October 3, 2007
Elaine Meinel Supkis
The G7 dwarves can't figure out what is going on. They want to keep the status quo only they are totally in trouble since the status quo involves the US going deeper and deeper and deeper into debt, the US lets the other dwarves send in more and more exports to the US and the US pay for WWIII as we should confront Russia and China on behalf of the other dwarves who don't want to pay for any of this at all. And so we head down the cliff, we are a dying beached whale and our allies are hacking at us with their knives to eat our blubber as we die and yet they want us to force the world's bankers, the Chinese, to pay for all this? HAHAHA. Right.
From one of our readers, Ron, is this Financial Times story:
Eurozone policymakers will urge the US and other countries at the next G7 meeting to take a strong stance against exchange rate volatility in an effort to halt the dollar’s decline against the euro, European Union officials said on Tuesday.Finance ministers of the 13-member eurozone plan to forge a common position in Luxembourg next Monday, 11 days before the meeting in Washington of central bankers and finance ministers of the Group of Seven leading industrialised countries.
This article about the 7 Dwarves is most interesting. I hope the Financial Times doesn't take offense if I quote this article rather frequently since it is a historic document and this is a mere 'blog' which is trying to put together an accurate history of the collapse of the global banking/trade systems. This is the central part of the greater Decline and Fall of the European Empires. Their historic rise matched the development of gun powder which was technology brought to Europe from the greatest ancient empire in the world in 1600, China.
The development of the cannon and then installing this on the ships used by Europe to conquer the planet changed the course of history every bit as much as the invention of the wheel that allowed the inventors, the Indo-european plains dwellers to sweep down and take over much of Europe, India, Egypt and the Middle East and then the invention of the stirrup which caused many plains dwelling hordes to sweep repeatedly across all the non-stirrup empires like ancient Rome and China... the invention of cannons did the same.
For the last 400 years, the Europeans ruled this planet and took much of the land, commodities, gold, silver, foods, and of course, slaves. This stunning expansion of the European powers who were all deadly rivals of each other, ruled by a small ruling class made up of the families of the top leaders of the barbarian hordes using stirrups to destroy the Roman Empire, these horsemen who also used Viking ships which could swiftly sail both the Atlantic's great waves as well as up shallow rivers to Paris or the Nile, these PIRATES became the ipso-facto rulers of Europe and then, the world.
I descend from these people, the pirate/invader/ruler class. The rulers, once they had taken control of the entire planet, while they were busy finally chopping up both the Ottoman Empire and the Chinese Empire, while they were busy taking over all of Africa and finally doing in the King of Ethiopia, the last of the African rulers who wasn't a subject of the European Powers, as the US reached the West Coast and took Hawaii, Alaska and then the Philippines, at this point, all the rulers suddenly and quite unexpectedly for themselves, came into direct conflict and suddenly had not one but two world wars which destroyed most of the ruling families, some of whom were physically annihilated via firing squads.
This long prelude to today's article here is for a reason: to give us much-needed perspective for the ridiculous and I think, utterly hilarous story of today's G7 meetings. The leaders of the remnants of the European empires are all gathered under the umbrella of the dying US empire to issue the usual threats, hysterical accusations and hilarous demands...while allowing Japan, a top rival and most dangerous advesary of ALL the European based empires...right next to them all, Japan, laughing at all of them as Japan works day and night to destroy them! Hahaha.
I will salute Miz Japan for fooling the other dwarves. Banzai! Banzai! Japan, unlike China in 1850, decided to utterly transform so they could get the Black Ships and especially, the cannons attached to these ships. They decided to learn from the Europeans and sent samurai all over the earth to study the empires that were chopping up the earth between themselves. They decided to imitate the school systems of the most forward-looking empire and they wanted one that would allow Japan to build up a great military system that could use cannons really well.
They didn't imitate the world's most powerful empire, they ended up falling in love with Bismark's Germany and to this day, Japan has decided to imitate Germany is many ways which is why they got in trouble when Germany got in trouble and for the same reasons. After WWII, Japan imitated Germany yet again and totally surrendered and then used the US as a shield and umbrella to rebuild and like Germany, used the US as a tool to keep from wasting money on defense but to shove all this onto the US and then get the US to allow one-way trade so they could grow their industrial base while the US industrial base collapses due to this and then...well, both are in the same fix today.
They won the Cold War but the communist nations, Russia and China, are clearly moving back into the center of world power and the US, totally weakened by Japan and Germany following this scheme to get rich while the US pays for everything, is now falling apart and leaving Germany facing a very powerful and angry Russia and Japan, an even angrier China! How will they fix this mess?
HAHAHA! They can't! They can't! So time to look at this news conference by the G7 nations that have a most peculiar history and a most interesting future mess:
The Finanial Times:
Jean-Claude Juncker, chairman of the eurozone finance ministers’ group, on Monday said that the euro’s rise “tends to worry us a lot” and that it was no longer acceptable that Europe was bearing the brunt of “the consequences of the existing global imbalances”.Christine Lagarde, French finance minister, said in an interview with Les Echos: “I’d really like to hear again [US Treasury secretary] Henry Paulson saying loud and clear that a strong dollar is good for the American economy.”
Why does Europe want a strong dollar? Why does Japan want a dollar that is a lot stronger than the yen? Why do our trade partners who all have trade surpluses with us want us to always have a strong dollar? Isn't it a rock-hard rule of economics that any country running huge trade deficits all the time, their currencies weaken? Eh? HAHAHA. I am seriously amazed that they dare talk this way to us. And it is a sign that our imperial alliances are killing us slowly.
Of course, they want their currency to be weak against the dollar! They benefit from this! But they won't stop flooding us with imports. Double goes for Japan that has a huge trade surplus with us and has put into their FOREX reserves a flood of dollars that would cause the dollar to lose value agains the yen. Japan wants the present status quo to continue. Europe wants the present status quo to continue.
But it can't! It just cannot continue much longer. There is no realistic way to make this continue. Note that the Europeans who have collectively as well as individually, trade surpluses with the US, are hoping the US could 'talk up' the dollar! Let's see what Paulson could say, 'Hocus pocus, pudding and pie, make the dollar fly to the sky!' Yes, a magic spell! That will do the trick.
Sigh. Money is magical, of course. But even magic has rules, regulations and natural laws. The concept of alchemy of equivalent value and equal trade-offs can be seen in today's news. The world has a trade surplus with the US. This surplus has grown every year of my working life starting in 1968. This can't continue forever. In 1968, our trade deficit was $5 billion. Then it was over $20 billion each year in the 1970's then in the 1980's, it rose to over $50 billion a year and then in the 1990's, it climbed ever steeper to $100 billion a year and more and then...today, it is nearly a TRILLION DOLLARS a year. And amazing number, a frightful number and totally outside of the laws of equal trade/equal value that is the basis of all good magic.
It is now a black hole, a churning whirlpool leading to the most fearful thing: the Outer Darkness where suddenly all things that are of one steady state suddenly reverse! Black becomes white, big becomes small, heavy becomes light and good becomes evil! In a lightning flash, all things reverse and converge. I call this new state 'World War III.' And it will happen in an eyeblink if we continue unequal trade for unequal value! This status quo grows more and more dangerous by the hour and the trembling ground of the world banking system is like the rumbles before a volcano explodes. It is like watching the sea suddenly vanish as it slides into the oncoming tsunami that is like a gentle swell far out at sea! A bulge in the water caused by underwater earthquakes can, when they finally reach a shore, rise up out of seemingly nothing and come crashing in with unstoppable fury and force!
So it is here: the problem isn't the euro's value. The problem isn't the value of the yuan or even the yen. The problem is the wild spending, mass consuming US empire and its relationship with the rest of the world as well as within itself. The repairs that must be made will not preserve the present world economic system. Nor the world's political systems. All will be forced to change in the bitter end but change will come no matter what! The question is, will we all push it until it reaches that flash point, that moment in the utterly occult darkness that surrounds money and is its magical base, when we reach the point where money itself resets the system or will we reform ourselves?
I beg everyone, the reformation of our system is of vital necessity for the US and this does NOT involve tax cuts or dropping interest rates! Quite the opposite. It means dropping our imperial self-image and embracing the concept of the United Nations or we can accept the reality that China will now be the world's top imperial power. At least, with the United Nations, we might keep some control over world events!
But the empire is finished. Will it be destroyed? Yes! Shall we do it peacefully or will we choose WWIII? I beg everyone to understand, there are only two choices: to peacefully withdraw like Russia did in 1990 or to violently collapse like Germany and Japan did and England finally did via WWI and WWII.
From the Financial Times:
The US has given no public signal yet as to what language it will accept on exchange rates in the communiqué to be issued at the G7 meeting.Such communiqués must have the consent of all seven governments – Canada, France, Germany, Italy, Japan, the UK and the US – and Washington can count on UK support in resisting language that implicitly questions the role of currency markets in determining exchange rates.
The US is also keen to highlight the need for China to accept more flexibility in its exchange rate regime to address the issue of its vast current account surpluses.
The tool the US is using to fix our trade deficits which are caused by our gross overspending on military expansion is to blame the place we used to reduce domestic inflation: China. And China has more sovereign wealth than anyone on earth and unlike the #2 sovereign wealth nation, Japan, China doesn't have much sovereign DEBT. The other day, I hammered away at that topic. The US has the most sovereign IOUs on earth, bar none. Japan is #2 in soveriegn debt. Indeed, its sovereign debts are 9X greater than Japan's FOREX reserves while China's is 4X SMALLER than their FOREX reserves! This is most astonishing.
And it means we can't bark at China to correct world trade via changing the value of the yuan. This is because China has a grip on the world banking system because...hold onto your hats, everyone....China is the bank! As they told me so proudly many years ago, 'I be bank!' so they are! And can we order the ONLY country on earth that is a major manufacturing value-added economy, that they must make their currency and ONLY their currency, the strongest on earth WHILE WE KEEP ON PRETENDING TO BE AN EMPIRE??????
China will assent to this only if we resign our imperial powers. This means, Japan must form a strong alliance with China, Taiwan must be re-integrated with China, Korea reunited and in a strong military/economic alliance with China, etc. And...this means world history changes. I assure everyone, China will happily do this peacefully.
BUT NOT IMPERIAL JAPAN!!!! And this is where WWIII comes in. Japan happily dragged Asia into WWII and will do so with WWIII if they could but only if they can use the US to do this for them while they hope to escape the logic of total annihilation that will be what WWIII will be all about: the utter destruction of all the world's major cities.
A good thing to avoid, I would say. So why are the Europeans joining JAPAN in attacking China's sound economic practices? Eh? Easy to see: Europe wants RUSSIA destroyed! When Russia surrendered at the end of the Cold War, Europe joined the US in destroying Russia further. After promising Russia, they wouldn't expand the EU, they did. After promises they wouldn't expand NATO, they did. Now they are trying to park ballistic missiles right on Russia's front doorsteps! This is a gross violation of Russia's territorial protections. We tend to forget that Europe has this nasty habit of suddenly invading Russia.
So Europe wants the US to have a strong dollar so we can then protect them from Russia while they expand and rebuild the Holy Roman Empire, centered yet again, in a fluctuating merged mess between Germany and France and this history is very old and I could write for hours about the Holy Roman Empire and should sit down this weekend and do this...publish my Holy Roman Imperial Time Line.
Back to the G7: this is a troublesome alliance. Japan is ourtright, a grave danger to the other G7 nations. Yet they are assumed to be part of some grand alliance that will make the G7 stronger and not weaker. The US is part of this group of dwarves yet it isn't a dwarf, it is the Great White Whale. It is huge and it is dying on the beach and stinking up everything. And as the other dwarves try to haul this carcass back to sea and get it to swim again, they are also hacking off the blubber of this whale and eating it because the Japanese eat whales! HAHAHA. I keep trying to come up with colorful pictures to aid in making cartoons.
Financial Times:
Speaking in Malta on Monday, Mr Trichet said he had “noted with extreme attention that the US Treasury secretary and ... the Federal Reserve have said a strong dollar is in US interests”.Robert Barrie, European economist at Credit Suisse, said the combination of a strengthening currency and weakening economy was proving awkward for the ECB. Mr Trichet’s comments might have been “the start of attempts to embark on verbal intervention”.
And here it is, at the very end of this article: everyone wants to talk their way out of this mess that is so huge, they can't help but notice it. Europe's 'ackward' situation can be easily fixed, right? All they must do is make the dollar stronger. They are already imitating Japan, Russia and China and hoarding dollars in the hopes of soaking up the flood of red-ink generated dollars that are FLOUNDERING (think of the beached whale here) on the shoals of declining ability to soak up more debt. The US homeowner no longer can take on more debt. US industry is dying. US banking must seek debt generation potential in Japan only Japan is locked and has Sharia-level loan policies of near 0% anyway, Europe is the only place outside of a certain China, where our bankers can create money via generating more debts!
No one can jawbone their way out of this.
China may prevent foreign investors from taking control of domestic brokerages, a setback to Wall Street's ambitions to tap the world's fastest-growing stock market, people familiar with the planned rules said.Overseas companies will be limited to owning stakes in publicly traded brokerages, with the foreign holding capped at 20 percent, said the two people, asking not to be identified before the rules are approved. The China Securities Regulatory Commission has submitted the draft rules to the State Council, the nation's highest decision-making body, they said.
As the 'I be bank' Chinese shut the door in our faces, they continue to take over our financial systems here at home. And this is the logic of the trade surplus they enjoy with us. And ditto, Europe. The Europeans want this to reverse. Well, they can! All they have to do is impose tariffs and barriers. And this ends 'free trade.' And this means everyone will do this INCLUDING CHINA. And we all can't do this because we all consume this black stuff called 'oil' that comes from a bunch of places the US wants to militarily dominate but trying to dominate world oil costs us half a trillion dollars and more, per year. And as the dollar dies, this drives up our imperial war/occupation bills and this is a vicious cycle and the only escape is for us to stop trying to be a world empire.
And this brings us to the topic of 'Horns of Dilemma' which is the Minotaur at the center of the magic maze. All actions being taken by the European, Japanese and US empires are driving us into the very problems we all claim, we want fixed. And these will be fixed but not to our liking so we refuse to fix it, none of the G7 nations have the slightest desire to fix anything at all, they want this mess to continue only they want it changed ever so slightly so the US can look strong even as it dies! They want a strong dollar, no matter what! Damn the Chinese and the torpedoes! Full speed ahead into the typhoon!
Citigroup To Turn Nikko Cordial Into 100% Unit Via Stock SwapTOKYO (Nikkei)--U.S. financial giant Citigroup Inc. said Tuesday that it will transform group member brokerage Nikko Cordial Corp. (8603) into a wholly owned subsidiary through a stock swap that will mark Japan's first triangular merger.
Seeing how pretending to be our best buddy is beginning to fall apart, Japan is very gingerly trying to look as if they want to let us into Fortress Japan only this is totally fake. The minute it looks like we will enter, they will slam the door back shut and hammer boards over it. China won't be open while Japan is closed and China is now making moves, like Japan's past moves, and is slowly taking ahold of the European and US industrial/banking systems. They know the Europeans and Americans will object to this but they don't care. Japan will never allow rules changes that will prevent Japan from manipulating world trade so they can stay #2 or become #1, a dream that is fading fast as China roars into the #1 postition eventually.
Readers of economic history know that England struggled to keep its empire after losing WWI to the United States...oh, you didn't know they lost? HAHAHA. They lost. They were so deep in hock to the US after the war, they thought they could escape this by making GERMANY pay for the war and when Germany decided to follow Hitler and not pay and indeed, finish off the British Empire, the British had to surrender a second time to the US in 1941.
Now they tag after us, wagging their fluffy little tail only the US is now dying and for the same reasons the British empire died. From 1921-1929, England tried and tried to make the pound more valuable than it really was worth. The collapse of the world banking system in 1930 is tied to this failed policy. And if everyone thinks the dollar can do what the pound failed to do in 1930: keep the world banking system going on a basis of an imperial currency of value when the empire has gone bankrupt....we are in the middle of watching the world's banking system crash and this is not due to the yuan, it is due to the dollar. Just like in 1930, there was nothing wrong with the dollar but the pound was dead as a dodo as a world currency.
Higher crude oil prices are having a negative impact on the earnings of 50.9 percent of the firms responding to a recent government survey.That feeling is even stronger among small and midsize firms, 61.4 percent of whom say they are hurt by rising oil prices. Nearly half — 47.0 percent — of corporations responding said they are having a hard time reflecting the higher costs in their product prices, the Ministry of Economy, Trade and Industry said Monday.
Japan's depression depends on keeping down prices ruthlessly despite huge inflation in all raw materials Japan imports. This way, Japan can accuse China of keeping the value of the yuan artificially low while keeping their own much lower than the value of the yuan. The yen has declined against the yuan which makes NO SENSE AT ALL. Tradewise, that is! Japan's ability to weaken their currency while running up huge profits and increasing their FOREX reserves to levels never seen in history is the curious mess at the heart of the US trade mess. The reason smaller businesses in Japan are hit hard by oil is that they must eat this cost in order to help keep the game with the US going: pretending there is no inflation in Japan.
This is a conspiracy and the other G7 nations would be wise to sit down with Japan and demand answers to the question as to why they and they, alone, have no inflation. The cruel rule of the Burmese junta is only a somewhat grimmer version of what Japan does.
The fiscal 2006 figure is ¥57.8 billion lower than the previous year, when uncollected premiums hit a record high ¥1.044 trillion, according to the agency's research.The slight improvement reflected the fact that an increasing number of people found jobs and benefited from employee pension programs against the backdrop of the recent economic recovery, the agency said.
It also attributed the drop to its launch of full-fledged forcible collection of premium payments.
The ratio of national pension payments peaked at 85.7 percent in fiscal 1992, but since then it has continued downward, hitting a low of 62.8 percent in fiscal 2002. It has recovered to some extent but remains at a level slightly above 65 percent.
The US is paying for future retirees by putting a piece of paper in a safe in the Treasury that says, 'Uncle Sam owes retirees whatever he can get out of our children's pay checks because every penny of the Social Security excess funds has been used for tax cuts for the rich'. In Japan, they just say, 'HAHAHA, so sorry. No yens. Go away.' So, 86% of Japan had Social Security in 1992 but now barely more than half have it? Oh my god. During the intervening years, Japan has squirreled away almost a trillion dollars? Indeed: Japan has many questions they must answer. And when the other G7 ask them, make certain the big car manufacturers and the other industrialists from MITI are in the room. And I can conduct the interrogations.
After all, with little training, my dad did this in Germany in 1945.
Now to visit the Federal Reserve and take a peek in that empty, echoing vault:
OH MY GOD. I hope the G7 looks at this chart. I wish our own government would look at this chart. What the hell? HAHAHA. Indeed: this is a sign of what? Instability? Massive instability? Like, whoopsie, off the cliffsie we fallsie? Starting with BEFORE 9/11, right on the heels of Bush stealing the White House, after the tax cuts began, suddenly the discount rate is counted upwards very sharply.
Greenspan began to cut Fed rates the minute Bush was sworn into office. Then after this unprecedented and sharp cut, he kept it there. Look at the chart below. It shows clearly that he wanted rates to be very, very low at that point in time.
But look at the chart at the top: suddenly, a pulse of pure fear made the discount rates shoot up. So did Greenspan make the Fed go up? NO! He made it drop to unprecedented levels. The 'spread' as we see above, ceased struggling against the Fed and accepted this amazing, and long-lasting 1% rate. Money flowed in a vast sea into the world's financial systems, courtesy of the Fed's generous and insane and way below the rate of inflation interest rates. In 2004, before the housing boom busted, it busted a year later, the alarmed Fed, seeing obvious inflation in food and fuel joining huge inflation of all other assets like stocks and housing, began to raise rates but not as fast as they dropped rates. So rates went up and up and up but the spread remained level. Then the daily commercial paper spread suddenly took wing. 7/17/7, on a magical day, the magic broke and so did the world's banking systems. And this is all connected and is part of the top story here today about the G7 fruitlessly demanding things get put to rights again via making the dollar stronger and to do this, the US must raise interest rates further, no drop them!
But if the Fed raises rates to make the dollar stronger, we can't buy all the stuff from Europe and Japan which is why they want the yuan to be stronger, I suppose, though that won't help them. I suppose they imagine they will cease exporting to the US and export to China? Talk about crazy dreams.
The Fed is not very forthcoming on analyzing these charts. This one is interesting. I believe the yellow line is basically mortgages on houses in America. If so, note how it takes off right when the Fed begain RAISING interest rates. Even as the housing value rises faltered and began falling at the end of 2005, the creation of mortgages continued upwards. These are the legendary Alt-A and other curious and brutal mortgages that are now going into rapid default.
And they are in fast retreat. The chart shows a complete drop off the cliff. More cliffs! We see them all over the place. Like the Horns of Dilemma. Everywhere, cliffs and horns. This collapse is the same point in time as the sudden little surge that was 'fixed' by the Fed by dropping rates (????). You fix surging rates by dropping the Fed's fund costs to banks....right now, we see a need for banks to accurately price risk being undermined by the Fed deliberately underpricing the cost of risk. And the real risk here is the decline of the value of the dollar vis a vis all other currencies. Which is causing world banking to go into chaos. And of course, the dollar's travels in the last 50 years has been an increasing disaster as we make rates or inflation shoot up and then things crash and we restart them over and over again: the world system, far from gaining greater stability and security, is doing the exact opposite.
Click on this image to enlarge so you can read the numbers better:
I like to play games with these sorts of numbers. In this case, I take the two middle rows of numbers which show the difference between this week and last week compared to the difference from a year ago. In this case, in one week, the reserve credit amount was increased by $6.5 billion. The increase over last year was $34.5 million. Obviously, if it increases at $6.5 a week for a year, this would be an immense increase, year over year. If we increased bank reserves by $6.5 a week for a year, it would be $336 billion for this last year so obviously, this increase is pretty big for one week. By 10X over the previous year.
Next, the repurchase agreements: rose by $8.9 billion in one week. The rise over the course of last year was $22.5 billion. If this rose at the same rate per week as it rose this week, the difference over last year would be $463 billion. This is 21X the size of the previous increase value. So it is even a bigger mouthful, right? A year ago, these repurchases totalled only $33.5 billion, today, they are now at $56 billion. So these repurchases are increasing, thank you, Bernanke.
I really wish the Fed would allow some employee in their basement where they keep their accountants locked up, let them explain their numbers when they are prublished. But in lieu of this, we must go off to the speeches by the top Fed bankers as they struggle to explain things they have no intention of trying to understand, much less, change.
Governor Frederic S. Mishkin
At the Tenth Annual International Banking Conference, Federal Reserve Bank of Chicago, Chicago, Illinois
September 28, 2007Systemic Risk and the International Lender of Last Resort
After the calm of the past several years, the events of this summer are a strong reminder that our increasingly globalized and sophisticated markets are still vulnerable to systemic risk. When we speak of systemic risk, we mean the risk of a sudden, usually unexpected, disruption of information flows in financial markets that prevents them from channeling funds to those who have the most productive profit opportunities. We have seen how systemic risk, when it becomes especially severe, can result in financial crises--the seizing up of financial markets--which can have potentially important economic consequences. We have also seen how governments, in their role as providers of emergency liquidity, can intervene to help put the financial system back on its feet and prevent a financial crisis from spinning out of control.1
In mature industrial economies, domestic central banks have the credibility and the resources to play this role. Around the world, central banks have injected liquidity and signaled that credit would be available to those institutions and markets that need it. At other times, as well, the Federal Reserve has acted successfully to prevent potentially devastating financial seizures: notably, after the stock market crash of October 19, 1987, and after the terrorist attacks of September 11, 2001.
If the Fed considers both of these situations to be success stories, we are doomed. The solutions they applied were to create much worse monsters in the future. The distress of the 1987 stock market collapse was fixed by choosing policies that caused our trade deficit to balloon hugely. It also caused, hold onto those dwarf pointy hats, everyone, a housing bubble! Which popped. Housing values fell from 1991-1995. Oops. He doesn't mention this.
So on 9/11, they did the same thing only this is a total lie! The Fed dropped rates well before 9/11. I wish he consulted with his own charts before making this stupid speech. Now on to the 'credibility' problem: no one believes a thing the Fed says anymore. Even Greenspan, bloated into some genius by the media and politicians because he was so generous with our money machine, he is now viewed with rising skepticism even by the media itself. Governments can only provide 'emergency liquidity' if they make money out of thin air and thus, cause inflation. Then they must be honest and realistically gage inflation by honestly admitting inflation in energy, food and other essentials is climbing. If they lie about that, all else falls apart, too. Including their damn credibility.
Miskin continues to sail onwards, damning all torpedoes:
To limit the moral hazard problem created by their acting as lenders of last resort, governments and institutions must make improved financial-sector supervision and regulation a high priority. The usual elements of a well-functioning prudential regulatory and supervisory system are adequate disclosure and capital requirements, limits on currency mismatch and connected lending, prompt corrective action, careful monitoring of an institution's risk-management procedures, close supervision of financial institutions to enforce compliance with regulations, and sufficient resources and accountability for supervisors. Often, however, strong political forces resist putting these kinds of measures into place. This resistance has been a problem in industrialized countries (it was, for example, an important factor in the U.S. savings and loan debacle of the 1980s),4 but the problem is far worse in many emerging-market countries. The political will to adequately regulate and supervise financial institutions can be weak because powerful special interests have prevented such oversight and because the underlying legal and political framework has often been too frail to counteract the special interests.Another important element of financial regulation is that the owners, if not also the managers, of insolvent institutions should suffer significant losses in the event of insolvency. In emerging-market countries (and sometimes in advanced countries, a prominent example of which is Japan during the 1990s), governments have often provided insolvent institutions with funds to keep them from failing and left the existing owners and managers in charge. Bailing out the owners and managers in this way worsens the moral hazard problem. Knowing that a bailout will occur, they have incentives to take on huge risks because they have so little to lose. Furthermore, in some cases, the owners and managers of these institutions have been able to take the rescue funds for their own personal gain and send them out of the country before the institutions fail.
So.....are the big investment houses, the big speculators, the big banks, the big nations, are they paying the piper? Or are they inflating their merry way out of the mess they made? Moral hazards, meet Peter Pan and the Pirates! The irresponsible Fed had fed these bubbles that fed these speculators and their many servants and hanger-ons and the need to do this is imperative: the only people who pay for all this are the people at the bottom, the ones who gained the least benefits from all this stuff in the first place: the workers, the retirees, everyone small.
And why can't this man name the 'special interests' who prevent oversight? How about looking at DC and who is funding this next election? Why, the same rich people who defy moral hazard and know that their army of bought and paid for million and billionaires in Congress will bail them out! Of course! And indeed, nearly everyone at the center of power in DC is in this class: they are mostly all rich, some, very, very rich like Cheney, for example. Fat and happy from ripping apart the beached US whale. Far from being merely 'too frail to counteract special interests', the government IS special interests!
And reforming this is nearly impossible, the smallest changes cause screams and wails and now the Democrats are reaping the fruits of this system, note how money is flowing to Hillary and not to Ron Paul or Kucinich. She doesn't have to appeal to any small people: the rich who want no moral hazards taken off their pelts, in power!
The Fed again:
As discussed earlier, for certain types of crises in emerging markets an international lender of last resort is necessary. However, the dramatic improvement of the policy and financial environment around the world over the past several years has left many wondering whether such crises are things of the past. For emerging-market economies, the most prominent international institution to act as a lender of last resort has been the International Monetary Fund (IMF). However, demand for IMF lending has dropped more than 80 percent since 2005 as emergency lending has almost ceased and most borrowers have repaid their loans. Such developments have led some to speculate that an international lender of last resort is no longer needed.However, it would be naïve to think that we will never again see situations where an international lender will be indispensable. The past few years have been unusual ones, providing ideal conditions for strong growth in emerging markets. In particular, growth in industrial countries has been solid, borrowing costs have been very low, and commodity prices have been high, not just for fuel but also for many of the primary metals and agricultural products that are produced in developing countries. Many countries have taken advantage of these developments to pay down debt and consolidate fiscal balances.
All is well! HAHAHA. Gads. Why, the problem is in 'emerging markets' and not that huge, dying whale floundering on the beach! The US is still the entity that can make money magically appear even as our debts are now one quarter of all world debts put together! And we are less than 5% of the world's population! And...we are no longer a world manufacturing base. And our debts are rising much faster than anyone else's debts....still. And this fool thinks no one goes to the deadly IMF for loans. Well, DUH. They go to the real bank, the one that has a trade surplus with the world, one that has the world's biggest FOREX reserves: China. The dragon is never mentioned as being the power behind all this. The Fed must pretend all this hinges on them and not on Hu and Wen over There.
The Fed:
A third important challenge, reflecting principle number three for operating as an international lender of last resort, is to bolster the ability to say no to countries and, in cases of insolvency, to facilitate the involvement of governments and the private sector. Several years ago the IMF adopted criteria that countries must meet to receive sizable loans. These criteria included rigorous analysis indicating that a country's financial difficulties reflected a crisis of liquidity rather than of solvency, a high likelihood of a quick return to borrowing from private markets, and a strong probability that the stabilization program would be successful. It is less clear what safeguards regional institutions are adopting to enable them to say no to members when the lending is not justified. Moreover, in countries where reserves are plentiful, it may tempting to lend to insolvent institutions and to avoid the difficult reforms necessary to address the underlying weaknesses.Distinguishing between illiquidity and insolvency, though critical to being an effective lender of last resort, is exceedingly difficult. The difference hinges on many assumptions about future economic conditions, including global and domestic demand, interest rates, commodity prices, exchange rates, and so on, as well as the behavior of market participants, policymakers, and consumers. Moreover the determination is not a static one. Institutions and markets that are initially illiquid can quickly become insolvent without the appropriate funds. The distinction may be even trickier in the case of sovereign insolvency. One could argue that governments have at their disposal an even greater range of possible policy responses to crises than do firms or markets, and so they face a greater range of potential outcomes.
Around the world over the past few weeks, central bankers, market participants, academics, and the media have been wrestling with the question of what it means to be an effective lender of last resort. Appropriately providing liquidity while limiting the risk of moral hazard has always been a challenge. Within their own countries, policymakers worldwide must wrestle with the best way to design institutions and, in times of crisis, support the stability of financial systems, in both the short and long runs. This approach must also be taken internationally. We have been fortunate that global economic conditions have been strong. However, it would be a grave mistake to assume that the world no longer needs a lender of last resort. In addition to promoting vigilance and crisis prevention, we should continue to strengthen our international institutions to enable them to provide liquidity quickly, appropriately, and in a way that encourages reform and good policymaking.
HAHAHA. And who is the damn 'lender of last resort'? And who is the 'leader' and who is going to say 'no' to big whales lying on the beach? Time to learn Mandarin. The ultimate sovereign insolvency is always the fall of an empire. So many fell before us, I would hope we could see how this works, it is dreadfully obvious. The leaders and central bankers 'wrestling' with academics: HAHAHA. I picture sumo wrestlers throwing a bunch of professors around....the question of what it means to be an effective leader of last resort: I do hope they give Hu the podium. And he can explain all of this in Mandarin. Our policies will reform only after we are forced to face reality and will we?
Lord knows, history tells a grim story in this regard.
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well its probably for the best that this crash of the US comes about, hopefully it will end the killing of people in various parts of the world in the name of US freedom and democracy....
Posted by: Greg | October 03, 2007 at 05:24 PM
has anyone ever told you you write like a great mystery writer making the suspense unbearable. As a non academic and a non economist, for me you never resort to jargon so I can understand what is happening. Thanks.
Posted by: hal ieberman | October 03, 2007 at 06:58 PM
Thanks, Hal.
This is a mystery! Believe it or not, I usually am figuring out stuff as I write! When I research something, it is because I often have no idea, what the hell is going on.
Thus, the sense of suspense. And trust me, this is deliberate: the guys doing these things WANT them to be a mystery so we can't stop them.
Posted by: Elaine Meinel Supkis | October 03, 2007 at 08:50 PM
You can't stop them in any case, Elaine. Just brace yourself. :)
Posted by: Good Student | October 04, 2007 at 02:00 AM