Wednesday, November 30, 2011

Money For Nothing and Risk For Free?

Love days like today. Those hopeless shorties at Zero Hedge are fuming after world central banks decided to pump up the jam. I've been warning them, don't mess with banksters, not only do they get secret Fed loans, they borrow for free on the short end, lock in spread by buying bonds, and invest in risk assets like high beta stocks, EM stocks, commodities, commodity currencies and high yield bonds.

Lots of money managers underperforming their indexes. Both long-only managers and hedge funds. They need a mega beta boost, which is why I'm positioned for La Dolce Beta once more (click on each image to enlarge):

When people ask me what is the biggest tail risk I see, I tell them, "a meltup unlike anything you've ever seen before." Forget Europe, it's just a lot of noise and in the end, Germany will cave to demands of financial oligarchs and back a eurobond market.

There will be profit taking along the way -- there always is -- but if you focus on the right stocks and right sectors, you'll profit from the mega beta boost coming our way. In a zero rate world where banksters get money for nothing and risk for free, don't be left behind. Just remember to stay nimble, take profits, and don't be surprised if these markets heat up all over again. When things really heat up, it will be unlike anything you've experienced before.

Pump Up The Jam?

Twas the month before Christmas when the world's central banks decided to pump up the jam:
The world's major central banks made it easier Wednesday for banks to get dollars if they need them, a coordinated move to ease the strains on the global financial system. Stock markets rose sharply on the move.

The European Central Bank, U.S. Federal Reserve, the Bank of England and the central banks of Canada, Japan and Switzerland are all taking part in the operation, which is designed to "enhance their capacity to provide liquidity support to the global financial system."

The European Central Bank said in a statement the central banks were making it cheaper for banks to get U.S. dollar liquidity when they need it, starting next Monday. They are also taking steps to ensure banks can get ready money in any currency if market conditions warrant by establishing a temporary network of reciprocal swap lines.

The ECB said the central banks have agreed to reduce the cost of temporary dollar loans to banks — called liquidity swaps — by a half percentage point. The new, lower rate will be applied to all central bank operations starting on Monday.

Stocks surged following the news. Germany's DAX was trading 4 percent higher as were Dow futures in New York.

The financial system has been showing signs of entering another credit crunch like the one in 2008 as Europe's debt crisis has shown alarming signs of spreading. The possibility that one or more European governments might default on debt have raised fears of a shock to the global financial system that would lead to severe losses for banks and a contraction in lending.

Fears of more financial turmoil in Europe have already left some European banks dependent on central bank loans to fund their daily operations. Other banks are wary of lending to them for fear of not getting paid back.

Such constraints on interbank lending can hurt the wider economy by making less money available to lend to businesses.

Even China reduced its reserve ratio to spur bank loans:

China cut the amount of cash that banks must set aside as reserves for the first time since 2008 as Europe’s debt crisis dims the outlook for exports and growth.

Reserve ratios will decline by 50 basis points effective Dec. 5, the People’s Bank of China said in a statement on its website today. Before the announcement, the level was a record 21.5 percent for the biggest lenders, based on previous PBOC statements.

A government clampdown on property speculation has added to the risk of a deeper slowdown in the economy that contributes the most to global growth. Exports rose by the least in almost two years in October and inflation eased to 5.5 percent, the smallest gain in five months.

“The move will help ease liquidity after previous tightening measures cooled credit growth too much and may have added to the risks of a hard landing for China,” Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd., said before today’s release.

The People’s Bank of China previously allowed reserve ratios to fall by half a percentage point for more than 20 rural credit cooperatives. Those lenders had been subject to elevated requirements for a year as a penalty for failing to meet lending targets.

Premier Wen Jiabao said last month the government will fine-tune economic policies as needed to sustain growth while pledging to maintain curbs on real estate. Economic growth cooled to 9.1 percent in the third quarter from a year earlier, the slowest pace in two years.

How should one read this latest "coordinated" effort of the world's central banks? Easy, it's what I always knew, the power elite dominated by financial oligarchs will do anything and everything to reflate risk assets and inflate their way out of this crisis. They don't really have much of a choice given that fiscal policy is increasingly becoming more restrictive as governments slash spending across the developed world.

Yet another liquidity tsunami has been unleashed on world markets. Things might turn back to normal again and we might get that Christmas rally we were all waiting for. And now that Silvio Berlusconi has reemerged and confirmed he will return to be president of AC Milan, it's "bunga, bunga" party time. Pump up the jam, la dolce beta coming right up.

Tuesday, November 29, 2011

By George, How Bad Is It?

The Guardian reports, George Osborne confirms state pension age will rise to 67:

The government will raise the state pension age to 67 by April 2028 in a move it said would save the UK almost £60bn.

The change, which was announced by the chancellor George Osborne in his autumn statement, and had been widely anticipated, will be phased in over two years from April 2026. It will affect 8.1 million people in their 40s who would otherwise have expected to retire at 66.

Osborne said the move was in response to rising life expectancy and described it as "a measure to control spending [which] is not for today or for next year or even for the next decade".

He added: "Our generation has been warned that the costs of providing decent state pensions are going to become more and more unaffordable unless we take further action.

"Let's not leave it to our children to take emergency action to rescue the public finances; let's think ahead and take responsible, sensible steps now."

The chancellor said the change would not affect anyone already within 14 years of reaching state pension age and would save £59bn between the 2026/27 financial year and 2035/36.

"We are showing a world sceptical that democratic western governments can take tough decisions that Britain will pay its way in the world," he added.

The government has already brought forward plans to increase the state pension age to 66. This will happen by 2020 instead of the 2026 deadline planned by the Labour government.

Dr Ros Altmann, director-general of older peoples' charity Saga, said rising life expectancy meant it was inevitable that the state pension age would increase.

"Pension ages everywhere are rising. Today's announcement that Britain's state pension age will increase to age 67 starting from 2026 is not far out of line with other nations. Around that time the US, the Netherlands, Germany, Denmark and Spain will all be increasing pension ages to 67, and Ireland's pension age will be 68," she said.

"It also does give people around 15 years' notice which is fair – however, it is really quite scandalous that the government refused to use some of the money saved to delay the original rise to age 66 that has just been passed into law."

The London Mail reports, Millions will retire later as Government speeds up rise in state pension age, stating that the rise in pension age is set to hit women especially hard as they are already delaying retirement as their pension age moves in line with that of men, adding:

However, this is unlikely to be the end of rapid rises in the retirement age, as increasing life expectancy makes the current system unsustainable.

The Government has promised that the state pension age will in future be linked to life expectancy - which means that current A-level students might not retire until they are 77, according to some estimates.

Pensions are fast becoming a thorn in the side of the Coalition Government, with tomorrow's public-sector strike set to force the spotlight back on to the cuts in public sector pensions, which ministers say are in desperate need of reform.
Pensions are fast becoming the thorn in the side of all governments. In response to these new measures, defiant unions vow fresh strike chaos as up to two million people across the UK are expected to protest plans to make them pay more and work longer for smaller pensions.

But not all public sector workers support the national strike. The BBC reports that some teachers have dilemmas over pension strikes:

Secondary school head teacher Siobhan Lowe has been lying at awake at night agonising about whether to join the public sector pensions strike.

She agrees with the concerns her union - the National Association of Head Teachers - has about changes to teachers' pensions, fearing these will see teachers having to work longer, pay more and get less from their pensions.

But, as a head teacher, she feels she has a moral duty not to strike.

"I have this moral dichotomy about being a head teacher and closing my school. I don't want to deprive the pupils of their education - it's a real dilemma," she says.

After some personal agonising, Mrs Lowe has decided to close the school to pupils for the day, while she works along with any other non-striking staff.

The Department for Education estimates at least 90% of schools in England will be closed on Wednesday because of industrial action and schools in Wales, Scotland and Northern Ireland are also likely to see disruption.

Education Secretary Michael Gove is urging striking teachers and heads to think again, saying there is a good offer on the table following negotiations.

But Mrs Lowe, head teacher of the highly successful Tolworth Girls' School in Surbiton, south-west London, is worried about the impact of pension changes on her staff, about 70% of whom are planning to strike on Wednesday.

"They don't earn that much. The average salary for a teacher is about £30,000 plus and if you are living in London that is only going to get you a mortgage of about £120,000 and rents in this area are high."

Mrs Lowe says: "I know the perception from the media is that we have these so-called gold-plated pensions and long summer holidays.

"But we work hard. We do Saturday school here, we do after-school here and the teachers do not get anything extra for their time.

"If you're a teacher you have to be innovative and inspiring from your first class in the morning to your last class in the afternoon.

"That's 600 pupils that you are inspiring on a daily basis. It's exhausting," she says.

Experienced teacher Richard Inch, who is planning to strike on Wednesday, agrees that life as a teacher is all consuming.

"It's not just a job, it's a way of life," she says.

"I often wake up at 5.30 in the morning and start thinking about work," he explains.

'On quicksand'

The head of resistant materials at the school worked as a civil engineer and a computer programmer, before retraining as a teacher 16 years ago.

"I had a company car, a good wage and a bonus every year. I took a pay cut to become a teacher," he says.

Now the proposed changes to his pension make him feel like he is "on quicksand", he says.

The scheme was reassessed and renegotiated in 2007 and found to be sustainable, he adds.

For head of science and technology at the school Jim Green, a decent pension was part of the trade-off for his years of dedicated service.

He says: "Part of what I bought into is that my salary isn't ever going to be fantastic but, at the end of the day, I was looking forward to a good pension."

He describes himself as a reluctant striker but is angry at the way that the government has portrayed teachers.

"The government is suggesting we are being greedy but it is not actually true because the pension scheme is sustainable."

Teaching at 68

However, maths teacher David Pelham who worked for 25 years in industry before becoming a teacher says he thinks teachers' pensions are still good - even after the planned changes.

"I think the teachers' pension scheme is still a good deal compared to the private sector."

He is not planning to strike on Wednesday but he is opposed to the government plans to make teachers work until they are 68.

Mr Green agrees: "My wife teaches in a special school and she has to get down on her knees a lot. She thinks the idea that she should do this until the age of 68 is ludicrous."

Fellow maths teacher Mark Barrett, who is 31 and used to work in finance, is also opposed to working until he is 68. He says he has always viewed himself as someone who would work until a good age.

"But," he says, "having been a teacher for a year now I know how stressful it is and I don't think I could work as a teacher until I was 68. I just wouldn't have the energy required."

Mr Barrett, who is also planning to strike, says: "We all know why the country's finances are in such a bad state and it's not because of teachers."

Gina Healy, who represents the school's support staff for the union, Unison, says staff feel like they are being taxed by the back door.

She adds: "We work for a school we don't want to disrupt the students' lives but we feel that the government has really given us no choice."

Mr Gove says there is no "hidden pot of gold" for teachers' pensions.

He has also criticised union "hard-liners" over the strike, saying they were "itching for a fight".

There is no hidden pot of gold for teachers but the government is only presenting one side of the story. While it's true that longer life spans require an increase in the retirement age, the truth is that private and public pensions have not been managed properly in the UK and elsewhere.

This last point was underscored by Alexander Baron in his op-ed comment in Digital Journal, Who is to blame for the coming national strike in the U.K?:
It is estimated that up to 2 million public sector workers will be walking out tomorrow in the U.K. The unions blame the government; the government blames union militants. But who is really to blame?

The latest polls indicate that broadly, the public is sympathetic to this strike, which the public sector unions have mounted as a protest against Government plans to cut their pensions and make them work longer before qualifying for same. The Government is of course opposed to this action, while even the Opposition is lukewarm. Yesterday, Michael Gove, Secretary of State for Education, mounted a fierce attack on the militants he claims are responsible for this action, but this is not a case of militants leading and the sheeple following.

It is also fair to say that most rank and file union members don't want to strike, lose pay and cause disruption to the public anymore than does anyone else, but they feel they have been backed into a corner. So is this the fault of the Government, or is it the fault of (greedy) union bosses? The answer is that this is the wrong question; the question we should all be asking is why have pensions suddenly become so expensive?

The simple answer is that they are being plundered. If they were administered properly, contributions would be a lot less. This is not a new story; the reader is invited to cast his mind back to a BBC Panorama programme that was screened last year. The programme is no longer available on the BBC's website, but some public spirited person has uploaded this and this to YouTube. Check this out, too.

The point we should make is that it doesn't matter whether we are talking about private pension funds or state run funds, it is the system that is wrong and needs changing. What do the people who “manage” these funds actually do? What constitutes management? The simple answer is that they move funds from A to B, from B to C and from C back to A again, that is, they play the stock market. They also play other markets, in particular the market in government bonds. To play in this context means to gamble, literally that. What else would you call buying at price A hoping to sell for price A+b or selling for price A hoping shortly to buy back the same stock at price A-b?

The fund managers, the people you entrust with your pension, are paid whether or not they make a profit, or generate any growth for your retirement nest egg. While it is true that most of these funds do grow over the long term, this is more by accident than by design, because the stockmarket grows over the long term, and the longer a fund invests, the greater the chance of a decent return.

We said earlier that neither the Government nor the unions are to blame; that is not strictly true. The Government could rectify this scandalous state of affairs by removing the power from these fund managers, certainly as far as public sector pensions are concerned. It has gone some way towards that with its NEST scheme, but it would be far better if public sector employees were to pay into a fund whose custodians didn't play the stock market but simply invested their money on their behalf in equities, government bonds and anything else the Government considered suitable. The money could simply be held in trust and paid out to people as they retired. That way there would be only a tiny administration charge and no management funds: no bonuses, no advertising or office expenses, no fees for analysts or economists, nothing.

The resulting savings would probably mean the contributions of individual workers could be considerably reduced. Why doesn't the British Government or any other government do this? Because there are too many parasites battening on the system, and too many people with their snouts in the trough. Including politicians of all shades.
There are indeed "too many parasites battening the system," including corrupt politicians who shamelessly abuse their power which is why I continue blogging on pensions and financial markets. There is no simple solution to the mounting pension woes that industrialized nations face. Everyone will have to tighten their belt to make pensions sustainable. Nonetheless, I believe in professionally managed defined-benefit plans for everyone in the public and private sector, but to do this properly, you need to detonate a nuclear bomb across the current pension and financial systems, get rid of the parasites and get the governance right by properly aligning interests between fund managers and their stakeholders.

Finally, as I watch George going for broke, blaming Europe's 'debt storm' for all of Britain's economic woes, I wasn't surprised to see him pandering to the financial oligarchs by increasing the bank levy by 0.088% in 2012 -- yes, a whopping 0.088% next year! Watch the clip below. The message is clear, austerity for the hard working peasant population while the banksters take it all. No wonder the UK and other nations are heading down a dangerous path, one that will lead to social unrest and end up costing us all more than we can possibly imagine.

Monday, November 28, 2011

Banksters Take It All?

A follow-up to my earlier comment on Hard Times Generation. Bloomberg reports on secret Fed loans which helped banks net $13B:

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

‘Change Their Votes’

“When you see the dollars the banks got, it’s hard to make the case these were successful institutions,” says Sherrod Brown, a Democratic Senator from Ohio who in 2010 introduced an unsuccessful bill to limit bank size. “This is an issue that can unite the Tea Party and Occupy Wall Street. There are lawmakers in both parties who would change their votes now.”

The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court case against the Fed and a group of the biggest U.S. banks called Clearing House Association LLC to force lending details into the open.

The Fed, headed by Chairman Ben S. Bernanke, argued that revealing borrower details would create a stigma -- investors and counterparties would shun firms that used the central bank as lender of last resort -- and that needy institutions would be reluctant to borrow in the next crisis. Clearing House Association fought Bloomberg’s lawsuit up to the U.S. Supreme Court, which declined to hear the banks’ appeal in March 2011.

$7.77 Trillion

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

“TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.”

Bankers didn’t disclose the extent of their borrowing. On Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day.

‘Motivate Others’

JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed’s Term Auction Facility “at the request of the Federal Reserve to help motivate others to use the system.” He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program’s creation.

Howard Opinsky, a spokesman for JPMorgan (JPM), declined to comment about Dimon’s statement or the company’s Fed borrowings. Jerry Dubrowski, a spokesman for Bank of America, also declined to comment.

The Fed has been lending money to banks through its so- called discount window since just after its founding in 1913. Starting in August 2007, when confidence in banks began to wane, it created a variety of ways to bolster the financial system with cash or easily traded securities. By the end of 2008, the central bank had established or expanded 11 lending facilities catering to banks, securities firms and corporations that couldn’t get short-term loans from their usual sources.

‘Core Function’

“Supporting financial-market stability in times of extreme market stress is a core function of central banks,” says William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”

The Fed has said that all loans were backed by appropriate collateral. That the central bank didn’t lose money should “lead to praise of the Fed, that they took this extraordinary step and they got it right,” says Phillip Swagel, a former assistant Treasury secretary under Henry M. Paulson and now a professor of international economic policy at the University of Maryland.

The Fed initially released lending data in aggregate form only. Information on which banks borrowed, when, how much and at what interest rate was kept from public view.

The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak.

Big Six

The Treasury Department relied on the recommendations of the Fed to decide which banks were healthy enough to get TARP money and how much, the former officials say. The six biggest U.S. banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt calculated by Bloomberg using data obtained from the central bank. Paulson didn’t respond to a request for comment.

The six -- JPMorgan, Bank of America, Citigroup Inc. (C), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (GS) and Morgan Stanley -- accounted for 63 percent of the average daily debt to the Fed by all publicly traded U.S. banks, money managers and investment- services firms, the data show. By comparison, they had about half of the industry’s assets before the bailout, which lasted from August 2007 through April 2010. The daily debt figure excludes cash that banks passed along to money-market funds.

Bank Supervision

While the emergency response prevented financial collapse, the Fed shouldn’t have allowed conditions to get to that point, says Joshua Rosner, a banking analyst with Graham Fisher & Co. in New York who predicted problems from lax mortgage underwriting as far back as 2001. The Fed, the primary supervisor for large financial companies, should have been more vigilant as the housing bubble formed, and the scale of its lending shows the “supervision of the banks prior to the crisis was far worse than we had imagined,” Rosner says.

Bernanke in an April 2009 speech said that the Fed provided emergency loans only to “sound institutions,” even though its internal assessments described at least one of the biggest borrowers, Citigroup, as “marginal.”

On Jan. 14, 2009, six days before the company’s central bank loans peaked, the New York Fed gave CEO Vikram Pandit a report declaring Citigroup’s financial strength to be “superficial,” bolstered largely by its $45 billion of Treasury funds. The document was released in early 2011 by the Financial Crisis Inquiry Commission, a panel empowered by Congress to probe the causes of the crisis.

‘Need Transparency’

Andrea Priest, a spokeswoman for the New York Fed, declined to comment, as did Jon Diat, a spokesman for Citigroup.

“I believe that the Fed should have independence in conducting highly technical monetary policy, but when they are putting taxpayer resources at risk, we need transparency and accountability,” says Alabama Senator Richard Shelby, the top Republican on the Senate Banking Committee.

Judd Gregg, a former New Hampshire senator who was a lead Republican negotiator on TARP, and Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee, both say they were kept in the dark.

“We didn’t know the specifics,” says Gregg, who’s now an adviser to Goldman Sachs.

“We were aware emergency efforts were going on,” Frank says. “We didn’t know the specifics.”

Disclose Lending

Frank co-sponsored the Dodd-Frank Wall Street Reform and Consumer Protection Act, billed as a fix for financial-industry excesses. Congress debated that legislation in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival.

It would have been “totally appropriate” to disclose the lending data by mid-2009, says David Jones, a former economist at the Federal Reserve Bank of New York who has written four books about the central bank.

“The Fed is the second-most-important appointed body in the U.S., next to the Supreme Court, and we’re dealing with a democracy,” Jones says. “Our representatives in Congress deserve to have this kind of information so they can oversee the Fed.”

The Dodd-Frank law required the Fed to release details of some emergency-lending programs in December 2010. It also mandated disclosure of discount-window borrowers after a two- year lag.

Protecting TARP

TARP and the Fed lending programs went “hand in hand,” says Sherrill Shaffer, a banking professor at the University of Wyoming in Laramie and a former chief economist at the New York Fed. While the TARP money helped insulate the central bank from losses, the Fed’s willingness to supply seemingly unlimited financing to the banks assured they wouldn’t collapse, protecting the Treasury’s TARP investments, he says.

“Even though the Treasury was in the headlines, the Fed was really behind the scenes engineering it,” Shaffer says.

Congress, at the urging of Bernanke and Paulson, created TARP in October 2008 after the bankruptcy of Lehman Brothers Holdings Inc. made it difficult for financial institutions to get loans. Bank of America and New York-based Citigroup each received $45 billion from TARP. At the time, both were tapping the Fed. Citigroup hit its peak borrowing of $99.5 billion in January 2009, while Bank of America topped out in February 2009 at $91.4 billion.

No Clue

Lawmakers knew none of this.

They had no clue that one bank, New York-based Morgan Stanley (MS), took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages. The firm’s peak borrowing occurred the same day Congress rejected the proposed TARP bill, triggering the biggest point drop ever in the Dow Jones Industrial Average. (INDU) The bill later passed, and Morgan Stanley got $10 billion of TARP funds, though Paulson said only “healthy institutions” were eligible.

Mark Lake, a spokesman for Morgan Stanley, declined to comment, as did spokesmen for Citigroup and Goldman Sachs.

Had lawmakers known, it “could have changed the whole approach to reform legislation,” says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size.

Moral Hazard

Kaufman says some banks are so big that their failure could trigger a chain reaction in the financial system. The cost of borrowing for so-called too-big-to-fail banks is lower than that of smaller firms because lenders believe the government won’t let them go under. The perceived safety net creates what economists call moral hazard -- the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers.

If Congress had been aware of the extent of the Fed rescue, Kaufman says, he would have been able to line up more support for breaking up the biggest banks.

Byron L. Dorgan, a former Democratic senator from North Dakota, says the knowledge might have helped pass legislation to reinstate the Glass-Steagall Act, which for most of the last century separated customer deposits from the riskier practices of investment banking.

“Had people known about the hundreds of billions in loans to the biggest financial institutions, they would have demanded Congress take much more courageous actions to stop the practices that caused this near financial collapse,” says Dorgan, who retired in January.

Getting Bigger

Instead, the Fed and its secret financing helped America’s biggest financial firms get bigger and go on to pay employees as much as they did at the height of the housing bubble.

Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data.

For so few banks to hold so many assets is “un-American,” says Richard W. Fisher, president of the Federal Reserve Bank of Dallas. “All of these gargantuan institutions are too big to regulate. I’m in favor of breaking them up and slimming them down.”

Employees at the six biggest banks made twice the average for all U.S. workers in 2010, based on Bureau of Labor Statistics hourly compensation cost data. The banks spent $146.3 billion on compensation in 2010, or an average of $126,342 per worker, according to data compiled by Bloomberg. That’s up almost 20 percent from five years earlier compared with less than 15 percent for the average worker. Average pay at the banks in 2010 was about the same as in 2007, before the bailouts.

‘Wanted to Pretend’

“The pay levels came back so fast at some of these firms that it appeared they really wanted to pretend they hadn’t been bailed out,” says Anil Kashyap, a former Fed economist who’s now a professor of economics at the University of Chicago Booth School of Business. “They shouldn’t be surprised that a lot of people find some of the stuff that happened totally outrageous.”

Bank of America took over Merrill Lynch & Co. at the urging of then-Treasury Secretary Paulson after buying the biggest U.S. home lender, Countrywide Financial Corp. When the Merrill Lynch purchase was announced on Sept. 15, 2008, Bank of America had $14.4 billion in emergency Fed loans and Merrill Lynch had $8.1 billion. By the end of the month, Bank of America’s loans had reached $25 billion and Merrill Lynch’s had exceeded $60 billion, helping both firms keep the deal on track.

Prevent Collapse

Wells Fargo bought Wachovia Corp., the fourth-largest U.S. bank by deposits before the 2008 acquisition. Because depositors were pulling their money from Wachovia, the Fed channeled $50 billion in secret loans to the Charlotte, North Carolina-based bank through two emergency-financing programs to prevent collapse before Wells Fargo could complete the purchase.

“These programs proved to be very successful at providing financial markets the additional liquidity and confidence they needed at a time of unprecedented uncertainty,” says Ancel Martinez, a spokesman for Wells Fargo.

JPMorgan absorbed the country’s largest savings and loan, Seattle-based Washington Mutual Inc., and investment bank Bear Stearns Cos. The New York Fed, then headed by Timothy F. Geithner, who’s now Treasury secretary, helped JPMorgan complete the Bear Stearns deal by providing $29 billion of financing, which was disclosed at the time. The Fed also supplied Bear Stearns with $30 billion of secret loans to keep the company from failing before the acquisition closed, central bank data show. The loans were made through a program set up to provide emergency funding to brokerage firms.

‘Regulatory Discretion’

“Some might claim that the Fed was picking winners and losers, but what the Fed was doing was exercising its professional regulatory discretion,” says John Dearie, a former speechwriter at the New York Fed who’s now executive vice president for policy at the Financial Services Forum, a Washington-based group consisting of the CEOs of 20 of the world’s biggest financial firms. “The Fed clearly felt it had what it needed within the requirements of the law to continue to lend to Bear and Wachovia.”

The bill introduced by Brown and Kaufman in April 2010 would have mandated shrinking the six largest firms.

“When a few banks have advantages, the little guys get squeezed,” Brown says. “That, to me, is not what capitalism should be.”

Kaufman says he’s passionate about curbing too-big-to-fail banks because he fears another crisis.

‘Can We Survive?’

“The amount of pain that people, through no fault of their own, had to endure -- and the prospect of putting them through it again -- is appalling,” Kaufman says. “The public has no more appetite for bailouts. What would happen tomorrow if one of these big banks got in trouble? Can we survive that?”

Lobbying expenditures by the six banks that would have been affected by the legislation rose to $29.4 million in 2010 compared with $22.1 million in 2006, the last full year before credit markets seized up -- a gain of 33 percent, according to, a research group that tracks money in U.S. politics. Lobbying by the American Bankers Association, a trade organization, increased at about the same rate, reported.

Lobbyists argued the virtues of bigger banks. They’re more stable, better able to serve large companies and more competitive internationally, and breaking them up would cost jobs and cause “long-term damage to the U.S. economy,” according to a Nov. 13, 2009, letter to members of Congress from the FSF.

The group’s website cites Nobel Prize-winning economist Oliver E. Williamson, a professor emeritus at the University of California, Berkeley, for demonstrating the greater efficiency of large companies.

‘Serious Burden’

In an interview, Williamson says that the organization took his research out of context and that efficiency is only one factor in deciding whether to preserve too-big-to-fail banks.

“The banks that were too big got even bigger, and the problems that we had to begin with are magnified in the process,” Williamson says. “The big banks have incentives to take risks they wouldn’t take if they didn’t have government support. It’s a serious burden on the rest of the economy.”

Dearie says his group didn’t mean to imply that Williamson endorsed big banks.

Top officials in President Barack Obama’s administration sided with the FSF in arguing against legislative curbs on the size of banks.

Geithner, Kaufman

On May 4, 2010, Geithner visited Kaufman in his Capitol Hill office. As president of the New York Fed in 2007 and 2008, Geithner helped design and run the central bank’s lending programs. The New York Fed supervised four of the six biggest U.S. banks and, during the credit crunch, put together a daily confidential report on Wall Street’s financial condition. Geithner was copied on these reports, based on a sampling of e- mails released by the Financial Crisis Inquiry Commission.

At the meeting with Kaufman, Geithner argued that the issue of limiting bank size was too complex for Congress and that people who know the markets should handle these decisions, Kaufman says. According to Kaufman, Geithner said he preferred that bank supervisors from around the world, meeting in Basel, Switzerland, make rules increasing the amount of money banks need to hold in reserve. Passing laws in the U.S. would undercut his efforts in Basel, Geithner said, according to Kaufman.

Anthony Coley, a spokesman for Geithner, declined to comment.

‘Punishing Success’

Lobbyists for the big banks made the winning case that forcing them to break up was “punishing success,” Brown says. Now that they can see how much the banks were borrowing from the Fed, senators might think differently, he says.

The Fed supported curbing too-big-to-fail banks, including giving regulators the power to close large financial firms and implementing tougher supervision for big banks, says Fed General Counsel Scott G. Alvarez. The Fed didn’t take a position on whether large banks should be dismantled before they get into trouble.

Dodd-Frank does provide a mechanism for regulators to break up the biggest banks. It established the Financial Stability Oversight Council that could order teetering banks to shut down in an orderly way. The council is headed by Geithner.

“Dodd-Frank does not solve the problem of too big to fail,” says Shelby, the Alabama Republican. “Moral hazard and taxpayer exposure still very much exist.”

Below Market

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, says banks “were either in bad shape or taking advantage of the Fed giving them a good deal. The former contradicts their public statements. The latter -- getting loans at below-market rates during a financial crisis -- is quite a gift.”

The Fed says it typically makes emergency loans more expensive than those available in the marketplace to discourage banks from abusing the privilege. During the crisis, Fed loans were among the cheapest around, with funding available for as low as 0.01 percent in December 2008, according to data from the central bank and money-market rates tracked by Bloomberg.

The Fed funds also benefited firms by allowing them to avoid selling assets to pay investors and depositors who pulled their money. So the assets stayed on the banks’ books, earning interest.

Banks report the difference between what they earn on loans and investments and their borrowing expenses. The figure, known as net interest margin, provides a clue to how much profit the firms turned on their Fed loans, the costs of which were included in those expenses. To calculate how much banks stood to make, Bloomberg multiplied their tax-adjusted net interest margins by their average Fed debt during reporting periods in which they took emergency loans.

Added Income

The 190 firms for which data were available would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported, the data show.

The six biggest U.S. banks’ share of the estimated subsidy was $4.8 billion, or 23 percent of their combined net income during the time they were borrowing from the Fed. Citigroup would have taken in the most, with $1.8 billion.

“The net interest margin is an effective way of getting at the benefits that these large banks received from the Fed,” says Gerald A. Hanweck, a former Fed economist who’s now a finance professor at George Mason University in Fairfax, Virginia.

While the method isn’t perfect, it’s impossible to state the banks’ exact profits or savings from their Fed loans because the numbers aren’t disclosed and there isn’t enough publicly available data to figure it out.

Opinsky, the JPMorgan spokesman, says he doesn’t think the calculation is fair because “in all likelihood, such funds were likely invested in very short-term investments,” which typically bring lower returns.

Standing Access

Even without tapping the Fed, the banks get a subsidy by having standing access to the central bank’s money, says Viral Acharya, a New York University economics professor who has worked as an academic adviser to the New York Fed.

“Banks don’t give lines of credit to corporations for free,” he says. “Why should all these government guarantees and liquidity facilities be for free?”

In the September 2008 meeting at which Paulson and Bernanke briefed lawmakers on the need for TARP, Bernanke said that if nothing was done, “unemployment would rise -- to 8 or 9 percent from the prevailing 6.1 percent,” Paulson wrote in “On the Brink” (Business Plus, 2010).

Occupy Wall Street

The U.S. jobless rate hasn’t dipped below 8.8 percent since March 2009, 3.6 million homes have been foreclosed since August 2007, according to data provider RealtyTrac Inc., and police have clashed with Occupy Wall Street protesters, who say government policies favor the wealthiest citizens, in New York, Boston, Seattle and Oakland, California.

The Tea Party, which supports a more limited role for government, has its roots in anger over the Wall Street bailouts, says Neil M. Barofsky, former TARP special inspector general and a Bloomberg Television contributing editor.

“The lack of transparency is not just frustrating; it really blocked accountability,” Barofsky says. “When people don’t know the details, they fill in the blanks. They believe in conspiracies.”

In the end, Geithner had his way. The Brown-Kaufman proposal to limit the size of banks was defeated, 60 to 31. Bank supervisors meeting in Switzerland did mandate minimum reserves that institutions will have to hold, with higher levels for the world’s largest banks, including the six biggest in the U.S. Those rules can be changed by individual countries.

They take full effect in 2019.

Meanwhile, Kaufman says, “we’re absolutely, totally, 100 percent not prepared for another financial crisis.”

This article hardly shocks me and of course the US is not prepared for another financial crisis, which is why they Fed continues to give the big banks fresh liquidity for free. The banksters take that money, buy bonds to lock in spread, and use proceeds to speculate on risk assets which is why I wasn't surprised to see the markets take off on Monday as news of an IMF backed European bailout spurred speculative fervor.

The fact that big banks netted $13B from secret Fed loans to continue paying outrageous bonuses at a time when Americans are losing their jobs and child poverty is hitting record levels should make people pause and think about how societies run by 'Goldman Sachs alumni' are doomed to fail. It's an outrage and having dealt with enough slimy weasels and wolves in the financial word, I got a lot more respect for that teenage girl on 60 Minutes living in a truck , Arielle Metzger, who said "yeah it's not really that much an embarrassment. I mean, it's only life. You do what you need to do, right?," than any of the clowns on Wall Street. She has nothing to be embarrassed about. It's the greedy banksters -- the true corporate welfare kings aided and abated by their corrupt government cronies in Washington -- that ought be ashamed of themselves.

Diane Urquhart sent me today's decision on the SEC vs Citiroup Global Markets. She comments:

Powerful words written by this judge will be in the history books of securities regulatory law.

"It is not reasonable, because how can it ever be reasonable to impose substantial relief on the basis of mere allegations? It is not fair, because, despite Citigroup's nominal consent, the potential for abuse in imposing penalties on the basis of facts that are neither proven nor acknowledged patent. It is not adequate, because, in the absence of any facts, the Court lacks a framework for determining adequacy. And, most obviously, the proposed Consent Judgment does not serve the public interest, because it asks the Court to employ its power and assert its authority when it does not know the facts.

An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on solid facts, established either by admissions or by trials - it serves no lawful or moral purpose and is simply an engine of oppression."

Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances."

Powerful words indeed! Below, Sarah Montague talks to Steve Keen on BBC's HARDtalk. Mr. Keen is one of the few economists who actually predicted the global financial crisis and he has firm views on debt forgiveness and how to deal with banksters who want to take it all (h/t Credit Writedowns).

Hard Times Generation?

I've seen many episodes of 60 Minutes but nothing got to me as much as watching these homeless kids living out of car. Scott Pelley brings 60 Minutes cameras back to central Florida to document another form of family homelessness: kids and their parents forced to live in cars:

More than 16 million children are now living in poverty and, for many of them, a proper home is elusive. Some cash-strapped families stay with relatives; others move into motels or homeless shelters. But, as Scott Pelley reports, sometimes those options run out, leaving an even more desperate choice: living in their cars. 60 Minutes returns to Florida, home to one third of America's homeless families, to find out what life is like for the epidemic's youngest survivors.

The following is a script of "Hard Times Generation" which aired on Nov. 27, 2011. Scott Pelley is correspondent, Bob Anderson and Nicole Young, producers.

Never has unemployment been so high for so long. And as a result, more than 16 million kids are living in poverty - the most since 1962. It's worst where the construction industry collapsed. And one of those places is central Florida.

We went there eight months ago to meet families who'd become homeless for the first time in their lives. So many were living day-to-day that school buses changed their routes to pick up all the kids living in cheap motels. We called the story "Hard Times Generation."

Now, we've gone back to see how things have changed. It turns out some families are losing their grip on the motels and discovering the homeless shelters are full. Where do they go then? They keep up appearances by day and try to stay out of sight at night - holding on to one another in a hidden America - a place you wouldn't notice unless you ran into the people that we met in the moments before dawn.

Time, has carried us into uncharted territory. The great recession began December 2007. Almost 1,500 mornings ago.

If you were rushing to work this morning, in Seminole County, Florida, it's not likely you'd notice the truck or hear the children getting ready for school.

Arielle Metzger: In the clear bin, we have dirty laundry. In that one, there's tools that we might need.

Scott Pelley: All these bank bags are storage of this and that.

Arielle Metzger: Like shampoo....

Austin Metzger: And over here is food.

Arielle Metzger: Food.

Pelley: So, you're really not heating up food so much. You're eating out of cans?

Arielle Metzger: Yup.

This is the home of the Metzger family. Arielle,15. Her brother Austin, 13. Their mother died when they were very young. Their dad, Tom, is a carpenter. And, he's been looking for work ever since Florida's construction industry collapsed. When foreclosure took their house, he bought the truck on Craigslist with his last thousand dollars. Tom's a little camera shy - thought we ought to talk to the kids - and it didn't take long to see why.

Pelley: How long have you been living in this truck?

Arielle Metzger: About five months.

Pelley: What's that like?

Arielle Metzger: It's an adventure.

Austin Metzger: That's how we see it.

Pelley: When kids at school ask you where you live, what do you tell 'em?

Austin Metzger: When they see the truck they ask me if I live in it, and when I hesitate they kinda realize. And they say they won't tell anybody.

Arielle Metzger: Yeah it's not really that much an embarrassment. I mean, it's only life. You do what you need to do, right?

It's life for a lot of folks. The number of kids in poverty in America is pushing toward 25 percent. One out of four. Austin and Ariel usually get cleaned up for school at gas stations. They find its best to go to different ones every day so the managers don't get sore.

I will leave my readers read the rest of the transcript and please watch the clip below. If you have kids, force them to watch this so they can truly appreciate what they have. And remind them that Thanksgiving and Christmas aren't about shopping; it's about helping those less fortunate.

Child poverty is a scandal in America. It's a scandal everywhere but this shouldn't be occurring in the "richest, most powerful nation in the world." I'd be ashamed to call myself "American" knowing such child poverty is so widespread right in my backyard. And yet, it is.

This is why economic inequality is the most pressing issue of our time. These kids are amazing, they are coping with unfathomable poverty, but hold their chin up, value education above everything else and manage to survive on next to nothing. They know what really matters in life.

Finally, please donate to Beth Davalos' "Families in Transition Program." In this day and age, nobody should be living out of a car, especially not young kids. Please donate generously and ask your co-workers and friends to donate too. Watch the segment below.

An update:

Sunday, November 27, 2011

Europe's Real 'Contagion' Threat?

Edward Harrison of Credit Writedowns reports that the IMF to offer Italy a 600 billion euro bailout via ECB funding. Don't know if this latest rumor is true and don't really care. At this point, I'm convinced the bond market will break Merkel by pushing Germany to the precipice.

There is something else that caught my attention, however, and it has to do with something much more serious in terms of European "contagion." Jeremy Laurance of the Independent reports, Antibiotic-resistant infections spread through Europe (h/t Paul Kedrosky):

The world is being driven towards the "unthinkable scenario of untreatable infections", experts are warning, because of the growth of superbugs resistant to all antibiotics and the dwindling interest in developing new drugs to combat them.

Reports are increasing across Europe of patients with infections that are nearly impossible to treat. The European Centre for Disease Control and Prevention (ECDC) said yesterday that in some countries up to 50 per cent of cases of blood poisoning caused by one bug – K. pneumoniae, a common cause of urinary and respiratory conditions – were resistant to carbapenems, the most powerful class of antibiotics.

Across Europe, the percentage of carbapenem-resistant K. pneumoniae has doubled from 7 per cent to 15 per cent. The ECDC said it is "particularly worrying" because carbapenems are the last-line antibiotics for treatment of multi-drug-resistant infections.

Marc Sprenger, the director, said: "The situation is critical. We need to declare a war against these bacteria."

In 2009, carbapenem-resistant K. pneumoniae was established only in Greece, but by 2010, it had extended to Italy, Austria, Cyprus and Hungary. The bacterium is present in the intestinal tract and is transmitted by touch.

Resistant strains of E.coli also increased in 2010. Between 25 and 50 per cent of E.coli infections in Italy and Spain were resistant to fluoroquinolones in 2010, one of the most important antibiotics for treating the bacterium.

In the UK, 70 patients have been identified carrying NDM-1-containing bacteria, an enzyme that destroys carbapenems. Separate research has shown that more than 80 per cent of travellers returning from India to Europe carried the NDM gene in their gut.

Researchers speak of a "nightmare scenario" if the gene for NDM-1 production is spread more widely.

The UK Health Protection Agency warned doctors last month to abandon a drug usually used to treat a common sexually transmitted disease because it was no longer effective. The agency said that gonorrhoea – which caused 17,000 infections in 2009 – should be treated with two drugs instead of one and warned of a "very real threat of untreatable gonorrhoea in the future."

Discovering new medicines to treat resistant superbugs has proved increasingly difficult and costly – they are taken only for a short period and the commercial returns are low. The European Commission yesterday launched a plan to boost research into new antibiotics, by promising accelerated approval for new drugs and funding for development through the the Innovative Medicines Initiative, a public-private collaboration with the pharmaceutical industry.

An estimated 25,000 people die each year in the European Union from antibiotic-resistant bacterial infections. Countries with the highest rates of resistant infections, such as Greece, Cyprus, Italy, Hungary and Bulgaria, also tended to be the ones with the highest use of antibiotics.

World Health Organisation scientists warned two years ago that overuse of antibiotics risked returning the world to a pre-antibiotic era in which infections did not respond to treatment. The warnings have been ignored.

Professor Laura Piddock, president of the British Society of Antimicrobial Chemotherapy, said politicians and the public had been slow to appreciate the urgency of the situation. In The Lancet, she writes: "Antibiotics are not perceived as essential to health, despite such agents saving lives." Global action to develop new antibiotics is required, she says.

The Department of Health published guidance aimed at curbing the overuse of antibiotics in hospitals, by avoiding long treatment and replacing broad-spectrum antibiotics with those targeted at the specific infection. Professor Dame Sally Davies, Chief Medical Officer, said: "Many antibiotics are prescribed... when they don't need to be."

Case study: Holiday fever that took two months to control

In August 2010, Paolo, 55, a university professor in Rome, was on holiday on the island of Ponza, when he fell ill with a fever and shaking chills. He had a urinary tract infection and his brother-in-law, a doctor, prescribed a commonly used antibiotic called ciprofloxacin.

Three days later he was no better and still feverish but continued with the drugs for a week. He returned to the mainland where his urine was tested and found to be infected with a strain of E.coli resistant to many antibiotics including ciprofloxacin.

He was prescribed a different antibiotic, which he took for four weeks. He got better but four days after stopping the treatment, his symptoms returned and he became feverish again.

He then called a friend, an infectious disease specialist, who suggested a third antibiotic which he took for 21 days. Two months after he began treatment, that finally cured his infection.

Nothing like drug resistant infectious diseases to cure humanity from all its socio-economic ills. And these infectious diseases do not discriminate between the meek and their masters, they just wipe out everyone in their path. Below, euronews reports on the threat of antibiotic resistance.

Saturday, November 26, 2011

Will the Meek Become the Masters?

Bloomberg reports that U.S. stocks fell, capping the worst Thanksgiving-week drop since 1932 in the Standard & Poor’s 500 Index, as S&P cut Belgium’s rating and a report said Greece is demanding private investors accept larger losses on their debt:

Financial (S5FINL) stocks in the S&P 500 rose 0.4 percent as a group, trimming an earlier gain of 2 percent. Chevron Corp. and Hewlett-Packard (HPQ) Co. slid at least 1.5 percent to pace losses in the Dow Jones Industrial Average. Sears Holdings Corp. lost 1.3 percent while Wal-Mart Stores Inc. (WMT) rose 0.4 percent on Black Friday, traditionally the biggest U.S. shopping day of the year.

The S&P 500 declined 0.3 percent to 1,158.67 at 1 p.m. New York time, falling for a seventh straight day, the longest streak since August. The Dow retreated 25.77 points, or 0.2 percent, to 11,231.78. The U.S. stock market was closed yesterday for a holiday and trading ended at 1 p.m. today. About 3 billion shares changed hands on U.S. exchanges, the lowest volume since Nov. 26, the day after Thanksgiving last year.

“The demands of Greece now totally change the game,” Mark Grant, a managing director at Southwest Securities Inc. in Fort Lauderdale, Florida, said in an e-mail. “The situation can no longer be called voluntary by any stretch of the imagination. The equity markets in the United States may test the lows again as there is increasing concern of a major recession in Europe.”

The S&P 500 fell 4.7 percent since Nov. 18, capping a second week (SPX) of losses, as the burden of government debt grew around the world. The cost of insuring European sovereign bonds against default rose to a record. The benchmark gauge was headed toward its worst November since 2000, dropping 7.6 percent for the month so far.

And hang on to your hats as next week will be another huge one in Europe with lots of big meetings taking place.What do I recommend investors do? Keep buying the fear because sooner or later, this bad case of eurofatigue will play itself out, the bond market will break Merkel, and a liquidity tsunami will be unleashed on global markets unlike anything you've ever seen before.

But that liquidity tsunami will only benefit the prosperous few, not the restless many. Earlier this week, Peter Orszag, vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration, wrote an op-ed piece in Bloomberg blaming the supercommittee's failure on the income gap:

The supercommittee’s failure to reach a substantial agreement this week is disappointing but unsurprising. The old model of politics, in which bipartisan agreement was the key to success, simply doesn’t work anymore. In the new model, there is almost no overlap in views across party lines, and government function requires either domination by one party (as was the case for much of President Barack Obama’s first two years in office) or more automatic decision-making (as I have suggested elsewhere).

What’s causing today’s hyper-polarization? Although political scientists still debate the issue, a growing body of evidence suggests that, as economists such as Paul Krugman and Ed Glaeser have argued, increases in income inequality may play a significant role.

It is striking that both income inequality and political polarization began to rise sharply in the U.S. in the mid- to late 1970s. Yet many pundits airily dismiss this connection, arguing that because blue states are, on average, higher-income than red states, the link between income and partisanship must be weak. Instead, they attribute increasing political polarization to the gerrymandering of legislative districts. Both of these assertions are empirically false.

Gerrymandering plays a relatively modest role in polarization trends. A more plausible driver is the sorting of the population itself into effectively two different camps. To a stunning degree, Americans are increasingly moving into neighborhoods with other people who have similar incomes and share their political views.

Bill Bishop and Robert Cushing, the authors of “The Big Sort,” and others have documented the way Americans increasingly live near people with similar political views. This residential sorting by political party has occurred despite an ongoing overall decline in housing mobility. And although this phenomenon reflects shifts among families of both parties, James Gimpel and Jason Schuknecht, the authors of “Patchwork Nation,” found that Republicans have been more likely than Democrats to move, even after adjusting for income, race and age.

Americans Sort Themselves

A new study provides a hint about one possible force behind this political segregation: Americans are increasingly choosing to live near people in their own income bracket. According to research by Sean Reardon and Kendra Bischoff of Stanford University, in 1970, almost two-thirds of American families lived in middle-income neighborhoods. By 2007, only 44 percent did. The share of those living in a poor neighborhood, in the same period, more than doubled, from 8 percent to 17 percent. So did the share living in an affluent neighborhood -- from 7 percent to 14 percent.

As Reardon and Bischoff conclude, “The increasing isolation of the affluent from low- and moderate-income families means that a significant proportion of society’s resources are concentrated in a smaller and smaller proportion of neighborhoods.” A separate study, by Tara Watson of Williams College, concluded that trends in income inequality can fully explain recent increases in economic segregation.

Does income have anything to do with voting patterns, though? Many pundits have suggested that it doesn’t, and here is where they cite that states generally voting for Democrats are, on average, higher-income than those that vote mostly for Republicans. But an important book by Andrew Gelman, a professor of statistics and political science at Columbia University, “Red State, Blue State, Rich State, Poor State,” shows why such reasoning is flawed: Within any given state, higher-income people are much more likely to vote Republican.

Gelman finds that although, in any state, higher- income people are more likely to be Republican, the link between income and party affiliation in blue states is less dramatic than it is in red ones. In other words, as you move up the income scale in a Democratic state, the proportion of Republicans rises, but not as much as it does in a Republican state. That higher-income people in red states are so much more likely to vote Republican helps explain the blue state-red state conundrum. My personal experience is consistent with this: It is rare to meet a high-income Democrat in a red state.

Nolan McCarty, Keith Poole and Howard Rosenthal reach similar conclusions in their book, “Polarized America: The Dance of Ideology and Unequal Riches.” They find that since the 1950s, a time when the U.S. experienced historically low levels of political stratification by income, “there has been a rather substantial transformation in the economic basis of the American party system. Today, income is far more important than it was in the 1950s. American politics is certainly far from purely class-based, but the divergence in partisan identification and voting between high- and low-income Americans has been striking.”

And so we come full circle. Residential segregation by income has been increasing markedly, and since income is strongly related to voting patterns, this phenomenon may help explain the rise in residential segregation by political party. As we surround ourselves with people like us, we reinforce our own views, and the result is a more polarized population.

The polarized population, in turn, feeds a more polarized political system, which makes governing difficult. Paradoxically, because polarization creates safe bases for each side, it may make the modest number of centrist swing voters ever more crucial to winning presidential elections. And yet, actually governing from the center is increasingly challenging, given the hyper- polarization reflected in Congress.

“United we stand, divided we fall” has been uttered many times in this nation’s history. As we increasingly fall into divided neighborhoods, we shouldn’t be surprised that our Congress cannot stand united.

It's striking how many intelligent Americans have recently come out to sound the alarm on income inequality and the politics of polarization. But this isn't an American problem. Last weekend, I discussed the "Global Disconnect" and followed that comment up with one on lies, damn lies and statistics.

Discussing income inequality is a sensitive topic. The rich and ultra-rich will tell you they worked hard and "earned" their wealth, but this is pure rubbish. Ask Bill Gates and Warren Buffet how they really became ultra-wealthy and you'll be surprised to hear that it has little to do with their hard work and brains. And in the financial world there are plenty of idiots who struck it rich just by being at the right place at the right time.

Income inequality will be the major political and economic issue of our time as people realize that democracy is incompatible with debt collection. While the prosperous few lobby against more tax hikes and for more austerity, the restless many will revolt. And in other nations, they are revolting against brutal regimes which consistently violate human rights, paying the ultimate price for freedom.

If you really want to know where the world is heading, brush up on your knowledge of Marx because the oppressed of the world are revolting against corrupt political systems which has concentrated wealth and power in the hands of the few. Can't tell you what the endgame of this European debt crisis will be, but can tell you what the endgame of corrupt capitalism and all corrupt "isms" will be. It will come when the restless many overthrow the wretched of the world, when the meek finally become the masters of their own lives.

Below, watch Sunny Stella Malagardi's report from Syntagma Square in late July. Do not agree with everything in the video but do agree with her main message ( h/t Sunny Stella).

Friday, November 25, 2011

Canada Facing EZ Contagion?

Blooomberg reports that Canadian Finance Minister Jim Flaherty says Europe’s debt crisis is creating “contagion” outside the region and policy makers must act while the situation can still be “stabilized”:

“Again today, we are staring a crisis in the face,” Flaherty said in the text of a speech he’s giving today in Toronto. “The crisis remains far from resolved.”

European leaders have spent two years struggling to prevent contagion from affecting the region’s largest economies such as France and Germany. Italy had to pay almost 7 percent to sell six-month bills at an auction today, and Germany failed to sell 35 percent of 10-year bonds on offer at a Nov. 23 sale.

“Ongoing uncertainty stemming from the European sovereign and banking crisis is leading to broader contagion outside Europe and global credit markets,” Flaherty, 61, said today. “If European authorities move aggressively and with decisiveness to address the crisis and restore financial market stability and confidence, the situation can be stabilized.”

Citizens in many countries face “dire consequences” without a quick solution, including more social unrest and major tax increases, Flaherty said.

Flaherty’s speech didn’t single out any countries or political leaders, adding that all Group of 20 countries have committed to boost economic growth and shrink budget deficits.

Debt Ratio

He touted Canada’s ratio of debt to gross domestic product of 34.9 percent, which he said compares with the Group of Seven average of 80 percent, citing International Monetary Fund estimates.

While Canada may offer additional stimulus measures if needed, the government won’t resort to “dangerous and risky new spending schemes,” Flaherty said. Canada’s federal and provincial governments must all aim to restore balanced budgets, he said.

Slower global growth led Flaherty to say Nov. 8 he would delay plans to balance the country’s budget by a year. The country’s cumulative deficit would be C$29 billion ($27.6 billion) higher between 2011 and 2016.

Canada’s two-year government bond yield rose 4 basis points to 0.953 percent at 12:26 p.m. in Toronto. Earlier today, the Canadian dollar touched C$1.0524 per U.S. dollar, the weakest since Oct. 5.

Flaherty is right to worry about Europe's debt crisis creating contagion as he saw the ravages that the 2008 credit crisis caused in the Canadian economy, especially in the auto sector. Publicly he is touting Canada's fiscal balance but privately he's nervous as hell because he knows the debt profile of the private sector is horrible and when the Canada bubble bursts, which is only a matter of time now, it will place huge pressure on government spending.

Meanwhile over in Europe, Reuters reports that eurozone states may ditch plans to impose losses on private bondholders should countries need to restructure their debt under a new bailout fund due to launch in mid-2013, four EU officials told Reuters on Friday.

Discussions are taking place against a backdrop of flagging market confidence in the region's debt and as part of wider negotiations over introducing stricter fiscal rules to the EU treaty.

Euro zone powerhouse Germany is insisting on tighter budgets and private sector involvement (PSI) in bailouts as a precondition for deeper economic integration among euro zone countries.

Commercial banks and insurance companies are still expected to take a hit on their holdings of Greek sovereign bonds as part of the second bailout package being finalized for Athens.

But clauses relating to PSI in the statutes of the European Stability Mechanism (ESM) - the permanent facility scheduled to start operating from July 2013 - could be withdrawn, with the majority of euro zone states now opposed to them.

The concern is that forcing the private sector bondholders to take losses if a country restructures its debt is undermining confidence in euro zone sovereign bonds. If those stipulations are removed, most countries in the euro zone argue, market sentiment might improve.

"France, Italy, Spain and all the peripherals" are in favor of removing the clauses, one EU official told Reuters. "Against it are Germany, Finland and the Netherlands." Austria is also opposed, another source said.

A third official said that while German insistence on retaining private sector involvement in the ESM was fading, collective action clauses would only be removed as part of broader negotiations under way over changes to the EU treaty.

Berlin wants all 27 EU countries, or at least the 17 in the euro zone, to provide full backing for alterations to the treaty before it will consider giving ground on other issues member states want it to shift on, officials say.

Germany is under pressure to soften its opposition to the European Central Bank playing a more direct role in combating the crisis, and member states also want Berlin to give its backing to the idea of jointly issued euro zone bonds.

German officials dismiss any suggestion of a 'grand bargain' being put together, but officials in other euro zone capitals, including Brussels, say such a deal is taking shape and suggest Berlin will move when it has the commitments it is seeking, although it's unclear when that will be.

German Chancellor Angela Merkel said after meeting French President Nicolas Sarkozy in Strasbourg on Thursday that there was no quid pro quo being set up.

"This is not about give and take," she said.

Euro zone finance ministers will discuss the ESM at a meeting in Brussels on November 29-30, including the implications of dropping collective action clauses from its statutes.


While most euro zone countries just want to forget about enforced private sector involvement, some are adamant that there must be a way to ensure banks and not just taxpayers shoulder some of the costs of bailing countries out.

Austria's opposition Green Party, whose support the government needs to secure backing for the ESM in the Vienna parliament, insists collective action clauses must remain a part of the ESM. It's also far from unclear whether the finance committee of the German lower house Bundestag would agree to such changes being made to the ESM.

Any changes to the mechanism would have to be approved by all member states and ratified by national parliaments before they can take effect, meaning fixed Austrian and German opposition could derail the push for changes.

Germany and some other member states were hoping to bring the ESM, which will have a lending capacity of 500 billion euros, into force as early as July next year, but disagreement over its structure could delay that.

In other words, more fiddling while Rome burns. Germany has to bite the bullet or it too risks sinking now that it has bought a first-class ticket on the Titanic. The endless political posturing will be met by more forceful selling of all European debt, including German bunds. In the end, the bond market will break Merkel and any other EU politician who adopts a hard stance against expanded powers for the ECB and a credible eurobond market.

Below, Nobel Prize winner Joseph Stiglitz talks about the risk of a recession in Europe and fiscal policy. He speaks from Helsinki with Francine Lacqua on Bloomberg Television's "Countdown."