From Panzner Insights: The Out-of-Touch-With-Reality Crowd

Here is a brief commentary from Panzner Insights, my members-only website, which I posted earlier today:

In “The Biggest Myth About the Fed,” David Beckworth, an assistant professor of economics at Western Kentucky University, suggests that the pessimists are wrong to be concerned about what Mr. Bernanke and Co. are up to.

There many myths about Fed policy over the past few years, but the biggest one has to be that the Fed has been monetizing the national debt.  This simply is not true, but it does not stop some folks from making this claim.  For example, at last week’s Cato Monetary Conference we find former Fed officials pounding the Fed-is-monetizing-the-debt drums:

Mr Warsh and Mr Poole (who was filling in for Allan Meltzer) made a sharp distinction between the “legitimate” efforts to fight the crisis and the subsequent easing actions that were, allegedly, unjustified by the economic fundamentals. According to them, the interventions of 2007-2009 were required to ensure that “the markets could clear”, as Mr Warsh put it, while the second round of easing was done to satisfy “political masters” by monetising the debt. In fact, Mr Warsh said that the Fed was being actively unhelpful by “crowding in” Congress’s supposedly poor policy choices.

My first response is how can they can say this with historically-low U.S. treasury yields and muted inflation expectations? Surely, if the Fed were truly monetizing the debt we would be seeing a 1970s-repeat in the bond market, but we are not.  And this is happening, in part, because the Fed is not that big of a treasury purchaser.  Consider the figure below.  It shows the Fed’s stock of treasuries by remaining maturity compared to the total stock of marketable treasuries as of the end of October, 2012.  Though the Fed’s share of treasuries increases by remaining maturity, at most it hits 32% of the total for 10-30 years category. That means that after many months of Operation Twist that roughly 68% of long-term treasuries are still held outside the Fed. Overall, the Fed holds about 15% of marketable treasuries as seen in the “All Years” category.  It is hard to square these numbers with the allegations that the Fed is monetizing the debt.

Leaving aside the questions of whether:

• the Fed’s share of the Treasury market will remain as low as it is now if other investors start heading for the hills;
• the central bank’s current intentions with respect to their securities holdings will remain the same if the economic, financial, political, or social landscape changes for the worse; or,
• we can really know for sure that the debt has been monetized until after the fact;

the notion that current benign market conditions are a reason for optimism sums up just how out of touch with reality most academic economists (and other alleged experts, including journalists-cum-forecasters who parrot this nonsense) are.

By this sort of logic:

• Mid-2005 was the right time to be optimistic on housing
• January-2007 was the right time to be optimistic on the banking sector
• The spring of 2007 was the right time to be optimistic on credit markets
• The fall of 2007 was the right time to be optimistic on global equity markets
• Mid-2008 was the right time to be optimistic on commodities
• This past September was the right time to be optimistic on technology stocks

Of course, we know how those all worked out (hint: not well).

(Note: for those who are interested, this is a taste of what I touch upon in today’s podcast, “Simple Minds.”)

Comments

[Be Concerned]

Michael Hudson: Fiscal cliff was manufactured to shift more of the burden of the crisis onto ordinary people

http://youtu.be/kTxY-oZuxB4

[Out of sight]

Offshore secrets revealed: the shadowy side of a booming industry

A worldwide research effort in collaboration with BBC Panorama and the ICIJ reveals the people behind these anonymous companies

The existence of an extraordinary global network of sham company directors, most of them British, can be revealed.

The UK government claims such abuses were stamped out long ago, but a worldwide joint investigation by the Guardian, the BBC's Panorama and the Washington-based International Consortium of Investigative Journalists (ICIJ) has uncovered a booming offshore industry that leaves the way open for both tax avoidance and the concealment of assets.

More than 21,500 companies have been identified using this group of 28 so-called nominee directors. The nominees play a key role in keeping secret hundreds of thousands of commercial transactions. They do so by selling their names for use on official company documents, using addresses in obscure locations all over the world.

http://www.guardian.co.uk/uk/2012/nov/25/offshore-secrets-revealed-shadowy-side

[Faustian Bargain]

The Faustian Bargain between States and Banks

States and banks have made a deal with the devil. Banks buy the sovereign bonds needed to prop states up in the tacit understanding that the states will bail them out in a pinch. But experts warn that this symbiotic arrangement might be putting the entire financial system at risk.

As European countries have dug themselves deeper and deeper into debt in recent years, there has been a dramatic increase in this dependence. Governments are addicted to borrowed money -- and banks meet this need by purchasing sovereign bonds. As an unspoken reward, the banks expect nothing less than a guarantee of their own survival. Should a bank run the risk of collapse, the state is expected to use taxpayer money to prop it up.

Privileges and Denial

Such returns make great sense for the banks in the short term but present a massive problem in the medium term as they enter more and more risky assets into their ledgers. "It's important for the institutes to diversify their assets," says Hans-Peter Burghof, professor of banking at the University of Hohenheim, in southwestern Germany. Burghof also believes that their massive holdings in sovereign bonds are putting the entire financial sector at risk. "If one wants a stable banking system," he concludes, "one cannot abuse it as a vehicle for state financing."

But that's exactly what governments and oversight agencies in Europe are doing.

http://www.spiegel.de/international/europe/tacit-bond-arrangement-between-governments-and-banks-endangers-system-a-868971.html

[Can't touch this either]

Congress Damns Corzine but Lets Him Off the Hook

Perhaps we should no longer be surprised by the arrogance of Wall Street executives. Still, the level of hubris and bullying displayed by Jon Corzine during his 19-month tenure as chairman and chief executive officer of MF Global Holdings Ltd. (MFGLQ) -- as described in a recent congressional report about the company’s 2011 collapse -- stands out for sheer offensiveness.

The 97-page report prepared by the staff for Republicans on the House Financial Services Committee panel on oversight and investigation pulls no punches when it comes to blaming Corzine for the MF Global disaster, which wiped out thousands of jobs and billions of dollars of customers’ and creditors’ money. “Jon Corzine caused MF Global’s bankruptcy and put customer funds at risk,” the report concludes flatly.

New Division

A month later, though, Corzine had set up a new division at MF Global, the Principal Strategies Group, to make big wagers with the firm’s capital, the very thing he said MF Global would not do. He fired a bunch of the firm’s traders who he thought were not capable of swinging for the fences and brought in a slew of new hires, many from Goldman Sachs, to get the job done. He also had his very own proprietary-trading account at MF Global, even though company policy required that a more senior executive always sign off on personal trading -- an impossibility in his case because he was the most senior executive. (Corzine got around that requirement by creating a subcommittee of the board of directors to oversee his personal trades.)

Tepid Law

The report makes a number of tepid recommendations about how to prevent a recurrence of what Corzine wrought at MF Global. Among them is encouraging Congress to enact a law “to restore investor confidence in the futures markets” that imposes civil liability on the officers and directors who sign a company’s financial statements or “authorize specific transfers from customer segregated accounts for regulatory shortfalls of segregated customer funds.”

Unfortunately, civil penalties have done little to deter bad behavior on Wall Street. The report lamely sidesteps the issue of criminal liability in the MF Global debacle, and the New York Times reported that “federal investigators do not expect to file criminal charges against top executives.”

To anyone who has read the House report, this is a head- scratcher.

http://www.bloomberg.com/news/2012-11-25/congress-damns-corzine-but-lets-him-off-the-hook.html

[Paint a picture]

The 0.1% Circles the Wagons: Buffett Pumps for Dimon as Treasury Secretary

Well, given that our current Treasury secretary was forgiven for being a tax cheat (Turbo Timmy never did settle up for his underpaid taxes that were beyond the IRS statute of limitations), there is a certain logic in upping the ante with his replacement. Having a Treasury secretary who is a slam-dunk case for criminal Sarbanes-Oxley violations (see here and here) as well as running a bank where the auditors signaled the worst level of accounting failure short of signaling “going concern” worries is par for the course for the ever-risinng level of corruption among what passes for our elites.

So what is Buffett’s angle in recommending Dimon? Is it simply that he’s the least tainted looking bank exec around (well, least tainted only if you put on super thick rose colored glasses?). Wells Fargo, a long-standing Buffett investment, is piling on mortgage exposures, even more so that the other major player in the residential mortgage space, JP Morgan. Dimon has such a monster ego if he were in the Treasury, he’d make sure to protect JPM from any “unforeseen” events. And while JPM remains too complex and international to fail, Wells a largely domestic bank could in theory be resolved (although its size makes that a stretch; Continental Illinois was taken over in 1984 and was under government operation for a full seven years). Of course, the idea that these banks would ever get in trouble again is dismissed by Dimon and his peers as ridiculous; they even deny they were in trouble in 2008.

Read more at http://www.nakedcapitalism.com/2012/11/the-0-1-circles-the-wagons-buffett-pumps-for-dimon-as-treasury-secretary.html#JJcROJcVZfCTqiLP.99

[automatic stay]

Whalen: Deutsche Bank’s Absurd Claims About Banks

A gentleman named Jan Schildbach of Deutsche Bank (DB) has published a research report “Universal banks: Optimal for clients and financial stability; Why it would be wrong to split them up.” This report is remarkable for many reasons, but not because it makes a convincing investment case for mega banks. Rather, it proves that anybody can make a case for any proposition so long as one carefully avoids touching any inconvenient facts.
But, again, this is completely wrong. Not only do large universal banks have lower nominal and risk-adjusted returns than smaller banks, but the periodic need to be bailed out by government renders the largest banks a nightmare for investors and the public. In the case of C and JPM, for example, these institutions require massive subsidies from the public that the DB analyst does not even mention in his report. Even in nominal terms, banks such as C and JPM have been consistent value destroyers.
Or let’s look at the market for OTC derivatives, another market that is very important for DB, JPM and C. In this market, banks are allowed to continue trading even when a obligor defaults. In the US, the TBTF banks are exempt from the automatic stay in bankruptcy when it comes to OTC derivatives. This crucial exemption is worth tens of billions of dollars per year and represents a considerable subsidy from public and private investors to the big banks. Yet somehow the DB analyst misses this point entirely in his analysis. This is hardly a surprise since DB is one of the largest players in OTC derivatives in the world.

http://www.ritholtz.com/blog/2012/11/whalen-deutsche-banks-absurd-claim-about-banks/

[Debt free]

Bankers, Bradburys And The Carnage On The Western Front

Justin Walker tells the British Constitution Group annual conference on the 24th November 2012 of a little known historical fact which will collapse even further the reputation of the City of London.

http://youtu.be/Cb4dc1JZzgs

[Students meet hard knocks]

The Scariest Chart Of The Quarter: Student Debt Bubble Officially Pops As 90+ Day Delinquency Rate Goes Parabolic

What also shouldn't be a surprise, at least to our readers who read about it here first, but what will stun the general public are the two charts below, the first of which shows the amount of 90+ day student loan delinquencies, and the second shows the amount of newly delinquent 30+ day student loan balances. The charts speak for themselves.

http://www.zerohedge.com/news/2012-11-27/scariest-chart-quarter-student-debt-bubble-officially-pops-90-day-delinquency-rate-g

[Think fubar]

Tuesday, November 27, 2012

The Financial System: FUBAR by Goldman Sachs and Others

Let me get this straight: there is $67 trillion floating around in the black hole called The Shadow Banking System. Only banks deal there, not ordinary citizens. The $67 trillion are not normal assets but are loans or borrowings amongst the banks of the world. In other words, the $67 trillion is DEBT owed from one bank to another. That is why the financial system has been royally screwed. There are not enough people in the world to pay off that debt and there is not enough public property to privatize to pay off that debt. Nevertheless, austerity is being imposed for just such a purpose.

Now the banks are pretending that the citizens of the world or their governments owe this money to them. What a scam the banks have pulled off! How long are the central bankers, the treasury officials and the finance ministers going to play this charade for us? Is it to play out until we all are slaves to the banks?

There are no banking executives in jail for fraud because there are not enough jail cells to hold them all.

http://www.goldmansachs666.com/2012/11/normal-0-false-false-false-en-ca-x-none.html

[Tom]

Beyond the financial instability, we have the FACT that the IPCC documents are completely useless in that they mask, hide or lessen the catastrophic consequences we are beginning to experience in the REAL world. Sea levels are rising about 60% times faster than they predict, for example, and none of the models used even mention, let alone contain, the (5) positive feedback loops that have already been triggered by CO2 emissions having warmed the planet sufficiently to kick them into exponential growth - like methane release, for one. These feedbacks will make the situation considerably worse in a far shorter time period than their models suggest.

http://thinkprogress.org/climate/2012/11/28/1249391/study-sea-levels-rising-60-faster-than-projected-planet-keeps-warming-as-expected/

All the money in the world won't save us from what's coming - that we caused by living the way we do (based on fossil fuel energy). No prepping is going to help anyone survive the "new normal" in the years directly ahead.

[Tom]

Listen to this recent talk by Guy McPherson to get the details:

http://guymcpherson.com/2012/11/livestreamed-tonight/

[Forced Fed]

Gold: The Solution To The Banking Crisis?

One of the more relevant aspects of Basel III for our portfolios is its treatment of gold as an asset class. Documents posted by the Bank of International Settlements (which houses the Basel Committee) and the United States FDIC have both referenced gold as a “zero percent risk-weighted item” in their proposed frameworks, which has launched spirited rumours within the gold community that Basel III may define gold as a “Tier 1” asset, along with cash and AAA-government securities. We have discovered in delving further that gold’s treatment in Basel III is far more complicated than the rumours suggest, and is still, for all intents and purposes, very much undecided. Without burdening our readers with the turgid details, it turns out that the reference to gold as a “zero-percent risk-weighted item” only relates to its treatment in specific Basel III regulation related to the liquidity of bank assets vs. its liabilities. (For a more comprehensive explanation of Basel III’s treatment of gold, please see the Appendix). But what the Basel III proposals do confirm is the regulators’ desire for banks to improve their liquidity position by holding a larger amount of “high-quality”, liquid assets in order to improve their overall solvency in the event of another crisis.

Herein lies the problem, however: the Basel III regulators have stubbornly held to the view that AAA-government securities constitute the bulk of those high quality assets, even as the rest of the financial world increasingly realizes they are anything but that. As banks move forward in their Basel III compliance efforts, they will be forced to buy ever-increasing amounts of AAA-rated government bonds to meet post Basel III-compliant liquidity and capital ratios. As we discussed in our August newsletter entitled, “NIRP: The Financial System’s Death Knell”, the problem with all this regulation-induced buying is that it ultimately pushes government bond yields into negative territory - as banks buy more and more of them not because they want to but because they have to in order to meet the new regulations. Although we have no doubt in the ability of governments’ issue more and more debt to satiate that demand, the captive purchases by the world’s largest banks may turn out to be surprisingly high. Add to this the additional demand for bonds from governments themselves through various Quantitative Easing programs… AND the new Dodd Frank rules, which will require more government bonds to be held on top of what’s required under Basel III, and we may soon have a situation where government bond yields are so low that they simply make no sense to hold at all. This is where gold comes into play.

http://www.zerohedge.com/news/2012-11-29/gold-solution-banking-crisis

[utterly sickening]

Kroft: Why Have No Banking Executives Been Prosecuted?

Video is a web-exclusive and was not broadcast on 60 Minutes.

Steve Kroft gives up hope.

At the 5:18 mark, Kroft's epitaph is utterly sickening in its hopelessness:

"I think this is the last story I’ll do about nobody being held accountable because I really have sort of given up. I don’t think that the federal government—either the S.E.C. or the Justice Department—are going to believe in bringing cases against individuals. I just don’t think that they’re going to."

(4) Tell us exactly what evidence you'd need to see in order to prosecute everyone at MF Global between Jon Corzine and the person who authorized the illegal transfer of $1.6 billion in customer funds? What additional evidence--if you can even think of any--do you need to bring Corzine up on a violation of Sarbannes-Oxley?

http://dailybail.com/home/kroft-why-have-no-banking-executives-been-prosecuted.html

[and you wander why you're falling behind?]

November 28, 2012

How Wall Street "Privatized" Money Creation
Shadow Banking

Shadow banking may have “come under increasing scrutiny”, but not a damn thing has been done to fix the problems. The banks and their lobbyists have beaten back all the sensible reforms that would have made the system safer. Instead, we’re back at Square 1, where credit is expanding in leaps and bounds by–what Pimco’s Paul McCulley called–”a whole alphabet soup of levered up non-bank investment conduits, vehicles and structures”. What we are seeing, in essence, is the privatizing of money creation. Privately-owned financial institutions of every stripe are increasing the amount of credit in the system even though the underlying collateral they’re using may be dodgy and even though they may not have sufficient capital to honor claims if there’s a run on the system.

Let’s explain: When a bank issues a mortgage, it is required to hold a certain amount of capital against the loan in case of default. But if the bank securitizes the mortgage, that is, it chops the mortgage up into tranches, pools it with other mortgages, and sells it as a bond (mortgage backed security), then the bank is no longer required to hold capital against the asset. In other words, the bank has created money (credit) out of thin air. This is the ultimate goal of banking, to maximize profits off zilch capital.

So how is this different than counterfeiting?

There’s no difference at all. The banks are creating “near money” or what Marx called “fictitious capital” without sufficient resources, without supervision, and without any regard for the damage they may inflict on the real economy when their ponzi-scam blows up. What matters is profits, everything else is secondary.

http://www.counterpunch.org/2012/11/28/shadow-banking/