Friday, February 12, 2010

Hedging your Swamp with Alligator Derivatives

For the second time in a month the Chinese government has raised reserve requirements for its banks in an effort control the market bubble Wall Street bankers are making a killing on. This move came on the eve of the extended Chinese New Year holiday and caught everybody by surprise. This move is driving the USD up against the Euro and commodities down. This is a bit odd since the Yuan is hard linked to the USD and China is the country everybody worried about.

Meanwhile Paul Volcker, Fed Chairman from the Carter Adm. who heads Obama’s Economic Recovery Advisory Board wants (with Obama’s blessing) to yank the Bank Holding Company status from the big banks like Goldman Sachs that allows them access to Fed money at near zero interest. Not so fast says Goldman, we’ll just close our deposit bank and since we aren’t risking the public’s money anymore we can keep our free access to Fed money just the same. Bubble? What bubble?

It’s estimated that there are still 600 trillion in derivatives in circulation worldwide down from a high of one quadrillion (1,000,000,000,000,000) before the bank freeze in ‘08. The “freeze” was by the way, from the Bank of International Settlements (BIS) in Switzerland refusing to clear transactions from the big banks until they demonstrated that they had adequate reserves or any reserves at all. Which they didn’t, so the Fed stepped in and doubled the money supply and lent it to these banks at zero interest. The Fed still won’t say who got the fourteen trillion dollars.

The problem is that enacting the Volcker Rule (a weak version of Glass-Seagal that was repealed by Clinton and the Republicans) will require action by Congress and Congressmen need to consider that with the sheer volume cash the bankers have they can buy and sell the entire election with ease. The entire ‘08 election campaign cost only about six billion and Goldman alone just passed out 17 billion just in bonuses. Since the Supreme Crime Family has given its blessing to spending unlimited money straight from corporate coffers on campaign ads, no Congressman is safe.

The rightwing talking point is that corporations wouldn’t risk public outrage by sponsoring ads. The problem with that is that corporations can own corporations and launder money through off shore accounts. The ads that run on your local TV tying your Congressman to a plot to steal your children may never be directly linked to the real source of the money. At least not until your democracy is long gone.

The Fed could jump in at anytime close these banks down. The Republicans gave the Fed sole regulatory control over the mega banks when minority Democrats objected to the ending of Depression era laws that kept these banks from destroying the country from 1935 until now.

Alan Greenspan who as Fed Chairman was the prime mover in setting up this debacle has apologized before Congress and said he was shocked that the bankers would behave this way. Greenspan wrote his Doctoral Thesis on the Florida land boom of the 1920’s that led to the banking collapse just as FDR took office. I’ve never read it but I suspect his thesis defended the sale of swamp land and criticized the failure of FDR’ New Deal to properly embrace the practice. FDR just needed to legalize alligator derivatives.

Thursday, February 11, 2010

Cake if not Bread

New unemployment claims for last week dropped by about 8% and from the media coverage you would everything had changed overnight. It hasn’t of course and these numbers are often revised later by a significant amount. It’s more likely that states are having reporting problems from the snow storms than that there was any real change. The underlying causes of unemployment have not only not changed but continue to worsen.

The Senate Finance Committee has released a draft of the Hiring Incentives to Restore Employment Act or HIRE. With a name like that you are reminded of bills from the Bush Crime Family era like The Healthy Forests Initiative, Clear Skies Initiative and No Child Left Behind. This 80 billion dollar monster is no different as it is loaded up with tax cuts and few jobs. This should be no surprise with Senators Baucus and Grassley as co-sponsors. One is a wholly owned corporate Republican that passes himself off as a Democrat and the other is a Christian Dominionist and member of the “C Street Family” who passes himself off as hard right Republican.

Any benefit to the public in a bill these two would put their names on is just a fig leaf to conceal the corporate engorgement that Bob Dole had to take pills to achieve. The part of Britney Spears in this ad spot will be played by the middle class.

The tax cuts are touted as a boon to small business and municipalities issuing construction bonds but without fixing the real problems this won’t happen. Small business doesn’t hire people to get a tax break, they hire because there is market share to be had. Companies like Wal-Mart already get huge tax breaks and will continue to grind small business into the ground. No tax break will help you if Wal-Mart comes to your town and undercuts you until you are gone.

Cities are going into a cash flow collapse and aren’t likely to be issuing a lot of bonds either. Congress could roll back the Reagan tax cuts for the rich who would be buying the bonds. Then we could simply pay cash like they did in the good old days when all our neglected infrastructure was built. Instead of spending the four trillion it would take to fix all our infrastructure (there might be some jobs there) they want to sell it off for pennies on the dollar. Then we can pay for it all again in usage fees plus a large profit for the same rich people who got the Reagan tax cuts. Makes sense if you’re one of those rich people except for the ever diminishing returns from that sort of system. But they’ll let us eat cake if not bread.

Wednesday, February 10, 2010

Back from Down Under

The DOW took an early plunge on news that the trade deficit was up sharply by more billions than Wall St. expected. The market did claw back to finish only 20 points down on the rumor that the EU will bail out Greece. This was based solely on the observation that an EU Finance Minister cut short his trip to Australia. (crikey) To further gin up enthusiasm among the Wall Street traders, the disaster capitalists are circulating gloating soliloquies about the failure of European socialism. Going on and on how the Greeks and the other PIGS countries will be brought under the lash of fiscal conservatism or in plain English; grinding poverty and depravation. Slashing budgets, eliminating government jobs and the end of unions will bring many opportunities for privatization and a shift of the tax burden away from business or so the story goes. Where have we heard this before? They are confidently predicting that this will spread throughout Europe creating the kind of Neo-con paradise they envisioned for Iraq.

Of course what is really calming the market is the word from the Fed that they will not cut off the free money anytime soon and the plan they have for drawing money from the credit system should inflation ever return is on indefinite hold. Our central bank has printed fourteen trillion dollars to bail out the financial services “industry”. An “industry” that produces nothing and drains off the wealth of the middle class as they facilitate the out sourcing of all their jobs. Now they have used their wholly owned Supreme Court to take over the rest of the government on their way to world domination. And right wingers tell you “Europe should do things the American Way”.

The Greeks are living the Neo-con dream and soon enough so will we. With new stimulus money off the table, states and local governments will start running out of money soon. The estimate is that when the Federal money runs out that 900,000 state and local jobs will need to be cut. This doesn’t allow for an ever shrinking tax base that will require even more cuts and as government becomes more dysfunctional, it becomes more inefficient and starts lurching from crisis to crisis.

The Republican base that has been told that government doesn’t work will find out what that is really like. The rich are already subscribing to private police and fire services. Better add ammunition and some basic fire fighting equipment to your canned goods stash.

Monday, February 8, 2010

Sucker Bets

The DOW 30 dropped another 100 points today on fears that Greece and some other countries on the periphery of the EU will default on their debts. The countries involved are known as the PIGS (Portugal, Ireland, Greece and Spain) and represent only a small fraction of Europe’s GDP and this hardly seems like a crisis for Wall Street.

The problem is that currency traders are betting a record amount against the Euro or “short selling” it on the futures market on the hopeful anticipation of the Euro tanking against the USD. Hedge funds have by short selling stocks taken down major banks and corporations in the past couple of years and now they have their sights set on a whole continent.

How does this affect the DOW? US corporations aren’t really American with more than half their business spread over the rest of the world and the US economy certainly can’t be counted on to keep them going. The markets are over inflated to begin with, you could replace the assets of these companies for about 60% of what their stock is currently selling for. Put that way, who would buy stock? It is all predicated on the premise that the price of stocks will continue to be bid up by people with more money than brains. Shhh… don’t tell the suckers.

So if there is a major default and Europe has to take a big haircut on the value of quarter of the world’s currency, this will ripple across the planet. China by the way, holds a lot of Euros as does much of the world. The strengthening USD is already causing problems because the Fed prints money like a banana republic and a general feeling of dread is spreading.

Inflation was rearing its ugly head but now deflation is the big fear again. Once defaulting starts it spreads like a flesh eating bacteira. Those corporate assets that you were already paying too much for when you buy stock could drop to a fraction of their current book value. When this has happened many times in the past 130 years, the stock market has dropped to a small fraction of what it had been, usually about 30% of asset value.

In the old days (before Reagan) the stock market was something rich people gambled on. In the twenties the middle class was suckered into the Ponzi scheme and lost big. But that was before 401k’s, all that extra money has been a meal ticket for the financial services “industry”. Now the party’s over, better tighten the belt, time to think about what park you will be sleeping in and what dumpster has the best eats.