What You MIght Have Missed...

Among the many interesting tidbits presented at yesterday's The Big Picture conference (I was there) was a chart by Jim Bianco of Bianco Research, L.L.C., which I posted at Panzner Insights, my new members-only website focused on markets, economics, and geopolitics.

As you can see, central bank balance sheets remain extraordinarily large and are much nearer in scale to what they were in the immediate aftermath of the Lehman Brothers bankruptcy than they were during the early stages of the global financial crisis (or before).

As I noted,

the big question, or course, is when the time comes for the Fed and others of their ilk to sell, who is going to be on the other side?

Regardless, that is just one of the many topics -- most of which can't be seen anywhere else -- that I discussed at Panzner Insights in recent weeks. Here is a brief sampling of others:

• One Risk Indicator Poised to Move?
• For Investors, a Place to Avoid
• Looks Like the End of the Road for Technology Sector Outperformance
• Global Growth vs. Value: More Evidence of the Big Shift
• Podcast: Thoughts on the Wall Street-Main Street Disconnect (As Earnings Season Approaches)
• Swedish Currency Under Growing Pressure

Feel free to have a look around.

Comments

[Chartist Friend from Pittsburgh]

Household Net Worthless - Poverty Here We Come
http://chartistfriendfrompittsburgh.blogspot.com/2012/10/household-net-worthless-poverty-here-we.html

[crime scene]

Questions From a Bailout Eyewitness
But perhaps the most telling anecdote is from early October 2008, when Henry M. Paulson Jr., the Treasury secretary, summoned Ms. Bair to his office. No reason was given for the meeting. When she arrived, Ben S. Bernanke, the Federal Reserve chairman, was already there. Timothy F. Geithner, then the president of the New York Fed, was on the phone.

Handed a piece of paper, Ms. Bair saw that she had been ambushed. It was a script, prepared for her by the Treasury and the Fed, stating that the F.D.I.C. was moving to guarantee all the liabilities in the financial system. Astonishingly, the guarantee would cover all bank depositors and even protect unsecured claims against institutions. In short, the F.D.I.C. was being asked to back “everybody against everything in the $13 trillion banking system,” Ms. Bair writes.

Dumbfounded, she told the men she had to discuss the plan with the F.D.I.C. board. Over a few days, they came up with a better, less costly plan.

If she had gone along, Ms. Bair said in an interview last week, “everyone who held bank debt would have immediately gotten a windfall profit,” as their bonds and other bank securities rose in value on the F.D.I.C. backing. “Of course, I wasn’t going to do that,” she adds, “and we ended up with a program that only guaranteed the renewal of expiring debt, which is where the problem was. And we charged a fee.”

The other disturbing theme in Ms. Bair’s book involves favored treatment given to Citibank and its parent by top regulators. Even as the bank racked up billions in losses on its mortgage and derivatives businesses in 2007 and 2008, Ms. Bair writes, no meaningful supervisory measures were taken against Citi by either the Office of the Comptroller of the Currency or the New York Fed, its main regulators.

“A smaller bank with those types of problems would have been subject to a supervisory order to take immediate corrective action, and it would have been put on the troubled bank list,” Ms. Bair writes. “Instead the O.C.C. and the New York Fed stood by as that sick bank continued to pay major dividends and pretended that it was healthy.”

http://www.nytimes.com/2012/10/14/business/sheila-bairs-big-questions-about-bank-bailouts.html?_r=1

[iPad Application Development]

Absolutely unique and fine piece of information. I've never spent that much time reading before but this is really awesome.

[crime scene]

Romney’s Medicaid shell game

Mitt Romney is lambasting federal aid in his campaign for the presidency, including derisive comments against those who receive government assistance. But he pulled all the stops to pursue federal aid as governor of Massachusetts, even hiring “revenue maximization” contractors to scour federal programs for every possible penny — and using financial schemes to maximize and then divert the aid from his needy constituents.

His strategies are akin to tax schemes using offshore bank accounts — but instead of avoiding federal taxes, seeking to pilfer the federal treasury. The Wall Street Journal labeled such financing mechanisms “Medicaid Money Laundering” and a “swindle.”
Medicaid is a matching grant program. If a state with a 50 percent match rate like Massachusetts spends $50 on qualifying services, the federal government will provide an additional $50 so there is $100 total for Medicaid services. The federal match payment is much higher in some states, such as Mississippi where its almost 75 percent.
Unfortunately, some states concocted budget shell games, often with private consultants, providing an illusion of state spending to claim federal matching funds, when no state spending has occurred. As governor of New Hampshire, Judd Gregg developed such a practice labeled “Mediscam.” Gregg taxed hospitals serving the poor, routed the money into an “uncompensated care fund” which he sent right back to the hospitals, and used the round-trip of money to claim federal matching funds. Then, the swindle gets worse, because he routed the federal Medicaid funds into his general coffers rather than for Medicaid services.
Romney’s schemes were similar to Gregg’s.
In such strategies, health care facilities serving the poor are used to claim federal funds to help the poor. But the health care facilities and the poor may get nothing, as the state diverts the federal aid to general coffers — and revenue maximization contractors reap millions in contingency fees. Romney used such private companies to help carryout his strategies.
http://articles.boston.com/2012-10-12/opinion/34403616_1_federal-aid-revenue-maximization-federal-taxes

[Serrata]

The Self-Destruction of the 1 Percent

IN the early 14th century, Venice was one of the richest cities in Europe. At the heart of its economy was the colleganza, a basic form of joint-stock company created to finance a single trade expedition. The brilliance of the colleganza was that it opened the economy to new entrants, allowing risk-taking entrepreneurs to share in the financial upside with the established businessmen who financed their merchant voyages.
Venice’s elites were the chief beneficiaries. Like all open economies, theirs was turbulent. Today, we think of social mobility as a good thing. But if you are on top, mobility also means competition. In 1315, when the Venetian city-state was at the height of its economic powers, the upper class acted to lock in its privileges, putting a formal stop to social mobility with the publication of the Libro d’Oro, or Book of Gold, an official register of the nobility. If you weren’t on it, you couldn’t join the ruling oligarchy.

The story of Venice’s rise and fall is told by the scholars Daron Acemoglu and James A. Robinson, in their book “Why Nations Fail: The Origins of Power, Prosperity, and Poverty,” as an illustration of their thesis that what separates successful states from failed ones is whether their governing institutions are inclusive or extractive. Extractive states are controlled by ruling elites whose objective is to extract as much wealth as they can from the rest of society. Inclusive states give everyone access to economic opportunity; often, greater inclusiveness creates more prosperity, which creates an incentive for ever greater inclusiveness.

That was the future predicted by Karl Marx, who wrote that capitalism contained the seeds of its own destruction. And it is the danger America faces today, as the 1 percent pulls away from everyone else and pursues an economic, political and social agenda that will increase that gap even further — ultimately destroying the open system that made America rich and allowed its 1 percent to thrive in the first place.
You can see America’s creeping Serrata in the growing social and, especially, educational chasm between those at the top and everyone else. At the bottom and in the middle, American society is fraying, and the children of these struggling families are lagging the rest of the world at school.

http://www.nytimes.com/2012/10/14/opinion/sunday/the-self-destruction-of-the-1-percent.html

[the bigger question]

What type of capitalism do we have today and to what extent does it need to be reformed?

The version of capitalism that is prevalent in the world today is globalized, oligopolistic, crony and blind to its own crisis of legitimacy.

It was given impetus by the likes of Milton Friedman and the ‘Chicago School’ in the 1960s and 1970s. They cherry-picked the ideas of the enlightenment thinker Adam Smith, and with the help of political followers such as Ronald Reagan, Margaret Thatcher and their successors spread their market fundamentalism throughout much of the rest of the world. Sadly however such people focused exclusively on Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations (1776), ignoring his earlier work, The Theory of Moral Sentiments (1759)

As a consequence, a ‘winner takes all’ or ‘feral’ version of capitalism became the norm. In this version of capitalism which the historian Eric Hobsbawm has described as “a pathological degeneration of the Adam Smith line” companies focused so relentlessly on short-term profit maximisation that responsibility and civilised values — including caring for customers, caring for their staff and caring the environment — were jettisoned.

Once this sort of capitalism takes root, a race to the bottom generally ensues. Indeed, the pre-crisis frauds in the banking sector, including the manipulation of Libor and rackets such as payment protection insurance and interest-rate swaps sold to SMEs, suggest that, under this version of the capitalism, banks thought it perfectly acceptable to swindle billions of dollars from their own customers and counterparies.

Central banks then compounded the problem. The US Federal Reserve, European Central Bank and Bank of England further distorted markets, patched up bubbles that should have been allowed to deflate and increased inequalities by printing money, keeping interest rates artificially low and pumping liquidity into the system.

The scope for ‘moral hazard’ and corruption when the government rescues failed banks and ends up owning whole swathes of the banking sector is immense (for example, the ownership of banks gives the government a vested interest in ensuring that their past and indeed current wrongdoing is swept under the carpet, and in generally whitewashing the sector through any number of wilfully blind “reports” and “inquiries”).

In a free market, corrupt and failed institutions would have been allowed to go bust. The people who drove them into the ground would have lost their shirts and perhaps gone to jail. But apart from a couple of scapegoats, they have now been largely exonerated, with many carrying on as directors and members of the “great and the good”.

http://www.ianfraser.org/the-pathological-degeneration-of-adam-smith/