Tag Archives: Treasury

Italian article this am

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Misrepresents what I say a bit, but they do have my picture next to JFK!
;)

The IMF: sovereign currency, no longer the monopoly of the banks

Eliminate the public debt of the United States at once, and do the same with Great Britain, Italy, Germany, Japan, Greece. At the same time revive the ‘ economy, stabilize prices and oust the bankers. In a clean and painless, and faster than what you can imagine. With a magic wand? No. With a simple law, but able to replace the current system, in which to create money out of nothing are private banks. We only need a measure requiring the banks to hold a financial reserve real, 100%. To propose two economists at the International Monetary Fund, Jaromir Bene and Michael Kumhof. You, the bank, you want to make money on the loan of money? First you have to prove it really that much money. Too easy to have it by the central bank (which the factory from scratch) and then “extort” families, businesses and entire states, imposing exorbitant interest.

The study of two economists, “The Chicago Plan Revisited,” with “a revolutionary and” scandalous “‘Maria Grazia Bruzzone,” La Stampa “, emphasizes the global resonance of the dossier, that bursts like a bomb on the world capitalist system now jammed. The global debt came the exorbitant sum of 200 trillion, that is 200 trillion dollars, while the world GDP is less than 70 trillion. Translated: the world debt is 300% of gross domestic product of the entire planet. “And to hold this huge mountain of debt – which continues to grow – there are more advanced economies and developing countries,” says the Bruzzone, stressing that “the heart of the problem and the cross” is the highest “power” Japan, Europe and the United States. Hence the sortie “heretical” by Bene and Kumhof: simply write off the debt, it disappears.Sparked the debate was the last IMF report, which points the finger on austerity policies aimed at reducing thepublic debt . Policies that “could lead to recession in the economies ‘, since’ cuts and tax increases depress the ‘economy ‘.

Not only. The IMF would be really worried the crisis that is ravaging the ‘ Europe threatens to be worse than the 2008 financial. The surprise is that even the IMF now thinks that “austerity can be used to justify the privatization of public services,” with consequences “potentially disastrous”. But if the problem is the debt – public, but now “privatized” by finance – you can not delete? Solution already ventilated by the Bank of England, which holds 25% of the British sovereign debt: the Bank of England may reset it by clicking on the computer. Advantages: “You will pay much less interest, it would free up cash and you could make less harsh austerity.” The debate rages on many media, starting from the same “Financial Times”. thread which breaks now the revolutionary proposal of the two IMF economists targati: cancel the debt.

“The Chicago Plan Revisited,” writes Maria Grazia Bruzzone, raises and explores the “Chicago Plan” original, drawn up in the middle of the Great Depression of the ’30s by two other economists, Irving Fisher, Henry Simons of the University of Chicago, the cradle of liberalism . Cancel 100% of the debt? “The trick is to replace our system, where money is created by private banks – for 95-97% of the supply of money – money created by the state. It would mean return to the historical norm, before the English King Charles II put in private hands control of the money available, “back in 1666. It would mean a frontal assault on the “fractional reserve” banking, accused of seigniorage on the issue of currency speculation: if lenders are instead forced to hold 100% of its reserves to guarantee deposits and loans, “pardon the exorbitant privilege of create money out of nothing. ” As a result: “The nation regained control over the availability of money,” and also “reduces the pernicious cycles of expansion and contraction of credit.”

The authors of the first “Plan of Chicago” had thought that the cycles of expansion and contraction of credit lead to an unhealthy concentration of wealth: “They had seen in the early thirties creditors seize farmers effectively bankrupt, grab their lands or comprarsele for a piece of bread. ” Today, the authors of the new edition of this plan argue that the “trauma” of the credit cycle that expands and contracts – caused by private money creation – is a historical fact that is already outlined with Jubilees Debt ancient Mesopotamia, as well as in ancient Greece and even Rome. Sovereign control (the state or the Pope) on currency, recalls Bruzzone, Britain remained so throughout the Middle Ages, until 1666, when it began the era of the cycles of expansion and contraction. With the “bank privatization” of money, add the “Telegraph”, “opened the way for the agricultural revolution, and after the industrial revolution and the biggest leap Economic ever seen “- but it is not the case of” quibbling, “quips the newspaper.

According to the young economists of the IMF, is just a myth – disclosed “innocently” by Adam Smith – that the money has been developed as a medium of exchange based on gold, or related to it. Just as it is a myth, the study points out the IMF, what you learn from books: that is the Fed, the U.S. central bank, to control the creation of the dollar. “In fact, money is created by private banks to 95-97% through loans.” Private banks, in fact, do not lend as owners of cash deposits, the process is exactly the opposite. “Every time a bank makes a loan, the computer writes the loan (plus interest) and the corresponding liability in its balance sheet. But the money that pays the bank has a small part. If it does borrow from another bank, or by the central bank. And the central bank, in turn, creates out of nothing that lends the money to the bank. ”

In the current system, in fact, the bank is not required to have its own reserves – except for a tiny fraction of what it provides. Under a system of “fractional reserve”, each money created out of nothing is a debt equivalent: “Which produces an exponential increase in the debt, to the point that the system collapses on itself.” The economists of the IMF hours overturn the situation. The key is the clear distinction between the amount of money and the amount of credit between money creation and lending. If you impose banks to lend only numbers covered by actual reserves, loans would be fully funded from reserves or profits accrued. At that point, the banks can no longer create new money out of thin air. Generate profits through loans – without actually having a cash reserve – is “an extraordinary and exclusive privilege, denied to other business.”

“The banks – says Maria Grazia Bruzzone – would become what he mistakenly believed to be, pure intermediaries who have to get out their funds to be able to make loans.” In this way, the U.S. Federal Reserve “is approprierebbe for the first time the control over the availability of money, making it easier to manage inflation.” In fact, it is observed that the central bank would be nationalized, becoming a branch of the Treasury, and now the Fed is still owned by private banks. “Nationalizing” the Fed, the huge national debt would turn into a surplus, and the private banks’ should borrow reserves to offset possible liabilities. ” Already wanted to do John Fitzgerald Kennedy, who began to print – at no cost – “dollars of the Treasury,” against those “private” by the Fed, but the challenge of JFK died tragically, as we know, under the blows of the killer of Dallas , quickly stored from “amnesia” of powerful debunking.

Sovereign coin, issued directly by the government, the state would no longer be “liable”, but it would become a “creditor”, able to buy private debt, which would also be easily deleted. After decades, back on the field the ghost of Kennedy. In short: even the economists of the IMF hours espouse the theory of Warren Mosler, who are fighting for their monetary sovereignty as a trump card to go out – once and for all – from financial slavery subjecting entire populations, crushed by the crisis , the hegemonic power of a very small elite of “rentiers”, while the ‘ economic reality – with services cut and the credit granted in dribs and drabs – simply go to hell. And ‘the cardinal assumption of Modern Money Theory supported in Italy by Paul Barnard: if to emit “money created out of nothing” is the state, instead of banks, collapsing the blackmail of austerity that impoverishes all, immeasurably enriching only parasites of finance . With currency sovereign government can create jobs at low cost. That is, welfare, income and hope for millions of people, with a guaranteed recovery of consumption. Pure oxygen ‘s economy . Not surprisingly, adds Bruzzone, if already the original “Chicago Plan”, as approved by committees of the U.S. Congress, never became law, despite the fact that they were caldeggiarlo well 235 academic economists, including Milton Friedman and English liberal James Tobin, the father of the “Tobin tax”. In practice, “the plan died because of the strong resistance of the banking sector.” These are the same banks, the journalist adds the “Print”, which today recalcitrano ahead to reserve requirements a bit ‘higher (but still of the order of 4-6%) required by the Basel III rules, however, insufficient to do deterrent in the event of a newcrisis . Banks: “The same who spend billions on lobbying and campaign contributions to presidential candidates. And in front of the new “Chicago Plan” threaten havoc and that “it would mean changing the nature of western capitalism. ‘” That may be true, admits Bruzzone: “Maybe but it would be a better capitalism. And less risky. ”

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Comments on Senator Sanders article on the Fed

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Dear Senator Sanders,

Thank you for your attention to this matter!
My comments appear below:

The Veil of Secrecy at the Fed Has Been Lifted, Now It’s Time for Change

By Senator Bernie Sanders

November 2 (Huffington Post) — As a result of the greed, recklessness, and illegal behavior on Wall Street, the American people have experienced the worst economic crisis since the Great Depression.

Not to mention the institutional structure that rewarded said behavior, and, more important, the failure of government to respond in a timely manner with policy to ensure the financial crisis didn’t spill over to the real economy.

Millions of Americans, through no fault of their own, have lost their jobs, homes, life savings, and ability to send their kids to college. Small businesses have been unable to get the credit they need to expand their businesses, and credit is still extremely tight. Wages as a share of national income are now at the lowest level since the Great Depression, and the number of Americans living in poverty is at an all-time high.

Yes, it’s all a sad disgrace.

Meanwhile, when small-business owners were being turned down for loans at private banks and millions of Americans were being kicked out of their homes, the Federal Reserve provided the largest taxpayer-financed bailout in the history of the world to Wall Street and too-big-to-fail institutions, with virtually no strings attached.

Only partially true. For the most part the institutions did fail, as shareholder equity was largely lost. Failure means investors lose, and the assets of the failed institution sold or otherwise transferred to others.

But yes, some shareholders and bonds holders (and executives) who should have lost were protected.

Over two years ago, I asked Ben Bernanke, the chairman of the Federal Reserve, a few simple questions that I thought the American people had a right to know: Who got money through the Fed bailout? How much did they receive? What were the terms of this assistance?

Incredibly, the chairman of the Fed refused to answer these fundamental questions about how trillions of taxpayer dollars were being spent.

The American people are finally getting answers to these questions thanks to an amendment I included in the Dodd-Frank financial reform bill which required the Government Accountability Office (GAO) to audit and investigate conflicts of interest at the Fed. Those answers raise grave questions about the Federal Reserve and how it operates — and whose interests it serves.

As a result of these GAO reports, we learned that the Federal Reserve provided a jaw-dropping $16 trillion in total financial assistance to every major financial institution in the country as well as a number of corporations, wealthy individuals and central banks throughout the world.

Yes, however, while I haven’t seen the detail, that figure likely includes liquidity provision to FDIC insured banks which is an entirely separate matter and not rightly a ‘bailout’.

The US banking system (rightly) works to serve public purpose by insuring deposits and bank liquidity in general. And history continues to ‘prove’ banking in general can work no other way.

And once government has secured the banking system’s ability to fund itself, regulation and supervision is then applied to ensure banks are solvent as defined by the regulations put in place by Congress, and that all of their activities are in compliance with Congressional direction as well.

The regulators are further responsible to appropriately discipline banks that fail to comply with Congressional standards.

Therefore, the issue here is not with the liquidity provision by the Fed, but with the regulators and supervisors who oversee what the banks do with their insured, tax payer supported funding.

In other words, the liability side of banking is not the place for market discipline. Discipline comes from regulation and supervision of bank assets, capital, and management.

The GAO also revealed that many of the people who serve as directors of the 12 Federal Reserve Banks come from the exact same financial institutions that the Fed is in charge of regulating. Further, the GAO found that at least 18 current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis. In other words, the people “regulating” the banks were the exact same people who were being “regulated.” Talk about the fox guarding the hen house!

Yes, this is a serious matter. On the one hand you want directors with direct banking experience, while on the other you strive to avoid conflicts of interest.

The emergency response from the Fed appears to have created two systems of government in America: one for Wall Street, and another for everyone else. While the rich and powerful were “too big to fail” and were given an endless supply of cheap credit, ordinary Americans, by the tens of millions, were allowed to fail.

The Fed necessarily sets the cost of funds for the economy through its designated agents, the nations Fed member banks. It was the Fed’s belief that, in general, a lower cost of funds for the banking system, presumably to be passed through to the economy, was in the best interest of ‘ordinary Americans.’ And note that the lower cost of funds from the Fed does not necessarily help bank earnings and profits, as it reduces the interest banks earn on their capital and on excess funds banks have that consumers keep in their checking accounts.

However, there was more that Congress could have done to keep homeowners from failing, beginning with making an appropriate fiscal adjustment in 2008 as the financial crisis intensified, and in passing regulations regarding foreclosure practices.

Additionally, it should also be recognized that the Fed is, functionally, an agent of Congress, subject to immediate Congressional command. That is, the Congress has the power to direct the Fed in real time and is thereby also responsible for failures of Fed policy.

They lost their homes. They lost their jobs. They lost their life savings. And, they lost their hope for the future. This is not what American democracy is supposed to look like. It is time for change at the Fed — real change.

I blame this almost entirely on the failure of Congress to make the immediate and appropriate fiscal adjustments in 2008 that would have sustained employment and output even as the financial crisis took its toll on the shareholder equity of the financial sector.

Congress also failed to act with regard to issues surrounding the foreclosure process that have worked against public purpose.

Among the GAO’s key findings is that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse. In fact, according to the GAO, the Fed actually provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

The GAO has detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves.

For example, the CEO of JP Morgan Chase served on the New York Fed’s board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed. Moreover, JP Morgan Chase served as one of the clearing banks for the Fed’s emergency lending programs.

This demands thorough investigation, and in any case the conflict of interest should have been publicly revealed at the time.

Getting this type of disclosure was not easy. Wall Street and the Federal Reserve fought it every step of the way. But, as difficult as it was to lift the veil of secrecy at the Fed, it will be even harder to reform the Fed so that it serves the needs of all Americans, and not just Wall Street. But, that is exactly what we have to do.

Yes, I have always supported full transparency.

To get this process started, I have asked some of the leading economists in this country to serve on an advisory committee to provide Congress with legislative options to reform the Federal Reserve.

Here are some of the questions that I have asked this advisory committee to explore:

1. How can we structurally reform the Fed to make our nation’s central bank a more democratic institution responsive to the needs of ordinary Americans, end conflicts of interest, and increase transparency? What are the best practices that central banks in other countries have developed that we can learn from? Compared with central banks in Europe, Canada, and Australia, the GAO found that the Federal Reserve does not do a good job in disclosing potential conflicts of interest and other essential elements of transparency.

Yes, full transparency in ‘real time’ would serve public purpose.

2. At a time when 16.5 percent of our people are unemployed or under-employed, how can we strengthen the Federal Reserve’s full-employment mandate and ensure that the Fed conducts monetary policy to achieve maximum employment? When Wall Street was on the verge of collapse, the Federal Reserve acted with a fierce sense of urgency to save the financial system. We need the Fed to act with the same boldness to combat the unemployment crisis.

Unfortunately employment and output is not a function of what’s called ‘monetary policy’ so what is needed from the Fed is full support of an active fiscal policy focused on employment and price stability.

3. The Federal Reserve has a responsibility to ensure the safety and soundness of financial institutions and to contain systemic risks in financial markets. Given that the top six financial institutions in the country now have assets equivalent to 65 percent of our GDP, more than $9 trillion, is there any reason why this extraordinary concentration of ownership should not be broken up? Should a bank that is “too big to fail” be allowed to exist?

Larger size should be permitted only to the extent that it results in lower fees for the consumer. The regulators can require institutions that wish to grow be allowed to do so only in return for lower banking fees.

4. The Federal Reserve has the responsibility to protect the credit rights of consumers. At a time when credit card issuers are charging millions of Americans interest rates between 25 percent or more, should policy options be established to ensure that the Federal Reserve and the Consumer Financial Protection Bureau protect consumers against predatory lending, usury, and exorbitant fees in the financial services industry?

Banks are public/private partnerships chartered by government for the further purpose of supporting a financial infrastructure that serves public purpose.

The banks are government agents and should be addressed accordingly, always keeping in mind the mission is to support public purpose.

In this case, because banks are government agents, the question is that of public purpose served by credit cards and related fees, and not the general ‘right’ of shareholders to make profits.

Once public purpose has been established, the effective use of private capital to price risk in the context of a profit motive should then be addressed.

5. At a time when the dream of homeownership has turned into the nightmare of foreclosure for too many Americans, what role should the Federal Reserve be playing in providing relief to homeowners who are underwater on their mortgages, combating the foreclosure crisis, and making housing more affordable?

Again, it begins with a discussion of public purpose, where Congress must decide what, with regard to housing, best serves public purpose. The will of Congress can then be expressed by the institutional structure of its Federal banking system.

Options available, for example, include the option of ordering that appraisals and income statements not be factors in refinancing loans originated by Federal institutions including banks and the Federal housing agencies. At the time of origination the lenders calculated their returns based on mortgages being refinanced as rates came down, assuming all borrowers would be eligible for refinancing. The financial crisis and subsequent failure of policy to sustain employment and output has given lenders an unexpected ‘bonus’ through a ‘technicality’ that allows them to refuse requests for refinancing at lower rates due to lower appraisals and lower incomes.

6. At a time when the United States has the most inequitable distribution of wealth and income of any major country, and the greatest gap between the very rich and everyone else since 1928, what policies can be established at the Federal Reserve which reduces income and wealth inequality in the U.S?

The root causes begin with Federal policy that has resulted in an unprecedented transfer of wealth to the financial sector at the expense of the real sectors. This can easily and immediately be reversed, which would serve to substantially reverse the trend income distribution.

Sincerely,

Warren Mosler

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News recap comments

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The news flow from last week was so voluminous it was nearly impossible to process. For good measure I want to start today’s commentary with a simple recap of what happened.

On the negative side –

· Greece called a referendum and threw bailout plans up in the air taking Greek 2yrs from 70% to 90% or +2000bps.
· Italian 10yr debt collapsed 40bps with spreads to Germany out 70bps. The moves were far larger in the 2yr sector.
· France 10y debt widened 25bps to Germany. At one point spreads were almost 40 wider.
· Italian PMI and Spanish employment data were miserable.
· German factory orders plunged 4.3 percent on the month.
· The planned EFSF bond for 3bio was pulled.
· Itraxx financials were +34 while subs were +45.
· Draghi predicted a recession for Europe along with disinflation.
· The G20 was flop – there was no agreement on IMF involvement in Europe.
· The US super committee deadline is 17 days away with no clear agreement.
· The 8th largest US bankruptcy in history took place.
· US 10yr and 30yr rallied 28bps, Spoos were -2.5%, the Dax was -6% and EURUSD was -3%.
· German CDS was up 16bps on the week.

On the positive side –

· The Fed showed its hand with tightening dissents now gone and an easing dissent in place.

Too bad what they call ‘easing’ at best has been shown to do nothing.

· The Fed’s significant downside risk language remained intact.

Downside risks sound like bad news to me.

· In the press conference Ben teed up QE3 in MBS space.

Which at best have been shown to do little or nothing for the macro economy.

· US payrolls, claims, vehicle sales and productivity came in better than expected.

And the real output gap if anything widened.

· S&P earnings are coming in at +18% y/y with implied corporate profits at +23 percent q/q a.r.

Reinforces the notion that it’s a good for stocks, bad for people economy.

· Mortgage speeds were much faster than expectations suggesting some easing refi pressures.

And savers holding those securities saw their incomes cut faster than expected.

· The ECB cut 25bps and indicated a dovish forward looking stance.

Which reduced euro interest income for the non govt sectors

· CME Margins were reduced.

Just means volatility was down some.

· There was a massive USDJPY intervention which may be a precursor to a Swiss style Japanese policy easing.

Which, for the US, means reduced costs of imports from Japan, which works against US exports, which should be a good thing for the US as it means for the size govt we have, taxes could be lowered to sustain demand, but becomes a bad thing as our leadership believes the US Federal deficit to be too large and so instead we get higher unemployment.

· The Swiss have indicated they want an even weaker CHF – possibly EURCHF 1.40.

When this makes a list of ‘positives’ you know the positives are pretty sorry

· The Aussies cut rates 25bps

Cutting net interest income for the economy.

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President Obama entering the fray

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More of the blind leading the blind. The one thing they all agree on, at great expense to global well being, is the budget deficits are all too large and the need for shared sacrifice and all that.

No chance for anything constructive to come out of any of this.

And these masters of their money machines don’t even know how to inflate, as they all desperately try to inflate with their versions of quantitative easing, which, functionally, is just another demand draining tax.

*DJ Merkel, Obama Discussed How To Boost EFSF Firepower Without ECB
*DJ Obama To Merkel: We Are Totally Invested In Your Success – Source
*DJ Geithner, Schaeuble May Meet To Discuss IMF Role In Euro Crisis -Source

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CBO Congressional Report- U.S. Could Face European-Style Debt Crisis

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How about the accounts sticking to accounting.

Just in case you thought there was any hope:

But most ominously, the CBO report warns of a “sudden fiscal crisis” in which investors would lose faith in the U.S. government’s ability to manage its fiscal affairs. In such a fiscal panic, investors might abandon U.S. bonds and force the government to pay unaffordable interest rates. In turn, the report warns, Washington policymakers would have to win back the confidence of the markets by imposing spending cuts and tax increases far more severe than if they were to take action now.

U.S. Could Face European-Style Debt Crisis: Congressional Report

June 22 (AP) — The rapidly growing national debt could soon spark a European-style crisis unless Congress moves forcefully, the Congressional Budget Office warned Wednesday in a study that underscores the stakes for a bipartisan group working on a plan to reduce red ink.

Republicans seized on the non-partisan report to renew their push to reduce costs in federal benefit programs such as Medicare — the federal government health care program that benefits the elderly.

The report said the national debt, now $14.3 trillion, is on pace to equal the annual size of the economy within a decade. It warned of a possible “sudden fiscal crisis” if it is left unchecked, with investors losing faith in the U.S. government’s ability to manage its fiscal affairs.

Democrats and Republicans have been stepping up budget talks aimed at averting what could be the disastrous first-ever default on U.S. government debt. A bipartisan group led by Vice President Joe Biden tasked with reaching an agreement has not made the politically difficult compromises on the larger issues, such as changes in Medicare, or tax increases.

The study reverberated throughout the Capitol as Biden and negotiators and senior lawmakers spent several hours behind closed doors. The talks are aimed at outlining about $2 trillion in deficit cuts over the next decade, part of an attempt to generate enough support in Congress to allow the Treasury to take on new borrowing.

Biden made no comment as he departed, except to say the group would meet again on Thursday and probably Friday as well.

The CBO, the non-partisan agency that calculates the cost and economic impact of legislation and government policy, says the nation’s rapidly growing debt burden increases the probability of a fiscal crisis in which investors lose faith in U.S. bonds and force policymakers to make drastic spending cuts or tax increases.

“As Congress debates the president’s request for an increase in the statutory debt ceiling, the CBO warns of a more ominous credit cliff — a sudden drop-off in our ability to borrow imposed by credit markets in a state of panic,” said Republican House Budget Committee Chairman Paul Ryan.

The findings aren’t dramatically new, but the budget office’s analysis underscores the magnitude of the nation’s fiscal problems as negotiators struggle to lift the current $14.3 trillion debt limit and avoid a first-ever, market-rattling default on U.S. obligations. The Biden-led talks have proceeded slowly and are at a critical stage, as Democrats and Republicans remain at loggerheads over revenues and domestic programs like Medicare and Medicaid.

With Republicans insisting that the level of deficit cuts at least equal the amount of any increase in the debt limit, it would take more than $2 trillion in cuts to carry past next year’s elections. House Republican leaders have made it plain they only want a single vote before the elections.

That $2 trillion-plus goal is proving elusive. And a top Senate Democrat warned Wednesday that it would be insufficient anyway.

“While I am encouraged by the bipartisan nature of the leadership negotiations being led by Vice President Biden, I am concerned by reports the group may be focusing on a limited package that will not fundamentally change the fiscal trajectory of the nation,” said Senate budget Committee Chairman Kent Conrad, a Democrat. “That would be a mistake.”

Democratic leaders, however, held a news conference Wednesday to argue for more economic stimulus measures such as a proposal floated by the White House to extend a payroll tax cut enacted last year. The move demonstrates the continuing appeal of deficit-financed policy solutions — suggested even as warnings of the dangers of mounting debt grow louder and louder.

“We absolutely need to reduce our deficit. We know that,” said Demoratic Senate Majority Leader Harry Reid. “But economists tell us that reducing spending is only half the equation. The other half is measures to create jobs.

President Barack Obama planned to meet with House Democratic leaders Thursday to discuss the status of the deficit reduction talks. The meeting comes as Democrats want the president to rule out Medicare benefit cuts as part of any budget deal.

The White House said the meeting will address deficit reduction through a “balanced framework,” a term the White House uses to describe cuts in spending coupled with increased tax revenue.

With the fiscal imbalance requiring the government to borrow more than 40 cents of every dollar it spends, the CBO predicts that without a change of course the national debt will rocket from 69 percent of gross domestic product this year to 109 percent of GDP — the record set in World War II — by 2023.

The CBO’s projections are based on a scenario that anticipates Bush-era tax cuts are extended and other current policies such as maintaining doctors’ fees under Medicare are continued as well. The debt would be far more stable under the budget office’s official “baseline” that assumes taxes return to Clinton-era rates and that doctors absorb unrealistic fee cuts.

Economists warn that rising debt threatens to devastate the economy by forcing interest rates higher, squeezing domestic investment, and limiting the government’s ability to respond to unexpected challenges like an economic downturn.

But most ominously, the CBO report warns of a “sudden fiscal crisis” in which investors would lose faith in the U.S. government’s ability to manage its fiscal affairs. In such a fiscal panic, investors might abandon U.S. bonds and force the government to pay unaffordable interest rates. In turn, the report warns, Washington policymakers would have to win back the confidence of the markets by imposing spending cuts and tax increases far more severe than if they were to take action now.

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Major Banks Likely to Get Reprieve on New Capital Rules

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The real problem is if you understand what a bank is, you wouldn’t be trying to use capital ratios to protect taxpayer money.

First, notice that the many of the same people clamoring for higher capital ratios have also supported ‘nationalization’ of banks, which means there is no private capital. So it should be obvious that something other than private capital is employed to protect taxpayer money.

Taxpayer money is protected on the asset side (loans and other investments held by banks) with lending regulations. That includes what type of investments are legal for banks, what kind of lending is legal, including collateral requirements and income requirements. That means if Congress thought the problem in 2008 was lax and misguided lending, to further protect taxpayer money they need to tighten things up on that side. And that would include tightening up on supervision and enforcement as well.

(Of course, they think the current problem is banks are being too cautious, but Congress talking out of both sides of its mouth has never seemed to get in the way before. Just look at the China policy- they want China to strengthen its currency which means they want the dollar to go down vs the yuan, but at the same time they are careful not to employ policy that might cause China to sell their dollars and drive the dollar down vs the yuan.)

So what is the point of bank capital requirements? It’s the pricing of risk.

With an entirely publicly owned bank, risk is priced by government officials which means it’s politicized, with government officials deciding the interest rates that are charged. With private capital in first loss position, risk is priced by employees who are agents for the shareholders, who want the highest possible risk adjusted returns on their investment. This introduces an entirely different set of incentives vs publicly owned institutions. And the choice between the two, and the two alternative outcomes, is a purely political choice.

With our current arrangement of banking being public/private partnerships, the ratio between the two is called the capital ratio. For example, with a 10% capital ratio banks have 10% private capital, and 90% tax payer money (via FDIC deposit insurance). And what changing the capital ratio does is alter the pricing of risk.

Banks lending profits from the spread between the cost of funds and the rates charged to borrowers. And with any given spread, the return on equity falls as capital ratios rise. And looked at from the other perspective, higher capital ratios mean banks have to charge more for loans to make the same return on equity.

Additionally, investors/market forces decide what risk adjusted return on investment is needed to invest in a bank. Higher capital requirements lower returns on investment, but risk goes down as well. But it’s not a ‘straight line’ relationship. It takes a bit of work to sort out all the variables before an informed decision can be made by policy makers when setting required capital ratios.

So where are we?

We have policy makers and everyone else sounding off on the issue who all grossly misunderstand the actual dynamics trying to use capital requirements to protect taxpayer money.

Good luck to us!

For more on this see Proposals for the Banking System, Treasury, Fed, and FDIC

Major Banks Likely to Get Reprieve on New Capital Rules

By Steve Liesman

June 10 (CNBC) — The world’s major banks may get a break from regulators and be forced to set aside only 2 percent-to-2.5 percent more capital rather than the 3 percent reported earlier, officials familiar with the discussions told CNBC.

News of the potential reprieve—which would affect major global banks such as JPMorgan , Citigroup , Bank of America , Wells Fargo , UBS and HSBC —helped stocks pare losses Friday afternoon.

The new rule, which would force the world’s biggest financial institutions to set aside more capital as a cushion against potential losses, is being imposed after the recent credit crisis nearly caused the collapse of the banking system.

The increased capital buffer would be in addition to a seven percent capital increase for all banks, which was negotiated at last year’s Basel III meeting.

The officials, who asked not to be named, made their comments after global banking regulators met this week in Frankfurt. The US has proposed a tougher three percent charge for big banks, but there has been pushback from some European nations, especially France. Negotiations are continuing.

The news comes after JPMorgan Chief Jamie Dimon rose in an Atlanta meeting this week and directly confronted Fed Chairman Ben Bernanke over the numerous new banking regulations, including a new surcharge for the biggest banks.

Officials say there is a more formal meeting in two weeks of regulators in Basel, Switzerland, where the actual percentage should be formalized as a proposal to global leaders.

Sources caution that the situation is still a moving target, with the U.S. apparently holding out for a higher global surcharge if other countries push lower forms of capital, other than common equity, to be used to meet capital requirements.

Earlier this week, U.S. Treasury Department Secretary Tim Geithner suggested that the higher the quality of capital, the lower the surcharge can be.

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The latest from our Treasury

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  • TREASURY AIMING TO NOT HAVE BANK STRESS TEST RESULTS REVEALED UNTIL END OF APRIL AT EARLIEST–SOURCE FAMILIAR WITH TREASURY TALKS

  • TREASURY WANTS TO DELAY ANY PUBLIC RESULTS OF COMPLETED TESTS SO AS NOT TO COMPLICATE MARKET’S REACTION TO BANKS’ Q1 EARNINGS–SOURCE

This is most peculiar. This administration continues to make one blunder after another.

Feeling a lot like the Carter days.

  • TREASURY STILL DISCUSSING HOW THE BANK STRESS TEST RESULTS WILL BE REVEALED

  • TREASURY CONSIDERING RELEASING RESULTS IN SOME AGGREGATE FORM, NOT INSTITUTION-SPECIFIC RESULTS–SOURCE


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Reverse auction proposed

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Under this proposal from treasury, they would ask for offerings from the banks and then take the lowest prices for up to $50 billion at a time.

This means they will be paying more and more for each round of purchases, driving up the prices from current market value.

And if the plan is to spend the entire $700 billion they could drive prices up through the roof.

They would need to limit the prices they are willing to pay somehow.


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U.S. Treasury announces plan to insure money-market holdings

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On Fri, Sep 19, 2008 at 9:44 AM, Scott asks:

These moves HAVE to be bad for the dollar, no?

Not much effect per se.

Immediate effect is higher interest rates/stronger stocks which very near term helps the USD.

But it seems saudis are hiking price which, if it continues, will again send the dollar down.

Also, the Fed showed some concern about exports softening, which they probably attribute to the recent USD strength.

So seems the Fed and Treasury probably don’t want the dollar to get too strong.

Major equity short covering rally in progress.

When it runs its course, the US economy will still be weak and higher crude prices will be problematic as well.


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Equity prices dropping to takeover levels

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A while back I wrote about how shareholders were at risk of management selling them up the river with dilutive converts and the like.

But if a someone buys all the shares in a takeover they don’t have that risk.

Therefore, I concluded, equities would get cheap enough for a massive round of takeovers.

Now a different risk has presented itself. Seems when the Fed or the Treasury decides to step in and help they take 79.9% of the equity.

So when the stock of a too-big-to-fail prospect starts going down, the incentives are in place for it going down further/faster as the risk of government intervention increases.

Lower prices make takeovers even more attractive.

Once they get going, look for record takeover volume.


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