If I have seen further it is by standing on the shoulders of giants.

Monday, August 29, 2011

Paul: Bernanke Is Out of Options to Save Economy

Chairman Ben Bernanke is not calling for another fix to the economy by the Federal Reserve because he's already used up all the quivers in the Fed's bow, Rep. Ron Paul said Sunday.

Paul is a 2012 Republican presidential candidate and supports the U.S. returning to the gold standard to protect its currency and force a balanced budget. He has been highly critical of the Federal Reserve and its chairman over plans for "quantitative easing," a two-part program which flooded the market with dollars in an attempt to make money more available for borrowing and lending.

Paul argued that Bernanke's plan to buy bank assets and drop more than $2 trillion into the economy did not yield the results the chairman hoped, a conclusion that Paul says Bernanke implicitly acknowledged during a speech last week in which he offered no new bailout programs from the Fed.

"He really hasn't pulled back. Symbolically, he has and he is not having another QE3," Paul said. "But he has maintained a (view) to keep interest rates low until 2013. You can't keep interest rates low without monetizing debt because if somebody else doesn't buy it, he has to buy it. So he's continuously quantitatively easing."

Paul said that artificially holding down interest rates was instrumental in the housing bubble that burst in 2007 and sparked the economic meltdown from which the U.S. economy is still trying to recover.

He said if government -- and its central bank -- stopped trying to bail out its friends, then the economy would soon return to normal.

"Let the people who live beyond their means, let them go bankrupt," he said. "Hands off, give us a sound currency, free up the markets. Property rights. Enforce contracts. Make sure people go bankrupt when they go bankrupt and don't bail out their buddies."

He added that one good thing out of Bernanke's speech is that he effectively returned the responsibility for the economy back to Congress and a fiscal approach.

"He at least sort of said, 'Oh, it's up to the Congress. It's all Congress' fault. They need to deal with it. So he's sort of throwing up his hands. But all he needs to do is quit monetizing debt. Interest rates would go up and Congress would be forced to cut debt," Paul said.

Paul has been holding steady near the top of the polls for the Republican nomination despite being described as "unconventional" because of his libertarian streak. The 12-term Texas congressman surmised that he's in vogue now because many Americans realize it's time to return to the principles on which the nation was founded.

"I'm fascinated with your word 'unconventional,'" he told "Fox News Sunday. "Isn't it strange that we can apply that word to freedom and liberty and the Constitution and limited government and a balanced budget?'

Continue reading - Paul: Bernanke Is Out of Options to Save Economy

Central Bankers Urge Governments to Keep Global Economic Expansion Intact

Central bankers gathered at an annual retreat in Jackson Hole, Wyoming, this weekend had a message for political leaders: monetary policy alone can’t keep the global expansion going.

Federal Reserve Chairman Ben S. Bernanke urged adoption of “good, proactive housing policies” to reverse the depressed U.S. real estate market and warned lawmakers to avoid steps that may hurt short-term growth. Ewald Nowotny of the European Central Bank Governing Council said euro-area governments should expand the powers of their regional bailout fund.

“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” Bernanke said at the annual conference of policy makers and economists, sponsored by the Kansas City Fed.

The call to arms ended a month in which the Fed and the ECB raced to shield their economies from fiscal tightening and strengthen a world economy that is losing momentum. Reports this week may underscore the challenges faced by policy makers: U.S. payroll growth probably slowed in August, and confidence in Europe’s economy fell to its lowest since April 2010, economists forecast. Fed policy makers will meet for two days in September instead of one so they can discuss options for spurring growth.

Warning of a “dangerous new phase” for the world economy, International Monetary Fund Managing Director Christine Lagarde told the forum that risks have been aggravated by “a growing sense that policy makers do not have the conviction, or simply are not willing, to take the decisions that are needed.”

‘Twin Perils’

Fiscal policy must navigate between the twin perils of losing credibility and undercutting recovery,” said Lagarde, who took the helm of the IMF in July.

Bernanke told the conference that the U.S. central bank still has a “range of tools” it could use to help the economy if needed, although he stopped short of signaling that the Fed would embark on a third round of government bond buying.

‘Only Game in Town’

“It’s a difficult burden central banks are carrying because of the constraints of fiscal policy,” Diane Swonk, chief economist at Mesirow Financial Holdings Inc., said in an interview in Jackson Hole. “The Fed and other central banks realize they are the only game in town.”

The policy makers met for three days to discuss ways to bolster long-term economic performance. They gathered as banks from UBS AG to Citigroup Inc. cut their forecasts for global expansion and predicted the Fed, ECB and Bank of Japan will keep benchmark interest rates at or near record lows through 2012.

Recession Odds

Harvard University Professor Martin Feldstein, who attended the conference, told Bloomberg Television there are “better than even” odds of another U.S. recession, while Stanford University’s John Taylor called it a “recovery in name only.” Allen Sinai, president of Decision Economics, said the chance of a global slump is 30 percent.

The dilemma for policy makers is that four years to the month since the start of the global credit crisis they have fewer remedies to aid the faltering expansion. Government budget deficits are high and interest rates are already at or near record lows.

A paper presented at the conference by economists from the Bank for International Settlements concluded that governments start to impair economic growth when their debts reach about 80 percent to 100 percent of gross domestic product, levels now witnessed in all of the Group of Seven countries.

Kansas City Fed President Thomas Hoenig told Bloomberg Television that there is a limit to how much more the Fed can help the economy, saying, “We can’t do it all.”

Continue reading - Bloomberg - Central Bankers Urge Governments to Keep Global Economic Expansion Intact

IMF’s Lagarde Urges Support for World Economy in a ‘Dangerous New Phase’

Christine Lagarde, the new managing director of the International Monetary Fund chief, warned that the world economy is in a “dangerous new phase” and that officials must take new steps to strengthen growth.

Lagarde, speaking to international finance officials and economists in Jackson Hole, Wyoming, said the U.S. should arrest a slide in house prices and European banks must be required to boost capital to prevent the continent’s debt crisis from infecting more countries. The U.S. and European Union should enforce long-term budget discipline to free up cash for short- term stimulus, she said.

We risk seeing the fragile recovery derailed,” Lagarde, 55, said. “So we must act now.

Lagarde spoke near the end of a month when the value of global equities dropped by $5.7 trillion on concern global growth is slowing and governments will be unable to tackle sovereign debt burdens. UBS AG and Citigroup Inc. cut their forecasts for expansion of the world economy and predicted major central banks will leave interest rates on hold through 2012.

Risks have been aggravated further by a deterioration in confidence and a growing sense that policymakers do not have the conviction, or simply are not willing, to take the decisions that are needed,” Lagarde said.

‘Stakes are High’

The slowdown provided the impetus for three days of debate at the conference, with Federal Reserve Chairman Ben S. Bernanke saying the U.S. central bank still has tools to boost its economy, without specifying what they were or whether they would be deployed.

The stakes for the world economy are high,” said Allen Sinai, president of Decision Economics in New York, who put the odds of another global recession at 30 percent.

Europe is struggling to contain a sovereign debt crisis that is nearing its third year and has left many banks from Spain to Greece in or close to insolvency. Stress tests on 90 European banks published on July 15 showed eight lenders had a combined 2.5 billion-euro ($3.6 billion) capital shortfall, failing to ease concern that many of them remain vulnerable to a potential sovereign default.

Without an “urgent” recapitalization, “we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis,” Lagarde said. Bolstering banks’ balance sheets “is key to cutting the chains of contagion.”

‘Accomodative’ Monetary Policy

Central bankers should also keep monetary policy “highly accommodative, as the risk of recession outweighs the risk of inflation” and should stand ready “to dive back into unconventional waters.” The Fed this month pledged to keep its key interest rate near zero until at least mid-2013.

Emerging economies have a part to play too, Lagarde said, adding that some “key” nations are curbing domestic demand and preventing their currencies from strengthening. Such steps prevent emerging markets from making a bigger contribution to global growth.

“Everyone should recognize that decoupling is a myth,” she said. “If the advanced countries succumb to recession, the emerging markets will not escape.”

Continue reading - Bloomberg - IMF’s Lagarde Urges Support for World Economy in a ‘Dangerous New Phase’

Economic Cycles Before the Fed | Thomas E Woods, Jr.

Archived from the live Mises.tv broadcast, this talk by Tom Woods was presented at the 2011 Mises University in Auburn, Alabama. Includes an introduction by Mark Thornton.

Economic Cycles Before the Fed | Thomas E Woods, Jr.


Austrian Economics: Why It Matters

Friday, August 26, 2011

World Economy Has 50% Chance of Slumping: Spence

The global economy has a 50 percent chance of slipping into recession as Europe and the U.S. struggle to grow, according to Nobel laureate Michael Spence.

“I’m quite worried,” Spence said in a Bloomberg Television interview in Hong Kong yesterday. “A combined downward dip in Europe and America, which is a good chunk of the industrialized economies, I’m quite sure will take down growth in China particularly, and that will then immediately spread to the rest of the emerging economies.” He put the likelihood of such a scenario “at about 50 percent.”

Spence’s remarks follow cuts in global growth forecasts by institutions from Citigroup Inc. to UBS AG as central bankers from around the world gather for a Federal Reserve symposium this weekend in Jackson Hole, Wyoming. Unlike the aftermath of the 2008 global financial crisis when China cushioned the blow with a stimulus program, this time it would only be able to buffer its domestic economy, he said.

China “cannot make up for the kind of loss of demand that would go with a downturn in the advanced economies,” Spence said. Because Chinese inflation is running at an official rate of 6.5 percent, a figure many economists say is understated, Beijing would be “pretty close to nuts” to fuel further credit growth, he said.

Spence, a professor at New York University’s Stern School of Business who won the Nobel Prize in economics in 2001, said Fed Chairman Ben S. Bernanke, who will speak at Jackson Hole today, has limited room to maneuver.

‘Awkward Spot’

The Fed is in a very awkward spot, where they have limited additional capacity to do much more than prevent a frail economy and a frail financial system from failing,” he said. “But the expectations of them are so high, and it’s really the government and the fiscal situation and other things which they don’t control that are kind of the main agenda items.”

Spence said that the Fed could seek to encourage lending in order to help bolster the real-estate market.

“They could focus more attention -- in their capacity as overseer of parts of the banking system -- on the housing sector, whose weakness is a big sea anchor that’s holding the economy back.”

Encouraging banks to lend more freely to home buyers or to provide relief to those whose homes are in foreclosure would help unlock consumer spending, he said.

“I just think we’ve been dithering on that front and it’s an important enough component of the problem that maybe the Fed could take a leadership role in focusing attention on it,” the Nobel laureate said.

Continue reading - Bloomberg - World Economy Has 50% Chance of Slumping: Spence

The Prophet

Twilight descends in new Hampshire as an old man climbs onto his soapbox. LIBERTY: TOO BIG TO FAIL reads a banner hanging in the jam-packed tent. He is hardly a commanding figure, but a thousand people chant his name and lean in to listen, ready to follow, as Ron Paul delivers his genre-bending stump speech. There are no focus-grouped slogans, no empty calories: Paul's talk is more like a high-fiber graduate seminar on economic theory, forgotten history and the nooks and crannies of the U.S. Constitution. "The Federal Reserve system and all their members have been counterfeiters for a long time," he says, his reedy voice straining. "Sound money is connected to free markets and the freedom message and the Constitution, and we can bring this all together for people. It fascinates me, and I'm sure it must fascinate a lot of you also."

In normal times, Paul's esoteric pitch might leave voters bemused, bewildered or just bored. But these aren't normal times, and the rapt crowd roars its approval. The attendees share his conviction that a great man has met his moment in history. "Our time has come," Paul declares, and this time, it may be more than wishful thinking.

For decades, the Republican Congressman from Texas has preached much the same brand of libertarian politics and Austrian economics. When he ran for President four years ago, Paul drew a zealous but narrow following, and his warnings that murky monetary policy, runaway spending and a sprawling foreign empire would ruin the country struck many Republicans as kooky. His GOP rivals smirked or simply ignored him. Although Paul raised a staggering $35 million, he captured just 1% of Republican delegates.

But in the four years since, the world has changed in mostly grim ways that seem to affirm Paul's worldview. His vision of an eroding Constitution and a Washington--Wall Street cabal helped spark the Tea Party movement. Conservatives who once sneered at his foreign policy as being "isolationist" have grown weary of war. His call for a more accountable and transparent Federal Reserve has morphed from quaint obsession to mainstream Republican talking point in Congress and on the campaign trail.

As presidential contender, Paul remains an extreme long shot. He lags behind central-casting candidates like Mitt Romney and Rick Perry in polls. The pillars of his libertarian philosophy--restoring the gold standard, abolishing the central bank, letting states legalize drugs, gutting the size of government and the social safety net, sharply reducing America's global footprint--are too radical for the typical suburban swing voter. Not to mention that the 76-year-old Paul would be the oldest ever first-term President.

But as prophet, he is still defining the GOP race. He came within a whisker of spoiling Michele Bachmann's headline-making win at the Aug. 13 Iowa straw poll and helped end Tim Pawlenty's candidacy by denying him a second-place finish. When Republican heavies like Newt Gingrich and Perry bash the Fed's monetary policy, he mocks them as latecomers to his party. "Who would have thought the former Speaker of the House would come out for 'Audit the Fed?'" Paul says to deafening applause in Concord. "Now we have a Southern governor. I can't remember his name"--a wry reference to Perry, who suggested it would be almost "treasonous" for Fed Chairman Ben Bernanke to pump more money into the economy--"[who] realizes talking about the Fed is good too."

Paul still struggles to win the major media's attention, prompting Jon Stewart to compare his candidacy to "the 13th floor of a hotel." But Paul's allies say he's more interested in influence than political power. "He does not have a great personal desire to be the President," says Jesse Benton, Paul's campaign chairman and grandson-in-law. Instead, he is that rare commodity in modern politics: a man of ideas, however unconventional they may be.

The Making of the Maverick

Ron Paul's political epiphany took place on Aug. 15, 1971. That was the day Richard Nixon, hoping to boost a flagging U.S. economy, decoupled the dollar from the gold standard. Few people understood or cared about the change. For Paul, it was a calamity. "That was the moment I knew something very strange was going on in the government establishment," he recalls, sitting in a desk chair in his Concord campaign office. Paul believes that a currency unmoored from gold is based on, well, nothing, and that simply printing fiat money inevitably leads to ruin. "I thought it was just a total disaster," he says.

The mild-mannered Paul is an unlikely messenger of economic doom. Born outside Pittsburgh, he attended medical school at Duke and joined the Air Force in 1963. He served as a flight surgeon during Vietnam, an experience that convinced him the American "empire" is folly. As he built an obstetrics practice in Brazoria County, Texas, he spent his free time studying the theories of Friedrich Hayek and Ludwig von Mises, giants of the Austrian school of economics, which champions unfettered free markets, individual rights and money backed by scarce commodities like gold and silver. "When I discovered people like Mises, to me they were geniuses," Paul says. "They could explain this stuff. It helped me feel comfortable that it wasn't only me in the world."

In 1974 Paul ran for Congress in South Texas, promising "freedom, honesty and sound money." He lost that race but won the seat two years later. Paul's latest campaign ad boasts that he is "guided by principle," and his record supports the claim. Though he represents a rural coastal district, Paul regularly votes against farm subsidies and flood insurance. He has never voted for a tax increase or an unbalanced budget. He opposed congressional medals for Rosa Parks, Ronald Reagan, Pope John Paul II and Mother Teresa as well as aid for Hurricane Katrina victims, all on the grounds that Congress has no business meddling in such matters.

Paul isn't a pure libertarian. He doesn't support abortion or gay marriage; he believes those issues should be left up to states. But he has a coherent worldview: that individual liberty is the highest American ideal and a free-market economy its foundation. Paper money is a mirage predicated on trust in a government that can't be trusted. Fealty to the Constitution means accepting the parts of it you might not like, whether it's your neighbor's right to shoot heroin or gamble away his paycheck. "You can take your life and be very productive, or you can be destructive," Paul says, "but you can't meddle in other people's lives."

Paul's acolytes often speak of him in nearly messianic tones. "It's like a light switch going on. You see things you haven't seen before," says Doug Wead, a senior adviser who served under both George W. Bush and Bush's father. After Paul spoke in Concord, hundreds of fans thronged to greet him. Kate Baker, the national chair of a group called Women for Ron Paul, tried to organize a greeting line. "Ron Paul walks where he wants to walk and stops," she tells an eager fan. "We follow him."

A Revolution Matures

For a political prophet, paul isn't much of a speaker. He tangles his syntax and is prone to rambling. But one man's awkward is another's authentic, and when you are trying to sell a candidate as a truth teller, it's best if the packaging doesn't show: his newest ad contrasts him with the "smooth-talking politicians" he's running against. "We've run into Romney. We ran into McCain. Whenever you talk to them, you feel like everything they say is almost programmed," says Jesse Coffey, a 17-year-old Paul volunteer who is among the candidate's many young devotees. "When you meet Ron Paul, it's like meeting an old friend you haven't seen in years."

For the next hour, Paul stands in the gathering dusk, shaking hands, snapping pictures and signing memorabilia: $2 bills, a watercolor portrait of his face, a copy of the John Birch Society's magazine. "I'd ask you to sign my chest, but it probably wouldn't be appropriate," says one woman, who settles for her sleeve. A trio of young men, including one in a T-shirt depicting a vampiric George W. Bush sinking his fangs into Lady Liberty, crowd around the Congressman to vent about the treatment of Bradley Manning, the Army private imprisoned for allegedly slipping a trove of classified documents to WikiLeaks. "They tried to throw Daniel Ellsberg in jail too," Paul says, shaking his head, recalling the furor over the Pentagon Papers 40 years ago.

The 2008 Paul campaign was a ragtag coalition of anarchists, antiwar activists, goldbugs, paleoconservatives, hard-core libertarians and conspiracy theorists. His grassroots supporters threw raucous rallies, floated a Ron Paul blimp, lionized the 17th century British revolutionary Guy Fawkes--infamous for his attempt to blow up Parliament--and raised huge chunks of cash through online "money bombs." But his organization was hapless when it came to translating that enthusiasm into votes. "Last time, we didn't know what we were doing," says Chris Lawless, 42, a volunteer who voted for Paul back in 1988 when he ran for President on the Libertarian Party ticket. "We made WHO IS RON PAUL? T-shirts"--a reference to the "Who is John Galt?" refrain in Ayn Rand's libertarian touchstone Atlas Shrugged. "We had a freaking blimp."

Paul was almost a passive figurehead in that spectacle, putting his message ahead of campaign tactics. "His goal, I think, was to use his platform as a pulpit to keep talking about these things until people understood it," says Jim Forsythe, his New Hampshire campaign chairman. "Enough people understand it now. It's time to do something about it."

Convinced that he has a shot in 2012--a late-August Gallup poll showed him running nearly even with President Obama in a hypothetical matchup--Paul's aides have hired seasoned operatives and are more focused on ballot-box results, demonstrating early success at the Iowa straw poll. And Paul is still raising big money, including a $1.8 million money bomb to mark his Aug. 20 birthday.

There remains the matter of the candidate himself, though. "He's incorruptible," Wead says. "He just will not say or do anything that is not based on what he believes, even if it will help his cause. It's very frustrating, because at times using different language would be so much more politically effective."

Whether or not Paul attracts more votes than he did in 2008, his ideas have clearly taken on a life of their own. And that's what Paul says is most important. "I do what I do because I believe that truth wins out in the end," he explains. Even if his candidacy will have a hard time doing the same.

Continue reading - TIME - The Prophet

Ron Paul's Amis

Participants at the annual Summer University of the New Economics in France have been focused on Ron Paul's issue: sound money and the political propensity to inflate away debt.

If Republican presidential hopeful Ron Paul is dissatisfied with the attention he's getting in America, here's another audience he might try: southeastern France.

This week European free-market economists, activists and students gathered in Aix en Provence for the annual Summer University of the New Economics. The sessions concern the crisis of the welfare state and paths back to fiscal sanity. But participants so far have been focused on Mr. Paul's issue of the summer -- sound money and the political propensity to inflate away debt.

French professor Pascal Salin of the Université Paris-Dauphine, twice on Monday thundered that "it is not necessary to create money," adding that "real money is investment, that's real wealth creation. . . . Morally, devaluation is nothing more than theft."

The University of Geneva's Victoria Curzon-Price adds that central banks carry no small amount of risk to society. "Confidence in money can disappear very quickly. How can we have confidence in states that steal, in central banks that say one thing and do another." Henri Lepage, president of the free-market think tank Institut Turgot, concluded that "at the heart of [this crisis] is the monopoly of central banks."

While the delegates were primarily concerned with the fate of the euro, American politics were never far from their discussions. After a day of lamenting the depredations of monetarists and not-quite independent central banks, Corsican economics and law student Tristan Casabianca was ready to give his endorsement: "I think Ron Paul is the best guy for America nowadays. Small government is the only solution to the crisis."

Mr. Casabianca is ineligible to vote in U.S. elections. But if Mr. Paul knew how many fans he has in the Mediterranean, he might reconsider his position on immigration.

via - WSJ - Ron Paul's Amis

Tuesday, August 23, 2011

Out of Control: The Destructive Power of the Financial Markets

Speculators are betting against the euro, banks are taking incalculable risks and the markets are in turmoil. Three years after the Lehman Brothers bankruptcy, the financial industry has become a threat to the global economy again. Governments missed the chance to regulate the industry, and another crash is just a matter of time.

The enemy looks friendly and unpretentious. With his scuffed shoes and thinning gray hair, John Taylor resembles an elderly sociology professor. Books line the dark, floor-to-ceiling wooden shelves in his office in Manhattan, alongside a bust of Theodore Roosevelt and an antique telescope.

Taylor is the chairman and CEO of FX Concepts, a hedge fund that specializes in currency speculation. It's the largest hedge fund of its kind worldwide, which is why Taylor is held partly responsible for the crash of the euro. Critics accuse Taylor and others like him of having exacerbated the government crisis in Greece and accelerated the collapse in Ireland.

People like Taylor are "like a pack of wolves" that seeks to tear entire countries to pieces, said Swedish Finance Minister Anders Borg. For that reason, they should be fought "without mercy," French President Nicolas Sarkozy raged. Andrew Cuomo, the former attorney general and current governor of New York, once likened short-sellers to "looters after a hurricane."

The German tabloid newspaper Bild sharply criticized Taylor on its website, writing: "This man is betting against the euro." If that is what he is doing, he is certainly successful. While Greece is threatened with bankruptcy, Taylor is listed among the world's 25 highest-paid hedge fund managers.

A well-read man, Taylor likes to philosophize about the Congress of Vienna and the Treaties of Rome. But is this man really out to speculate the euro to death? And does he have Greece on his conscience?

Taylor grimaces and sighs. He was expecting these questions. "The big problem is that in some cases these politicians are looking for the easy way out and want to blame somebody else and say speculators are taking Europe apart, taking the euro down and ruining the prosperity of our country," he says, characterizing such charges against hedge fund managers as "nonsense." "My capital isn't the capital of the Rothschilds," he says, insisting that he is working with the "capital of the people," and that his goal is to protect and increase this capital. Taylor points out that no one from any of the German pension funds that invest their money with him has ever called him on the phone to tell him not to bet against the euro.

Markets Control Politicians

Taylor's arguments echo those of everyone in the financial industry -- the executives, the bankers and the big fund managers. They all insist that they are not responsible for the crisis in the euro zone and the turbulence in the financial markets, and that their actions are purely rational and in the interest of their investors.

The truth is that the financial markets are controlling the politicians. If Sarkozy interrupts his vacation, the markets interpret his sudden return as a sign that the situation there is worse than they thought -- and promptly set their sights on the country. And if there is an argument between Italian Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti, then the markets target Italy, because they doubt that the Italian government is serious about introducing austerity measures. The markets take advantage of every weakness and every rumor to speculate against one country after the next.

In doing so, they aggravate the crisis. Once a country has become the subject of rumors and speculation, other investors become nervous. Fearing further price declines, pension funds and insurance companies also start selling stocks and bonds. In the end, fear nurtures fear and a panic ensues.

Stock markets are currently in turmoil. Even the most experienced equity traders cannot remember a time when prices fluctuated as widely from day to day -- and often even within a single day -- as they have in recent weeks. The German stock index, the DAX, fell by 5.8 percent last Thursday and lost another 2.2 percent the next day.

There is no calm in sight for the global economy. Sharp declines on the stock market and crises have become an everyday reality. This raises the question of why the financial markets are so erratic. They have developed into a permanent threat to the global economy. But what can be done to avert this risk?

It cannot be a coincidence that the number and scope of disruptions have increased with the expansion of the financial industry. The Asian financial crisis in the 1990s came on the heels of the bursting of the Internet bubble at the turn of the millennium. When Lehman Brothers went bankrupt in 2008, the financial world suddenly found itself on the brink of collapse. Now that the euro is at risk, and millions of people are afraid of their currency collapsing. A number of countries, including the United States, are groaning under debt burdens that run into the trillions.

Incalculable Risk

Naturally the financial industry -- all those who trade in securities, currencies, money and the products derived from them, known as derivatives -- is not responsible for all the crises in the global economy. Politicians also share some of the blame, for having accumulated too much debt and given the banks too much leeway. But without the destructive power of the banks, hedge funds and other investment companies, the world would not be where it is today -- at the edge of an abyss.

The financial industry grew rapidly, as did the sums of money with which its players speculated on the prices of stocks, commodities and government bonds. The products they developed to turn money into even more money became more and more complex. At the same time, the risks they were willing to accept became incalculable.

The sector's high salaries tend to attract the best and brightest university graduates. The members of this youthful elite don't devise new products that make people's lives better, nor do they found new companies that further progress. Instead, these young financial wizards invest a great deal of money and effort to develop sophisticated financial products, the sole purpose of which is to generate more profit for both their employers and, ultimately, for themselves -- sometimes at the expense of other market players or even their customers.

Many things that happen on Wall Street and in London's financial district are "socially useless," says Lord Adair Turner, chairman of Britain's Financial Services Authority (FSA). The values that are created there are often not real or of any use to society, Turner adds. Paul Volcker, the former chairman of the US Federal Reserve, once remarked that the only truly useful financial innovation in the past 20 years is the cash machine.

Once upon a time, the sole purpose of banks was to supply the economy with money. They were service providers, sources of energy for the economy, so to speak, but nothing more. But now the financial industry has largely disconnected itself from the manufacturing economy, transforming its role from subservient to dominant in the process.

The potential upshot of this shift became evident less than three years ago. The banks had excessively foisted mortgages on Americans without paying much attention to their customers' ability to repay these loans. They packaged the risks into new financial products and sold them on. But apparently very few people understood how these products actually worked. When the subprime bubble finally burst, it dragged down the entire financial industry with it. The major financial firms found themselves on the brink of bankruptcy and were forced to appeal to the government for help.

Lost Opportunity

The assistance was provided, but a historic opportunity was squandered in the process. None of the powerful banks was broken up, and only a few of the dangerous financial products were banned. With the central banks lending money at low rates, speculation could continue.

The financial industry recovered quickly as a result, and now it is just as powerful as it was before the crisis -- and just as dangerous, for both the economy and society as a whole.

Even passionate advocates of the market economy are now questioning how an economic system that functioned so well for so long could spin dangerously out of control. In a hard-hitting opinion piece in the Daily Telegraph on July 30, British journalist Charles Moore sharply criticized the banks for keeping profits while passing on losses to taxpayers. "The banks only 'come home' when they have run out of our money," he wrote. "Then our governments give them more."

Moore asks himself whether the left, with its criticism of the capitalist system, might actually be right. The prominent German journalist Frank Schirrmacher, expounding on Moore's commentary in the Sunday edition of the conservative Frankfurter Allgemeine Zeitung, wrote that a decade of economic policies based on loosely regulated financial markets is proving to be the "most successful" way to make the left-wing critique of free-market capitalism, which had fallen out of favor, popular again.

Western societies have seldom been more divided, and never have income disparities been as great as they are today. In no other industry can someone get rich as quickly as in the financial industry, where investment bankers divide up a large share of the profits among themselves and hedge-fund managers earn annual incomes in the millions -- and sometimes even in the billions.

At the same time, the markets are constantly demanding higher returns. Those who do not meet their expectations are punished with declines in the price of their stock and higher borrowing costs. Companies, forced to adjust to these requirements, keep wages down and their workforces at a minimum.

These differences are especially glaring in London, Europe's most important financial center. Bankers live in the lap of luxury in the city's exclusive neighborhoods, while poor neighborhoods are home to people who have abandoned all hope. Many observers see this disparity and loss of hope as one of the causes of the recent unrest.

Continue reading - Out of Control: The Destructive Power of the Financial Markets

Friday, August 19, 2011

Is capitalism doomed?

The massive volatility and sharp equity-price correction now hitting global financial markets signal that most advanced economies are on the brink of a double-dip recession. A financial and economic crisis caused by too much private-sector debt and leverage led to a massive re-leveraging of the public sector in order to prevent Great Depression 2.0. But the subsequent recovery has been anaemic and sub-par in most advanced economies given painful deleveraging.

Now a combination of high oil and commodity prices, turmoil in the Middle East, Japan's earthquake and tsunami, eurozone debt crises, and America's fiscal problems (and now its rating downgrade) have led to a massive increase in risk aversion. Economically, the United States, the eurozone, the United Kingdom, and Japan are all idling. Even fast-growing emerging markets (China, emerging Asia, and Latin America), and export-oriented economies that rely on these markets (Germany and resource-rich Australia), are experiencing sharp slowdowns.

Until last year, policymakers could always produce a new rabbit from their hat to reflate asset prices and trigger economic recovery. Fiscal stimulus, near-zero interest rates, two rounds of "quantitative easing", ring-fencing of bad debt, and trillions of dollars in bailouts and liquidity provision for banks and financial institutions: officials tried them all. Now they have run out of rabbits.

Fiscal policy currently is a drag on economic growth in both the eurozone and the UK. Even in the US, state and local governments, and now the federal government, are cutting expenditure and reducing transfer payments. Soon enough, they will be raising taxes.

Another round of bank bailouts is politically unacceptable and economically unfeasible: most governments, especially in Europe, are so distressed that bailouts are unaffordable; indeed, their sovereign risk is actually fueling concern about the health of Europe's banks, which hold most of the increasingly shaky government paper.

Nor could monetary policy help very much. Quantitative easing is constrained by above-target inflation in the eurozone and UK. The US Federal Reserve will likely start a third round of quantitative easing (QE3), but it will be too little too late. Last year's $600bn QE2 and $1tn in tax cuts and transfers delivered growth of barely three per cent for one quarter. Then growth slumped to below one per cent in the first half of 2011. QE3 will be much smaller, and will do much less to reflate asset prices and restore growth.

Currency depreciation is not a feasible option for all advanced economies: they all need a weaker currency and better trade balance to restore growth, but they all cannot have it at the same time. So relying on exchange rates to influence trade balances is a zero-sum game. Currency wars are thus on the horizon, with Japan and Switzerland engaging in early battles to weaken their exchange rates. Others will soon follow.

Meanwhile, in the eurozone, Italy and Spain are now at risk of losing market access, with financial pressures now mounting on France, too. But Italy and Spain are both too big to fail and too big to be bailed out. For now, the European Central Bank will purchase some of their bonds as a bridge to the eurozone's new European Financial Stabilisation Facility. But, if Italy and Spain lose market access, the EFSF's €440 bn ($627bn) war chest could be depleted by the end of this year or early 2012.

Then, unless the EFSF pot were tripled - a move that Germany would resist - the only option left would become an orderly but coercive restructuring of Italian and Spanish debt, as has happened in Greece. Coercive restructuring of insolvent banks' unsecured debt would be next. So, although the process of deleveraging has barely started, debt reductions will become necessary if countries cannot grow or save or inflate themselves out of their debt problems.

So Karl Marx, it seems, was partly right in arguing that globalisation, financial intermediation run amok, and redistribution of income and wealth from labour to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labour income, increases inequality and reduces final demand.

Recent popular demonstrations, from the Middle East to Israel to the UK, and rising popular anger in China - and soon enough in other advanced economies and emerging markets - are all driven by the same issues and tensions: growing inequality, poverty, unemployment, and hopelessness. Even the world's middle classes are feeling the squeeze of falling incomes and opportunities.

To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.

The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment. It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts.

Over time, advanced economies will need to invest in human capital, skills and social safety nets to increase productivity and enable workers to compete, be flexible and thrive in a globalised economy. The alternative is - like in the 1930s - unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies, and massive social and political instability.

Continue reading - Nouriel Roubini - Is capitalism doomed?

US streets full of formerly middle class

The world is now seeing the economic uncertainty of the U.S. but for many Americans, it has been apparent for quite some time. Economic despair has been spreading across our nation and it can be seen by the rising number of middle class Americans losing their homes. In some cases, joblessness and inability to pay rent has forced people to live in their cars, shelters, or on the sidewalk.

US streets full of formerly middle class

Thursday, August 18, 2011

Is the SEC Covering Up Wall Street Crimes?

A whistleblower claims that over the past two decades, the agency has destroyed records of thousands of investigations, whitewashing the files of some of the nation's worst financial criminals.

Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – "Hey, chief, didja know this guy had two wives die falling down the stairs?" No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record.

That, it now appears, is exactly how the Securities and Exchange Commission has been treating the Wall Street criminals who cratered the global economy a few years back. For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation's worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – "18,000 ... including Madoff," as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.

Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency's records – "including case files relating to preliminary investigations" – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term "Orwellian," devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation. Amazingly, the wholesale destruction of the cases – known as MUIs, or "Matters Under Inquiry" – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission's internal website. "After you have closed a MUI that has not become an investigation," the site advised staffers, "you should dispose of any documents obtained in connection with the MUI."

Many of the destroyed files involved companies and individuals who would later play prominent roles in the economic meltdown of 2008. Two MUIs involving con artist Bernie Madoff vanished. So did a 2002 inquiry into financial fraud at Lehman Brothers, as well as a 2005 case of insider trading at the same soon-to-be-bankrupt bank. A 2009 preliminary investigation of insider trading by Goldman Sachs was deleted, along with records for at least three cases involving the infamous hedge fund SAC Capital.

The widespread destruction of records was brought to the attention of Congress in July, when an SEC attorney named Darcy Flynn decided to blow the whistle. According to Flynn, who was responsible for helping to manage the commission's records, the SEC has been destroying records of preliminary investigations since at least 1993. After he alerted NARA to the problem, Flynn reports, senior staff at the SEC scrambled to hide the commission's improprieties.

As a federally protected whistle-blower, Flynn is not permitted to speak to the press. But in evidence he presented to the SEC's inspector general and three congressional committees earlier this summer, the 13-year veteran of the agency paints a startling picture of a federal police force that has effectively been conquered by the financial criminals it is charged with investigating. In at least one case, according to Flynn, investigators at the SEC found their desire to bring a case against an influential bank thwarted by senior officials in the enforcement division – whose director turned around and accepted a lucrative job from the very same bank they had been prevented from investigating. In another case, the agency farmed out its inquiry to a private law firm – one hired by the company under investigation. The outside firm, unsurprisingly, concluded that no further investigation of its client was necessary. To complete the bureaucratic laundering process, Flynn says, the SEC dropped the case and destroyed the files.

Much has been made in recent months of the government's glaring failure to police Wall Street; to date, federal and state prosecutors have yet to put a single senior Wall Street executive behind bars for any of the many well-documented crimes related to the financial crisis. Indeed, Flynn's accusations dovetail with a recent series of damaging critiques of the SEC made by reporters, watchdog groups and members of Congress, all of which seem to indicate that top federal regulators spend more time lunching, schmoozing and job-interviewing with Wall Street crooks than they do catching them. As one former SEC staffer describes it, the agency is now filled with so many Wall Street hotshots from oft-investigated banks that it has been "infected with the Goldman mindset from within."

The destruction of records by the SEC, as outlined by Flynn, is something far more than an administrative accident or bureaucratic fuck-up. It's a symptom of the agency's terminal brain damage. Somewhere along the line, those at the SEC responsible for policing America's banks fell and hit their head on a big pile of Wall Street's money – a blow from which the agency has never recovered. "From what I've seen, it looks as if the SEC might have sanctioned some level of case-related document destruction," says Sen. Chuck Grassley, the ranking Republican on the Senate Judiciary Committee, whose staff has interviewed Flynn. "It doesn't make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what time frame and to what extent its actions were consistent with the law."

Continue reading - Rolling Stone - Is the SEC Covering Up Wall Street Crimes?

Exclusive: Matt Taibbi on SEC covering up Wall Street crimes

Tuesday, August 16, 2011

We've been warned: the system is ready to blow

Only a new way of managing the global economy can prevent more mayhem in the markets and on the streets

For the past two centuries and more, life in Britain has been governed by a simple concept: tomorrow will be better than today. Black August has given us a glimpse of a dystopia, one in which the financial markets buckle and the cities burn. Like Scrooge, we have been shown what might be to come unless we change our ways.

There were glimmers of hope amid last week's despair. Neighbourhoods rallied round in the face of the looting. The Muslim community in Birmingham showed incredible dignity after three young men were mown down by a car and killed during the riots. It was chastening to see consumerism laid bare. We have seen the future and we know it sucks. All of which is cause for cautious optimism – provided the right lessons are drawn.

Lesson number one is that the financial and social causes are linked. Lesson number two is that what links the City banker and the looter is the lack of restraint, the absence of boundaries to bad behaviour. Lesson number three is that we ignore this at our peril.

To understand the mess we are in, it's important to know how we got here. Today marks the 40th anniversary of Richard Nixon's announcement that America was suspending the convertibility of the dollar into gold at $35 an ounce. Speculative attacks on the dollar had begun in the late 1960s as concerns mounted over America's rising trade deficit and the cost of the Vietnam war. Other countries were increasingly reluctant to take dollars in payment and demanded gold instead. Nixon called time on the Bretton Woods system of fixed but adjustable exchange rates, under which countries could use capital controls in order to stimulate their economies without fear of a run on their currency. It was also an era in which protectionist measures were used quite liberally: Nixon announced on 15 August 1971 that he was imposing a 10% tax on all imports into the US.

Four decades on, it is hard not to feel nostalgia for the Bretton Woods system. Imperfect though it was, it acted as an anchor for the global economy for more than a quarter of a century, and allowed individual countries to pursue full employment policies. It was a period devoid of systemic financial crises.

Utter mess

There have been big structural changes in the way the global economy has been managed since 1971, none of them especially beneficial. The fixed exchange rate system has been replaced by a hybrid system in which some currencies are pegged and others float. The currencies in the eurozone, for example, are fixed against each other, but the euro floats against the dollar, the pound and the Swiss franc. The Hong Kong dollar is tied to the US dollar, while Beijing has operated a system under which the yuan is allowed to appreciate against the greenback but at a rate much slower than economic fundamentals would suggest.

The system is an utter mess, particularly since almost every country in the world is now seeking to manipulate its currency downwards in order to make exports cheaper and imports dearer. This is clearly not possible. Sir Mervyn King noted last week that the solution to the crisis involved China and Germany reflating their economies so that debtor nations like the US and Britain could export more. Progress on that front has been painfully slow, and will remain so while the global currency system remains so dysfunctional. The solution is either a fully floating system under which countries stop manipulating their currencies or an attempt to recreate a new fixed exchange rate system using a basket of world currencies as its anchor.

The break-up of the Bretton Woods system paved the way for the liberalisation of financial markets. This began in the 1970s and picked up speed in the 1980s. Exchange controls were lifted and formal restrictions on credit abandoned. Policymakers were left with only one blunt instrument to control the availability of credit: interest rates.

For a while in the late 1980s, the easy availability of money provided the illusion of wealth but there was a shift from a debt-averse world where financial crises were virtually unknown to a debt-sodden world constantly teetering on the brink of banking armageddon.

Currency markets lost their anchor in 1971 when the US suspended dollar convertibility. Over the years, financial markets have lost their moral anchor, engaging not just in reckless but fraudulent behaviour. According to the US economist James Galbraith, increased complexity was the cover for blatant and widespread wrongdoing.

Looking back at the sub-prime mortgage scandal, in which millions of Americans were mis-sold home loans, Galbraith says there has been a complete breakdown in trust that is impairing the hopes of economic recovery.

"There was a private vocabulary, well-known in the industry, covering these loans and related financial products: liars' loans, Ninja loans (the borrowers had no income, no job or assets), neutron loans (loans that would explode, destroying the people but leaving the buildings intact), toxic waste (the residue of the securitisation process). I suggest that this tells you that those who sold these products knew or suspected that their line of work was not 100% honest. Think of the restaurant where the staff refers to the food as scum, sludge and sewage."

Finally, there has been a big change in the way that the spoils of economic success have been divvied up. Back when Nixon was berating the speculators attacking the dollar peg, there was an implicit social contract under which the individual was guaranteed a job and a decent wage that rose as the economy grew. The fruits of growth were shared with employers, and taxes were recycled into schools, health care and pensions. In return, individuals obeyed the law and encouraged their children to do the same. The assumption was that each generation would have a better life than the last.

This implicit social contract has broken down. Growth is less rapid than it was 40 years ago, and the gains have disproportionately gone to companies and the very rich. In the UK, the professional middle classes, particularly in the southeast, are doing fine, but below them in the income scale are people who have become more dependent on debt as their real incomes have stagnated. Next are the people on minimum wage jobs, which have to be topped up by tax credits so they can make ends meet. At the very bottom of the pile are those who are without work, many of them second and third generation unemployed.

Deep trouble

A crisis that has been four decades in the making will not be solved overnight. It will be difficult to recast the global monetary system to ensure that the next few years see gradual recovery rather than depression. Wall Street and the City will resist all attempts at clipping their wings. There is strong ideological resistance to the policies that make decent wages in a full employment economy feasible: capital controls, allowing strong trade unions, wage subsidies, and protectionism.

But this is a fork in the road. History suggests there is no iron law of progress and there have been periods when things have got worse not better. Together, the global imbalances, the manic-depressive behaviour of stock markets, the venality of the financial sector, the growing gulf between rich and poor, the high levels of unemployment, the naked consumerism and the riots are telling us something.

This is a system in deep trouble and it is waiting to blow.

Continue reading - Telegraph - We've been warned: the system is ready to blow

Endorsements for Ron Paul

Jim Rogers supports Ron Paul

Glenn Beck: Ron Paul For President

Jack Cafferty: Ron Paul Deserves More Attention

Sean Hannity defends Ron Paul

Ron Paul Ad - THE ONE

Monday, August 15, 2011

Nixon Ends Bretton Woods International Monetary System

One generation ends the gold standard and the next goes on the soap standard If the US defaults on its interest payments on August 15 it will be 40 years to the day that Nixon "Temporarily" suspended the gold standard.

Nixon Ends Bretton Woods International Monetary System

TZM - Democracy, technocracy, the free market or the scientific method for social concern?

This video is an attempt to show how the various forms of government and decision making work, what are their advantages and their problems.

Democracy, technocracy, the free market or the scientific method for social concern?

Sunday, August 14, 2011

World Bank head warns markets heading to new danger zone

The loss of market confidence in economic leadership in key countries like the United States and Europe coupled with a fragile economic recovery have pushed markets into a new danger zone, something that policymakers have to take seriously, the head of the World Bank said on Sunday.

Speaking at the Asia Society dinner in Sydney, Robert Zoellick also said the global economy was going through a multi-speed recovery, with developing countries now the source of growth and opportunity.

"What's happened in the past couple of weeks is there is a convergence of some events in Europe and the United States that has led many market participants to lose confidence in economic leadership of some of the key countries," he said.

"I think those events combined with some of the other fragilities in the nature of recovery have pushed us into a new danger zone. I don't say those words lightly ... so that policymakers recognize and take it seriously for what it is."

Zoellick said the process of dealing with the sovereign debt problem and some of the competitive issues in the euro zone have tended to be done "a day late," leaving markets worried that authorities may not be ahead of the problem or moving in the right direction.

"That (worry) has accumulated and so we're moving from drama to trauma for a lot of the euro zone countries," he said.

On the United States, Zoellick said it wasn't fears the world's biggest economy faced an imminent problem, but "frankly that markets are used to the United States playing a key role in the economic system and leadership."

He said efforts to cut U.S. government spending have so far been focused on discretionary spending as opposed to the entitlement program such as social security. "Until they make an effort on those programs, there is going to be continued skepticism about dealing with long-term spending."

Zoellick said while market confidence has been hit, the real issue was whether this will spread to business and consumer confidence, something that was still unclear.

"What is different from the world of the past is now emerging markets are sources of growth and opportunity. About half of global growth is represented by the developing world ... so this is a very rapid change in a relatively short span of time in historical terms," he added.

Continue reading - Reuters - World Bank head warns markets heading to new danger zone

Thursday, August 11, 2011

Central Bankers Worldwide Race to Save Growth in 72 Hours of Policymaking

Central bankers are racing to shield their economies from fiscal tightening and lopsided currency swings that threaten a new global recession.

In the 72 hours after a Group of Seven conference call on Aug. 7, the Federal Reserve pledged to keep interest rates near zero through at least mid-2013, the European Central Bank intervened in bond markets and the Bank of England indicated it’s ready to add more stimulus if needed. Japan signaled renewed concern about the yen and Switzerland yesterday stepped up its fight to curb an “overvalued” franc.

Central bankers have so far been the tower of strength,” said Stefan Schneider, chief international economist at Deutsche Bank AG in Frankfurt. “Lawmakers have done everything to destroy belief in their ability to solve the problems they’re facing.

Today, the Bank of Korea kept interest rates unchanged for a second month and government officials planned a 2 p.m. local time media briefing in Seoul on the stock market rout. The MSCI Asia Pacific Index sank 1.1 percent as of 9:42 a.m. in Tokyo.

Finance ministers and central bankers from the G-7 nations, which include the U.S., U.K. and Germany, said in a statement Aug. 7 that they will “take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.”

Buying Bonds

The next day, the Frankfurt-based ECB, which last week restarted its bond-purchase program after an 18-week hiatus, extended its focus to include debt of Italy and Spain, the region’s third- and fourth-largest economies.

The Fed’s decision Aug. 9 to hold its key interest rate at a record low through mid-2013 and signal it’s ready to use additional tools comes as U.S. politicians are tightening the nation’s fiscal belt and the economic stimulus enacted by President Barack Obama in 2009 comes to an end.

Bank of England Governor Mervyn King told reporters in London yesterday that headwinds buffeting the nation’s economy are intensifying “by the day” and officials can expand stimulus if the outlook for growth deteriorates further.

Bank of Japan Governor Masaaki Shirakawa said Aug. 9 that volatile exchange rates could have a “negative impact” on the economy, after the central bank last week added 10 trillion yen ($130 billion) of stimulus and the country unilaterally intervened in the currency market to weaken the yen.

Switzerland’s central bank said yesterday it will increase the supply of francs to fight the currency’s “massive overvaluation.”

‘Fragile’ Economies

Randall Kroszner, a former Fed governor, said central banks must consider the effects of fiscal tightening when making decisions about how to aid their economies.

“It is wise to be doing this kind of risk management because economic conditions have become more fragile,” he said.

With euro-region governments failing to act swiftly enough to stop contagion from Greece’s fiscal meltdown, it has fallen to the ECB to battle a crisis that’s now threatening the survival of the euro. The ECB has lifted its benchmark interest rate twice this year, to 1.5 percent to fight inflation.

Buying Italian and Spanish debt may require the ECB to massively expand its balance sheet and open it to accusations of bailing out profligate nations, breaching a key principle in the euro’s founding treaty and undermining its credibility. Within the ECB’s ranks, Bundesbank President Jens Weidmann voted against the resumption of the program; he was joined by Juergen Stark, Germany’s representative on the ECB’s Executive Board and representatives from the Netherlands and Luxembourg.

Bernanke’s Signal

In the U.S., Fed Chairman Ben S. Bernanke signaled that the central bank may consider a third round of large-scale asset purchases, even after the first two rounds totaling $2.3 trillion failed to secure sufficient job growth and sustain the two-year-old recovery. This week’s decision to leave its benchmark interest rate near zero through at least mid-2013 provoked three dissents from policy makers, the most opposition since Bernanke took office in 2006.

Even as they take action, central bankers “don’t know the panacea” and have disagreement within their ranks, Deutsche Bank’s Schneider said. “It’s increasingly unclear who can stop this spiral.

A scholar of the Great Depression, Bernanke said last year that among the lessons learned from the financial collapse of the 1930s is that “policy makers must respond forcefully, creatively and decisively” and that “crises that are international in scope require an international response.”

“The wheels of fiscal change grind slowly, but central bankers can act more quickly” to address economic obstacles, said Alan Levenson, vice president and chief economist at T. Rowe Price Associates Inc. in Baltimore, which manages $521 billion in assets. “Central bankers are more nimble in breaking the negative feedback loop that’s developed between financial markets and the economy.”

Continue reading - Bloomberg - Central Bankers Worldwide Race to Save Growth in 72 Hours of Policymaking

The Ron Paul Superbomb - September 19

http://RevolutionPAC.com | Northbrook, IL - Revolution PAC, the Super PAC formed in July to support the presidential ambitions of Congressman Ron Paul, has announced a money bomb fundraiser -- a "Super PAC Superbomb" -- for September 19.

"September 19 marked the first of the battles of Saratoga, which taken together amounted to a significant turning point in the War for Independence," said Revolution PAC President Gary Franchi. "We hope this Superbomb, and the resources it brings in, will propel us toward a victory no less dramatic for Ron Paul."

In advance of the Superbomb, the Super PAC is emphasizing its grassroots nature, its low overhead, and its effective use of funds.

"We are regular Americans, each of whom has a track record of support for Dr. Paul and what he stands for," said Thomas Woods, Revolution PAC Advisory Board Chairman. "We aren't paying the six-figure salaries and five- and six-figure expense reimbursements we often encounter in the political world. We are simply dedicated to the cause, and we have employed every penny donated to us wisely and conscientiously."

The Super PAC form of organization, made possible by two court rulings in 2010, has gathered steam quickly during this election cycle. Unlike a presidential campaign, it can accept unlimited donations from individuals, businesses, and other groups.

During an event outside the Chicago Federal Reserve over the weekend Franchi remarked: "We're changing the game. Anybody can donate to us, but in particular those who have reached the $2500 legal limit in donations to a presidential campaign can now continue to help Ron Paul by supporting the Revolution Super PAC.

"We will devote whatever we raise to carrying out the most efficient and effective political marketing campaign Americans will see this cycle. Ron Paul and his message will be everywhere. The Ron Paul grassroots will have been underestimated for the last time."

The Revolution PAC is asking foreign supporters of Ron Paul to patronize US businesses who support the Super PAC like http://RonPaulSwag.com

Ron Paul supporters are being asked to pledge to contribute to the September 19th Superbomb at http://RevolutionPAC.com

The Ron Paul Superbomb - September 19

Ron Paul on Currency Destruction

Ron Paul Discussing the "Inevitable Default" on Bloomberg

Ron Paul on CNBC: I worry most about consequences of Currency Destruction

Wednesday, August 10, 2011

Jean-Claude Trichet defends buying bonds to halt European debt crisis

European Central Bank president says threat of market collapse in the eurozone is the 'worst since the second world war'

The president of the European Central Bank, Jean-Claude Trichet, vigorously defended his controversial decision to buy up Italian and Spanish bonds, saying the European debt crisis held the potential for the worst market collapse for almost a century.

"It is the worst crisis since the second world war and it could have been the worst crisis since the first world war if leaders hadn't taken the important decisions," Trichet said in an interview with the French radio station Europe1 on Tuesday.

As the borrowing costs of the latest countries to be caught up in Europe's debt crisis fell for a second day running, Trichet implicitly confirmed that the ECB was behind a surge in purchases. "We are in the secondary market," he acknowledged.

The rise in demand lifted the prices of Italian and Spanish bonds, cutting their yields which represent the return to investors and the cost to the governments issuing them.

The news from the debt markets, however, did little to prevent turmoil on Europe's stock markets which extended their earlier, heavy losses before climbing back in response to the positive opening on Wall Street. Sentiment was initially depressed by the release of data showing a slowdown in German export growth.

The Federal Statistical Office said exports in June were up by 3.1% to €88.3bn($126bn) on the year, the lowest increase in 16 months. Since the introduction of the euro, Germany's export-led economy has become even more crucial to European growth than it was before.

"In June we got to feel the first indications of the decreasing global economic dynamism," said Anton Börner, the head of Germany's exporters' association, who warned that the effect of a slowing US economy would "be felt in the coming months".

The Bank of France's monthly industrial survey showed both corporate order books and factory utilisation rates falling for the second month in a row in July.

A slowdown in growth in the eurozone's two core economies would only encourage speculation that they are next in line to be contaminated by the debt crisis.

Bloomberg reported that, for the first time in three years, the cost of insuring against a German default on its bonds had risen to more than was asked for insurance against a British default.

Trichet said: "In the past few days, we have asked the Italian government very clearly to take a certain number of decisions... and in particular to speed up the return to a situation of normal balance [between spending and revenue]."

He added: "The same thing has been asked of the Spanish government."

His remarks went some way towards confirming a report on Monday that he and his designated successor, the Italian central bank governor, Mario Draghi, had sent Italy's prime minister, Silvio Berlusconi, a detailed "shopping list" of reforms they wanted in exchange for supporting Italy's bonds.

On Friday, Berlusconi announced that he was bringing forward to 2013 the date by which he intended to eliminate Italy's budget deficit.

The ECB's reported intervention has ignited political controversy, with opposition leaders claiming Berlusconi has surrendered control to Frankfurt.

Antonio Di Pietro, head of the Italy of Principles party, claimed that the prime minister had been "dragged by the ear by the EU and international economic institutions" into making last week's announcement.

Further evidence that the crisis is pushing the eurozone towards centralised policy-making came from Germany's economy minister and vice-chancellor, Philipp Rösler. He proposed the creation of a new "stability council" that could penalise member states that lived beyond their means and oversee competitiveness tests, which could look at, among other things, the flexibility of labour markets.

With some analysts expressing scepticism about the long-term effectiveness of the ECB's bond-buying spree, the bank's president refused to say how long it planned to remain in the market.

"What we expect is that the governments do what we consider to be their job," Trichet said.

It was agreed last month that the ECB should hand over its debt-purchasing role to the eurozone governments' bailout vehicle.

The European Financial Stability Facility (EFSF) cannot start to intervene in the markets, however, until its terms of reference have been adjusted and its new powers ratified by eurozone parliaments, which are in recess.

By most estimates, the process can be finished by mid-October.

Continue reading - Jean-Claude Trichet defends buying bonds to halt European debt crisis

Reuters: ECB says will "actively implement" bond-buying

Telegraph: European Central Bank must go nuclear to save Europe

Greenspan: No Chance of Default, US Can Print Money

Former Federal Reserve Chairman Alan Greenspan on Sunday ruled out the chance of a US default following S&P's decision to downgrade America's credit rating.

"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default" said Greenspan on NBC's Meet the Press

"What I think the S&P thing did was to hit a nerve that there's something basically bad going on, and it's hit the self-esteem of the United States, the psyche" said Greenspan

Austan Goolsbee, the chairman of the White House's council of economic advisors, hit out at S&P on the same show, insisting the credit ratings agency had got its math wrong.

"Well, the basic case is they made a $2 trillion math error and forgot to check their work," he said. "So rating agencies that didn't make a $2 trillion math error reaffirmed the AAA status. You saw Warren Buffet say that, if they had a AAAA, he would put U.S. Treasurys in AAAA status."

Following the decision to downgrade America's credit rating, the head of sovereign ratings at S&P, David Beers, said the Obama administrations analysis of the move was a complete "misrepresentation."

Greenspan said the current sense of crisis that has unnerved investors is about the euro zone, not the US.

'The United States was actually doing relatively well, sluggish but going forward until Italy ran into trouble," he said. "That destabilized the European system, and the crisis re-emerged. Europe is very critical to the United States in the sense not only do we have a fourth of our exports there, but more importantly, significant proportion of the foreign affiliate profits, in fact half of U.S. corporations, are in Europe."

"When Italy showed signs of significant weakness in selling its bonds—the yield is now over 6 percent, which is an unsustainable level—it created a massive problem within Europe because Italy is a very large country, cannot be easily bailed out and, indeed, cannot be bailed out," Greenspan added.

Continue reading - Greenspan: No Chance of Default, US Can Print Money

Greenspan: US Can Pay Any Debt It Has Because It Can Print Money To Pay It

Fed is as paralyzed as Congress is

The U.S. economy is slumping, and the word Tuesday from the Federal Reserve is that the central bank is just as paralyzed as Congress is.

The most remarkable thing about the policy statement from the Fed was the wide gulf between the Fed’s diagnosis of what’s ailing the economy and the Fed’s prescribed medicine. Read the full story: Fed says low rates to stay through at least mid-2013.

The economy is in much worse shape than we thought, the Fed said. And we won’t — or can’t — lift a finger to do anything about it.

Up until now, the Fed had been clinging to a hope that the softening in the economy would prove to be transitory, that temporary factors — such as high energy prices and the supply shock of the Japanese earthquake — were to blame.

No longer.

The Fed has come to grips with the reality: If temporary factors “account for only some of the recent weakness in economic activity,” then it follows that permanent, structural or fundamental factors must account for most of our problems. And those problems will take years to resolve.

Sure, the Fed made some news by saying that it would likely keep interest rates exceptionally low until the middle of 2013. Never before has the Fed put a date-certain stamp on any of its actions. That sounds like a pretty dramatic announcement, but actually it was a statement of impotence. Read the full text of the Fed statement.

The promise to keep interest rates near zero for two more years will do very little to stimulate the economy in the near term. On the margin, the Fed’s promise will help cement market expectations that the Fed won’t be tightening monetary policy any time soon. Everyone already expected the Fed to sit tight for a long time, so what does it really achieve?

The mid-2013 promise falls well short of the market’s hopes, but it was as far as Federal Reserve Chairman Ben Bernanke could push his committee. Three of the 10 members of the Federal Open Market Committee dissented, which by central-banking standards is practically a mutiny. Read blog post on the Tell: Three dissents among Fed officials akin to ‘mutiny’?

The three dissents tell us that the Fed won’t implement a new round of bond buying — not unless the situation gets a lot worse. The remaining arrows in Bernanke’s quiver will stay right there, unused.

And the economy — and the market — must fend for itself.

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