Watching re-enactments of scenes from the global financial crisis is a very peculiar experience indeed. The opening by the Fed of currency swap lines to allow the ECB and other central banks to extend dollar funding to Eurobanks was seen as an extreme measure the first time around, a sign of how close to the abyss the financial system had come. This time, allegedly because the powers that be acted before things got quite so dire, bank stocks rallied impressively. Similarly, the media treated this move as just another episode in the ongoing Perils of Pauline drama running on the other side of the Atlantic. The $2 billion loss by a UBS rogue trader got far more extensive coverage, even though rogue traders also seem to be all of a muchness.
Now narrowly, the jaundiced media response and the market bounce both make sense. The Eurodrama has gone so many chapters that it’s easy to get rescue fatigue. And a bailout handled tidily among central bankers makes for less gripping reporting that the national and interpersonal theatrics involved in the typical Eurozone cliffhanger. Similarly, the Eurobanks were under real stress by being frozen out of dollar funding, largely because US money market funds were not longer willing to do repos with them or buy their commercial paper. And US banks were also encouraged to cut back on their exposures to them. So the central banks have stepped into this breach.
But this is just a liquidity fix, and here, that means largely a palliative. The Eurobanks will suffer serious hits when the sovereign debt crisis losses come home to roost; this alone will render many major banks undercapitalized. The ECB has, as the Fed did, allowed banks to pledge dreckly collateral in return for shiny new funds. But the big difference between the ECB and the Fed is the ECB apparently sees itself as constrained by its $5 billion in equity (even though it could simply print, give the proceeds to national governments, and have them give that back to the ECB as an equity contribution) and is loath to bloat its balance sheet too much. The self imposed balance sheet growth limits of the ECB plus the refuse of EU leaders to consider other mechanisms such as Eurobonds means it’s hard to see how the wheels are not going to come off the European financial system in the not too distant future.
The UBS saga provided a stark reminder that the visible sovereign credit risk is not the only peril facing these banks. In the crisis, it wasn’t one problem that felled banks; it seemed like everything came apart in quick succession. The UBS losses were on a desk that took ETF-related exposures, something that regulators have belatedly realized has concentrated a lot of risk in already highly leveraged dealer banks. This situation sounds scarily like a rerun of the CDO saga of the crisis. Gillian Tett has the same reaction:
Consider the parallels. On paper, ETFs (just like CDOs) look like a wonderful idea…So, unsurprisingly, the sector has exploded: annual growth over the past decade has been 40 per cent on average…Indeed, if you look at the charts tracking ETF growth in the past three years, they look extraordinarily similar to the CDOs charts back in 2005: the lines all point to the sky.
But, as with CDOs, this growth has come at a cost. Although the first generation of ETFs were very stodgy – composed of cash equities, say – more recently banks have started creating more exotic structures to boost returns…Worse still, potential conflicts of interest have emerged within the banks too: not only do banks sell ETFs to their clients, but they also manage the trading flows that occur when the portfolios are hedged and rebalanced..
Of course, in theory, senior bank managers should be able to monitor this. But, as ever, cultural and structural problems have sometimes prompted them to look away: precisely because ETFs have been labelled as “safe” and “transparent” by the industry, they have not featured as a danger spot on risk managers’ radar screens. Once again, there may be echoes of those CDOs: one reason why UBS racked up such vast losses in 2007 on CDOs, for example, was that AAA-rated CDOs were classified as safe and profitable in internal risk management reports – and nobody felt any need to probe.
This is a long-winded way of saying crises have a nasty way of exposing weaknesses that regulators and bank managers themselves had managed to downplay (in fairness, regulators are pretty worried about ETFs but they haven’t moved to rein them in).
The other distressing aspect of this saga is that we have cross border regulatory action without effective cross border/supranational regulation. Responsibility (for cross border bailouts) without authority is not a good combination. Even though the rationale for the Fed helping save the Eurobanks’ hide is that the risk is small and a Eurocrisis would hurt US banks, it’s not good practice to save entities you don’t oversee. And it’s even more troubling to have this done by central banks, who have enormous power yet very little accountability in a nominally democratic system.
So this not-so-little rescue serves as a reminder of what we on some level know all too well: despite the desperate need for reform in the wake of the crisis, too much appears to remain just the same as before.
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The ironic thing is that if the victims of the banks, the entire population including savers, were bailed out then the banks would be fixed too. However, to keep the bailout from causing price inflation, the banks would have to be put out of the money creation business at the same time. The question then is if banks are smarter than the proverbial monkey with his hand caught in the cookie jar. All the monkey has to do to escape is to let go of the cookie.
How do you put the banks out of the money creation business without getting rid of fractional reserve banking? I wouldn’t have a problem with that myself but how realistic is that any time soon? What do you do about libertarian playgrounds like the Euro Dollar market, the shadow banking system and the like? If you were to get rid of the banks’ ability to create money wouldn’t you have to have some control over where money goes (ie capital controls)? It seems that there is virtually a revolution when the IMF says that inflation targeting should be a bit higher or comes around to capital controls. I can’t imagine that these financial interests would go along with the radical measures needed for what you are calling for, although I think it might be needed. It seems that mass movements would be needed to push that through and they, presently, don’t exist and don’t have a coherent program. Even if they did, would they know enough about these issues to deal with things like fractional reserve banking and capital controls? Maybe they wouldn’t need to know about these issues. They would need a coherent program but if they put pressure on the parasites in power maybe they’d do what is necessary or would be forced to the guillotine (figuratively).
Krugman has already discussed the virtues of capital controls in a solvency crisis.
The lunatics running things won’t listen to that idea any more than they will to any other idea, of course.
How do you put the banks out of the money creation business without getting rid of fractional reserve banking? Lefty
At the very least, all government support for banks should be abolished and fraud and insolvency laws vigorously enforced.
I wouldn’t have a problem with that myself but how realistic is that any time soon? Lefty
Actually reform, since it would be deflationary, allows a general bailout of the population which, by itself, would be inflationary. The trick would be to meter the bailout checks to just replace existing credit as it was paid off with no new credit to replace it.
What do you do about libertarian playgrounds like the Euro Dollar market, the shadow banking system and the like? Left
Let em play but with absolutely no government backing. Our current money system is not libertarian but fascist.
If you were to get rid of the banks’ ability to create money wouldn’t you have to have some control over where money goes (ie capital controls)? Lefty
I don’t see why. Examples, please?
It seems that there is virtually a revolution when the IMF says that inflation targeting should be a bit higher or comes around to capital controls. Lefty
With genuine private currencies, there would be an individual inflation rate for each private currency plus an inflation rate for a country’s fiat. There would be no money bottle neck for anyone to control.
I can’t imagine that these financial interests would go along with the radical measures needed for what you are calling for, although I think it might be needed. Lefty
It is increasingly clear that the PTB are clueless and in disarray. When they feel enough heat they may see the light.
It seems that mass movements would be needed to push that through and they, presently, don’t exist and don’t have a coherent program. Lefty
The good thing about our banking system is it screws everyone, including the banks ultimately. And since everyone is screwed then everyone can be bailed out without acrimony once that is understood.
Even if they did, would they know enough about these issues to deal with things like fractional reserve banking and capital controls? Lefty
Really the only things the population needs to know is:
1) We have a government enforced money monopoly for private debts.
2) It has screwed everyone.
3) Everyone can be bailed out without significant price inflation risk if the monopoly is abolished at the same time.
Maybe they wouldn’t need to know about these issues. They would need a coherent program but if they put pressure on the parasites in power maybe they’d do what is necessary or would be forced to the guillotine (figuratively). Lefty
Really, reform plus a bailout would help everyone (except the CBs), even the banks. It’s time we move on to genuine capitalism.
“Actually reform, since it would be deflationary, allows a general bailout of the population which, by itself, would be inflationary. The trick would be to meter the bailout checks to just replace existing credit as it was paid off with no new credit to replace it.”
Doesn’t answer my question. I am asking about some of the mechanics of this. How would this work? 100% reserve requirement, so all loans come out of savings and money isn’t simply created on a keyboard when banks lend money?
“I don’t see why. Examples, please?”
You can reform the domestic monetary system, you can’t make any other country do that. They would still have fractional reserve banking and there would still be financial libertarian playgrounds that have NO reserve requirements or regulation (which is where a lot of the financial inflation has happened). What would stop someone from taking US dollars and playing around in countries or areas that have low or no reserve requirements? What would stop hot money from coming into the country, especially when there are financial crises, which have grown in size and frequencies over the years after the neo-liberal free market reforms?
You also, because of your extreme ideological bias, don’t seem to realize that private interests create the vast majority of the financial inflation, not the government. The government is responsible for the initial infusion of money into the system and as Steve Keen has shown, it does so in RESPONSE to what private interests are doing, it is not the starting point. After that it is all about private interests operating in the fractional reserve banking system. Reserve requirements, the velocity of money, whether or not capital controls are in place, differences in between country’s interest rates and inflation levels, this has lead to the vast majority of inflation, not the damn government. It isn’t an ideological argument and isn’t open to debate.
“With genuine private currencies, there would be an individual inflation rate for each private currency plus an inflation rate for a country’s fiat. There would be no money bottle neck for anyone to control.”
So we see that the ECB is a mess in large part because it couldn’t create money, private interests were called on to do that. We should use that idea here? We should financialize the monetary system? Oh wait, the big difference is that there wouldn’t be one currency, but many. Right. We should emulate the Free Banking Era in the US then, which was beyond chaotic. No thank you. The whole private is always better mindset is a dead end. I am sick of libertarians and their pet theories. No amount of failure sways you people.
“Really, reform plus a bailout would help everyone (except the CBs), even the banks. It’s time we move on to genuine capitalism.”
Again, no thank you. We have massive ecological issues the world over to deal with. Some WILL, it is 100% certain, cause societal collapse if not properly dealt with in the coming decades. Soil erosion, water shortages, ocean acidification, air and water pollution, deforestation (and its impact on carbon sequestration), amongst other things. To think that we will leave the expansion of credit and money (and with it purchasing power, consumption of natural resources, production and the ecological costs that goes with it) to private banks who will not consider ecological issues and who will only consider private costs and benefits is insane and out of date. This is just another example of people who have an ideological bias and aren’t emotionally strong enough to question it. To not be a libertarian would be too much for you to deal with emotionally since it is such a big chunk of who you see yourself as.
We can’t go back to the gold standard and we shouldn’t go back to the free banking era. We live in the 21st century, a world entirely different than the 19th and 20th century. The problems we are facing, there institutions that exist, are entirely different. Either we reform our economy to exist within ecological limits or there won’t be people around. Capitalism, real or otherwise, socialism, none of it will exist, so this all will be a moot point.
100% reserve requirement, so all loans come out of savings and money isn’t simply created on a keyboard when banks lend money? Lefty
Yes, during the bailout period, loans would have to be 100% reserve (matching maturities between deposits and loans) to prevent the banks from leveraging the bailout money.
What would stop someone from taking US dollars and playing around in countries or areas that have low or no reserve requirements? Lefty
Nothing I suppose but that is not my problem. Reform has to start somewhere and ideally should not require much international cooperation.
What would stop hot money from coming into the country, especially when there are financial crises, which have grown in size and frequencies over the years after the neo-liberal free market reforms? Lefty
How would that work without a central bank to buy (newly created) US currency from? Genuine reforms would not allow the US Government to accept foreign currency either. So how would the hot money enter the US economy? I am seriously asking. If the “hot money” did not result in new money or credit creation how could it hurt? Explain please?
You also, because of your extreme ideological bias, don’t seem to realize that private interests create the vast majority of the financial inflation, not the government. Lefty
Say what? 97% of our money supply is private credit, I’ve read. So of course most of the price inflation is privately generated. Just look at the housing bubble. But remember, without government privileges for the banks their ability to leverage would be far less.
As for the government, I am FOR deficit spending but with the important condition that the laws be changed so that government money is not legal tender for private debts and that genuine private currencies be allowed too.
And perish the thought that I ever be a gold bug.
The government is responsible for the initial infusion of money into the system and as Steve Keen has shown, it does so in RESPONSE to what private interests are doing, it is not the starting point. Lefty
Agreed. However, knowing they hold the economy hostage, the banks can be pretty sure that liquidity will be provided as needed.
After that it is all about private interests operating in the fractional reserve banking system. Reserve requirements, the velocity of money, whether or not capital controls are in place, differences in between country’s interest rates and inflation levels, this has lead to the vast majority of inflation, not the damn government. It isn’t an ideological argument and isn’t open to debate. Lefty
We agree. But government IS to blame for granting special privileges to the bank like a lender of last resort. The only involvement government should have with banks is to punish them for fraud and insolvency.
“With genuine private currencies, there would be an individual inflation rate for each private currency plus an inflation rate for a country’s fiat. There would be no money bottle neck for anyone to control.”
So we see that the ECB is a mess in large part because it couldn’t create money, private interests were called on to do that. We should use that idea here? Lefty
I advocate that the US Treasury should bailout the entire US population equally, including savers, with a ban on FRB till the bailout was over to prevent the banks from leveraging the bailout money. I am FOR money creation so the victims of the banks can be completely bailed out of ALL debt to them with an equal amount going to savers.
We should financialize the monetary system? Oh wait, the big difference is that there wouldn’t be one currency, but many. Lefty
What I advocate is abolishing the money monopoly for private debts. That is the root of our problems.
Right. We should emulate the Free Banking Era in the US then, which was beyond chaotic. No thank you. The whole private is always better mindset is a dead end. Lefty
The government should still create, spend and tax as necessary its own fiat. As for private monies, the government would be completely forbidden from accepting them.
I am sick of libertarians and their pet theories. No amount of failure sways you people. Lefty
The idea of separate government and private money supplies is Biblical (Matthew 22:16-22). It is a combined government/private sector money supply that allows the bankers to loots us.
“Really, reform plus a bailout would help everyone (except the CBs), even the banks. It’s time we move on to genuine capitalism.”
Again, no thank you. We have massive ecological issues the world over to deal with. Some WILL, it is 100% certain, cause societal collapse if not properly dealt with in the coming decades. Soil erosion, water shortages, ocean acidification, air and water pollution, deforestation (and its impact on carbon sequestration), amongst other things. Lefty
It is usury that requires exponential growth to pay the compound interest. I am for non-usury forms of private money such as common stock that “share” wealth and power, not dangerously concentrate it.
To think that we will leave the expansion of credit and money (and with it purchasing power, consumption of natural resources, production and the ecological costs that goes with it) to private banks who will not consider ecological issues and who will only consider private costs and benefits is insane and out of date. Lefty
Without government privileges for the banks (such as the Fed) their ability to leverage would be greatly reduced.
This is just another example of people who have an ideological bias and aren’t emotionally strong enough to question it. To not be a libertarian would be too much for you to deal with emotionally since it is such a big chunk of who you see yourself as. Left
Many libertarians are in fact hypocrites. For example, many of them advocate a government acceptance of gold as money.
We can’t go back to the gold standard Lefty
Absolutely agree. That would be economically stupid, fascist and environmentally destructive.
and we shouldn’t go back to the free banking era. Lefty
I hate fractional reserves and usury but I am not so arrogant as to think that there may not be a niche for completely private banks under vigorous enforcement of fraud and insolvency laws.
We live in the 21st century, a world entirely different than the 19th and 20th century. The problems we are facing, there institutions that exist, are entirely different. Lefty
They have a single root cause – the government enforced money monopoly for private debts.
Either we reform our economy to exist within ecological limits or there won’t be people around. Capitalism, real or otherwise, socialism, none of it will exist, so this all will be a moot point. Lefty
Agreed. The current system is suicidal.
The Fed … unaudited … can do whatever it wants to do. Who is going to stop them? Obama the white knight bank savior? Not hardly.
The self imposed balance sheet growth limits of the ECB … means it’s hard to see how the wheels are not going to come off the European financial system in the not too distant future.
Within the past couple of days I saw a chart of ECB balance sheet expansion … can’t recall where. While the ECB is certainly no match for Banzai Ben’s unchallenged Ponzi King status, it’s no piker either. If I recall the chart correctly, the ECB’s assets have roughly doubled since 2007.
Gillian Tett’s analogy between CDOs and ETFs doesn’t resonate with me. There may be conflicts of interest in ETFs, and their high growth rate means there are bound to be some creepy-crawlies lurking under the carpet. But unlike with CDOs, the underlying components of ETFs are not going to default en masse the way a tranche of 2006 Vegas mortgages did.
Agreed, dollar swap lines are a palliative. If, and only if, those swap lines constitute part of a support structure to provide for an orderly default by Greece, they could be seen as a positive. But if Europe remains in denial — insisting that a puny 21% haircut plus harsher austerity in Greece is the best and final offer — then swaps are just more good money thrown after bad.
The underlying components of ETFs most certainly are going to default en masse. Go look up what most of them are *actually* composed of. Not what they say they’re composed of, what they’re *actually* composed of.
The commodities ones are composed of derivatives (futures and options contracts) — counterparty default risk. The bond ones are composed, at best, of bonds (mostly leveraged), and at worst, of CDOs. Et cetera.
The ETF question brings up the whole subject of what investors, particularly pension fund plans should be investing in. Unfortunately the whole stock market has been rigged by the plunge protection team and exploited by management and high frequency trading to the point that it no longer reflects true economic productivity. So standard equities and mutual funds are in fact very risky. There is no reason ETFs should be considered safe, they are essentially ways to allow investors to make risky speculations on commodities etc. Probably alright for a certain degree of speculative play but who would want a major portion of their pension plan invested in these vehicles…
‘..So standard equities and mutual funds are in fact very risky. There is no reason ETFs should be considered safe, they are essentially ways to allow investors to make risky speculations on commodities etc..’
I have been investing (successfully!)since early 80s. No one said that the investing is easy!
B/c of inverse 2x&3x ETFs I remained unscathed by carnage in 2008. In fact they became deadly and unpredictable when Govt murdered the so called ‘free market’ and also instituted funny accounting (FASB 157) rules and banning shorts. They are just ‘tools’ and one has to know the merits and the limitations!
In the current ‘casino type’ volatility in the market, I am using them as effective RISK MANAGEMENT TOOLS – hedges,with options on these 2x/3x on both directions in at least 1/3rd of portfolio. My portfolio has withered volatility very nicely since early August, with a net increase contrary to the market, thanks to these leveraged ETFs. They are definitely not products for the novice or the uninitiated!
For individuals who are willing to learn and use these TOOLS effectively along with options, ETFs are godsend!
If the SEC really wants to reign the HFT and the volatility. all they have to do is reinstate the UPTICK rule!
Agree completely. Very useful to understand the rules and caveats if you want to play the game.
I like your strategy but I think it would be unusual for a client to find an investment advisor to recommend this. There is too much pressure to follow the crowd and then when things fall apart it’s ‘oh well’ it happened to everyone..
But it’s also hard to play against fraud and inside information.
FYI
INDEX UNIVERSE
“….When we watch the market fall 100s of points in the last 15 to 30 minutes of trading, why are we blaming ETFs, which trade throughout the day and thus reduce end-of-day volatility by giving investors access to the market throughout the trading day?
If you want to reduce market volatility, don’t blame ETFs, use ETFs!
The correlation between inverse and leveraged ETFs and market volatility simply doesn’t exist. Let’s move away from these witch hunts and take actions that allow our market structure and pricing mechanisms to withstand the ever-changing market events that have always been the root cause of volatility”.
http://www.indexuniverse.com/hot-topics/9889-etfs-and-market-volatility-a-witch-hunt.html
Freudian slip?
I have been investing (successfully!)since early 80s. Sunny129
“Investing”? It sounds more like a “Glass Bead Game”.
I both pity and despise the waste of an intelligent person’s time trying to protect his economic future. If the system worked for the general good then it could be justified but it is increasingly apparent that it doesn’t.
You really need to be careful. There is massive counerparty risk in levered ETFs. I was using doubles in the crisis too and realized rather late in the game that there was major risk of non-performance. I did some checking then about the company I was using and came away satisfied that they were OK.
The problem is now is not 2008. There has been an explosion of ETFs since then and the structures are riskier too. There have been studies by the BIS and others saying the risk of blow up is real and substantial. I skimmed them months ago and need to read them more closely now, but I came away agreeing the concerns were legitimate and not overstated.
There will be a “Market Holliday” before this is over. Liquidity will vanish, option spreads will go so wide as to be useless. I fully expect to be a muti-miiionaire, on Paper, but be unable to collect a dime.
For 98% of people, preservation, of Self and Family and some Cash should be the prime objective. I grew up on a Trading Floor, and I don’t stand a chance. What chance does Mr/Ms 401k have delving into 3x inverse ETFs?
‘For 98% of people,….’
-Majority are brain washed by the Fin industry to ‘buy and hold(hope!?)
-Majority DO NOT KNOW how to position or react to BEAR markets beside being completely out of the market
-Majority do NOT or do NOT WANT to learn about investing but rely on ‘others’ whose interest doesn’t align with you.
-Majority whose holdings are in 401K, IRAs etc are sitting ducks in Financial tsunami like in 2008.
-If you invest like every one else, don’t expect it to be different!
The retail investor/speculator has no chance at all. Look up Fleecing the Lambs, circa mid 1970s.
Over the past 35 years the fleecing has been made very sophisticated. This is especially the case with the demise of the specialist and the arrival of electronic trading.
Nanosecond flash offers can strip a book and the trade term is limited to nanoseconds. Worse still, the trades are initiated out of: if this then this executions.
The current market is a trading market and the individual trader needs to be very nimble just to survive. Talking heads haven’t got a clue and keep looking for cliche reasons for price movements.
I have been in and out of oil, paper, trees and real estate taking moderate profits. Right now I haven’t got a clue and the situation in Europe is very scarry in that the major banks are highly levered.
Now, who holds all of the debt that Greece can’t service? And, how much of a haircut can those holders bear?
That’s what all the stalling and bandaids are about. The only true resolution for Greece and its fellow travelers is repudiation, in whole or in part.
I agree with some of your points.
I have been using these leveraged ETFs when they came early in 2006(?) and on wards. They are like ‘derivative’ tools with no correlation to indexes they are ‘supposed’ to reflect! There is a daily decay and a ‘reset’ feature at the end of each day. In 2010 and early 2011, one could make money by selling puts on these leveraged inverse ETFs due to daily-resetting feature!
They worked exactly as they supposed during 2008 mayhem but became counter productive in 2009 and 2010. I learned a lot by trial and error plus quite a few costly mistakes. Experience is a great teacher but with an expensive tuition!
They work fine in a frenzied volatility like in the early August with market down 620 pts and up 450 next day! The key is to pair them in 3:1or2 (net negative) ratio with short vs intermediate/long term time frame eg FAS vs FAZ. I watched their response over time and came with a strategy on my own. I apply this strategy only to 1/3rd of my portfolio. Rest is conservative with stodgy div paying stocks/ETFs + MFunds. Learning options in early 2000s was a right decision in learning to manage risk.
I am less bothered by recent ‘market volatility’ which I have NEVER witnessed, since I started investing! With these tools I worry less than those folks with their 401Ks or broker directed accounts/IRAs which are ‘sitting ducks’ just back in 2008!
In the end it is ‘TO EACH HIS/HER OWN’!
“it’s hard to see how the wheels are not going to come off the European financial system in the not too distant future.”
OK, great…. What is one to do with a 401k? Are we facing another deflationary event where all assets tumble in value?
The dollar swap lines with the ECB were extended on June 29th. You can read the press release on the Fed’s web site. The ECB move yesterday was designed to reduce the cost and the uncertainty around EZ banks rolling US dollar denominated liabilities, especially around year end. This is not a new coordinated central bank easing as long only equity investors and the financial media echo chamber would like many to believe. The swap facility was already extended two and a half months ago. At best, this is part of the ECB following in the footsteps of the Fed in 2008. When the interbank lending mark starts to break down because of solvency uncertainty for the major financial institutions, and there is a risk short term finance can’t get rolled, which could in turn force asset sales and set off a debt deflation dynamic, the central bank steps in and becomes the intermediary or clearing house in the market to guarantee short term financing gets rolled, preferably at less prohibitive prices.
“(in fairness, regulators are pretty worried about ETFs but they haven’t moved to rein them in).”
This is not quite true. The SEC has temporarily discontinued issuing exemptive relief for the creation of leveraged ETFs, which in effect means that no new leveraged ETFs will be entering the market in the near future. Leverage in investment companies (which includes ETFs) is under intensive review by the Commission, which has opened the issue for public commentary, and may be the subject of future regulations in the near future.
“The other distressing aspect of this saga is that we have cross border regulatory action without effective cross border/supranational regulation. Responsibility (for cross border bailouts) without authority is not a good combination. Even though the rationale for the Fed helping save the Eurobanks’ hide is that the risk is small and a Eurocrisis would hurt US banks, it’s not good practice to save entities you don’t oversee. And it’s even more troubling to have this done by central banks, who have enormous power yet very little accountability in a nominally democratic system.”
Totally agreed. Although if the Federal Reserve’s swaps with Europe go horribly wrong, it is difficult to imagine Congress not taking action to significantly curtail the Fed’s authority. For better or for worse, Fed mistakes in attempting to bail out the American economy are barely tolerable, but Fed mistakes in trying to bail out Europe would be unforgivable.
Imagine if the trading operation where conducted (as they used to be) as an unlimited liability partnership, so that the other partners in the Investment bank took the loss right out of their hide. I believe that investment banking should be taken back to the old unlimted liability partnership model for all those involved directly involved in running the bank, including all traders. There would be a capital providing corporation (as a limited partner) that none of those running the bank could own stock in, (they would have capital accounts in the partnership) Then the first group to take potentially a total haircut would be the bankers in question, just like the names at Llyods can take complete haircuts.
Dear Lyle;
I concur, the Depression Era financial sector laws enacted by the US were in response to identified flaws in the social aspects of the ‘Banking System.’ These were the result of painful lessons learned. Well, the required time has gone by and we’ve forgotten those painful lessons. Time to relearn them, unfortunately.
Time to relearn them, unfortunately. ambrit
It is time to relearn really old lessons like the prohibition on usury between fellow countrymen in Deuteronomy 23:19-20 and the command to forgive debts in Deuteronomy 15.
The Congressional abolition of state usury laws definitely needs to be reversed.
The correct definition of “usury” is charging ANY interest, not just “excessive” interest.
We really do not need usury based money systems; common stock is an ideal usury-free private money form. It has the characteristic of “sharing” wealth and power rather than concentrating them.
So is anyone on this Progressive site opposed to “sharing” wealth and power?
Sorry to sound like a broken record, but if accepting dreck at its repo windows was the worst thing the Fed had done, I would be much happier today. Even bailing out foreign banks with TARP funds, or now with currency swaps is not what most bothers me. What I find most despicable was the Fed’s outright purchase of drecky CDOs during the AIG bailout. I know the reason – global credit stability – what I object to mostly is how wholly undemocratic this action was. You see, by its charter, the Fed is authorized to purchase only U.S. Government securities. The fact that I fail to accept the “end of days” view of systemic collapse, may color my views but, if an institution is to retain legitimacy it must act within the authorities granted to it by the democratic process. Please Mr. Bernanke, if you wish to save the world, go before the U.S. Congress and seek authorization. Thank you.
Haven’t politicians as bankers done enough damage? Capitalism is not democratic. Capitalism is a name for a more complex form of money-getting of the 1600’s. Money-getting is about wealth transfer and frequently associated with swindling.
Well, since these well-heeled swindlers are playing with my money (or more accurately, the purchasing power of my money) shouldn’t I, or my duly elected representative, have a say in whether we wish to play the game? I sense that your disagreement is with the system, not my comment. BTW – If Bernanke had chosen to go before Congress for authorization, he may not have gotten it and the resulting CDO implosion would have bankrupted many of the world’s largest banks – a painful lesson in risk management – and one that clearly needs to be learned.
When the “sovereign debt crisis losses come home to roost,” we’ll see the real action as the IMF steps in with more bailout loans. Except that one thing will be different this time around. The IMF loans will no longer have senior status, as they have in the past. (This was changed several months back with almost no one noticing.) This will allow the wounded Eurobanks to make good on their loans, while shifting the defaults over to the IMF, and by extension, the IMF’s major funder, the US taxpayer. It’s not enough, you see, that we bail out our own crooks; we now must bail out Europe’s crooks as well. All to insure that progress towards one-world banking (are you kidding? they don’t care about one-world government) continues unhindered.
Do you have a source for this? If it’s true, it’s a very interesting piece of news (well, it’s news to me anyway).
It would also mean that the volatility in gold is going to go crazy, as people first run to it as a safe haven and then flee from it as the bankrupt IMF sells it off to pay off some of tis debts…
I would like to take this opportunity (between making collection calls to my insolvent clients and dodging creditor calls to my insolvent self) to thank Yves and the commentors on this site for being my “grounding zone” in attempting to understand and filter what’s really going on in this economic/financial/propaganda tornado we’re in.
I tend to prioritize political news behind economic news, as the latter seems more objectifiable and “usable” in understanding what’s really going on. Unfortunately, my knowledge and understanding of the markets and financial industry is limited to 2 years working as a trade-checker on the floor of the Chicago Board Options Exchange in the late 70’s (just out of HS) and a couple of very rudimentary economics classes at university on my way to my BFA degree in Graphic/Industrial Design.
When I read the news about the ECBs rescue from the Fed and other “national banks” around the world, my jaw almost hit the floor. Thanks to this NakedCapitalism report I’m a little more confidant that I haven’t gone insane yet BECAUSE THIS IS AN OUTRAGEOUS ABUSE OF THE FEDS CHARTER and another proof that there’s something so fishy going on with the behavior of the world’s central banks it’s like a financial Frederick Forsyth or Robert Ludlum conspiracy novel!
I’m reminded that I only read Business Insider because it’s entertainingly sensationalistic and consistantly self-contradictory and trashy (commentors SOOO nasty, hateful and HuffPo “low-brow”). Bloomberg seems like a dry-as-a-bone meme-machine. Simon Johnson and gang over at Pragmatic Capitalism might as well be written in Latin for someone like me (though I try).
Then I hit NakedCapitalism for a truthful analysis and honest debate between apparently diverse but intelligent and knowledgeable authors and commentors. Just wish you had more time to write your articles and inspire practical debate so we financial ignoramuses can make some sense of the chaos.
It helps. Thanks.
I agree with Yves that these currency swaps are a bailout. The question is Cui bono? My impression is that dollars are needed to settle speculative leveraged bets. Making cheap dollars available to these bettors reduces the true cost of their bets. Indeed because of the leveraged nature of these bets, if they were to bear the true cost of them (that is minus this subsidy), the original equity behind them would have been destroyed many times over. These swaps not only protect but incentivize bad behavior. Ultimately, it is not ordinary Europeans who made these bets but the rich and their agents.
I believe in the first round of swaps after the 2008 meltdown the Fed claimed it eventually made a profit on them. But if the eurozone breaks up which is a real possibility, who exactly would be on the hook to buy back defunct or rump euros?
Does anyone see the hypocrisy of the Central Banks, especially the US FED, passing out billions of credit zeros to zombie Euro banks to cushion them from the inevitable losses on Greece defaulting, while at the same time squeezing citizens in their respective countries with social services cuts?
It’s not a bug but a feature.
So the ECB doesn’t start to act like a traditional central bank when the real economy collapses. They don’t act like a central bank when unemployment shoots through the roof in their countries. They act like a more traditional central bank when it comes time to socialize the losses of financial capital. Wonderful.
What baffles me is that everyone knows this is doomed to fail. Everyone knows what needs to be done (a debt write down, a reversal of the financialization of the economy, growth in the real economy at the expense of bond holders and financial capitalists, counter-cyclical measures, the banks have to take a hit on their investments), yet they just pile onto the debt which has no possible chance of being paid back. All they are doing is making the situation worse.
Honestly, I think that these neo-liberals simply don’t know any other way. Their economic philosophy is a like a cage they can’t escape and they can’t think outside of a very narrow set of values, policies and ideas. They denigrate anyone who doesn’t agree with them, so there isn’t many alternative viewpoints around to consider, especially at most economics departments, think tanks and journals.
Either the left gets its act together and rallies around coherent alternatives or we in the West descend back into something like feudalism or even worse, cause the neoliberals simply don’t have any solutions. This is their mess and they have no ideas about how to clean it up. They are making it much, much worse.
I particularly like Yves talking about finance being a public utility. The private interests aren’t up the task and we have socialized their losses far too many times any damn way. The Mexican Peso Crisis, the various crisis during the Latin American debt crisis, S & L, Eat Asia and after when it spread in the late 90’s, the downturn that began in 2007, amongst many others.
We should have listened to Paul Sweezy and the Monthly Review economists who started to warn about financialization in the late 60’s. He and they have been proven right.
What baffles me is that everyone knows this is doomed to fail.
This is what baffles me, too. I work with people who believe things such as that the government has secretly invented perpetual motion machines and that space aliens have impregnated humans, but I can’t find *a single person* who thinks that this is going to work over an even intermediate term (ie, a 3-5 yr period).
And yet politicians/Central Bankers/talking heads somehow feel compelled to go through the motions of funding this crap and then do the photo ops and go in front of a camera and tell people that this is going to work. Like, wtf? I thought politicians’ only goals involved getting re-elected or re-appointed. Aren’t these people even remotely worried about having to defend the stupidity of their statements in the future? If I were making these types of decisions, I’d make damned sure there wasn’t any footage anywhere.
Maybe I’d even try to tell people that my underling Treasury Secretary pursued it all on his own and didn’t follow my directinos…
“US banks were also encouraged to cut back on exposures to Eurobanks”.
I recall that Bernanke himself warned of the systemic risk posed by US MM funds’ exposure there. So by taking on the risk directly, he avoids the need to bail out the US banks and just drains the US taxpayer through an open vein.