent, unlike middle class or upper class tax breaks which will go off to pay off debts or be stashed in an investment account (for the upper class), thereby increasing demand.
6. Tax credits for hiring Americans, manufacturing tax credits to make it profitable to manufacture here in America again, a "manufacturing bank" to give out low-interest loans and other subsidies to manufacturers who want to set up factories here in America, and tax reform so that we no longer reward companies for outsourcing American jobs to India and China. One problem with increasing demand is that we're increasing *Chinese* jobs, not American jobs. Which is okay if the Chinese are willing to pay for it, but the Chinese aren't going to give billions of dollars to the U.S. government to increase U.S. demand so that Chinese workers are kept employed. The Chinese are going to just free-ride on this stimulus stuff. Well, okay. We can't stop them from doing that, they're playing chicken with us, and betting that we aren't going to deliberately smash our economy just to "beat" the Chinese. But we can ensure that in the future, those gains go to Americans too.
7. Spending on infrastructure. Doh. Infrastructure is the gift that keeps on giving. We're still using roads and buildings built by the WPA in the 1930's.
8. Spending on education. Doh. Same deal. We shouldn't be laying off teachers and putting 40 kids into classrooms that are standing-room-only without enough textbooks for all the kids, this is our seed capital for the next generation. And save the nonsense about how African parents are happy to have a teacher and a chalkboard standing by the side of the road with no walls or roof or desks or anything. In case you haven't noticed, Africa isn't exactly an economic marvel lately...
9. Bailouts of states, with the proviso that accepting the money means that the states have to clean up their tax and budget systems, which are a mess right now. All this hiring stuff isn't any good if the states are busy firing at the same time because they have no money to maintain basic services.
So let's look at some "common wisdom" that's wrong:
1. The federal government needs to reduce spending and live within its means. Bzzt. Wrong. We have data on this, folks. Things don't work the same during a depression (and we ARE in a depression right now whether the Feds want to admit it or not) as they do during normal times. In 1934, when FDR increased spending, the economy went up. In 1937, when FDR decreased spending, the economy went down. In 1942, when FDR increased spending WAY high, the economy went through the roof. During a depression, increases in government spending cause an improvement in the economy. Decreases cause a decline in the economy. This is data. This is reality. We don't need to wave our hands and talk about vague theories, this is what actually happens.
2. Middle class tax cuts will stimulate the economy. BUZZZ. Wrong. In a solvency crisis like right now, where the middle class is insolvent, all that happens is that tax cuts to the middle class will get sucked up by lenders who are themselves insolvent. You can't make the middle class solvent by cutting their taxes, you have to do something about their debts, which means making bankruptcy more accessible.
3. We should not reward people for being financially irresponsible. BZZT. We have *ALL* been financially irresponsible, either personally or by electing irresponsible governments. And we're all going to pay for it. Finishing the destruction of the economy because we're too busy nattering about who is more responsible than the next person is nonsense. We need to do what works, and if that requires allowing people to duck out of debts they assumed knowing that they probably couldn't repay them via bankruptcy, that's part of the price.
4. Tax hikes on the rich will kill the economy. BZZZt. WRONG. The time period that showed the most economic growth in American history -- the 1950's and 1960's -- were also a time when the rich were taxed at 80%+ marginal rate. The rich divide their income into two streams: Consumption, and investment. If they have less income, they invest less. But we already have an excess of investment capital in our economy, thanks to the Reagan shift of the tax burden from the upper classes to the lower classes, and what it's doing is causing investment bubbles such as the dot-com bubble, the housing bubble, and so forth, which cause great economic pain once they burst. Reducing the amount of investment money in the economy by the amount needed to stop all this bubbling will be good for the economy.