And we’re still at risk of it happening all over againby Adam Taggart Saturday, March 30, 2013, 12:42 PM
Then, when the Fed’s fire hoses started spraying an elephant soup of liquidity injections in every direction and its balance sheet grew by $1.3 trillion in just thirteen weeks compared to $850 billion during its first ninety-four years, I became convinced that the Fed was flying by the seat of its pants, making it up as it went along. It was evident that its aim was to stop the hissy fit on Wall Street and that the thread of a Great Depression 2.0 was just a cover story for a panicked spree of money printing that exceeded any other episode in recorded human history.
David Stockman, The Great Deformation
David Stockman, former director of the OMB under President Reagan, former US Representative, and veteran financier is an insider’s insider. Few people understand the ways in which both Washington DC and Wall Street work and intersect better than he does.
In his upcoming book, The Great Deformation: The Corruption of Capitalism in America, Stockman lays out how we have devolved from a free market economy into a managed one that operates for the benefit of a privileged few. And when trouble arises, these few are bailed out at the expense of the public good.
By manipulating the price of money through sustained and historically low interest rates, Greenspan and Bernanke created an era of asset mis-pricing that inevitably would need to correct. And when market forces attempted to do so in 2008, Paulson et al hoodwinked the world into believing the repercussions would be so calamitous for all that the institutions responsible for the bad actions that instigated the problem needed to be rescued — in full — at all costs.
Of course, history shows that our markets and economy would have been better off had the system been allowed to correct. Most of the “too big to fail” institutions would have survived or been broken into smaller, more resilient, entities. For those that would have failed, smaller, more responsible banks would have stepped up to replace them – as happens as part of the natural course of a free market system:
Essentially there was a cleansing run on the wholesale funding market in the canyons of Wall Street going on. It would have worked its will, just like JP Morgan allowed it to happen in 1907 when we did not have the Fed getting in the way. Because they stopped it in its tracks after the AIG bailout and then all the alphabet soup of different lines that the Fed threw out, and then the enactment of TARP, the last two investment banks standing were rescued, Goldman and Morgan [Stanley], and they should not have been. As a result of being rescued and having the cleansing liquidation of rotten balance sheets stopped, within a few weeks and certainly months they were back to the same old games, such that Goldman Sachs got $10 billion dollars for the fiscal year that started three months later after that check went out, which was October 2008. For the fiscal 2009 year, Goldman Sachs generated what I call a $29 billion surplus – $13 billion of net income after tax, and on top of that $16 billion of salaries and bonuses, 95% of it which was bonuses.
Therefore, the idea that they were on death’s door does not stack up. Even if they had been, it would not make any difference to the health of the financial system. These firms are supposed to come and go, and if people make really bad bets, if they have a trillion dollar balance sheet with six, seven, eight hundred billion dollars worth of hot-money short-term funding, then they ought to take their just reward, because it would create lessons, it would create discipline. So all the new firms that would have been formed out of the remnants of Goldman Sachs where everybody lost their stock values – which for most of these partners is tens of millions, hundreds of millions – when they formed a new firm, I doubt whether they would have gone back to the old game. What happened was the Fed stopped everything in its tracks, kept Goldman Sachs intact, the reckless Goldman Sachs and the reckless Morgan Stanley, everyone quickly recovered their stock value and the game continues. This is one of the evils that comes from this kind of deep intervention in the capital and money markets.
Stockman’s anger at the unnecessary and unfair capital transfer from taxpayer to TBTF bank is matched only by his concern that, even with those bailouts, the banking system is still unacceptably vulnerable to a repeat of the same crime:
The banks quickly worked out their solvency issues because the Fed basically took it out of the hides of Main Street savers and depositors throughout America. When the Fed panicked, it basically destroyed the free-market interest rate – you cannot have capitalism, you cannot have healthy financial markets without an interest rate, which is the price of money, the price of capital that can freely measure and reflect risk and true economic prospects.
Well, once you basically unplug the pricing mechanism of a capital market and make it entirely an administered rate by the Fed, you are going to cause all kinds of deformations as I call them, or mal-investments as some of the Austrians used to call them, that basically pollutes and corrupts the system. Look at the deposit rate right now, it is 50 basis points, maybe 40, for six months. As a result of that, probably $400-500 billion a year is being transferred as a fiscal maneuver by the Fed from savers to the banks. They are collecting the spread, they’ve then booked the profits, they’ve rebuilt their book net worth, and they paid back the TARP basically out of what was thieved from the savers of America.
Now they go down and pound the table and whine and pout like JP Morgan and the rest of them, you have to let us do stock buy backs, you have to let us pay out dividends so we can ramp our stock and collect our stock option winnings. It is outrageous that the authorities, after the so-called “near death experience” of 2008 and this massive fiscal safety net and monetary safety net was put out there, is allowing them to pay dividends and to go into the market and buy back their stock. They should be under house arrest in a sense that every dime they are making from this artificial yield group being delivered by the Fed out of the hides of savers should be put on their balance sheet to build up retained earnings, to build up a cushion. I do not care whether it is fifteen or twenty or twenty-five percent common equity and retained earnings-to-assets or not, that is what we should be doing if we are going to protect the system from another raid by these people the next time we get a meltdown, which can happen at any time.
You can see why I talk about corruption, why crony capitalism is so bad. I mean, the Basel capital standards, they are a joke. We are just allowing the banks to go back into the same old game they were playing before. Everybody said the banks in late 2007 were the greatest thing since sliced bread. The market cap of the ten largest banks in America, including from Bear Stearns all the way to Citibank and JP Morgan and Goldman and so forth, was $1.25 trillion. That was up thirty times from where the predecessors of those institutions had been. Only in 1987, when Greenspan took over and began the era of bubble finance – slowly at first then rapidly, eventually, to have the market cap grow thirty times – and then on the eve of the great meltdown see the $1.25 trillion to market cap disappear, vanish, vaporize in panic in September 2008. Only a few months later, $1 trillion of that market cap disappeared in to the abyss and panic, and Bear Stearns is going down, and all the rest.
This tells you the system is dramatically unstable. In a healthy financial system and a free capital market, if I can put it that way, you are not going to have stuff going from nowhere to @1.2 trillion and then back to a trillion practically at the drop of a hat. That is instability; that is a case of a medicated market that is essentially very dangerous and is one of the many adverse consequences and deformations that result from the central-bank dominated, corrupt monetary system that has slowly built up ever since Nixon closed the gold window, but really as I say in my book, going back to 1933 in April when Roosevelt took all the private gold. So we are in a big dead-end trap, and they are digging deeper every time you get a new maneuver.
21 May, 2012, 14:52 Posted by Zarathustra
The events in Europe right now is essentially a slow-motion bank run (or “bank jog”) on various European banks in the periphery. Greece, for instance, have been losing deposits in their banks, while Spanish bank Bankia was rumoured to have massive among of deposits being withdrawn. And of course, in the days of modern banking with internet and other stuff, you don’t even need to see a massive queue outside a bank to know that there’s a bank run.
Disturbingly, what’s happening today in Europe reminds me of something happening more than 80 years ago, when bank failures triggered bank runs virtually in the whole of Europe, later bank holidays in hope to stop bank runs, capital control, and countries going off gold standard. Sure enough, by thinking about the event in 1931 by no means suggest that I think what happened then will surely happen in 2012. It is always, however, good to look at the history and see what we can learn from it.
We all knew that the Great Depression started in 1929. Perhaps lesser known is that one of the more dangerous legs of the slump during the the Great Depression did not start until 1931 when an Austrian Bank Credit Anstalt went bust.
At the time, it was the biggest bank of Austria. Its failure triggered a European banking crisis, with bank runs started first with Austrian banks, then with German banks.
In Liaquat Ahamed’s wonderful book Lords of Finance: The Bankers Who Broke the World, he wrote that while Austria was a small country with the GDP about one tenth of Germany’s, remarkably the failing on its biggest bank sent a massive shockwave to the whole of Europe, an ultimately to the world economy. While the big central bankers were trying to come up with rescue packages, without the experience of modern central banking, they came in too late, with too little money.
During the time of the Great Depression, it was the French which had the biggest gold reserve after the United States. At the time of Credit Anstalt’s failure, the French was apparently faring relatively well among European countries. And not surprisingly, politics was in play in their attempt to save themselves. France, although financially stronger among European great powers, they were not keen at all to save the Germans and Austrians (perhaps still quite keen to punish them for starting World War One). When the United States unilaterally forgo war debts from Europe for a year, which included German’s reparation, France was furious. Liaquat Ahamed quoted that the British Prime Minister at the time Ramsay MacDonald saying that “France has been playing its usual small minded and selfish fame over Hoover proposal…”, while the Bank of England Governor’s Montagu Norman said, according to Ahamed, that “Berlin was being ‘bled to death’ while the French and the Americans were busy arguing” (p. 413). And sure enough, when the German’s central bank Reichsbank asked Banque de France and the French government for help, that didn’t work. The French government offered some loan with conditions, which the Germans thought of that as “political blackmail”.
As the crisis worsened, Danatbank, at the time the second biggest bank in Germany, went bust some two months later after Credit Anstalt failed. On 13 July, it failed to open for business, triggering yet another wave of massive bank runs on every other German banks. With the banking crisis at its worst, a two-day bank holiday was imposed in German to prevent further drain in deposits. Later, banks in virtually the whole of Europe are closed.
Meanwhile, in London, the government is considering measures to reduce budget deficits even as the banking crisis hit Britain, partly because of UK’s banks exposure to Germany and other countries in the continental Europe, and the Bank of England was losing gold reserve, forcing the Bank to raise interest rate when it should not. The military’s salary would be cut in hope to plug the budget gap, but the some sailors in the Royal Navy became (predictably) very angry and essentially went on strike, an event which is now known as the Invergordon Mutiny. Not a particularly huge event, but enough to send a shockwave to the City of London with stock market crashed and a sterling crisis. In about a week after the Mutiny, Britain was forced out of the gold standard.
- European Banks Are Getting Pounded (mb50.wordpress.com)
- As First Greek CDS “Anstalt” Appears, A Question Emerges: Did Banks Not Square Off Margins? (zerohedge.com)
- Chinese Defaulting on Commodity Contracts (ritholtz.com)
- 18 Signs That The Banking Crisis In Europe Has Just Gone From Bad To Worse (raptureimminent.wordpress.com)
End of the Euro?: The IMF warns that one country leaving the single currency could force its entire collapseBy Hugo Duncan PUBLISHED: 12:45 EST, 17 April 2012 UPDATED: 04:28 EST, 18 April 2012
In its World Economic Outlook report, the International Monetary Fund said the collapse of the crisis-torn single currency could not be ruled out.
It was the first time the Washington-based institution has accepted the prospect of the eurozone splitting up and follows fears over the health of the Spanish economy.
The IMF predicted a return to recession in the eurozone this year but upgraded its growth forecasts for Britain.
However, it warned that the world remains at risk of collapsing into a slump that would rival the Great Depression – with ‘acute risks in Europe’ the major threat.
‘Things have quietened down but there is a very uneasy calm,’ said IMF chief economist Olivier Blanchard. ‘I have a feeling that at any moment things could get very bad again.’
Speaking at the launch of the half-yearly report in Washington, Mr Blanchard said there was ‘no plan’ in place to deal with a country leaving the euro.
However Greece is widely expected to default on its crippling debts and quit the doomed single currency.
‘If such an event occurs, it is possible that other euro area economies would come under severe pressure as well, with a full-blown panic in financial markets,’ the IMF report said.
‘Under these circumstances, a break-up of the euro area could not be ruled out. This could cause major political shocks that could aggravate economic stress to levels well above those after the Lehman collapse.’
U.S. investment bank Lehman Brothers imploded in September 2008 – plunging the world economy into the worst recession since the 1930s. The IMF said that although ‘the outlook for the global economy is slowly improving again’ it is ‘still very fragile’.
It warned of the ‘possibility that several adverse shocks could interact to produce a major slump reminiscent of the 1930s’.
The IMF forecast growth of 0.8 per cent in Britain this year – more than the 0.6 per cent it predicted in January, but less than last September’s target of 1.6 per cent. Its 2013 forecast was unchanged at 2 per cent.
Asked about the IMF’s comments on the eurozone, a Downing Street spokesman said: ‘The eurozone still needs to get its house in order. Those issues still exist and no doubt will be a focus of discussions at the coming meeting of the IMF towards the end of the week, which the Chancellor will be attending.’
The IMF said Britain will outperform Germany and France this year – their economies are expected to grow by just 0.6 per cent and 0.5 per cent respectively.
The Italian and Spanish economies are forecast to decline by 1.9 per cent and 1.8 per cent, while a slump of 4.7 per cent is expected in Greece following a 6.9 per cent drop in 2011.
But the report warned that output in the eurozone could fall by 3.5 per cent over the next two years if the debt crisis escalates.
This would knock 2 per cent off the world economy, said the IMF, while a 50 per cent rise in the oil price would lower output by a further 1.25 per cent.
In the absence of such ‘shocks’ the global economy is expected to grow by 3.5 per cent this year, down from 3.9 per cent in 2011, with the U.S., Canada and Japan leading the way in the developed world.
‘Because of the problems in Europe, activity will continue to disappoint in the advanced economies as a group, expanding by only about 1.5 per cent in 2012 and by 2 per cent in 2013,’ said the report.
- Euro meltdown will be a bigger disaster than the credit crunch’ (express.co.uk)
- IMF: Euro Break-up Cannot Be Ruled Out (news.sky.com)
- IMF Exploits Euro-Crisis to Create Global Money Power (mb50.wordpress.com)