Friday, October 31, 2008
Thursday, October 30, 2008
My financial reform plan is:
1. Repeal the Federal Reserve Act.
2. Criminalize fractional reserve banking.
3. Make the sale of CDOs, CDOs squared, CDSs criminal.
The reestablishment of personal liability for bankers managing institutions which hold federally insured deposits is long overdue. I agree with Jefferson, corporations are dangerous. They can be used to redistribute wealth. And are. That's a fair slice of private-equity and LBO shops returns, i.e., "cutting off the left tail" and leaving it to other creditors. WW advocates adopting International Accounting Standards, 120. I don't and just see than as tools for manipulation. I wonder if WW, wherever he is, feels the plaintiffs' bar has done as much damage to the US taxpayer as say the managements of: Goldman Sachs, Freddie, Fannie, Bear, etc., etc.?
Wednesday, October 29, 2008
If the Feds want to nail someone, they can. If they could convict Martha Stewart for nothing, they can nail say, LB and John Mack (JM). Imagine Wall Street's reaction to LB and JM each getting a 20-year sentence for securities fraud. MG would have a block-long line in front of his office of white-collar criminal defense attorneys waving eight-figure certified checks and begging not to have their clients indicted as they had already made restitution for their wrongs. This is a standard criminal defense tactic to avoid prosecution, "Parallel Civil And Criminal Litigation", LA Lawyer, Vol. 38, No. 9, 36-42 (December, 1990), Nessim, Ronald. The Feds don't need Sarbox for anything. Wire, mail, bank and securities fraud and continuing financial crimes enterprise will do fine.
"Let's see if I get this right. In exchange for their expertise and leadership skills, Wall Street CEOs and managers are paid millions, tens of millions, and in several cases, hundreds of millions in compensation. ... What leadership? What expertise? How could lower-priced leadership be any worse for Wall Street?," Vern Mastel letter to the WSJ, 21 October 2008.
"Retain top talent? What are you talking about?", John Krustins letter to the WSJ, 21 October 2008.
This is laughable. Where will Wall Streeters go? To hedge funds, half of which may fold in the next 24 months? Threats by this "talent" to leave should be greeted with, "Thank God. Now you get no severance pay". Wall Street's average compensation per employee is over six times the rest of New York's private sector, my 18 October 2008 post. Why doesn't competition on Wall Street reduce its compensation to that of the rest of industry? Where is "our" DOJ to prosecute what I conclude is a Wall Street cartel that facilitates this? Hey Mike Garcia, are you looking into this, or are you too busy prosecuting nickel and dime (ugh) crack dealers?
I'm surprised too. Along with the dollar bull market.
Tuesday, October 28, 2008
Monday, October 27, 2008
Sunday, October 26, 2008
"In one frenzied month Treasury Secretary Henry Paulson and [Fed] chairman Ben Bernanke remade Wall Street. Along the way they may also have recast American politics. A month of historic government interventions shows signs of triggering a political version of climate change--unleashing a new era of class fury that could hurt U.S. companies, business leaders, and wealthy investors for years. 'A potential calamity,' predicts Democratic pollster Doug Schoen. 'If the reactions we're seeing hold, we could have real spasmodic anger directed at businesses and corporations.' ... By contrast, the implosion of Wall Street, followed by Paulson's escalating series of multibillion-dollar rescues, has fired up populist sentiments that were already building in American politics. ... White House spokesman Tony Fratto tried valiantly to get his message out to reporters: 'This is a rescue plan for the American economy,' he insisted. Despite the dire warnings of financial calamity from the White House and a few high-profile business leaders, much of Middle America wasn't buying the story that their own livelihoods were linked to the fate of the rescue package. Instead, average workers read the plan as the 'big guys bailing out their friends,' says former House Speaker Newt Gingrich. ... Morning talk-show hosts like Regis and Kelly shook their heads in disgust. Constituents in rural southern Illinois--a Republican district--phoned in their opposition to Congressman John Shimkus in a ratio of 200 to 1. ... Paulson ... banked on public fear of a financial crash; instead they ran into a fear from lawmakers who had to face down the folks back home angry at having to bail out Wall Street's masters of the universe. ... 'When an economy is overleveraged, it strikes me that investors are eventually going to be seeking a much higher return [from bonds and loans],' says Jared Bernstein, an Obama adivsor and senior economist with the left-leaning Economics Policy Institute. ... Even before this populist eruption over the Wall Street rescue, Middle America was souring on the privileged class. There has been a growing sense in the U.S. that a stagnant tide has kept the 80-foot yachts afloat while beaching the family outboard. ... Obama advisor Jacon Furman has calculated that the rise in the income of the top 1% of earners, set against the drop in income by the bottom 80%, is the equivalent of a shift of $885 billion a year. ... Former Arkansas Governor Mike Huckabee ... [said] 'I'm disappointed and disgusted with my own Republican Party as I watch them attempt to strong-arm a bailout of some of America's biggest corporations by asking taxpayers to suck up the staggering results of the hubris, greed, and arrogance of those who sought to make a quick buck by throwing the dice.' ... Gingrich argues that the rise in American populism is not a revolt against business alone but a revolt against all elites, including government and media elites. In his mind this is the age of the populist Andrew Jackson, not the socialist Eugene Debs. ... By this thinking, Wall Street veteran Paulson tocuhed off a populist revolt not only in the substance of what he proposed but also in the style in which he proposed it", Nina Easton at Fortune, 13 October 2008.
Unlike BS, I am not surprised at all. Read my 2 October 2008 post citing Vox Day. Unlike BS, I don't wonder "whose side government is on". It's been obvious for years. BS refers to an "axis"; is it the US answer to the "axis of evil"? Yes, "there is revolution in the air". One can almost smell the cordite. "Nero" Bush fiddles while his Republican constituency is sacrificed "on a cross of paper" to bail out the banks. Henry Paulson (HP), "formerly" of Goldman Sachs (GSG) will "understand the terror" if an American Robespierre appears on Wall Street with a few dozen stout ropes and horses, and HP sees peoples' Justice dispensed. The peasants contempt for the HP regime may soon equal HP's contempt for the peasants.
Saturday, October 25, 2008
"The [Fed] threw open its coffers to strained overseas credit markets, taking further steps to stem the global financial crisis. The U.S. central bank said Monday it would provide unlimited dollars to the European Central Bank, Bank of England and Swiss National Bank, allowing them to relieve pressure on commercial banks across their regions. Dollars have become elusive in recent weeks as short-term money markets around the world deteriorate. ... The U.S. previously had extended $620 billion in currency swaps with foreign central banks, which provide the funds in exchange for collateral from commercial banks", WSJ, 14 October 2008.
"In a financial world gone haywire, market indicators often send mixed signals. ... One gauge of market inflation expectations reflects this new paradigm: The spread between yields on 10-year Treasury inflation-protected securities and the 10-year Treasury note has shrunk to less than one percentage point, the lowest since 1998", Mark Gongloff at the WSJ, 16 October 2008.
I agree with Gitliz who is chief economist of Trend Macrolytics.
Deflation, I just can't see it.
Haywire indeed. Is there anyone who believes inflation will average 1% for the next ten years?
"Talk about your role reversals. In the past few weeks, officials at the [Fed] have discussed the unfolding crisis with at least one central banker from a developing nation who witnessed his own country's financial system implode: Mexico's Guillermo Ortiz. ... The so-called Tequila Crisis, named after Mexico's national drink, is today seen as the first financial crisis of the globalized economy. The U.S. put together a massive credit line that helped Mexico emerge from the crisis and grow prosperous in its wake. ... Nonetheless, many of the lessons of the Tequila Crisis and others like it apply to the U.S. ... 'Do whatever it takes to restore confidence,' Mr. Ortiz said in an interview. 'Once you lose it, it's very difficult to get it back.' ... In nearly all financial crises, the government usually reacts too slowly at first. ... What lasted longer was political bitterness linked to the bailout, which was seen as having helped rich bankers at taxpayers' expense. ... Much like Washington, the Mexican government expected to break even and possibly make some money on the bad loans that it purchased. The reality: The government lost money--lots of it. The bailout's final price tag of about $75 billion was three times what the Mexican government expected", my emphasis, David Luhnow at the WSJ, 13 October 2008.
It's fun to relive your youth. All the US needs to achieve banana republic status is 20-35% annual inflation rates. Be patient. I refer back to my 15 December 2007 post:
Do"whatever it takes". There is no rule of law in such a country. The US really is becoming Mexico.
Friday, October 24, 2008
Thursday, October 23, 2008
"With credit markets in New York in crisis last week, California Gov. Arnold Schwarzenegger sent an extraordinary letter to Treasury Secretary Henry Paulson asking for $7 billion. Although the governor has since withdrawn that request, it testifies to the dire state of his budget. ... Actually, the state's budget woes should give voters pause--especially since high-speed rail is a fantasy that has as much chance of delivering on its promises of creating 450,000 jobs, vanquishing road congestion and lowering greenhouse gases as 'Conan the Barbarian' had of winning the Oscar. The Golden State's finances are a mess. California's general obligation debt has tripled in the past six years and is now almost equal to the state's $145 billion annual budget. ... But there is little reason to believe [high-speed rail] cost or revenue projections. ... To attract riders, California's rail will have to out-compete cars and airplanes by keeping a lid on commute times and fares. ... It seems California is promising to build a train that is faster, cheaper, more efficient and serves more riders than any high-speed train in the world. And all it has to do to pull off this miracle is defy the laws of economics and physics. This is the kind of creative thinking possible only in the land of Hollywood, but odds are that eventually reality will sink in and California will have to abandon its rail just like Texas, Florida and Southern California were previously forced to do with their far less ambitious proposals", Shikha Dalm, at the WSJ, 11 October 2008.
The credit crunch? Or California government wild spending? These idiots want to give 5 million illegal aliens government services, let 'em. The rest of the US should not pay for it. The idiots thought real estate would increase 20% in value yearly forever and found it won't. Tough. Go bankrupt.
"Credit crisis" or no, California would be insolvent.
The California high-speed rail project looks like another boondoggle. Now wouldn't it be nice if the WSJ applied this kind of thinking to the Paulson Plan and wrote an editorial, "Just Say No" as Nancy Reagan used to say.
"A rare inside look at an enforcement case against Bear Stearns Cos. [BS] that was ultimately dropped highlights the sensitivity of the 'revolving door' between government and industry. In one of several scathing reports released in recent weeks, the [SEC's] inspector general said that a senior SEC official closed a long-running case against [BS] amid an 'ongoing personal relationship' with the lawyer representing Bear in the matter. ... While the inspector general 'did not find evidence of a direct connection' between the relationship and the decision to close the investigation, 'even the appearance of a conflict is disturbing and could potentially damage the reputation of the Commission.' The report recommends disciplinary action against [David] Nelson. ... In a statement, the SEC said 'the report does not cite a single instance of improper communication or undue influence.' ... The allegations illustrate the delicate dealings in industries where lawyers and others cycle between roles in government regulation and private practice. Many enforcement lawyers have left the agency for jobs representing clients in SEC cases. ... Still some SEC executives in Miami were 'stunned' at the decision, the report says. Jon Jordan, a Miami branch chief ... said he didn't complain because that 'would do nothing' for him but make his 'life miserable' and 'definitely would not help' his career at the SEC", my emphasis, Michael Siconolfi at the WSJ, 18 October 2008.
"[BS] improperly valued certain assets to avoid taking write-offs in 2007 as the credit crunch was beginning to unfold, according to the [SEC's] inspector general. ... Albert Kyle, a finance professor at the University of Maryland who conducted the review for the inspector general, said it was improper for risk managers to allow [BS] in effect to adopt two valuations for the same asset. ... The SEC's regulatory staff, which was responsible at the time for overseeing the firm's risk management, rejected the report's contentions. ... Charles Mulford, an accounting professor at the Georgia Institute of Technology, reviewed the report and said it 'raises a lot of questions.' Using different valuations for the same asset is 'improper accounting,' he said. 'Whether it rises to the level of fraud is for somebody with jurisdiction to decide'," Kara Scannell at the WSJ, 18 October 2008.
"The FBI is struggling to find enough agents and resources to investigate criminal wrongdoing tied to the country's economic crisis, according to current and former officials. ... According to previously undisclosed internal FBI data, the cutbacks have been particularly severe in staffing for white-collar crimes like mortgage fraud, with a loss of 625 agents, or 36 percent of its 2001 levels", Houston Chronicle, 19 October 2008.
"Serious questions"? Hahahaha! The SEC is a joke. Do lawyers other than NY Biglaw get regular access to senior SEC personnel? The SEC should give Linda Thomsen a new title, director of questionable practices concealment. Mary Jo White, again. She's everywhere. The SEC should adopt a new policy: log every contact made by NY Biglaw and have someone not associated with the SEC, like a prominent member of the plaintiff's bar investigate them. This looks like a job for, no not Superman, but Melvyn Weiss as soon as he's released from prison. Now that would please the Mikado's Lord High Executioner. I conclude SEC enforcement cases are almost invariably subject to political influence. Some relevant prior posts:
Potentially damage? Rigorous enforcement might end one's SEC career. Sounds like the major CPA firms.
Which other firms use Bear's valuation techniques today?
Perhaps the FBI should give up its "Palmer" raids and focus on serious crime.
Wednesday, October 22, 2008
This makes sense. Ensuring the GSG executives are at risk for mismanagement.
Tuesday, October 21, 2008
"The Treasury in going to devalue the US dollar by 30 to 40 percent, or more, from here. Why? Because they have no choice. ... The devaluation will be coated with a minty flavor shell of verbage and G7 misdirection and government programs with lots of letters in the names. ... Remember, its a secret. Don't tell the Chinese, foreign holders of US debt, and especially the US middle class whose life savings are going to be wiped out", Jesse, 8 October 2008, the link: http://jessescrossroadscafe.blogspot.com/2008/10/shhhhhh-here-is-secret-worth.html.
"Various level-headed economic pundits have opined that the $700 billion Bailout cannot possibly succeed. ... And the Bailout approaches $2 trillion now. Except for dedicated pros, it's impossible to keep tabs on its total size anymore. ... The '08 elections are being contested by a man who is so tainted by anti-American poison that, if elected President, he would not pass a Secret Service background check to be his own bodyguard. ... And the economic crisis is a mark-to-market not only of our financial assets, but also of our fictitious weltanschauung. To begin with, an economy based on consumption, borrowing and speculation rather that on production, saving and investment is a greater fool game bound to self-destruct. ... When a man who holds an MBA from Harvard advises his nation to go out and shop on 9/12, something is wrong with Harvard. When the American Dream has morphed from having personal freedom, to owning real estate with no money down, something has gone wrong with American dreaming. ... An overlord of cultural and economic saboteurs is in control. Their Bolshevik predecessors wreaked havoc by exploiting differences between the classes, but the new breed has accomplished the same by exploiting differences between the races. ... An economy cannot be bailed out that allows millions of terminal savages to wreck and terrorize its cities under the banner of "F**k Whitey'. An America that sends its National Guard to bring peace and order to Baghdad and Kosovo rather than Philadelphia and Cleveland cannot be saved from the mark-to-market of history. ... Starting with demographics. Because of all the answers to any question at all that concerns the future of the [US], the most important is Demography is Destiny. In 1965, America's ruling class decided that the problems with the black minority were not enough. This almost-vanilla ice cream needed more Tabasco. A country that was the envy of the world in every material and political area and many cultural ones as well, began the wholesale importation of the Third World onto its shores at the rate of over 1 million per year, not counting illegals, refegees and asylees. So now the ice cream is 1/3 Tabasco, and in two decades it will be 50%. ... One wonders whether the inspiration for this came from the great success stories of the multicultural late-Roman, Russian or Austro-Hungarian Empires. The enthusiams did not abate despite the fate of Yugoslavia and Czechoslovakia, Rwanda, Kashmir and Iraq. ... Wasn't there something in Federalist #9 and #10 aabout the destructive tendency of factions? But to understand that doesn't require the genius of Hamilton or Madison. It takes common sense at the level of a 14-year-old who has not attended an American school in the last 40 years. ... America already spends twice to three times as much on education per student as dozens of countries thaty outrank it in scholastic achievement. American schools are failing because they are full of sub-85-IQ imported children from unassimilable minorities. ... Unless he has been stung by a liberal encephalitis mosquito, anyone who had spent time among the nonwhites in the US or abroad knows that, in its obsession with white racism, the American society of 300 million is enagaged in a collective act of moral masturbation the like of which may have no precedent in history, excepting China's pre-1976 cult of Mao and the EU's cult of Islam. ... The Russians have a despotic leader who does what's best for her, her being Russia. He will be remembered by a grateful people as one of the five greatest sons that nation has ever produced. America has leaders who do what's best for Iraq, Albania and South Korea. Who work for Pakistani democrats, Chinese arms manufacturers, Chechen warlords, Bosnian mullahs or American mullahs. ... A bonfire of a trillion dollars can do nothing for a slumbering slob. But history's mark-to-market to Third World status may, if we are lucky, awaken a sleeping giant", Takuan Seiyo at Gates of Vienna, 14 Ocotober 2008. The link: http://gatesofvienna.blogspot.com/2008/10/real-mark-to-market.html.
LK, a Boston University professor sings my song.
Jesse, I'll give you the benefit of the doubt. I assume you mean 30-40% in the next say 3-5 years. I expect much more over the long term, see my 4 July 2008 post.
Monday, October 20, 2008
"Demonstrators clashed with police while trying to force their way into the Royal Exchange building during a demonstration Friday against the British government's bank bailout. ... About several hundred people, mostly students and Socialist Worker Party activisits, turned out for the late-afternoon protest against the government's $86 billion plan to partly nationalize major banks, while guaranteeing an additional $431 billion of bank loans. 'Whose money" Our money!" chanted the protesters, some of whom carried placards reading 'Why should we pay for their crisis?", Houston Chronicle, 11 October 2008.
Yes, as Lenin said, "War is the cradle of revolution". Lenin also said, "The way to crush the bourgeoise is to grind them between the millstones of taxation and inflation" and "The best way to destroy the capitalist system is to debauch the currency". Comrade Dellinger (CD) sounds like Pat Buchanan. CD has much to learn. He should heed Alexander Kerensky who said, "no enemies to the left". CD, do you not realize Comrades: Paulson, Bernanke and Buffett are amongst our most effective agents of influence? You worry about the working class's temporary discomfort. I say, it's a small price to pay to hasten the revolution. Again CD we look to Lenin's wisdom, "You can't make an omelet without breaking a few eggs", my 10 January 2008 post, http://skepticaltexascpa.blogspot.com/2008/01/with-apologies-to-ayn-rand.html.
Yes, we need a WSA, worker-student alliance. Anyone remember the 1970s? Has Mark Rudd an opportunity here? Leon Trotsky said, "The old principle he who does not work shall not eat, has been replaced with a new one: who does not obey shall not eat". Let's go to New York's Union Square and see if we can find Troskyites debating Stalinists, Leninsts or Maoists about the bailout. Great fun! What does Webb know about socialism anyway? Let's see if we can have Castro weigh in on this. I'm on the SW side in this left-wing intramural spat. CD, while I applaud your enthusiam, I remind you as a true heir of Lenin, that the bailout will bring Communism closer. Do you think our leading socialists like Warren Buffet are unaware of this? They follow Stalin's injunction, "Break eggs? I can help break eggs". Stalin did. about 20 million of them!
Sunday, October 19, 2008
"Saying Iceland was at risk of 'national bankruptcy,' Prime Minister Geir Haarde prepared to give regulators authority to take over the nation's failing banks as a worsening financial crisis all but cut off the island from the global financial system. ... Late Monday, Iceland's parliament was voting on an emergency law that could put the entire banking system under government control. It was expected to pass. 'There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy,' Mr. Haardie said. After the speech, Standard & Poors cut Iceland's foreign-currency sovereign debt rating for a second time in a week. ... Under the bill in Parliament, the government has wide-ranging authority to take over banks, seize control of management and direct asset sales. Mr. Haarde wouldn't say whether the government would use the full powers but said 'it is conceivable that some [banks] will not be able to function without the authorities intervening'," Charles Forelle at the WSJ, 7 October 2008.
"An article at En.rian.ru, a Russian site asks, 'Time for a gold rouble?", which made me laugh in a Disrespectful, Xenophobic Mogambo Way (DXMW), as it looks like the damned Russians are so stupid they can't even spell 'ruble'! Hahaha! My levity was soon abandoned, however as the paper reports 'the decision by the US government to inject $700 billion into the financial system means that the already gigantic annual budget deficit of the American state (previously some $450 billion a year) will now rise by a factor of three. The total state debt of the USA will rise to well over $11 trillion. It is obvious that such a colossal debt can never be repaid. Instead, it will be serviced by more debt in the future', which they attribute to the collapse of the financial system, such as 'the collapse of those markets is only a symptom of a much deeper problem, the basic insolvency of the American state itself.' ... Since I never think of Russians except as humorless bad guys who speak English with terrible accents and who are always out to kill James Bond, it is novel to me that the paper concludes that 'as a major exporter of hydrocarbons, her role in the world economy is actually very important. As the age of the dollar draws to a close, Russia will have to consider selling her oil and gas not in the devalued American currency, but instead in the euro used by most of her customers.' ... SoI thought that was a little strange: but it got spooky when they wrote the line, 'the age of the dollar draws to a close', as my heart withered in fear and I suddenly mistrusted everyone around me, but before I could ask them to explain such a remark, it suddenly made sense when they went on, 'It is surely unnatural for two geographic neighbiors to do such large volumes of business using the currency of a distant and now ailing nation.' Ooops! They're right! we're freaking doomed! ... Somewhat mollified and again ready to give them the benefit of the doubt, they now finally win me over when they conclude, 'The contempt of the Keynesians notwithstanding, it is an undisputable fact that gold does remain the ultimate store of value, which is precisely why the states own so much of it'," my emphasis, Mogambo Guru at http://www.atimes.com/, 8 October 2008.
"Iceland sought to avert the collapse of its financial system Tuesday by reaching out to Russia for an emergency loan, trying to peg its plummeting currency and seizing a second big bank. ... Early Tuesday, the Icelandic central bank announced Russia would lend it Euro 4 billion ($5.4 billion), citing a seemingly unimpeachable source: Russian Prime Minister Vladimir Putin. Hours later, the central bank backpedaled, saying Russia and Iceland were planning to start negotiations on a loan Wednesday or Thursday. ... This week, krona trading had effecively disintegrated", Charles Forelle at the WSJ, 8 October 2008.
"Iceland plunged further into financial turmoil--and muddled into a diplomatic spat with Britain over its handling of the crisis--on Wednesday as the country's third-largest bank went into receivership and the government abandoned attempts to put a floor under its free-falling currency. ... Prime Minster Geir H. Haarde ... added that talks with Russia over the potential of a 4 million [I believe the author means billion] euro ($5.47 billion) loan were scheduled to take place in Moscow on Tueday", Jane Wardell at the Houston Chronicle, 9 October 2008.
"As Iceland nationalized a second big bank and abandoned a brief attempt at pegging its tumbling currency, Britain and the Netherlands sought to protect hundreds of thousands of their savers who have money in frozen Icelandic bank accounts. ... The fallout from the financial meltdown in tiny Iceland underscores the often unpredictable connections the global economy has woven among far-flung people, banks and nations and the damage they can cause. ... Iceland's government has vowed not to default on its soverign debt, but some economists fear it could", Jeanne Whalen and Charles Forelle at the WSJ, 9 October 2008.
"Kristjan Davidsson went to sea as a deckhand at 16. At fisheries college he aspired to be a boat captain. For two decades, he sold fish and fish-processing equipment. Like his father, and pracitcally everyone else in this remote village, he owed his living to the fish his country pulled from the ocean. ... But just a half-dozen years ago, Icelanders discovered that cast fortunes could be made in high finance. ... The banks quickly swelled to a size that dwarfed the economy of some 300,000 Icelanders back home. ... The banks' assets reached Euro 100 billion, about 10 times the country's gross domestic product last year, and their foreign depositors have come to far outnumber the island's poipulation. ... Today, Iceland's swollen banks are ruined. In the space of a few days, practically the entire banking system has been seized by the government. ... The krona has ceased functioning as a currency outside Iceland. ... The U.K. and Netherlands are suing over frozen deposits held by their citizens, while the government is trying to arrange more foreign loans to help stave off national bankruptcy. ... Up until a few days ago, Icelanders thought they could live on banks. ... The krona was strong. That damped exports--fish is the island's biggest--and the trade deficit ballooned, a worrying sign. ... To their surprise, they became some of the wealthiest people on the planet. Many became millionaires, a few billionaires. The standard of living was high and foreign luxuries could be imported cheaply. They bought expensive cars with loans in yen and Swiss Francs with attractively low interest rates, racking up high debts exposed to the vagaries of currency exchange. ... For the banks, growing was easy. They could borrow at low cost from around the globe, then turn around with little oversight lend that money to businesses and entrepreneurs where they wanted--in the U.K., Denmark and the U.S. Over time, the banks assets--largely these loans they made--grew and grew. ... Just printing more money--something the U.S. can do--wouldn't help the banks much, since their foreign debts were largely in foreign currencies. The creation of more Icelandic krona would just puch down the exchange rate. Fearing this, investors began shunning the krona. It tumbled more than 40% against the euro this year. ... 'Overnight, the change of emphasis from banking over solid products, and that is fish and aluminum,' [Gisli Gislason, the director of the Reykjavik port] said. ... A real economy needs products to sell, Mr. [Halldor] Leifson [fisherman] says. Banking is 'paper money. You can't do anything with paper money'," my emphasis, Charles Forelle at the WSJ, 10 October 2008.
"Britain sent a team of negotiators to Iceland to resolve an increasingly bitter dispute over British savers and local governments whose deposits are frozen in failed Icelandic banks. ... 'We will take further action against the Icelandic authorities wherever that is necessary to recover the money,' U.K. Prime Minister Gordon Brown said at a meeting with voters in southern England on Friday. 'This is the responsibility of the Icelandic government. They've got to take responsibility'," WSJ, 11 October 2008.
"When Iceland's banking system collapsed last week, stunned bankers and government officials pointed blame at the freeze in short-term funding markets that has inflicted pain the world over. But Iceland's leaders had long been warned of the potential damage of a liquidity squeeze. And when it struck, authorities who had expressed optimism about the system didn't have the tools to keep it afloat. ... The central bank held low foreign-exchange reserves, leaving it with scant ammunition in a crisis. ... But there were other regulatory failures by the central bank and other authorities in recent years, [Gylfi] Magnusson [an economist at the University of Iceland] says. Among them, he says, reducing reserve requirements for banks and letting them accept giant deposits overseas. 'They gre well beyond what the government could reasonably hope to provide in deposit insurance.' ... [David] Oddison [central bank head] said foreign-exchange reserves weren't the issue. 'People started yelling that we must enlarge the foreign-currency reserves in step with the banks' growth. A totally wrong theory,' he said. 'We should have cut the banking system down'," my emphasis, Charles Forelle at the WSJ, 17 October 2008.
Venezeula's Hugo Chavez (HC) must be smiling at the "emergency" laws. HC is now the world's leader in monetary theory. I propose him for a Nobel Economics Prize. How far behind Iceland is the US?
Right on Mogambo. IA war story time, here's how IA became a "gold bug". If any reader wishes to deride IA as a crank for that reason, go ahead. See if IA cares. In January 1980, gold reached $875. Until then, I was a "good" Milton Friedman monetarist. Based on "inflation" from 1933, when gold was $20.67, I estimated gold's "fair value" was about $350. I saw something. With gold over twice its "fair value", the world's biggest gold holder, the "Treasury-Fed" with 261.5 million ounces didn't sell! Now, almost as a lark, IA rechecked all his assumptions about money, everything I ever learned, with a new assumption, i.e., gold is money and the dollar is a commodity. Many things fit which made no sense before. Even monetarism could be explained by the gold standard. I felt I made a breakthrough like that of relativistic mechanics. Huh? Newtonian mechanics fits within relativistic mechanics as long as you aren't moving near lightspeed. Similarly, monetarism can be explained by the gold standard. IA then remembered his first economics class, 101, the "Samuelson" class. My professor used McConnell's text. I remember reading a section on multipliers. There were balanced budget multipliers (BBM) and tax cut multipliers. The BBM left me stymied. I asked my professor "How did a dollar know if it was a tax increase dollar or a spending increase dollar? It seems a dollar is a dollar?" He had no answer. When I came to the marginal propensity to consume (MPC) I asked, "What if the MPC approached 1 in the limit? Does that mean if I throw a penny into the system we all become infinitely rich"? My professor said the MPC effect only works within the "relevant range". I said, "it sounds like you have no theory. Only ad hocery". If you want Keynes dissected, read almost anything by Henry Hazlitt, 1894-1993.
When times get bad enough, central banks will go anywhere for support. As they say, "Even the devil dances for gold".
I wonder how much political influence Czar Putin can buy for $5.47 billion?