Posts Tagged ‘timothy geithner’

European Bank Stress Tests Are Tragic-Comedic Farce

July 25th, 2010 Comments off

When  the Obama Administration assumed office in early January 2009, the President’s chosen Secretary of the Treasury, Timothy Geithner, was already on record as estimating that the United States banking sector was in such dire straits resulting from the global financial and economic crisis triggered by the collapse of leading investment banks on Wall Street, it would require $2 trillion in government bailouts to repair the damage. However, once in power, President Obama and Secretary Geithner were reluctant to ask American taxpayers for another handout for Wall Street after the highly unpopular $700 billion TARP bailout. Their response was to rig a series of so-called banking stress tests,  which were completed in the spring of 2009. Only months after the near implosion of the global financial system, Geithner’s stress tests supposedly showed that the U.S. banks were in such excellent shape, only a handful required a measly $75 billion in recapitalization, a sum that could be easily raised through private investors. Never mind that Geithner’s stress tests  incorporated “worst case” unemployment rates that were already eclipsed by the summer of 2009 and other less-than-rigid assumptions. The market seemed to be charmed by Geithner’s charade, attested to by rising equity values of financial firms. Now the Europeans hope they can pull off the same performance.

With much fanfare, the Committee of European Banking Supervisors has announced the results of their own engineered bank stress tests, involving 91 banking institutions in 20 European countries. The architects of this banking Eurofest knew they could not show that all 91 had “passed” the stress tests, as this would simply not be credible even to the most gullible. For that reason, seven banks were selected as sacrificial lambs, and revealed as having failed the stress test, including five relatively minor Spanish banks, as well as the much larger state-owned German property and municipal funding specialist, Hypo Real Estate. This latter financial institution was so heavily weighted with toxic real estate assets, providing it with a passing grade would clearly have given the game away. However, despite the not unclever manipulation engaged in by the Committee of European Banking Supervisors, a growing number of observers and investors have begun to see through this farcical exercise.

Consider this; how valid can a stress test of European banks saturated with government bonds and other long-term public debt instruments really be if the supposed “worst case scenario” envisions no possibility of sovereign debt default in Europe? Only months after Greece was on the verge of public debt default without a massive Eurozone financial bailout, in turn funded by European countries that are themselves becoming increasingly mired in a profound sovereign debt crisis? Neither did the tests consider the possibility of a real estate or commodities crash, despite warnings that, among other dire possibilities, a global commercial real estate crash is increasingly likely.

The authors of this banking stress test would have one believe that not a single UK bank is in danger from worsening economic developments, despite a warning issued by analysts at the Royal Bank of Scotland to senior British policymakers in January 2009, entitled “Living on a Prayer,” which stated that almost the entire banking sector of the United Kingdom was “ technically insolvent.”

In February 2009, the European Union’s own executive branch, the European Commission, issued a confidential report, subsequently leaked to the British newspaper, The Daily Telegraph, which warned that European banks collectively held as much as 18.6 trillion euros in toxic assets. In the past 18 months we have witnessed a massive expansion of public debt  across Europe to fund economic stimulus programs, which has produced at best anaemic or stagnant growth figures, at the price of catastrophic levels of sovereign debt, prompting these same countries to now reverse fiscal policy and revert to budget trimming austerity measures. The likely outcome is clear; a double-dip recession in Europe, in conjunction with a lack of financial capacity by European taxpayers to again bail out their banking system to the same profligate degree that was undertaken after the collapse of Lehman Brothers.

As with Timothy Geithner, the architects of the European banking stress tests hope that  investors and the general public will believe their farce, based on totally unrealistic and overly-optimistic scenarios. In the case of Europe, the fervent desire is that the banks which are rightfully worried about counterparty risk will jettison their well-founded anxieties, and resume interbank-lending and credit flows at pre-crisis levels. However, as the American experience reveals, a banking stress test based on public relations requirements rather than realistic financial and economic modeling may boost the stock price of major banks, justifying  massive bonus payments to banking executives. However, as a solution for the continuing credit crunch and economic turmoil, it is no more than a tragic-comedic farce designed by committee.

U.S. Treasury Strikes On Christmas Eve: Unlimited Taxpayer Support For Fannie Mae And Freddie Mac

December 30th, 2009 Comments off

It was the night before Christmas, when normally nothing newsworthy stirs. Like a thief in the night, that was the moment selected with precision by U.S. Treasury Secretary Timothy Geithner to stealthily announce a radical policy shift regarding the two bankrupt Government Sponsored Entities (GSEs), Fannie Mae and Freddie Mac. When both of these mortgage giants teetered on the edge of  insolvency in September 2008, they were placed under the largesse of the federal government and the overburdened American taxpayer. In the early days of the Obama administration, $400 billion was established as the maximum guarantee the Treasury Department would provide to these two GSEs to ensure their survival. It was highly unlikely that anything close to $400 billion would be the ultimate cost to the American taxpayer, so assured the Treasury Department. But amid the reassuring rhetoric, something very peculiar is obviously being hatched by Geithner and Company.

On Christmas Eve, one of the quietest news days of the year, the U.S Treasury announced that in lieu of the previous $400 billion backstop, the U.S. taxpayers will now provide unlimited financial support to ensure the survival and liquidity of Fannie Mae and Freddie Mac for the next 3 years. Apparently, by slipping in this policy change near year end, no new legislation is required from Congress. Which is just as well, since it is unlikely that such an unfathomable level of bailout support would be approved by Congress during a mid-term election year.

The real question is this: if, as Treasury originally claimed, a $400 billion guarantee was more than sufficient for these two GSEs, why sneak in a new taxpayer commitment, with no limits?  Speculation is rife, and being fed by the total lack of transparency on the part of Timothy Geithner and his minions. However, this much is clear: Fannie Mae and Freddie Mac collectively underwrite or guarantee half of all the residential mortgages in the United States. If the U.S. Treasury is privy to data on emerging trends on mortgage defaults and residential real estate deflation, there must be something Geithner and his team are cognizant of that they are too frightened to share with the American public, and are spooked to a level that requires such a surreal form of taxpayer guarantee.

With more than $5 trillion of mortgages sitting on the balance sheets of these two GSEs, a new wave of bad real estate news could conceivably  witness the American public assume responsibility for another trillion dollars in bad debts, without a single vote by Congress. There is much more to this story than meets the eye, and the policymakers at U.S. Treasury desperately want to keep the full picture as to why they enacted such a massive overdose of moral hazard in the dark of night under wraps. But a Christmas Eve news dump only obfuscates reality, as opposed to making it disappear. Red lights and shrill klaxons must be going off at Treasury. As with much else involving the global economic and financial crisis, however, the public will be the last to be enlightened when the  rationale underlying the decision to guarantee all the financial obligations  of Fannie Mae and Freddie Mac to infinity can no longer be suppressed.





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Banking on Failure: FDIC Shutting Down Insolvent Banks at a Record Pace

August 18th, 2009 Comments off

In the wake of last fall’s  $700 billion taxpayer funded bailout of the financial and banking sector, the so-called TARP program, the decision makers in Washington have been engaging in a fiscal masquerade. The objective: convince the public that America’s banks, with balance sheets choking on toxic assets, are actually well-capitalized and secure. This, despite clear evidence that at least $2 trillion in additional funding would be needed to clean up the nation’s problem banks. To convince U.S. citizens and global investors that all is well with the American banking system, Treasury Secretary Timothy Geithner concocted a misnamed “stress tests” to demonstrate the fiscal health of the country’s banks. Not surprisingly, the major banks “passed” the Geithner test, for the most part with flying colors. My readers will recall that I labelled the Geithner stress test a fraudulent exercise in deception. Now, it is reality that is casting its impartial verdict.

The Federal Deposit Insurance Corporation (FDIC),  over the past few days , closed several banks, including Alabama based Colonial Bank. This institution, with $25 billion in assets, represents the 6th largest bank failure in American history. So far, 2009 has witnessed 77 bank failures in the United States. In all of 2008, the year that the banking crisis exploded, 35 banks were shut down by the FDIC, and only 3 in 2007.

With the number of bank failures accelerating, and running far ahead of last year’s pace, it is preposterous to conclude that the U.S. banking sector is well capitalized and strong enough to endure a severe economic recession. Yet, that is exactly the fantasy world the key economic policymakers in the Obama. administration  are beckoning us to embrace.

This problem of cognitive dissonance is not a uniquely American one, however. In Western Europe there is a numbing resistance to understating how vulnerable that region’s banks are to the disastrous and worsening economic situation in Eastern Europe. As with America and the UK, former Soviet bloc countries have suffered a severe contraction in home prices. In addition, many East European homebuyers obtained their mortgages from banks located in Germany, Italy, Austria and other parts of Western Europe. The loans were structured in euros, and now virtually all the national currencies in Eastern Europe have severely declined in value in relation to the euro. The results is a wave of mortgage defaults, which are eroding balance sheets throughout the European banking system.

Action speaks louder than words. Economic realities in the United States, Eurozone and UK, and the multiplication of bank failures in America, point to the futility of trying to pretend a problem does not exist, then converting that ignorance into a solution. Just as the political decision makers lost control over the financial system in 2008, they seem headed down the same path now, having failed to learn from their recent mistakes, which have already inflicted such a fearful cost on the global economy.


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How To Shrink the Unemployment Rate Through More Job Losses

August 9th, 2009 Comments off

When President Obama trumpeted the first “decline” in the national unemployment rate in more than a year, I thought for a moment that the 44th U.S. president was residing in an alternative universe. How can you lose a quarter of a million jobs in a month, and simultaneously witness the unemployment rate actually post a  decline from 9.5% to “only” 9.4%? However, on reflection, it is I who reside in an  alternative universe. For if you decide to remove a whole chunk of discouraged workers, those whose long-term unemployment is deemed more or less permanent, from the official workforce count, then you can  absolutely post a reduction in the national unemployment rate while still shredding jobs, courtesy of the statistical wizards at the Department of Labor. Easy as toast.

So it is I who must apologize to President  Barack Obama for having committed the heresy of screwing up with logic my understanding of official statistics on employment in America . Of course, it makes perfect sense. Now, let’s just go ahead and save a whole lot of stimulus money by deducting everybody who is unemployed for more than a month from the official national workforce number.

If this pearl of economic policymaking is indeed valid, why not go the next step, and completely solve the problem of our national debt. Even with rising yearly deficits, we can actually reduce the total national debt by just removing a whole category of IOUs that no one seems to be worrying about at the moment. That way, Treasury Secretary Timothy Geithner can withdraw his request before Congress to increase the national debt ceiling to above $12 trillion, or nearly triple the total it was back in 2000. A brilliant solution to the nation’s fiscal imbalance, so it would appear.

But wait a moment. It seems we already are doing that. According to David M. Walker, who served as the Comptroller-General of the United States from 1998 to 2008, if the U.S. were following general accounting rules that are applicable to businesses in the private sector, it would be posting a far higher figure for the national debt. How much higher? According to Walker, there are more than $50 trillion in unfunded liabilities the U.S. government has incurred regarding future Medicare and Social Security obligations.


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Fortunately, a high official with the Federal Reserve disagrees with David Walker. Unfortunately, that official, Richard W. Fisher, President of the Dallas Federal Reserve, revealed in a speech delivered in May that the actual national debt of the United States, accurately tabulating all the nation’s obligations, is a cool $100 trillion.

Now maybe all this statistical manipulation being conducted by our government officials is meant to serve some useful purpose, such as to artificially boost investor confidence and create a new stock market bubble. Perhaps Obama and his Wall Street coterie of advisors really do know what they are doing, and sceptics such as myself are just panicky doomsayers. However, I really do hope America’s foreign creditors are blissfully ignorant as to the true state of the U.S. economy and its fiscal reality. Heaven help us if they stop believing Washington’s math.

The U.S. is on a Fast Track to Bankruptcy

June 6th, 2009 Comments off

In less than a year we have seen the bankruptcy of financial and industrial behemoths once thought impregnable: Lehman Brothers, Chrysler and GM. Selectively employing the mantra “too big to fail” with companies such as AIG and Citigroup, the U.S. government has sought to reassure the American public that it is acceptable for other large corporations to endure the tribulations of Chapter 11 reorganization; that bankruptcy is actually a healthy business process that will restore profitability to large companies overwhelmed by debt and the consequences of the Global Economic Crisis. Yet, amid this Orwellian business vocabulary, the most essential question is perhaps being missed. Will the United States government be forced into bankruptcy?

If your reaction is one of incredulity, with the temptation to write off such a dire mega-financial event as a fringe-group fantasy, think again. Witness what some otherwise boring yet highly respected accountants and bankers have been saying recently about the exploding indebtedness of the United States.

David M. Walker served as the Comptroller-General of the United States from 1998 to 2008. In his capacity as the chief congressional financial watchdog, Walker warned long before the onset of the current financial and economic crisis that the nation faced more than $50 trillion in unfunded obligations due to Medicare and Social Security. Rather than allocating revenue to ensure these future liabilities were fully funded, Congress and the federal government have done exactly the opposite. Not only has no funding provision been made for these two major entitlement programs; while Medicare and Social Security have been in surplus their revenue stream has been used to artificially deflate the actual government deficit. Unfortunately, this shell game will come to an end in only a few years, when both programs enter into extreme and growing deficits of their own. And the figure of $50 trillion in unfunded liabilities, separate and apart from the U.S. government’s official national debt of more than $11 trillion, is already outdated by a cascading avalanche of dire financial news.

Richard W. Fisher, President of the Dallas Federal Reserve, delivered a speech to the Commonwealth Club of California back in May, and revealed that the authentic national debt of the United States, using generally accepted accounting principals, was nearly $100 trillion! Putting this surreal as well as apocalyptic number in perspective, Fisher said, “With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four, over 25 times the average household’s income.”

It is in the context of an already fragile fiscal architecture that the Obama administration and Congress are unleashing a torrent of unprecedented debt. The rationale is that this must be done, or the economy will crater. For the sake of short-term moderation of the worst ravages of the Global Economic Crisis, an already disastrous fiscal posture is being stampeded towards unmitigated catastrophe. Yet, the political leadership still claims it is committed to fiscal responsibility and that once the economy recovers and strong economic growth is restored, the deficit will shrink as a proportion of the nation’s GDP. Does anyone still believe these political promises of a new era of fiscal discipline that surely awaits us just around the bend?

There is mounting evidence that America’s primary overseas creditors are no longer easily fooled. Their collective skepticism is mounting, as Treasury Secretary Timothy Geithner discovered recently on his beggar’s expedition to China. The policymakers in Beijing are shifting their sovereign fund investments from U.S. Treasuries to commodities as a clear indication of their growing concern about the staggering level of indebtedness of the United States. And they are not the only major global financial actors to manifest a growing level of unease at Uncle Sam’s ballooning debt.

The Co-Chief Investment Officer at Pacific Investment Management Company, otherwise known as Pimco, is Bill Gross. He is one of the most important individuals on the planet at this time of global crisis, as Pimco manages the world’s largest bond fund. It is through the bond market that sovereigns finance their national debt. This is what he had to say about the credibility of the Washington political establishment on its claimed intent to restore fiscal sanity:


“While policymakers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery’s corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington’s hat.”

Undoubtedly, Mr. Gross is correct. There is no rabbit to pull out of a magician’s hat. Which leaves just three alternatives for resolving America’s fiscal imbalance: 1. Raise taxes exorbitantly and/or drastically cut government expenditures 2.Unleash hyperinflation to reduce the real value of the national debt-and destroy the value of the currency in the process 3.Default on the national debt.

Defaulting on the national debt, which in effect is a declaration of U.S. insolvency, would have tectonic ramifications for the entire global system. Financial and economic power, international relations and strategic alliances would be altered so radically, the world that would ultimately emerge would be vastly different from the one we know today. While its exact composition cannot be predicted, it is a rule of history that great powers that go bankrupt lose their great power status.

Do any members of the Washington political establishment actually reflect on the long-term implications of the untenable fiscal policies they have authorized with their votes? If there are, they are sadly too few in numbers.


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Will the Chinese Economy Save the World?

June 3rd, 2009 Comments off
Like a pilgrim seeking the altar of St. Jude, patron saint of hopeless causes, U.S. Treasury Secretary Timothy Geithner journeyed to China in search of salvation. It is not spiritual healing, however, that Geithner seeks but the most material form of assistance; sovereign loans to finance the growing debt of the United States, in the form of purchases of Treasuries.
Geithner symbolizes the collective desperation of elites throughout the crippled global economy, who look to China as the only and best hope for solving the global financial and economic crisis. And by focusing on specific economic data in a highly selective manner, analysts and economists are able to find glimmers of hope to salivate over. While the global economy overall will undergo collective contraction for the first time since World War II, the Chinese economy is expected to grow by at least 6% in 2009. Recent trends reveal some areas of increase in domestic consumption, such as purchases of automobiles. There has been in several instances an increase in manufacturing output, contributing to a rise in certain commodity prices as China’s appetite for raw materials grows. However, look beyond the spin-doctors and a somewhat different economic picture emerges.
Where domestic consumption has increased, this has been in large part due to tax incentives being offered by the authorities in Beijing to stimulate demand. This is a short-term fix, and not indicative of a sustained trend. More importantly, China must maintain a very high rate of annual growth in order to keep employment levels steady. A growth rate in the range of 6%, a figure that would be considered miraculous in much of the rest of the world, is insufficient to prevent a rise in unemployment. Since the onset of the Global Economic Crisis, more than 25 million migrant workers have lost their jobs, as factories by the thousands that depended on export markets are shuttered.
Another question mark is the state of China’s banks. Largely still controlled by the state, there has been a process of liberalization underway, and thus far the Chinese banking system appears to have weathered the economic storm better than most. However, only a few years prior to the onset of the global financial and economic crisis, China’s banks were rife with corruption and mismanagement, leading to a vast accumulation of toxic assets on their balance sheets. In 2002 it was estimated that Chinese banks carried a half trillion dollars in non-performing loans; it is not clear what that number is currently, or how vulnerable Chinese banks are to their own nation’s potential real estate bubble.

Much of the world is betting on the success of China’s own stimulus spending program, which equals nearly $600 billion. However, despite the impressive aggregate size of the Chinese economy, per capita income still ranks very low, standing at 107 out of 179 nations, or about $2,000. The capacity of the economy to compensate for demand destruction in its principal export markets through comparable increases in domestic consumption does not appear to be suffcient enough to create a basis to hang the global economy on. What is more likely is that China will spend what it can, borrowing from its sovereign wealth funds and reserves, to inhibit the growth of unemployment so as to maintain social cohesion.

As for Geithner’s agenda, his number one priority remains China continuing in its role as America’s principal banker. Like large debtors everywhere, the U.S. Treasury Secretary and Obama administration actually believe they have China over a barrel. The U.S. was just a larger version of AIG or Citigroup in their framework; too big to fail, as China’s major export market. For a time, it appeared that China’s political and economic leadership reluctantly agreed. Recall the words of Luo Ping, a director-general at the China Banking Regulatory Commission, who told journalists back in February that, “Except for U.S. Treasuries, what can you hold? U.S. Treasuries are the safe haven. For everyone, including China, it is the only option. We hate you guys. Once you start issuing $1 trillion to $2 trillion [of Treasury bonds] we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”

Now, however, there are growing indications that a major reassessment is underway among China’s principal economic policymakers regarding their country’s huge investment in U.S. government debt, currently in the range of $1 trillion. A growing number of Chinese officials are on record as believing that the U.S. dollar will eventually lose its role as the world reserve currency. And while in the short-term China will continue to purchase U.S. Treasuries, its own domestic needs and financial limitations are likely to restrict those investments to a level that represents only a fraction of the vastly exploding U.S. government borrowing requirements.

Ultimately, China does not see itself as the St. Jude of America, but as a sovereign nation with an old civilization, downtrodden for the last two centuries by Western powers and Japan, but which is on the verge of emerging from the Global Economic Crisis as the preeminent world financial power. It therefore will make decisions on how it allocates its resources and financial reserves not based on America’s desperate borrowing needs to finance its profligate budget deficits, but on serving the supreme long-term national and strategic interests of the People’s Republic of China.


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U.S. Economy Risks Hellish Prospect of Hyperinflation

May 24th, 2009 Comments off
The global financial and economic crisis arose out of radical deflation in the U.S. housing market, as the real estate asset bubble split asunder. With the collapse in housing prices came the contraction of another asset bubble; equities. The ongoing demand destruction has also deflated commodity prices from their recent peaks, giving rise to a collective view among economic policymakers that deflation represents the single greatest risk to the global economy.
In itself, deflation is a dangerous economic phenomenon. Historians of the Great Depression often refer to deflation in the 1930s as a contributing factor to the prolongation of that epochal downturn in the world’s economy. Looking closely at the dynamics of deflation, it is not difficult to see why this is a dangerous economic state to be in. When prices of major durable goods, especially homes, continue to decline, this inserts a strong dose of uncertainty into the human decision-making process. Not many consumers are likely to take out a mortgage on a home that they believe will actually decline in value right after the legal papers are signed. Or so the classical economic theory goes.
However, though not downgrading the danger of deflation, I believe policymakers are ignoring other factors regarding this economic and financial condition. Furthermore, the U.S. government and Federal Reserve in particular, are taking steps to “cure” deflation that will inevitably lead to hyperinflation, which in the long-term may prove far more destructive to the long-term health of the U.S. economy.
History demonstrates that deflation is not a permanent condition. Market forces, unencumbered by fiscal and monetary intervention, eventually restore pricing equilibrium. At a certain point prices of major durables such as homes are low enough to encourage new categories of consumers to enter the marketplace. As demand is restored, prices stabilize and then resume their upward ascent. It is all a question of time. However, key decision-makers in the United States are not paragons of patience. They want deflation cured immediately, which explains why the U.S. Treasury and Federal Reserve are hell-bent on policies that are guaranteed to be inflationary. The question is how bad will inflation ultimately be.
Massive quantitative easing by the Fed is pouring trillions of fiat U.S. dollars into the money supply, essentially conjured out of thin air. This is being done without transparency, the rationale being that frozen credit markets require a vast expansion of the money supply in an attempt to get the arteries of commerce flowing again. Similarly, the U.S. government is spending vast amounts of money it does not have, with the Treasury Department selling unprecedented levels of government debt in a frantic effort to fund the wildly expanding U.S. deficit. These two forces, quantitative easing and multi-trillion dollar deficits, are the core ingredients of an explosive fiscal cocktail that I believe will ultimately lead to hyperinflation.
What exactly is hyperinflation? Economists disagree on a common definition, so I will offer one myself. Double-digit inflation extending over a period of at least two years would arguably be a hyperinflationary period. It can get much worse, witness Weimar Germany in the early 1920’s and Zimbabwe at present. The most recent experience the United States had with this unstable economic condition was in 1981, when the annual CPI rate exceeded 13%. The cure was draconian; Federal Reserve Chairman Paul Volcker engineered a severe economic recession that created the highest level of U.S. unemployment since the Great Depression-until now. The federal funds rate, currently near zero, rose to above 20% under Volcker’s harsh discipline. Eventually high inflation was purged out of the system and economic growth was restored, however the monetary regimen was punitive for several years.

The current monetary and fiscal policies being enacted by the key economic decision-makers in the United States are laying the groundwork for a far more dangerous inflationary environment than anything encountered by Paul Volcker. The explosive growth in the money supply and government debt is simply unsustainable without severe inflation. It must be kept in mind that the Federal government is not the only public authority engaged in massive deficit spending. Throughout America, state, county and municipal governments are faced with imploding tax revenues and lack the ability or political flexibility to cut services to a level commensurate with revenue flows. Both the Fed and the public sector are engaging in a reckless gamble; borrow like crazy in the hope that this overdose of economic stimulation will restore growth to the economy and normal tax revenues, leading to a decreased and sustainable level of public sector indebtedness.

If one believes that the policymakers running the Federal Reserve, Treasury and Federal government, the same architects of the Global Economic Crisis, are smart enough to now get everything right, perhaps we may escape the worst consequences of their turbo-charged fiscal and monetary policies. However, there are growing indications that global investors and the broader market are beginning to reach a far more sobering assessment.

In an interview with Bloomberg News, Bill Gross, co-chief investment officer of PIMCO (Pacific Investment Management Company) suggested that the coveted AAA credit rating U.S. government debt now benefits from will eventually be downgraded. “The markets are beginning to anticipate the possibility of a downgrade,” Gross said.

China, the major purchaser of Treasuries and holder of $1 trillion of U.S. government debt, is already on record as expressing concern for the integrity of its American investments, and has begun actively exploring alternatives to the U.S. dollar as the primary global reserve currency. These moves by China are not based on fears of expropriation of its U.S. assets, but focuses on the specter of hyperinflation destroying much of the value of assets denominated in U.S. dollars. No doubt China’s economic experts are well aware of the growing number of economists who are convinced that the U.S. will be unable to service its rapidly expanding debt burden without significant inflation. Inflation in monetary terms means the erosion of the intrinsic value of the American dollar.

What is most frightening about the policy moves being enacted by the Fed and Treasury is that their actions may not be a reckless gamble after all. They may have come to the conclusion that only hyperinflation will enable the United Sates to avoid national insolvency. In effect, they may be pursuing the exact opposite course undertaken by Paul Volcker in the early 1980’s. If that is their prescription for the dire economic crisis confronting the U.S., then one must conclude that Ben Bernanke, Timothy Geithner and Larry Summers have learned nothing from history Once the spigot of hyperinflation is tuned on, it becomes a cascading torrent that is almost impossible to switch off, and which in its wake inflicts inconceivable levels of economic, political and social devastation. Before it is too late, President Obama should put the brakes on his economic team’s dangerous gamble with the haunting specter of hyperinflation. If he fails to act in time, a hellish prospect may be his economic and political legacy.


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Timothy Geithner Proposes A “Cure” For Toxic Assets: Take A Poison Pill

March 24th, 2009 Comments off
In scientific terms, toxins are regarded as compounds that, if ingested in small quantities, can cause severe organic damage and even death. There are in the natural world, however, compounds which in small quantities are harmless; taken in large doses the same compounds can prove lethal. Such is the case with financial toxicity.
Our modern financial system is the creation of fallible human being, meaning there will be encountered in any modern economy a certain degree of mischievous speculation, outright fraud and chicanery. Often these activities lead to the creation of asset bubbles. If the proportion of inflated or fraudulent assets is a trivial proportion of the gross aggregate assets held by the major institutions in the financial system, the damage can be contained. However, when asset bubbles constitute a significant proportion of the paper wealth of a major economy and then deflate, they become toxic in the truest sense of the term. With our current Global Economic Crisis, it is the size of these deflating assets that contributes to their toxicity. However, their impact on the global credit system is virtually identical to that of chemical toxins on biological mechanisms; they are the penultimate monkey wrench that jams up the whole works. The toxic assets sitting on the balance sheets of financial institutions throughout the world have paralyzed the economic heart of the global economy, starving it of the blood and oxygen of normal flows of credit. The result has been economic paralysis more severe than anything experienced since the Great Depression. However, instead of an antidote, or at least a well conceived therapeutic response, U.S. Treasury Secretary Timothy Geithner has offered up more toxicity.
Perhaps toxicology is too clinical for the Wall Street clique that has dominated policy making in Washington as it applies to the economy. By training and experience Geithner is a creature of Wall Street, and has proposed a solution to the disease of toxic assets that is nothing more than the original brainchild of former Treasury Secretary Hank Paulson. Yet, even Paulson retreated from his original idea of buying up the toxic assets on the balance sheets of U.S. banks, choosing instead to purchase equity in these institutions, an approach that was just as ill conceived.
There are many weaknesses to the Geithner plan, not the least being that it is simply Paulson redux. It pretends that U.S. banks are essentially healthy except for the fact these toxic assets are not really toxic but are in fact “under-valued” by the market. Accordingly, Geithner wants to use taxpayer money to re-inflate the value of these assets, by encouraging private investors to buy them through auctions, thus bidding up their price. This will be accomplished by Treasury using the balance of the TARP money, $75-100 billion, to match private investors direct stake in the purchase of such assets, and then provide cheap loans to the private investors through the Federal Reserve and FDIC to buy up to $1 trillion of the toxic assets. The private investors will only risk the small proportion of their own capital being utilized in the transactions, as the U.S. taxpayer loans will be “secured” by these same toxic assets, which will be the collateral.
Rather than toxicology, Geithner is resorting to folktales and alchemy in providing this witches brew of a curative. The Geithner plan is not only bad in terms of its philosophy; have the taxpayers take almost all the risks, with the private investors subsidized to the tune of nearly a trillion dollars, while these same investors are assured of the great bulk of any upside. There is an even more fundamental problem. Most of the U.S. banking system, and much of Europe’s, is effectively insolvent. Other than radical surgery, which recognizes that maintaining on life support zombie banks can only prolong the Global Economic Crisis, any other solution is doomed to failure.
Geithner is proposing to place U.S. taxpayers at severe risk, by in effect borrowing money to purchase these toxic assets on behalf of hedge funds and other private investors. Yet, as massive a sum as Geithner’s plan envisions, it is not nearly adequate towards addressing the full dimensions of the problem. NYU economics professor Nouriel Roubini has estimated that the U.S. financial system is sitting on $3.6 trillion of bad assets. A leaked document from the European Commission assesses that banks across Europe hold up to $24 trillion in bad assets, suggesting that even Roubini’s gloomy analysis may be unduly optimistic. It is already clear that the banking system in the United Kingdom is comatose. Yet, Geithner asks that we suspend disbelief, accept that the U.S. financial system’s toxic asset exposure is limited to $1 trillion, and we should allow the private sector to do its thing, subsidized by the American taxpayers. Far from being thoughtful, insightful and analytical, Timothy Geithner offers a dish of warmed-over free market cliches and Hank Paulson inanities, avoiding at all costs even a hint of bank nationalization and radical financial surgery.

In his column in The New York Times, Nobel prize-winning economist Paul Krugman summed up the fallacy of Timothy Geithner’s toxic assets rescue plan as follows, “But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus-for that is what the Geithner plan amounts to-will change that fact”

Unfortunately, hocus-pocus is exactly what has been proposed by Geithner, to the delight of Wall Street. It will prove as effective an antidote to our economic and financial crisis as the toxins injected through the fangs of a cobra.







Wall Street Is A Ticking Time Bomb

March 16th, 2009 Comments off
Webster’s Dictionary offers the following definition for a ticking time bomb: an explosive device connected to a timer that will set it off at a given moment; any potentially destructive state of affairs. I believe that this is an accurate definition for the current state of Wall Street. Despite last week’s “sucker’s rally,” there can be little doubt as to the fragility of The Street in the wake of the raging Global Economic Crisis.

Since the onset of the global financial and economic crisis, there have been a number of these fool’s rallies on the stock markets of the world, led by Wall Street. These rallies have not been based on market fundamentals, but rather largely on the political prowess of Wall Street in its ability to intimidate decision-makers in Washington, compelling them to cobble up whatever stratospheric amounts of money have been demanded by them to “repair” the financial system.

Back in October, former Goldman Sachs chairman and then current U.S. Treasury Secretary Hank Paulson warned Capital Hill that unless Congress immediately allocated $700 billion to bailout Wall Street, the entire global economy would collapse, literally within hours. Congress, however, voted down Paulsen’s TARP boondoggle. In response, The Street mobilized its lobbyists, and pressured Congress into “reconsideration” of its vote. Congress conducted another TARP vote, and Wall Street got its $700 billion bailout. However, the rally from the initial losses incurred by rejection of TARP was short-lived and shallow. That has also been the pattern with similar rallies as the Global Economic Crisis has accelerated in its devastating impact.

The most recent sucker’s rally that elevated the Dow Jones from its depressing lows was sparked in large part by “leaked” memos from the CEOs of Citigroup and Bank of America, claiming that these insolvent institutions, only still in existence due to massive infusions of taxpayers bailout money, had actually returned to profitability in the first two months of 2009! It seems some creative bookkeeping went into that calculation.

The facts remain unalterable; American and global macroeconomic data points to massive demand destruction, rapidly rising rates of unemployment and the collapse of world trade. Enron-style accounting can only postpone the inevitable, not stop it. Since the Dow Jones hit its peak in October 2007 of just over 14160, it has lost approximately 50% of its value. This collapse in equity prices mirrors the Dow Jones contraction experienced during the Great Depression. However, with much worse economic data likely to emerge over the next several months from all corners of the globe, further massive losses on Wall Street are not only likely; they are a metaphysical certainty.

Wall Street has perpetuated a myth that it is a manifestation of market rationality, rather than a man-made construction infused with irrational exuberance, Machiavellian greed and outright manipulation. Despite all the bailouts Wall Street has secured for itself, at the expense of intergenerational debt that will burden the American taxpayers far into the future, it is heading into the abyss. Wall Street is indeed a ticking time bomb, set to detonate with full destructive yield. Don’t expect Timothy Geithner or a thousand leaked memos from American CEOs to disarm this financial time bomb.


Global Financial Crisis Agonistes

February 15th, 2009 Comments off
At the G7 meeting of finance ministers in Rome, representing most of the world’s major economies (but excluding China), there was an outpouring of Keynesian conformity. Already engaging in fiscal policies in most G7 countries that represent major structural deficits, the finance ministers in unison pledged even more massive deficit spending as a panacea for demand destruction and rising unemployment. However, even if massive stimulus spending were the correct policy response in a normal recession, in this economic crisis such a course is doomed to failure. The current Global Economic Crisis began with a global financial crisis that is still very much with us. The banking and financial system in the major economies is struck with paralysis, resulting in a credit crunch that has debilitated a growing proportion of the world’s primary economic activities. Without a solution to the global banking and credit crisis, all the debt spending in the world will accomplish nothing save international insolvency.

Right now, frightening proportions of the banks of the major economies are either insolvent, close to insolvent or in otherwise poor condition. Though the major economies have already poured trillions of dollars of largely borrowed money into shoring up the balance sheets of failing banks, it has been a case of good money after bad. There may simply not be enough money available in the world to “fix” all the banks, which are rotting with the disease of toxic assets. Yet, without some form of effective, coordinated policy response on a strategic level to the financial component of this global crisis, all the other conversations ongoing in Rome with these illustrious finance ministers represents nothing more than side-talk on the decks of the Titanic.

U.S. Treasury Secretary Timothy Geithner and his G7 colleagues are pontificating about their robust stimulus deficit spending and pledges to avoid protectionism, while paying lip service to the catastrophic disintegration of much of the global financial architecture. As outlined on this blog in prior posts, almost the entire United States banking sector is insolvent; ditto for the United Kingdom. I have also drawn reference in another post to a leaked secret document from the European Commission, which seems to suggest that a large proportion of the Eurozone Banks are also infected with toxic assets to such a degree, they are also threatened with insolvency.

The financial cancer is spreading through the enfeebled limbs and arteries of the global credit and banking system. Time is running out for an effective and comprehensive solution. Yet, in imitation of Emperor Nero, the G7 finance ministers prefer to exercise their fiddles, accompanied by the lyrical singing of meaningless rhetoric, as the financial and economic world around them burns with agonizing ferocity.