Tuesday March 17, 2009

Published on Monday, March 16, 2009 by Mother Jones

Real Capitalists Nationalize

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The Granny Bashers: Different Facts, Same Policy

Monday 16 March 2009
by: Dean Baker, t r u t h o u t | Perspective
    The granny basher crew constitutes one of the largest and most determined lobbies in Washington. The top priority for this lobby is to cut Social Security and Medicare.
    The lobby includes the Peter G. Peterson Foundation, with an endowment of more than $1 billion from the private equity tycoon himself. It also includes The Washington Post, which liberally sprinkles assertions about the need to cut Social Security and Medicare in both its news and editorial pages. Many prominent members of Congress also belong to the club, along with much of the punditry who make their living pronouncing on public policy.
    The granny bashers' theme is that Social Security and Medicare constitute an enormous generational injustice because the young, and those yet to be born, will be forced to pay for the cost of these programs for retirees and current workers. Of course, the reality is that the vast majority of the granny bashers' horror stories about generational inequity stems from the cost of sustaining a broken health care system not from programs for retirees.
    If the United States fixed its health care system, then the granny bashers' horror story disappears. In fact, even if we don't fix the health care system, we can make most of the horror story disappear by just allowing seniors to buy into the health care systems of countries that have more efficient systems than the United States .
    But the granny bashers are not interested in fixing the health care system; that would involve confronting powerful interest groups like the insurance and pharmaceutical industries and the doctors' lobby. In fact, the granny bashers are not really even particularly interested in generational equity. This is just an excuse for their real agenda: cutting Social Security and Medicare.
    This point is demonstrated by the fact that their policy recommendations never change even when the evidence changes in very big ways. The granny bashers have treated us to three very dramatic examples of this "different facts, same policy" approach in the last 15 years.
    The first example is slightly technical. It has to do with the claim that the consumer price index (CPI) overstates inflation.
    The CPI is our yardstick for measuring how much better off people are getting through time. If wages grow 4.0 percent and the CPI tells us that inflation is 3.0 percent, then real wages have grown by 1.0 percent. However, if the true rate of inflation is just 2.0 percent because the CPI overstates inflation by 1.0 percentage point a year, then real wages have grown by 2.0 percent (4.0 percent wage growth, minus 2.0 percent inflation).
    Fifteen years ago, many economists and pundits (including much of the granny basher lobby) embraced the claim that the CPI overstated the true rate of inflation by at least 1.0 percent a year. If this claim was true, then it undermined the core of the granny bashers' story. It would mean that our children and grandchildren would be far richer than we ever imagined possible and that many older workers and elderly grew up in poverty.
    If annual wage growth was 2.0 percent rather than 1.0 percent, then in 40 years, wages will be more than 220 percent of the current level, instead of just 50 percent higher. The granny bashers embraced the claim of the overstated CPI in order to justify cutting Social Security (retiree benefits are indexed to the CPI), but they never followed through the logic of this claim for their generational equity story.
    This would be comparable to Al Gore maintaining a drive to reduce greenhouse gas emissions even after new evidence showed that the planet was actually cooling. Honest people don't ignore such evidence.
    The exact same issue arises with the speed up in productivity growth in the mid-90s. The granny basher crusade against Social Security and Medicare dates from the mid-80s when productivity growth was just 1.5 percent a year.
    Productivity growth determines the rate at which society can, on average, get richer. In the mid-90s, the rate of annual productivity growth increased by a full percentage point - in effect bringing about the more rapid gains in real income that would have been implied by an overstated CPI. However, none of the granny bashers noted how the productivity growth speedup had enormously improved the prospects of future generations. They just maintained their insistence on cutting Social Security and Medicare.
    Finally, the recent collapse of the housing bubble and the resulting stock market plunge have reduced the wealth of older workers and retirees by close to $15 trillion. This is a transfer to the young, since they will be able to buy the housing stock and the corporate capital stock for a far lower price than they would have expected to pay just two years ago.
    Remarkably, the granny basher crew has somehow failed to notice this enormous transfer of wealth from the old to the young. They just continue their crusade to cut Social Security and Medicare as though nothing has happened.

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Published on Monday, March 16, 2009 by TruthDig.com

The False Idol of Unfettered Capitalism

by Chris Hedges

When I returned to New York City after nearly two decades as a foreign correspondent in Latin America, Africa, the Middle East and the Balkans, I was unsure of where I was headed. I lacked the emotional and physical resiliency that had allowed me to cope as a war correspondent. I was plagued by memories I wanted to forget, waking suddenly in the middle of the night, my sleep shattered by visions of gunfire and death. I was alienated from those around me, unaccustomed to the common language and images imposed by consumer culture, unable to communicate the pain and suffering I had witnessed, not much interested in building a career.

It was at this time that the Brooklyn Academy of Music began showing a 10-part film series called "The Decalogue." Deka, in Greek, means 10.
Logos means saying or speech. The Decalogue is the classical name of the Ten Commandments. The director was the Polish filmmaker Krzysztof Kieslowski <http://archive.sensesofcinema.com/contents/directors/03/kieslowski.html
>  [1], who had made the trilogy "White, Blue and Red." The 10 films,
each about an hour long and based on one of the commandments, were to be shown two at a time over five consecutive weeks. I saw them on Sunday nights, taking the subway to Brooklyn, its cars rocking and screeching along the tracks in the darkened tunnels. The theater was rarely more than half full. 

The films were quiet, subtle and often opaque. It was sometimes hard to tell which commandment was being addressed. The characters never spoke about the commandments directly. They were too busy, as we all are, coping with life. The stories presented the lives of ordinary people confronted by extraordinary events. All lived in a Warsaw housing complex, many of them neighbors. They were on a common voyage, yet also out of touch with the pain and dislocation of those around them. The commandments, Kieslowski understood, were not dusty relics of another age, but a powerful compass with vital contemporary resonance.

In film after film he dealt with the core violation raised by each of the commandments. He freed the commandments from the clutter of piety and narrow definitions imposed upon them by religious leaders and institutions. The promiscuous woman portrayed in the film about adultery was not married. She had a series of empty, carnal relationships.
Adultery, at its deepest level for the director, was sex without love.
The father in the film about honoring our parents was not the biological father. The biological mother was absent in the daughter's life.
Parenting,  Kieslowski knew, is not defined by blood or birth or gender.
It is defined by commitment, fidelity and love. In the film about killing, an unemployed drifter robs and brutally murders a cab driver.
He is caught, sentenced and executed by the state. Kieslowski forces us to confront the barbarity of murder, whether it is committed by a deranged individual or sanctioned by society.

I knew the commandments. I had learned them at Sunday school, listened to sermons based on the commandments from my father's pulpit and studied them as a seminarian at Harvard Divinity School. But Kieslowski turned them into living, breathing entities. 

" ... For 6,000 years these rules have been unquestionably right,"
Kieslowski said of the commandments. "And yet we break them every day.
We know what we should do, and yet we fail to live as we should. People feel that something is wrong in life. There is some kind of atmosphere that makes people turn now to other values. They want to contemplate the basic questions of life, and that is probably the real reason for wanting to tell these stories."

In eight of the films there was a brief appearance by a young man, solemn and silent. Kieslowski said he did not know who the character was. Perhaps he was an angel or Christ. Perhaps he represented the divine presence who observed with profound sadness the tragedy and folly
we humans commit against others and against ourselves.   

"He's not very pleased with us," was all the director said. 

The commandments are a list of religious edicts, according to passages in Exodus and Deuteronomy, given to Moses by God on Mount Sinai. The first four are designed to guide the believer toward a proper relationship with God. The remaining six deal with our relations with others. It is these final six commands that are given the negative form of "You Shall Not ... ." Only two of the commandments, the prohibitions against stealing and murder, are incorporated into our legal code.
Protestants, Catholics and Jews have compiled slightly different lists, but the essence of the commandments remains the same. Muslims, while they do not list the commandments in the Koran, honor the laws of Moses, whom they see as a prophet.

The commandments are not defined, however, by the three monotheistic faiths. They are one of the earliest attempts to lay down moral rules and guidelines to sustain a human community. Nearly every religion has set down an ethical and moral code that is strikingly similar to the Ten Commandments. The Eightfold Path, known within Buddhism as the Wheel of Law, forbids murder, unchastity, theft, falsehood and, especially, covetous desire. The Hindus' sacred syllable Om, said or sung before and after prayers, ends with a fourth sound beyond the range of human hearing. This sound is called the "sound of silence." It is also called "the sound of the universe." Hindus, in the repetition of the Sacred Syllable, try to go beyond thought, to reach the stillness and silence that constitutes God. Five of the Ten Commandments delivered from Mount Sinai are lifted directly from the Egyptian "Book of the Dead." No human being, no nation, no religion, has been chosen to be the sole interpreter of mystery. All cultures struggle to give words to the experience of the transcendent. It is a reminder that all of us find God not in what we know, but in what we cannot comprehend.

The commandments include the most severe violations and moral dilemmas in human life, although these violations often lie beyond the scope of the law. They were for the ancients, and are for us, the core rules that, when honored, hold us together, and when dishonored lead to alienation, discord and violence. When our lives are shattered by tragedy, suffering and pain, or when we express or feel the ethereal and overwhelming power of love, we confront the mystery of good and evil.
Voices across time and cultures have struggled to transmit and pay homage to this mystery, what it means for our lives and our place in the cosmos. These voices, whether in the teachings of the Buddha, the writings of the Latin poets or the pages of the Koran, are part of our common struggle as human beings to acknowledge the eternal and the sacred, to create an ethical system to sustain life.

The commandments retain their power because they express something fundamental about the human condition. This is why they are important.
The commandments choose us. We are rarely able to choose them. We do not, however hard we work to insulate ourselves, ultimately control our fate. We cannot save ourselves from betrayal, theft, envy, greed, deception and murder, nor always from the impulses that propel us to commit these acts. These violations, which can strike us or be committed without warning, can leave deep, often lifelong wounds. There are few of us who do not wrestle deeply with at least one of these violations.

We all stray. We all violate some commandments and do not adequately honor others. We are human. But moral laws bind us together and make it possible to build a society based on the common good. They keep us from honoring the false covenants of greed, celebrity and power that destroy us. These false covenants have a powerful appeal. They offer feelings of strength, status and a false sense of belonging. They tempt us to be God. They tell us the things we want to hear and believe. They appear to make us the center of the universe. But these false covenants, covenants built around exclusive communities of race, gender, class, religion and nation, inevitably carry within them the denigration and abuse of others. These false covenants divide us. A moral covenant recognizes that all life is sacred and love alone is the force that makes life possible.

It is the unmentioned fear of death, the one that rattles with the wind through the heavy branches of the trees outside, which frightens us the most, even as we do not name this fear. It is death we are trying to flee. The smallness of our lives, the transitory nature of existence, the inevitable road to old age, are what the idols of power, celebrity and wealth tell us we can escape. They are tempting and seductive. They assure us that we need not endure the pain and suffering of being human.
We follow the idol and barter away our freedom. We place our identity and our hopes in the hands of the idol. We need the idol to define ourselves, to determine our status and place. We invest in the idol. We sell ourselves into bondage.

The consumer goods we amass, the status we seek in titles and positions, the ruthlessness we employ to advance our careers, the personal causes we champion, the money we covet and the houses we build and the cars we drive become our pathetic statements of being. They are squalid little monuments to our selves. The more we strive to amass power and possessions the more intolerant and anxious we become. Impulses and emotions, not thoughts but mass feelings, propel us forward. These impulses, carefully manipulated by a consumer society, see us intoxicated with patriotic fervor and a lust for war, a desire to vote for candidates who appeal to us emotionally or to buy this car or that brand. Politicians, advertisers, social scientists, television evangelists, the news media and the entertainment industry have learned what makes us respond. It works. None of us are immune. But when we act in their interests we are rarely acting in our own. The moral philosophies we have ignored, once a staple of a liberal arts education, are a check on the deluge. They call us toward mutual respect and self-sacrifice. They force us to confront the broad, disturbing questions about meaning and existence. And our callous refusal to heed these questions as a society allowed us to believe that unfettered capitalism and the free market were a force of nature, a decree passed down from the divine, the only route to prosperity and power. It turned out to be an idol, and like all idols it has now demanded its human sacrifice.

Moral laws were not written so they could be practiced by some and not by others. They call on all of us to curb our worst instincts so we can live together, to refrain from committing acts of egregious exploitation that spread suffering. Moral teachings are guideposts. They keep us, even when we stray, as we all do, on the right path.

The strange, disjointed fragments of our lives can be comprehended only when we acknowledge our insecurities and uncertainties, when we accept that we will never know what life is about or what it is supposed to mean. We must do the best we can, not for ourselves, the great moralists remind us, but for those around us. Trust is the compound that unites us. The only lasting happiness in life comes with giving life to others.
The quality of our life, of all life, is determined by what we give and how much we sacrifice. We live not by exalting our own life but by being willing to lose it. 

  The moral life, in the end, will not protect us from evil. The moral life protects us, however, from committing evil. It is designed to check our darker impulses, warning us that pandering to impulses can have terrible consequences. It seeks to hold community together. It is community that gives our lives, even in pain and grief, a healing solidarity. It is fealty to community that frees us from the dictates of our idols, idols that promise us fulfillment through self-gratification.
These moral laws are about freedom. They call us to reject and defy powerful forces that rule our lives and to live instead for others, even if this costs us status and prestige and wealth.

Turn away from the moral life and you end in disaster. You sink into a morass of self-absorption and greed. You breed a society that celebrates fraud, theft and violence, you turn neighbor against neighbor, you confuse presentation and image with your soul. Moral rules are as imperative to sustaining a community as law. And all cultures have sought to remind us of these basic moral restraints, ones that invariably tell us that successful communities do permit its members to exploit each other but ensure that they sacrifice for the common good.
The economic and social collapse we face was presaged by a moral collapse. And our response must include a renewed reverence for moral and social imperatives that acknowledge the sanctity of the common good.

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Mammoth Financial Losses: Credit Default Swaps – Exercises in Surrealism

 By Satyajit Das

 Global Research <http://www.globalresearch.ca> , March 16, 2009

wilmott.com/blogs/satyajitdas <http://www.wilmott.com/blogs/satyajitdas>
At the quantum level, the laws of classical physics alter in intriguing ways. In financial markets, at the derivative level, the rules of finance also operate differently.

The derivative industry’s indefatigable advocacy of credit default swaps
(“CDS”) centers on the fact that contracts related to recent defaults settled and the overall net settlement amounts were small. Closer scrutiny suggests causes for caution.

The CDS contract is triggered by a “credit event”; broadly, default by the reference entity. CDS contracts on Freddie and Fannie were ‘technically’ triggered as a result of the conservatorship necessitating settlement of around $500 billion in CDS contracts with losses totaling
$25 to $40 billion. Government actions were specifically designed to allow the firms to continue fully honouring their obligations.
Triggering of these contracts poses questions on the effectiveness of CDS contracts in transferring risk of default.

Practical restrictions on settling CDS contracts has forced the use of “protocols” – where counterparties may substitute cash settlement for physical delivery. In cash settlement, the seller makes a payment to the buyer of protection to cover the loss suffered by the protection buyer based on the market price of defaulted bonds established through an “auction” system.

For the GSEs, the auction prices resulted in the following settlements by sellers of protection: Fannie Mae – around 8.49% for senior debt and 0.01% for subordinated debt. Freddie Mac – around 6.00% for senior debt and 2.00 % for subordinated debt.

Subordinated debt ranks behind senior debt and is expected to suffer larger losses in bankruptcy. The lower payout on subordinated debt probably resulted from subordinated protection buyers suffering in a short squeeze resulting in their contracts expiring virtually worthless.
Differences in the payouts between the two entities are also puzzling given that they are both under identical “conservatorship” arrangements and the ultimate risk in both cases is the US government.

In other CDS settlements in 2008 and 2009, the payouts required from sellers of protection have been highly variable and large relative to historical default loss statistics. This may reflect poor economic conditions but are more likely driven by technical issues related to the CDS market.

For example, the Washington Mutual payout (around 43%) may have been affected by capital remaining at the holding company, Washington Mutual Inc. (estimated at $2.8 billion). More recently, the auction settlement of Lyondell (around 80-85%) reflected complication from the role of debtor in possession financing and complex collateral allocation mechanisms.

Skewed payouts do not assist confidence in CDS contracts as a mechanism for hedging. In addition, the large payouts are placing a material pressure on the price of underlying bonds and loans exacerbating broader credit problems.

Low overall net settlement amounts may also be misleading. In practice, there are actually two settlements. The ‘real’ settlement where genuine hedgers and investors deliver bonds under the physical settlement rules (i.e. those who actually own bonds and were hedging). The ‘auction’
where dealers who have both bought and sold protection and have small net positions settled via the auction.

In the case of Lehman Brothers, the net settlement figure of $6 billion that was quoted refers to the auction. Some banks and investors that had sold protection on Lehmans did not participate in the auction choosing to take delivery of defaulted Lehman debt resulting in losses of almost the entire face value.

CDS contracts can amplify losses in credit market. Lehman Brothers defaulted with around $600 billion in debt implying a maximum loss to creditors of that amount. In addition, according to market estimates, there were CDS contracts of around $400-500 billion where Lehmans was the reference entity.

Market estimates suggest that only around $150 billion of the CDS contracts were hedges. The remaining $250-350 billion of CDS contracts were not hedging underlying debt. The losses on these CDS contracts (in excess of $200-300 billion) are additional to the $600 billion. The CDS contracts amplified the losses as a result of the bankruptcy of Lehmans by (up to) approximately 50%.

The CDS market is also complicating restructuring of distressed loans as all lenders do not have the same interest in ensuring the survival of the firm. A lender with purchased protection may seek to use the restructuring to trigger its CDS contracts.

As the global economy slows and the risk of corporate default increases sharply, the identified issues with CDS contracts are likely to complicate the problems of credit markets and banks generally.

In October 2008, Alan Greenspan, the former Chairman of the Fed, acknowledged he was “partially” wrong to oppose regulation of CDS.
“Credit default swaps, I think, have serious problems associated with them,” he admitted to a Congressional hearing.

Ludwig von Mises, the Austrian economist from the early part of the twentieth century, once noted: “It may be expedient for a man to heat the stove with his furniture; but he should not delude himself by believing that he has discovered a wonderful new method of heating his premises”.

Satyajit Das is a risk consultant and author of Traders, Guns & Money:

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The Size of the Derivatives Bubble = $190K Per Person on Planet
The Invisible One Quadrillion Dollar Equation

By DK Matai

Global Research, March 16, 2009
siliconvalleywatcher.com

The Invisible One Quadrillion Dollar Equation -- Asymmetric Leverage and Systemic Risk
According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland -- the central bankers' bank -- the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:
1. Listed credit derivatives stood at USD 548 trillion;
2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:
a. Interest Rate Derivatives at about USD 393+ trillion;
b. Credit Default Swaps at about USD 58+ trillion;
c. Foreign Exchange Derivatives at about USD 56+ trillion;
d. Commodity Derivatives at about USD 9 trillion;
e. Equity Linked Derivatives at about USD 8.5 trillion; and
f. Unallocated Derivatives at about USD 71+ trillion.
Quadrillion? That is a number only super computing engineers and astronomers used to use, not economists and bankers! For example, the North star is "just" a couple of quadrillion miles away, ie, a few thousand trillion miles. The new "Roadrunner" supercomputer built by IBM for the US Department of Energy's Los Alamos National Laboratory has achieved a peak performance of 1.026 Peta Flop per second -- becoming the first supercomputer ever to reach this milestone. One Quadrillion Floating Point Operations (Flops) per second is 1 Peta Flop/s, ie, 1,000 Trillion Flops per second. It is estimated that all the data found on all the websites and stored on computers across the world totals more than One Exa byte of memory, ie, 1,000 Quadrillion bytes of data.
Whilst outstanding derivatives are notional amounts until they are crystallised, actual exposure is measured by the net credit equivalent. This is normally a lower figure unless many variables plot a locus in the wrong direction simultaneously. This could be because of catastrophic unpredictable events, ie, "Black Swans", such as cascades of bankruptcies and nationalisations, when the net exposure can balloon and become considerably larger or indeed because some extremely dislocating geo-political or geo-physical events take place simultaneously. Also, the notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. This means that no large OTC derivative house can be allowed to go broke without falling into the arms of another. Whatever funds within reason are required to rescue failing international investment banks, deposit banks and financial entities ought to be provided on a case by case basis. This is the asymmetric nature of derivatives and here lies the potential for systemic risk to the global economic system and financial markets if nothing is done.
Let us think about the invisible USD 1.144 quadrillion equation with black swan variables -- ie, 1,144 trillion dollars in terms of outstanding derivatives, global Gross Domestic Product (GDP), real estate, world stock and bond markets coupled with unknown unknowns or "Black Swans". What would be the relative positioning of USD 1.144 quadrillion for outstanding derivatives, ie, what is their scale:
1. The entire GDP of the US is about USD 14 trillion.
2. The entire US money supply is also about USD 15 trillion.
3. The GDP of the entire world is USD 50 trillion. USD 1,144 trillion is 22 times the GDP of the whole world.
4. The real estate of the entire world is valued at about USD 75 trillion.
5. The world stock and bond markets are valued at about USD 100 trillion.
6. The big banks alone own about USD 140 trillion in derivatives.
7. Bear Stearns had USD 13+ trillion in derivatives and went bankrupt in March. Freddie Mac, Fannie Mae, Lehman Brothers and AIG have all 'collapsed' because of complex securities and derivatives exposures in September.
8. The population of the whole planet is about 6 billion people. So the derivatives market alone represents about USD 190,000 per person on the planet.
The Impact of Derivatives
1. Derivatives are securities whose value depends on the underlying value of other basic securities and associated risks. Derivatives have exploded in use over the past two decades. We cannot even properly define many classes of derivatives because they are highly complex instruments and come in many shapes, sizes, colours and flavours and display different characteristics under different market conditions.
2. Derivatives are unregulated, not traded on any public exchange, without universal standards, dealt with by private agreement, not transparent, have no open bid/ask market, are unguaranteed, have no central clearing house, and are just not really tangible.
3. Derivatives include such well known instruments as futures and options which are actively traded on numerous exchanges as well as numerous over-the-counter instruments such as interest rate swaps, forward contracts in foreign exchange and interest rates, and various commodity and equity instruments.
4. Everyone from the large financial institutions, governments, corporations, mutual and pension funds, to hedge funds, and large and small speculators, uses derivatives. However, they have never existed in history with the overarching, exorbitant scale that they now do.
5. Derivatives are unravelling at a fast rate with the start of the "Great Unwind" of the global credit markets which began in July 2007 and particularly after the collapse of Freddie Mac and Fannie Mae in September this year.
6. When derivatives unravel significantly the entire world economy would be at peril, given the relatively smaller scale of the world economy by comparison.
7. The derivatives market collapse could make the housing and stock market collapses look incidental.
Three Historical Examples
1. The so-called rogue trader Nick Leeson who made a huge derivatives bet on the direction of the Japanese Nikkei index brought on the collapse of Barings Bank in 1995.
2. The collapse of Long Term Capital Management (LTCM), a hedge fund that had a former derivatives and bond dealer from Salomon Brothers and two Nobel Prize winners in Economics as principals, collapsed because of huge leveraged bets in currencies and bonds in 1998.
3. Finally, a lot of the problems of Enron in 2000 were brought on by leveraged derivatives and using derivatives to hide problems on the balance sheet.
The Pitfall
The single conceptual pitfall at the basis of the disorderly growth of the global derivatives market is the postulate of hedging and netting, which lies at the basis of each model and of the whole regulatory environment hyper structure. Perfect hedges and perfect netting require functioning markets. When one or more markets become dysfunctional, the whole deck of cards could collapse swiftly. To hope, as US Treasury Secretary Mr Henry Paulson does, that an accounting ruse such as transferring liabilities, however priced, from a private to a public agent will restore the functionality of markets implies a drastic jump in logic. Markets function only when:
1. There is a price level at which demand meets supply; and more importantly when
2. Both sides believe in each other's capacity to deliver.
Satisfying criterion 1. without satisfying criterion 2. which is essentially about trust, gets one nowhere in the long term, although in the short term, the markets may demonstrate momentary relief and euphoria.
Conclusion
In the context of the USD 700 billion rescue plan -- still being finalised in Washington, DC -- the following is worth considering step by step.

Decision makers are rightly concerned about alleviating immediate pressure points in the global financial system, such as, the mortgage crisis, decline in consumer spending and the looming loss of confidence in financial institutions. However, whilst these problems are grave, they are acting as a catalyst to another more massive challenge which may have to be tackled across many nation states simultaneously. As money flows slow down sharply, confidence levels would decline across the globe, and trust would be broken asymmetrically, ie, the time taken to repair it would be much longer. Unless there is government action in concert, this could ignite a chain-reaction which would swiftly purge trillions and trillions of dollars in over-leveraged risky bets.

Within the context of over-leverage, the biggest problem of all is to do with "Derivatives", of which CDSs are a minor subset. Warren Buffett has said the derivatives neutron bomb has the potential to destroy the entire world economy, and is a "disaster waiting to happen." He has also referred to derivatives as Weapons of Mass Destruction (WMD). Counting one dollar per second, it would take 32 million years to count to one Quadrillion.

The numbers we are dealing with are absolutely astronomical and from the realms of super computing we have stepped into global economics.

There is a sense of no sustainability and lack of longevity in the "Invisible One Quadrillion Dollar Equation" of the derivatives market especially with attendant Black Swan variables causing multiple implosions amongst financial institutions and counterparties! The only way out, albeit painful, is via discretionary case-by-case government intervention on an unprecedented scale. Securing the savings and assets of ordinary citizens ought to be the number one concern in directing such policy.

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Dollar Crisis In The Making Before the stampede

By W Joseph Stroupe

Global Research, March 16, 2009
Asia Times - 2009-03-15

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Welcome to the TALF

Bernanke's Witness Protection Program

By MIKE WHITNEY
Fed chief Ben Bernanke's new funding facility is a real doozy. In fact, if the Term Asset-Backed Loan Facility or TALF, which is set to launch on Thursday, doesn't convince the American people that it's time to take a wrecking ball to the Central Bank and start over, than nothing will. Bernanke and his co-conspirator at Treasury, Timothy Geithner, are planning to revive the shadow banking system by dumping $2 trillion into the same over-leveraged, derivatives-based garbage that blew up the financial system in the first place. All the blabbering about a "good bank-bad bank" remedy appears to have been a diversion. This is how Bloomberg sums it up:
"Geithner’s program has three main elements: Injecting fresh government capital into some of the country’s biggest financial institutions; establishing a public-private partnership to handle as much as $1 trillion of banks’ bad assets; and starting a credit facility with the Federal Reserve of as much as $1 trillion to promote lending to consumers and businesses.
The Treasury hopes to unfreeze credit markets by providing new incentives to banks and investors to resume trading in mortgage securities and other troubled assets. U.S. regulators are conducting a new series of examinations to make sure banks have enough capital to accept losses when selling these assets, while also planning to provide government financing to the investors who might buy them." (Bloomberg News)
That's right; $1 trillion for Bernanke's TALF and another trillion for Geithner's so called "Public-Private Partnership". That's $2 trillion down a derivatives sinkhole just to preserve the illusion that the banks are still solvent. Bernanke has decided to shrug off the advice of nearly every reputable economist in the country, most of whom are pushing for a government takeover of the failing banks (nationalization), just to toss his shifty banking buddies a lifeline. It doesn't bother him that the public till has already been looted and that his action will leave the next generation of Americans bobbing in a pool of red ink.
Last week, investors backed away from Bernanke's TALF, even though the Fed promised to provide up to 95 percent of the funding (through low interest loans) to investors willing to buy distressed assets backed by student loans, car loans and credit card debt. The potential investors "objected to the level of scrutiny that dealers would have over their books, arguing that the dealers' rules attached too many strings. Dealers were saying they take plenty of risk to facilitate the program and need to be protected in situations where the collateral or the client made mistakes or wound up ineligible." (Wall Street Journal")
This is how crazy it's gotten. Why shouldn't the Fed have the right to look at the books and see if these financial institutions are solvent or not? Should they just take their word for it?
But that's only half the story. When the WSJ says that dealers need to "be protected in situations where the collateral or the client made mistakes or wound up ineligible", what they mean to say is that they expect the Fed to make up for any losses on securities which are explicitly banned from the program. This is no small matter, since the Fed cannot legally buy any asset that is less than triple A, and yet, everyone knows the TALF will end up being a dumping ground for all kinds of toxic waste.
So who will pay when financial institutions sell double A or lower securities that they KNOW are ineligible for the program? As it stands now, the taxpayer, because the Fed caved in to industry pressure. In other words, the interests of the people who put up a measly 5 percent of the original investment will take precedent over those who put up 95 percent. This is the kind of sleazy dealmaking that is going on behind the scenes of this bailout fiasco. The Fed is so desperate to launch its facility and keep these Wall Street scamsters and bank extortionists in business, they're willing to underwrite the fraudulent sale of rotten securities. It's outrageous!
But there's even more to this swindle than that--much more. According to the Wall Street Journal:
"Wall Street dealers, including J P Morgan Chase & Co. and Barclays PLC's Barclays Capital, have created vehicles to participate in the TALF that would allow investors in the program to circumvent many of the restrictions laid out by the Fed. The vehicles resemble collateralized debt obligations, or CDOs, and use some of the financial engineering that was partially responsible for the collapse of the credit markets. The Fed, eager to get what it hopes will be a $1 trillion program up and running, has blessed the vehicles because they open the TALF up to a much larger group of investors." (TALF is reworked after investors balk, Liz Rappaport, Wall Street Journal)
Great. More CDOs. Just what we need.
Keep in mind that the Fed's funding is in the form of "non recourse loans" already, which means that if the dealers decide to walk away, the losses are transferred to the taxpayers balance sheet, no questions asked. But even that is not good enough for the Wall Street crooksters. They want to create a whole new security buffer-zone for themselves by dredging up the Frankenstein of structured debt-instruments--the notorious CDO--so they can "circumvent" the rules and plead innocent when B grade garbage is sold through the TALF. This isn't a financial rescue plan, it's a witness protection program for self acknowledged con artists and snake oil salesmen.
Again, the Wall Street Journal:
"Under the new proposal, a bank such as Barclays or J.P. Morgan would set up a trust to buy securities with money borrowed from the Fed. The trust would then sell investors securities in the trust. Those securities would give returns similar to the TALF loan, but without the strings attached....The dealers say they could create markets for these derivative securities to trade."
The Fed's culpability in this boondoggle is undeniable. Bernanke and his wily friend at Treasury have given their full support to a plan that does nothing but move trillions of dollars of toxic waste from one balance sheet to another while foisting the liability onto the American taxpayer. And don't be misled by the term "trust" in the Journal's report. In this instance, "trust" refers to an Enron-type, off-balance sheets Structured Investment Vehicle (SIV) which is designed to keep investors in the dark about the real condition of the financial institutions that run them. SIV's are the banks sausage-making units which hold hundreds of billions of dollars of undercapitalized complex securities, like mortgage-backed securities (MBS) and collateralized debt obligations (CDO). These are the same debt-instruments which greased the skids for the current downward death-spiral.
Wall Street Journal:
"The vehicles also would make it easier for investors that aren't eligible for TALF loans to buy into the program, like investors that are restricted by their investment guidelines from using borrowed money to buy securities. Smaller hedge funds that can't vie for large allocations of deals could also buy in through these vehicles."
Sure, what the heck. Why worry about "eligibility" or "restrictions"?
We don't need a financial rescue plan that isolates the toxic waste and writes down the losses. We don't need to protect the taxpayer or the depositor. We'll just keep asset prices in the stratoshpere for a while longer by adding a little more helium and pretending that private institutions really want this mortgage-backed sludge. That way, we can keep the public from knowing what's really going on." This seems to be the general line of reasoning at the Fed and Treasury.
Wall Street Journal:
"Some investors have raised concerns, however, noting that the structure puts these dealers at an advantage in bidding and influencing the price of new offerings. They also say the derivative securities present old and familiar problems, such as keeping the end holder of the risk of the TALF securities several steps away from the pricing of that risk."
The economy is sliding headlong into another Great Depression because of the mispricing of risk, the sale of complex and unregulated derivatives, the vast and unsustainable use of leverage, and shadowy and fraudulent off-balance sheets operations. When the TALF is launched on Thursday, all of these same activities will be reignited with the explicit blessing of the Central Bank. It is a reckless, wacky plan to keep the banks in private hands and to keep asset prices inflated beyond their true market value.
Bernanke and Geithner are moving ahead with their plan despite the clearly articulated guidelines set out by the world's finance ministers and central bankers who convened over the weekend in Sussex, England. Number 7 of the G-20's Communiqué reads:
"We have also agreed to: regulatory oversight, including registration, of all Credit Rating Agencies whose ratings are used for regulatory purposes, and compliance with the International Organization of Securities Commissions (IOSCO) code; full transparency of exposures to off-balance sheet vehicles; the need for improvements in accounting standards, including for provisioning and valuation uncertainty; greater standardization and resilience of credit derivatives markets; the FSF’s sound practice principles for compensation; and the relevant international bodies identify non-cooperative jurisdictions and to develop a tool box of effective counter measure."
It couldn't be much clearer than that. But don't expect "compliance" from Geithner or Bernanke. They have no intention of reworking their plans to meet the demands of the G-20. No way. Multilateralism and cooperation might sound great in speeches, but it's not what drives policy.
The TALF and the "Public-Private Partnership" are another slap in the face of the international community. They violate the spirit and the letter of the G-20 communique. It will be interesting to see if foreign holders of US Treasurys endure this latest insult in silence or if there's a sudden stampede for the exits. There's a sense that the world is getting fed up with the Fed's financial chicanery and would like to chart a different course. Enough is enough.

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How to Blow Your Credit Limit -- Without Spending

by Kelli B. Grant
Thursday, March 12, 2009provided by
If you haven't had the credit limit cut on your credit card recently, count yourself lucky. Risk-averse card issuers are getting slash happy. And while many cardholders gripe that such cuts slice razor-close to their balance amounts, for an unfortunate few the cuts go far deeper: below what they currently owe.
Under different circumstances, David Chaplin-Loebell wouldn't have minded that American Express cut his unlimited credit line to just $5,000. Except that when AmEx reduced his line in October, he had an outstanding balance of $10,000. "I found out by having a business purchase declined," he says. Repeated calls to AmEx failed to yield an answer about why the cut was made. Chaplin-Loebell, who lives in Philadelphia, is now paying the balance under his regular card terms, and presumes the line will free up for new purchases once he's below the limit. "For now, they've essentially frozen the account," he says, leaving him to juggle business expenses on his personal cards. American Express did not respond to requests for comment.
Nasty as it may be, the practice of cutting credit lines below the balance is legal -- at least, for now, says Chi Chi Wu, a staff attorney for the National Consumer Law Center, a consumer advocacy group. Federal Reserve rules requiring lenders to give cardholders 45 days notice before reducing a credit line to the point that it would trigger penalties won't go into effect until July 2010. "[Until] then, there are no federal protections," says Wu.
Congress is also hoping to rein in unscrupulous credit-card practices. In February, Sen. Chris Dodd (D., Conn.), chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs, reintroduced the Credit CARD Act, which among other things, offers cardholder protections like the ability to pay under the existing terms if an account is closed and requiring issuers to lower penalty rates within six months once a cardholder gets back on track with payments. Earlier this month, the House Committee on Financial Services chairman Barney Frank, announced a series of four hearings that will include discussions about credit card reform.
SmartMoney.com contacted both committees to see if they were aware of issuers' practice of cutting credit lines below balances, and if they planned to address it in upcoming hearings. Neither responded to requests for comment.
The motivation among issuers to make such deep cuts that they plunge below a cardholder's balance amount isn't very clear. Usually, issuers cut credit lines to reduce outstanding liabilities -- they sometimes may even chase the balance on riskier accounts with further limit cuts as cardholders pay down debts, explains Bill Carcache, an analyst with investment bank Fox-Pitt Kelton. But cutting below the balance doesn't reduce an issuer's liability: The cardholder still owes the outstanding debt.
One possibility is that this is yet another attempt by card issuers to get consumers to close their accounts (while bringing in a little fee income in the short term), says Dennis Moroney, research director and senior analyst for consulting firm Tower Group. "I can't rationalize in my mind what other motivation there would be," he says.
Paul Pensabene of Saratoga Springs, N.Y., received a statement from HSBC on Dec. 8 that said he had a $359.99 balance and remaining available credit of $8,640. But when he went online to pay the bill several days later, his online account showed that same balance put him over his newly-reduced credit line of $300. And that didn't include the $35 over-limit fee. Pensabene grappled with customer service until they agreed to remove the fee, and then paid the balance in full. "All I could think was, 'Good lord, what if this is happening to someone that couldn't pay their balance off in one shot?'" he says. "They'd end up in default with these fees piling up."
HSBC declined to comment on individual cardholder accounts. Spokeswoman Cindy Savio says the issuer has tightened its credit standards based on the economy. "As we have previously stated, in an effort to reduce credit risk and refine strategies for our card business, we have tightened credit standards, reduced or canceled higher risk credit lines, and closed a number of inactive accounts," she says.
While the fees, frozen accounts and default interest rates resulting from credit-line cuts can sting your finances, they can do some serious long-term damage to your credit score. Your credit utilization ratio -- the total amount of debt you owe in relation to the amount of credit available to you -- accounts for roughly 30% of your score. A credit line cut has the potential to decrease your score by 50 points or more if you don't have much other available credit, says Craig Watts, spokesman for FICO, the company that calculates and issues the credit score that most lenders use.
Even cuts that are close to the balance have the potential to devastate if they're not caught quickly. Luckily for Carol Gressett of Decatur, Miss., she noticed the reduction in her Discover-branded Sam's Club card limit just days after it happened. The limit was cut to within $100 of her $3,000 balance. The official letter notifying her of the reduction arrived three weeks later. "We could easily have gone over if I hadn't been paying attention," she says.