Ilargi: A lite and late TAE version today, if such a thing -lite- is possible to begin with. I worked all day on various issues that all have to do with the site, for which I never have time. Besides, attendance is sparse (comparatively), so why not?
There are a lot of things brewing, both economically and politically, from where I’m sitting. Makes me think back of when I first started saying that this is not a financial or economical crisis, but a full-blown political one. Anyone still doubt that?
It looks like the Obama administration had better come up with some real numbers, and real good numbers, if they want to avoid being hung out to dry. There is one problem: there are no numbers that are both real and good. The real are bad, and the good are fake.
There’s this old tale about a guy offering to pay for a job he needs done, saying he wants it executed: Good, Fast and Cheap.
To which the prospective contractor replies: Pick Two.
See, now I made you think, or I'd hope so.
How many economists would you say understand what lies behind that little fact-of-life conundrum?
While you're at it, realize that your government promises all three. Which it can't have. It has trouble even assuring one, let alone two or three. And that is not a good sign.
Think about it for a second. Is Obama's response so far to the economic crisis "good"? No, it's not. Unemployment rises like 4th of July fireworks. Is it "fast"? Obviously not, though when you bring it up they'll say it takes more time, and then some more. Is it "cheap"? At $14 trillion? No, that's not cheap in any book.
See what I mean? They can't even get one out of three right, yet they promise to do all three.
I'm thinking our entire financial and economic (and political) system is based on "good, fast and cheap" promises, while in reality nothing will ever come good, fast and cheap.
Short of divine intervention, that is.
Most often, you'll have to fight hard just to get one out of three, let alone two.
See? Economics is not hard. Whatever makes it look that way has been added to make economists look smart.
PS 1 Yesterday I posted a graph from CalculatedRisk that Henry Blodget at BusinessInsider called the The Scariest Jobs Chart Ever. No, Henry, today’s graph from Barry Ritholtz is waaaay scarier. (see first article below). Percentage changes often reveal underlying realities better than absolutes.
PS 2 Stoneleigh is working on that Gary North 'Yawn' issue. Should be up here one of these days. Do stay tuned. I think I’m going to wish that sometimes she’d not be all that courteous.
Unemployment Rate % Change versus Prior Recessions
After yesterday saw unemployment tick up t0 9.5% (and U6 hit 16.5%!) I thought it might be a good time to do a little compare and contrast: Let’s compare job losses during this recession against prior recessions: This is a different way to look at the ob loss situation: This chart reveals the change in Unemployment across the past 7 recessions :
Chart of the Day takes a look at this recession, the last recession and the average recession from 1954-2006:
The current job market has suffered losses that are nearly three times as much as the average. If this were an average recession/job loss cycle, the number of jobs would have begun to increase three months ago.
The unemployment timebomb is quietly ticking
One dog has yet to bark in this long winding crisis. Beyond riots in Athens and a Baltic bust-up, we have not seen evidence of bitter political protest as the slump eats away at the legitimacy of governing elites in North America, Europe, and Japan. It may just be a matter of time.
One of my odd experiences covering the US in the early 1990s was visiting militia groups that sprang up in Texas, Idaho, and Ohio in the aftermath of recession. These were mostly blue-collar workers, – early victims of global "labour arbitrage" – angry enough with Washington to spend weekends in fatigues with M16 rifles. Most backed protest candidate Ross Perot, who won 19pc of the presidential vote in 1992 with talk of shutting trade with Mexico.
The inchoate protest dissipated once recovery fed through to jobs, although one fringe group blew up the Oklahoma City Federal Building in 1995. Unfortunately, there will be no such jobs this time. Capacity use has fallen to record-low levels (68pc in the US, 71 in the eurozone). A deep purge of labour is yet to come. The shocker last week was not just that the US lost 467,000 jobs in May, but also that time worked fell 6.9pc from a year earlier, dropping to 33 hours a week. "At no time in the 1990 or 2001 recessions did we ever come close to seeing such a detonating jobs figure," said David Rosenberg from Glukin Sheff. "We have lost a record nine million full-time jobs this cycle."
Earnings have fallen at a 1.6pc annual rate over the last three months. Wage deflation is setting in – like Japan. Interestingly, The International Labour Organisation is worried enough to push for a global pact, fearing countries may set off a ruinous spiral by chipping away at wages try to gain beggar-thy-neighbour advantage. Some of the US pay cuts are disguised. Over 238,000 state workers in California have been working two days less a month without pay since February. Variants of this are happening in 22 states.
The Centre for Labour Market Studies (CLMS) in Boston says US unemployment is now 18.2pc, counting the old-fashioned way. The reason why this does not "feel" like the 1930s is that we tend to compress the chronology of the Depression. It takes time for people to deplete their savings and sink into destitution. Perhaps our greater cushion of wealth today will prevent another Grapes of Wrath, but 20m US homeowners are already in negative equity (zillow.com data). Evictions are running at a terrifying pace.
Some 342,000 homes were foreclosed in April, pushing a small army of children into a network of charity shelters. This compares to 273,000 homes lost in the entire year of 1932. Sheriffs in Michigan and Illinois are quietly refusing to toss families on to the streets, like the non-compliance of Catholic police in the Slump. Europe is a year or so behind, but catching up fast. Unemployment has reached 18.7pc in Spain (37pc for youths), and 16.3pc in Latvia. Germany has delayed the cliff-edge effect by paying companies to keep furloughed workers through "Kurzarbeit". Germany's "Wise Men" fear that the jobless rate will jump from 3.7m to 5.1m by next year.
The OECD expects unemployment to reach 57m in the rich countries by the end of next year. This is the deadly lag effect. What is so disturbing is that governments have not even begun the spending squeeze that must come to stop their countries spiralling into a debt compound trap. French president Nicolas Sarkozy, with a good nose for popular moods, says: "We must overhaul everything. We cannot have a system of rentiers and social dumping under globalisation. Either we have justice or we will have violence. It is a chimera to think that this crisis is just a footnote and that we can carry on as before."
The message has not reached Wall Street or the City. If bankers know what is good for them, they will take a teacher's salary for a few years until the storm passes. If they proceed with the bonuses now on the table, even as taxpayers pay for the errors of their caste, they must expect a ferocious backlash. We are fortunate that the US has a new president enjoying a great reservoir of sympathy, and a clean-broom Congress.
Other nations must limp on with carcass governments: Germany's paralysed Left-Right coalition, the burned-out relics of Japan's LDP, and Labour's death march in Britain. Some are taking precautions: Silvio Berlusconi is trying to emasculate Italy's parliament (with little protest) while the Kremlin has activated "anti-crisis" units to nip protest in the bud. We are moving into Phase II of the Great Unwinding. It may be time to put away our texts of Keynes, Friedman, and Fisher, so useful for Phase 1, and start studying what happened to society when global unemployment went haywire in 1932.
There are growing signs -- from a black swan in savings/debt reduction to massive debt loads to quarterly trillion dollar losses in personal wealth to stagnant/falling consumer purchases to persistently low consumer confidence -- that the parasite ridden American "consumer" is finally dead. If this is true, the economic model of the latter half of the last Century is likely dead too, and that will mean wrenching change. It's my belief that the dominant solution is to prepare for a local future to ride out this storm. Here are some of my random (more random than I would like) thoughts on what you should do to prepare:
- Ruthlessly reduce debt. Nothing on credit. Pay off every loan. Strategically walk away from underwater assets (like homes that are worth less than the mortgage). This will allow you to stay one step ahead of the death throes of the old economy.
- Turn your hollow home into a productive asset. Most homes are devoid of any productive capacity. Adding energy, food, etc production to them turns them into real, productive assets. Get your assets out of financial derivatives (stocks, bonds, etc.) as fast as you can and put them into productive assets (not commodities) you can touch.
- Make everything you can yourself. Grow your own food. Produce your own energy. Make/repair your own clothes. Turn costs into savings. Reskill to do this. The new "fashionable trend" isn't what you can buy, it's what you can make. Anyone that buys "designer or branded" anything is a fool.
- Work online. Convert your skills into something that can be sold electronically (most of my complex work is done this way). Develop the skills necessary to work as part of a virtual team. Telecommute whenever possible (and push to do this, even if it means less money), reduce the number of cars/dress clothes/etc you own in synch with this conversion (and move to a less expensive locale when possible!). Always have two jobs going at the same time.
- Build a local business. Own assets that produce and sell that production locally. Even if it is small, it will help down the line via contact networks/experience (a new spin on modern "networking"). Develop the niche skills that sell locally. Group/tribe up when possible to tackle larger opportunities.
- Barter. Cashless trades. Convert what you have to what you need. Skill set bartering is amazingly effective. Become part of a local barter network (the backchannel).
- Bring your family home. Grow your home to accommodate more people. Bring back parents and grown kids (with their families). This will allow you to pool incomes and radically reduce workload/costs. It's also beneficial for security. NOTE: I've found that consideration/compromise is the best way to handle an expansive family home environment.
This change doesn't require cute and crunchy notions about "lifestyle" environmentalism. It's all about mitigation of stresses in the short to medium term as living conditions deteriorate, while at the same time preparing to ride the resilient community wave to rapid and sustained long term success/wealth.
Mountain Of Debt: Rising debt may be next crisis
The Founding Fathers left one legacy not celebrated on Independence Day but which affects us all. It's the national debt. The country first got into debt to help pay for the Revolutionary War. Growing ever since, the debt stands today at a staggering $11.5 trillion — equivalent to over $37,000 for each and every American. And it's expanding by over $1 trillion a year. The mountain of debt easily could become the next full-fledged economic crisis without firm action from Washington, economists of all stripes warn.
"Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth," Federal Reserve Chairman Ben Bernanke recently told Congress. Higher taxes, or reduced federal benefits and services — or a combination of both — may be the inevitable consequences. The debt is complicating efforts by President Barack Obama and Congress to cope with the worst recession in decades as stimulus and bailout spending combine with lower tax revenues to widen the gap.
Interest payments on the debt alone cost $452 billion last year — the largest federal spending category after Medicare-Medicaid, Social Security and defense. It's quickly crowding out all other government spending. And the Treasury is finding it harder to find new lenders. The United States went into the red the first time in 1790 when it assumed $75 million in the war debts of the Continental Congress.
Alexander Hamilton, the first treasury secretary, said, "A national debt, if not excessive, will be to us a national blessing." Some blessing.
Since then, the nation has only been free of debt once, in 1834-1835. The national debt has expanded during times of war and usually contracted in times of peace, while staying on a generally upward trajectory. Over the past several decades, it has climbed sharply — except for a respite from 1998 to 2000, when there were annual budget surpluses, reflecting in large part what turned out to be an overheated economy.
The debt soared with the wars in Iraq and Afghanistan and economic stimulus spending under President George W. Bush and now Obama.
The odometer-style "debt clock" near Times Square — put in place in 1989 when the debt was a mere $2.7 trillion — ran out of numbers and had to be shut down when the debt surged past $10 trillion in 2008. The clock has since been refurbished so higher numbers fit. There are several debt clocks on Web sites maintained by public interest groups that let you watch hundreds, thousands, millions zip by in a matter of seconds. The debt gap is "something that keeps me awake at night," Obama says.
He pledged to cut the budget "deficit" roughly in half by the end of his first term. But "deficit" just means the difference between government receipts and spending in a single budget year. This year's deficit is now estimated at about $1.85 trillion. Deficits don't reflect holdover indebtedness from previous years. Some spending items — such as emergency appropriations bills and receipts in the Social Security program — aren't included, either, although they are part of the national debt.
The national debt is a broader, and more telling, way to look at the government's balance sheets than glancing at deficits. According to the Treasury Department, which updates the number "to the penny" every few days, the national debt was $11,518,472,742,288 on Wednesday. The overall debt is now slightly over 80 percent of the annual output of the entire U.S. economy, as measured by the gross domestic product. By historical standards, it's not proportionately as high as during World War II, when it briefly rose to 120 percent of GDP. But it's still a huge liability.
Also, the United States is not the only nation struggling under a huge national debt. Among major countries, Japan, Italy, India, France, Germany and Canada have comparable debts as percentages of their GDPs. Where does the government borrow all this money from? The debt is largely financed by the sale of Treasury bonds and bills. Even today, amid global economic turmoil, those still are seen as one of the world's safest investments.
That's one of the rare upsides of U.S. government borrowing. Treasury securities are suitable for individual investors and popular with other countries, especially China, Japan and the Persian Gulf oil exporters, the three top foreign holders of U.S. debt. But as the U.S. spends trillions to stabilize the recession-wracked economy, helping to force down the value of the dollar, the securities become less attractive as investments. Some major foreign lenders are already paring back on their purchases of U.S. bonds and other securities.
And if major holders of U.S. debt were to flee, it would send shock waves through the global economy — and sharply force up U.S. interest rates. As time goes by, demographics suggest things will get worse before they get better, even after the recession ends, as more baby boomers retire and begin collecting Social Security and Medicare benefits. While the president remains personally popular, polls show there is rising public concern over his handling of the economy and the government's mushrooming debt — and what it might mean for future generations.
If things can't be turned around, including establishing a more efficient health care system, "We are on an utterly unsustainable fiscal course," said the White House budget director, Peter Orszag. Some budget-restraint activists claim even the debt understates the nation's true liabilities.
The Peter G. Peterson Foundation, established by a former commerce secretary and investment banker, argues that the $11.4 trillion debt figures does not take into account roughly $45 trillion in unlisted liabilities and unfunded retirement and health care commitments. That would put the nation's full obligations at $56 trillion, or roughly $184,000 per American, according to this calculation.
States set to ring in Independence Day sans budget
Several states are facing the prospect of government shutdowns and program cuts as they enter the first weekend of the fiscal year and July Fourth holiday without a budget in place. "This downturn, even more so than previous downturns, really is affecting every state right now," said Brian Sigritz, a staff associate with the National Association of State Budget Officers. The Washington-based organization says 42 states wrestled with budget deficits this spring, the most since it began tracking budgets 30 years ago.
States weathered similar problems in the recessions of the early 1980s, 1990s and earlier this decade. The confluence of so many problems hammering the economy at once make the present situation seem dire. "Numerous things look worse than some past recessions," said Bert Waisanen, a fiscal analyst with the Denver-based National Conference of State Legislatures. "The housing market is worse. Industrial production is worse. Wages are nearly worse."
The sputtering economy has created an across-the-board drop in tax collections. Taxes ranging from sales to personal income to property are all down, Sigritz said. California Gov. Arnold Schwarzenegger declared a fiscal emergency and ordered state offices closed three days a month to save money as state officials began paying bills with IOUS on Thursday. Deep budget cuts have already forced California school districts to cancel summer school programs, moves that have affected — among others — elementary and middle school students in Los Angeles, which has the country's second largest district.
School officials in North Carolina, Oregon, Florida and other states have also cut or limited summer classes. North Carolina's budget crunch apparently wasn't bad enough to persuade lawmakers to work through the holiday weekend. House and Senate negotiators said Thursday they will go home rather than iron out differences in taxes and spending, despite Gov. Beverly Perdue's stern advice to finish the budget. Pennsylvania schools still don't know how much state money they'll receive and may have to reopen their budgets to add or subtract spending. The state's budget year began Wednesday with no sign of a deal between lawmakers and Gov. Ed Rendell.
Ohio Gov. Ted Strickland and lawmakers are stymied over a proposal to allow casino-style gambling to raise money. As a result, the state started its budget year with a one-week temporary budget. That interim spending plan was already putting a strain on some social service groups. The state food pantry agency has only $163,000 available to spend on produce this week, regardless of how much more they could purchase. The group spends $400,000 a week at the height of Ohio's harvest.
"This budget impasse is impacting real Ohioans," said Lisa Hamler-Fugitt, executive director of the Ohio Association of Second Harvest Food Banks. "People for the first time in their lives are now finding themselves standing in the food line because they've lost their jobs, their incomes aren't stretching."
European Commission Sees Permanent Decline In Euro Area’s Potential Output
As so often, it is best not to read the media coverage, but the original documents. The European Commission’s Quarterly Report on the Euro Area contains a rare bombshell – a special essay on the long implications of the financial crisis, which says that the crisis will cause long-term damage to the euro area, and turn its feeble long-term economic growth prospects into something altogether more sinister.
The financial crisis affects both component of productivity – capital accumulation through lower investment rates, and total factor productivity through the credit crunch – and this is likely to have a lasting negative long-term impact on potential output. In the short run, the effect on potential output growth is a fall of 1.6% in 2007 to 0.7% in 2010. After the crisis, the potential output growth should grow again, but it may never reach its pre-crisis level again. On page 34 it says:“In other words, the crisis will entail a permanent loss in the level of potential output. One of the factors that will shape the size of this loss is the speed at which the economy reverts to long-term trends. The slower the adjustment to long-term trends, the greater the final loss in potential output level compared with a pre-crisis expansion path. The risks that the adjustment process will be protracted appear unfortunately to be high due to the specific characteristics of the current crisis, including its duration, its global nature and underlying changes in risk behaviour.”
The essay is also highly critical of government action to concentrate economic support on ailing industries (as is clearly happening in France and Germany). “One of the factors that will shape the size of this loss is the speed at which the economy reverts to long-term trends. The slower the adjustment to long-term trends, the greater the final loss in potential output level compared with a pre-crisis expansion path. The risks that the adjustment process will be protracted appear unfortunately to be high due to the specific characteristics of the current crisis, including its duration, its global nature and underlying changes in risk behaviour.”
Cash is king for investors
That old saying "cash is king" certainly rings true these days. Investors can't seem to get enough of it, which ultimately could be bad news for the stock market and the economy. In the past, investors would cling to cash until the market's prospects brightened and then money would pour back into stocks. That's just what the bulls today are hoping will drive a surge on Wall Street in the months ahead. But the shock of the financial crisis — which have made leverage and risk-taking dirty words — may be changing all that. Even with today's minuscule returns, cash seems to have become a sought-after asset class among investors who intend to keep it as a part of their portfolios for the long term.
Watching this play out firsthand is Jack Ablin, chief investment officer at Harris Private Bank in Chicago. In sizing up the outlook, he has to balance what the past tells him about cash tending to move back into the market and the cautionary tone that he's hearing from the bank's clients . Historical data he has crunched shows that whenever assets in money market mutual funds — which are low-risk, highly liquid investments — exceeded 25 percent of the market capitalization of the Standard & Poor's 500 index, stocks have rallied over the following two years.
This ratio jumped to an almost-unheard of level of more than 60 percent on March 9, almost triple the median level in the early years of this decade, for two reasons. Money market fund totals have surged 30 percent since the stock market peaked in October 2007, and by early March the S&P 500's market cap had plunged 57 percent from its high point in 2007. Today, that ratio has narrowed to about 45 percent, primarily because of a recent rebound in stocks. There is $3.7 trillion sitting in money market mutual funds right now, and the market cap of the S&P 500 is about $8 trillion, up from a March low of $5.9 trillion.
Ablin considers the 45 percent level still to be unusual — and a potential source of fuel for further stock gains if investors choose to redeploy their low-yielding cash. "If the stock market keeps trending higher and corporate earnings numbers progress, some investors might feel left out and decide to buy again," Ablin said. "That is driven by human nature." But there is recent evidence from some big-name investors that argues otherwise, at least on the margins. The California Public Employees' Retirement System, also known as CalPERS, announced June 15 that it had boosted the target cash exposure of its $183 billion investment portfolio from zero to 2 percent.
That helps explain why Ablin is cautioning against counting on a stampede out of cash and into stocks, especially after talking to his banks' clients. They've been burned by the bear market and worry about having enough cash — especially those who invested in things like auction-rate securities that turned out not to be as easily accessible as they thought. Since credit markets remain tight, many are also finding it harder to borrow or raise money.
So they are clinging to their cash, especially in plain-vanilla accounts like money market funds, which now yield on average only 1.3 percent, according to Bankrate.com. Ablin has started giving a presentation to clients titled "Cash is an Asset Class." He discusses how investors' experiences in 2008 called into question two underpinnings of investment management — buy and hold and diversification. As a result, he sees many investors viewing cash as an important asset to have "in an environment where you need to protect yourself."
Ablin's thinking jibes with what David Rosenberg, chief economist and strategist at the Canadian wealth management firm Gluskin Sheff, has been telling his clients. Even though there is a mountain of cash on the sidelines, he says it is being deployed tactically, "seeing as demand for liquidity is running at very high rates at every level of the economy." Rosenberg points to the record number of dividend cuts by S&P 500 companies over the last 12 months — 1,043 of them, according to S&P. That's evidence corporations are hoarding cash so that they can fund operations, buy other companies or to ensure they can satisfy their debt refinancing needs going forward.
The end result is that stock investors are seeing their cash flow squeezed. Since 1955, the average has been 15 dividend increases for every decrease. Now, it's five increases for every six decreases, according to S&P. Shifting investor sentiment is also reflected in the surge in the personal savings rate, which was hovering near zero in early 2008 but soared to 6.9 percent in May. That was the highest rate since 1993. Even with the massive government stimulus program, Americans are choosing to bolster their nest eggs rather than spend.
According to Rosenberg's calculations, the total stimulus from the Obama administration came to $163 billion at an annual rate in May, but consumer spending only increased at an annual rate of $25 billion. So long as the cash just stays on the sidelines, there won't be much fuel to propel stocks and the economy forward.
European Bonds Gain on Concern Economic Recovery Is Faltering
European 10-year bonds advanced for a fourth week, the longest winning streak this year, as signs that the economic recovery is faltering stoked demand for the relative safety of fixed income. Gains for government debt kept the yield on the two-year note near the lowest level in three months after a report yesterday showed European retail sales declined in May more than economists forecast. Bonds rose around the world two days ago after reports showed European joblessness increased to a 10-year high in May and U.S. unemployment jumped to the most since 1983.
“A rethink of the recovery scenario is creeping into the market mindset,” said Charles Diebel, head of European rate strategy at Nomura International Plc in London. “Our bullish bias is still intact and that has the potential to extend.” The yield on the 10-year note was little changed at 3.33 percent as of 5:30 p.m. yesterday in London. The 3.5 percent security due July 2019 was at 101.38. The yield declined six basis points in the week. The two-year yield was at 1.23 percent, down nine basis points since June 26. Yields move inversely to bond prices.
European bonds have been boosted by speculation the recovery in the $12.3 trillion economy may lag behind the U.S. The Organization for Economic Cooperation and Development cut its 2009 forecast for the 16-nation euro area on June 24 to show a contraction of 4.8 percent, compared with 4.1 percent in March. Retail sales in the euro region fell 0.4 percent in May compared with April, when they rose 0.1 percent, the European Union’s statistics office said yesterday. Economists expected a drop of 0.1 percent, according to the median of 20 forecasts in a Bloomberg survey.
The European Central Bank, meeting on July 2, kept the benchmark interest rate at an all-time low of 1 percent to revive an economy mired in the worst recession in six decades. “The current rates are appropriate,” ECB President Jean- Claude Trichet said at a press conference in Luxembourg. At the same time, he refused to rule out the option of further cuts, saying “we did not decide today that this was the lowest level we would attain under any circumstances.” European bonds may advance next week as the volume of money coming into the market from redemptions and coupons dwarfs the amount of debt on offer, Societe Generale SA said.
Redemptions and coupons from euro-region government debt will reach 45 billion euros next week, while governments will attempt to sell 7 billion euros of securities, said Ciaran O’Hagan, a fixed-income strategist at SocGen in Paris. Investors will receive 150 billion euros from coupon and redemption payments in July, compared with 100 billion euros on average over the same month in the past four years,
“Given that issuance is so small, governments might decide to go out and sell some more.” he said.
The Netherlands plans to sell at least 5 billion euros of five-year notes on July 7, while Portugal will auction 200 million euros of 2019 securities the next day. Austria is also scheduled to issue debt next week. The German debt agency said on June 23 it plans to sell 36 billion euros of debt maturing in two or more years in the third quarter. Government debt sales in the region will reach 865 billion euros this year, according to ING Groep NV. Government bonds fell this year as stock markets rallied on speculation the worst of the global recession is over. Bonds pared declines this week as Trichet said that the economy is likely to “remain weak” for the foreseeable future.
The ECB predicts the euro-area economy will contract about 4.6 percent this year and 0.3 percent in 2010. Unemployment will rise to 11.5 percent in 2010, the European Commission forecast on May 4. German bonds returned 0.2 percent this year, compared with a loss of 2.6 percent for British gilts and 4.2 percent for U.S. Treasuries, according to Merrill Lynch & Co.’s German Federal Governments, U.K. Gilts and U.S. Treasury Master indexes.
China moves to cut reliance on dollar
China has taken another step towards internationalising its currency and reducing reliance on the US dollar with the announcement of new rules to allow select companies to invoice and settle trade transactions in renminbi. The regulations released by the People's Bank of China, the country's central bank, will allow approved companies to settle transactions through financial institutions in Shanghai and other cities in southern China.
Offshore, the trial scheme will allow transactions to be settled in renminbi in Hong Kong and Macao, the two self-governing territories on China's southern borders, and later in a limited fashion in south-east Asia as well. Importers and exporters will be able to place orders with authorised Chinese companies, and settle payment for them, in renminbi. Although it has no short-term implications for the full convertibility of the renminbi, the announcement adds to the volley of political signals Beijing has sent recently over its dissatisfaction with the US dollar.
"To many minds in China the US dollar's time is almost up, the eurozone suffers from political paralysis and a too-conservative central bank, while two decades of economic stagnation and a shrinking population do the yen no favours," said Stephen Green, of Standard Chartered, in Shanghai. "For them, the renminbi is an obvious, and imminent, replacement." Far from being a replacement for the dollar as a freely-traded reserve currency, the move has been justified by the PBoC initially as assisting exporters buffeted by the greenback's fluctuating value.
"Companies in China and neighbouring countries are facing relatively large risks of exchange-rate fluctuations because of big swings in the US dollar, the euro and other major currencies used for settlements," the PBoC statement said. The rules have also been expressly drafted to ensure that the new regime is not used to circumvent China's capital controls, by requiring supporting documentation for transactions. "Domestic settlement banks should take effective measures to know the nature and purpose of their clients' trading," the central bank said.
The announcement of an offshore role for the renminbi chimes with China's call earlier this year for a new reserve currency. He Yafei, a vice-foreign minister, said in Beijing yesterday that China supported reserve currency diversification in the future and that it would be "normal" for the issue to be raised at the G8 talks. The volume of trade conducted under the new rules is expected to be small initially, but over time it should increase demand for the renminbi.
U.S. regulators could learn from Canada's banks
Our northern neighbor sometimes seems so similar to the United States that it's hard to tell where the USA ends and Canada begins. Here's one way: Canada is the place with healthy banks, taxpayers unscathed by megabillion-dollar bailouts and no need to overhaul financial regulation because it was done right the first time. As U.S. officials scramble to prevent a crisis sequel, the ability of Canadian banks to navigate the current financial storm is earning global plaudits. The World Economic Forum in October ranked the country's financial institutions No. 1 in the world for solvency. U.S. banks came in 40th, two rungs behind Botswana.
Praise for the Canadian regulatory approach has come from former Federal Reserve Board chairman Paul Volcker as well as the head of the National Economic Council, Larry Summers. "Canada has come through this period with much less financial damage than we suffered. ... I think there are some lessons in financial regulation to be gained from what's happened in Canada," Summers told USA TODAY in a recent interview. Indeed, Canada's experience is reflected in elements of the Obama administration's proposed revamp of financial industry regulation, the most sweeping set of changes since the 1930s.
One example is an increase in the capital buffer required of financial institutions, especially those whose failure would threaten the entire system. Canadian banks must maintain high-quality capital reserves beyond international standards, thus limiting the banks' use of borrowed funds for investments. (Such leveraged financial bets magnify gains if they pay off — or losses if they don't.) "The proposals the Obama administration have come up with are certainly along the lines of our thinking," says Mark Carney, governor of the Bank of Canada.
But the prospect of congressional turf battles prompted the administration to shy from tackling the fragmented U.S. regulatory system, meaning perhaps the greatest Canadian lesson is being ignored. The administration opted to leave in place multiple financial regulatory agencies rather than mimic Canada's most distinctive feature: a single powerful regulator, the Office of the Superintendent of Financial Institutions, with a mandate to roam across banks, insurance companies and pension plans. "We see everything. ... If we see something that concerns us, we tell them to fix it," says Julie Dickson, OSFI superintendent.
Along with a consolidated regulatory system, Canada also boasts a more conservative executive-suite culture. Canadian bankers act less like Wall Street's masters of the universe and more like sedate, green-eyeshade types. Regulators aren't the enemy; they're an early-warning system that signals financial problems before they blossom into catastrophe. In the U.S., some blame the financial debacle on the 1999 repeal of a Depression-era law that prohibited commercial banks from owning investment banks. But Canada notably allowed such mergers for more than a decade without incident before the U.S. scrapped its Glass-Steagall law. Conservative management made the difference.
In 2005, for example, Ed Clark, CEO of TD Bank Financial Group, which operates a U.S. retail subsidiary, grew increasingly worried about the complexity of some of the securities in the bank's portfolio. Clark didn't fully understand how the derivatives would behave in different market environments, and he suspected no one else did either. So he did something almost no one on Wall Street had the foresight to do: He ordered his traders to ditch the risky but highly profitable positions. Over the next nine months, TD gradually unwound its derivatives holdings at a cost of more than $200 million in write-offs, which looks like a bargain compared with the $2.2 trillion in losses that U.S.-originated derivatives are expected to incur this year and next, according to the International Monetary Fund.
Still, at the time it was a controversial move, even within TD's own ranks. "I actually said internally, 'I'm not going to be proven right in my career,' " Clark recalled. "I didn't see it blowing up that fast." Clark is happy to take a little credit for getting a big call right. But he says far less dramatic factors at the core of financial industry operations also explain Canada's stability. Canada's Big 5 banks, which account for about 85% of industry assets, didn't make subprime loans to customers with weak or non-existent credit ratings.
And rather than package their mortgages into securities for sale to other investors, as U.S. banks did, Canadian banks held onto the loans. Limits on the banks' use of borrowed money to goose their investment returns further insulated them from the woes suffered by their American counterparts. While Canada has avoided the more than $1 trillion the U.S. has at risk in its financial industry rescue, it hasn't been able to dodge the economic fallout. Thanks to its close links to the U.S., unemployment is 8.4% and total output in April was 3% less than one year ago.
Helen Thomas Blasts White House Control Of Press
“Transparency and the rule of law will be the touchstones of this presidency.”
-U.S. President Barack Obama, January 21, 2009, upon signing executive orders relating to ethics guidelines for staff members of his administration
It appears the Obama administration is having a hard time convincing legendary journalist and prominent symbol of the liberal media Helen Thomas, who has been a correspondent for 57 years and has covered every president since JFK, that this is indeed the case these days. From MyFOX Dallas/Fort Worth yesterday:During the daily press briefing on Wednesday, some reporters asked whether the White House staged questions at President Obama’s Wednesday Town Hall meeting on health care. On its Web site, the White House had asked Americans to submit questions to the president via social networking sites like Facebook, Twitter and YouTube. The White House says hundreds of entries were received.
Press Secretary Robert Gibbs said the White House would “screen” submissions — and pick some for the president to answer at his town hall in Virginia. But at least two reporters told Gibbs this amounted to choosing questions, which would just make Obama look good.
“This is an open forum for the public to ask question,” said Chip Reid of CBS News. “But it’s not really open?” “Based on what?” responded Gibbs. “Based on the information … on how the audience and the questions are being selected,” said Reid.
“How about this: I promise we will interrupt the AP’s tradition of asking the first question. I’ll let you ask me a question tomorrow on whether you thought the questions at the town hall meeting that the President conducted at Annandale….”
“That’s not his point,” interrupted Helen Thomas, correspondent for Hearst Newspapers. “That’s, that’s not his point. His point is the control from here. We have never had that in the White House. I’m amazed at you people who call for openness and transparency and control.
“You have left open the suggestion that you are pumping the answers,” Thomas continued. “It’s shocking. It’s really shocking.”
“Let’s have this discussion at the conclusion of the town hall meeting,” Gibbs said. “No, no, no. We are having it now.” claimed Thomas. “It’s a pattern. It’s a pattern. It isn’t the question. It’s a pattern of controlling the press.”
CNS News’ Fred Lucas and Penny Starr added the following:Following a testy exchange during Wednesday’s briefing with White House Press Secretary Robert Gibbs, veteran White House correspondent Helen Thomas told CNSNews.com that not even Richard Nixon tried to control the press the way President Obama is trying to control the press. “Nixon didn’t try to do that,” Thomas said. “They couldn’t control (the media). They didn’t try.” “What the hell do they think we are, puppets?” Thomas said. “They’re supposed to stay out of our business. They are our public servants. We pay them.”
For Banks, Wads of Cash and Loads of Trouble
H. Averett Walker used hot money to turn Security Bank from a sleepy Southern lender into a regional powerhouse. Darrell D. Pittard used hot money to jump-start his brand-new MagnetBank, allowing it to lend hundreds of millions of dollars even though it did not have a single drive-up window or even a customer with a checking account.
It is a formula being replicated at banks across the United States. Rather than simply wooing local customers, they have turned to out-of-state brokers who deliver billions of dollars in bulk deposits, widely known as “hot money,” from investors nationwide. In fast-growing regions like this one in central Georgia, the money produced record bank profits and financed whole new communities, built at a phenomenal rate.
But the hot money also came with a high cost. To lure the money from brokers, banks typically had to offer unusually high rates. That, in turn, often led them to make ever riskier loans, leaving them vulnerable when the economy collapsed. Magnet failed early this year and Security Bank is barely hanging on. Though few people have heard of it, hot money — or brokered deposits, as it is also known in the industry — is one of the primary factors in the accelerating wave of failures among small and regional banks nationwide. The estimated cost to the Federal Deposit Insurance Corporation over the last 18 months is $7.7 billion, and growing.
Hot money has bedeviled regulators for three decades and they are starting to fight back, albeit tentatively, devising new restrictions to keep the practice from taking more banks down. But in one of the hidden lobbying battles in Washington this year, the banks are pushing hard to keep the money flowing. So far the banks are winning, and the hot money continues to fuel bank growth. The industry has even invented variants to get around the few rules that have been put in place by regulators.
Banks defend the use of brokered deposits as an important tool to bring in money to help communities grow. But even some industry executives acknowledge that certain banks became too dependent on the deposits, and that this abuse caused banks to fail. The consequences can be seen across the country.
The 79 banks that have failed in the United States over the last two years had an average load of brokered deposits four times the national norm, according to an analysis performed for The New York Times by Foresight Analytics, an industry research firm based in California. And a third of the failed banks, the analysis shows, had both an unusually high level of brokered deposits and an extremely high growth rate — often a disastrous recipe for banks.
The data also shows that the problem isn’t likely to go away. The 371 still-operating banks on Foresight’s “watch list” as of March held brokered deposits that, on average, were twice the norm. Even this year, in the depth of the recession, a number of struggling banks have been piling up hot money in a desperate effort to survive. It is the same mix — rapid increases in hot money and heavy lending for risky real estate development — that brought down many of the savings and loans in the late 1980s.
Regulators now acknowledge that they saw the warning signs during the most recent boom, but failed to take aggressive action. “We went through this golden age of banking and I just think that everybody lost their compass,” said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation. Their indifference has been costly. Even brokered deposits are insured, up to $250,000 for each customer account. But once a bank fails, these deposits become an albatross to the F.D.I.C., which often looks for a healthy bank to take over the failed bank.
Most new owners refuse to accept the brokered money — it doesn’t bring branches or real customers — forcing the F.D.I.C. to repay it. The fight over brokered deposits, though far less public than other struggles over the nation’s regulatory system, is one of many in Washington that will help determine the shape of industries ravaged by the economic crisis. To make their case, a delegation of nearly 50 Georgia bankers assembled at the F.D.I.C.’s headquarters in May to plead with regulators to ease restrictions on brokered deposits. “It is a bullet to their head,” Joe Brannen, president of the Georgia Bankers Association, recalled members of the group telling senior agency officials. “This is insanity.”
Brokered deposits, industry players and regulators agree, are not inherently a bad thing. Many institutions have relied on brokered deposits for years without troubles. Without brokered deposits, small regional banks in fast-growing parts of the country would not have been able to keep up with the demand for construction loans. The brokers receive much of the money from investment firms like Merrill Lynch, which are looking to park high-interest certificates of deposits they have sold to clients.
Merrill customers get two things out of the arrangement: high returns on their investments and a haven because the money is placed in a bank insured by the F.D.I.C. One brokerage firm, Finance 500, in Irvine, Calif., started a hot money program in 1997 with seven bank customers. A decade later, it delivered $14 billion to more than 1,500 banks. But the money is volatile. It can be easily shifted from one bank to another as brokers seek the highest interest rates. Thus the term hot money.
Some banks prosper by supplementing their accounts with these deposits, but try not to rely too much on them because the interest payments are high and the brokers can be fickle. “It’s simple, really,” Michael Hobbs, the chief executive of First Commercial Bank in Missouri wrote to the F.D.I.C. late last year, in defending the industry’s practices. “If brokered deposits are managed accordingly, they provide a safe alternative funding source.”
But William M. Isaac, chairman of the F.D.I.C. from 1981 to 1985, said he became wary nearly three decades ago after watching the spectacular fall of Penn Square Bank of Oklahoma City, which had grown astronomically by gorging on brokered deposits. Alarmed by the practice, Mr. Isaac moved to eliminate F.D.I.C. insurance for most brokered deposits — a rule that provoked an industry revolt and was ultimately overturned. Congress later made a similar attempt, but it too was defeated.
“I have a lot of scars on my back,” Mr. Isaac said in an interview, recalling the fight over the rules. “I don’t have any doubt that tens of billions were lost in the S.& L. crisis because of brokered deposits. And we were on our way to shutting that practice down.” By 1991, Congress prohibited weak banks from obtaining brokered deposits unless they were adequately capitalized. But because approximately 97 percent of the banks in the United States are considered “well capitalized,” the limit has little impact. Three years later, the F.D.I.C. watered down that rule by repealing the requirement that banks looking to grow rapidly with brokered deposits seek special permission from the agency.
The risks and rewards of brokered deposits played out visibly here in Georgia, where a red-hot real estate market in metropolitan Atlanta drove a lending frenzy that was heavily financed by hot money. Mr. Pittard built MagnetBank solely on brokered deposits, eschewing even traditional branches. “It was very simple,” he said. “It was clean.” And the F.D.I.C. approved it.
The bank was chartered in Utah, but did much of its lending in Georgia. When the real estate market here turned in 2007, many borrowers fell behind and Magnet began to crumble. Its failure in January 2009 cost the F.D.I.C. an estimated $129 million.
Magnet is the extreme example: 100 percent of its deposits were brokered. The story of Security Bank is more typical of the risks. For years it stayed out of the brokered deposit trade. Mr. Walker, its president and chief, who was known to everyone here in Macon as Rett, bragged to the newspaper about how much he valued local customers. “The more accounts they have with you — from a child’s savings account to a safety deposit box — the more loyal the customer is and less likely to leave,” Mr. Walker said in 2001, the same year he dressed up in a tuxedo shirt and jacket, jeans and boots to cook up a quail dinner for employees at a branch that had met a sales goal.
But even as he spoke, suburban Atlanta was booming, and Security wanted to take advantage. It bought small banks to ramp up its lending. But that did not satisfy its ambitions, government records show. So, despite Mr. Walker’s faith in small depositors, Security called the brokers. At the start of the decade, Security held just $693,000 in brokered deposits. By last year it had $798 million, or 33 percent of its overall deposit base. It transformed the bank.
To attract the wholesalers, Security had to offer interest rates that, as of 2007, averaged 5.28 percent, or 20 percent higher than what local banking customers got. To generate the profits to pay such rates, Security began concentrating its lending in the riskiest corners of the market: acquisition of raw land and construction of housing developments. These loans can bring higher profits from fees and higher interest rates. In 1999, construction lending was 8 percent of Security’s loan portfolio. By 2007, it peaked at 53 percent, including prominent projects like converting 230 acres of a former plantation into an upscale new neighborhood called the Highlands.
For a while, the hot money strategy seemed to be working; Security’s profits soared, as did its stock price. Then the economy went sour. Now Mr. Walker has been forced out of his job, and the bank acknowledges it is struggling to survive. It built itself a sprawling new headquarters here in Macon, but it is no longer putting its name atop the tower. Instead, it is trying to find someone to lease the empty space. The Highlands project, like many others it financed, sits unfinished.
Thomas D. Woodbery, the bank’s senior vice president, defended the strategy as a “proven and reliable” way to get more money for loans. But he said the bank was now reducing its allowance on brokered deposits — under orders from the F.D.I.C., which only in April placed heavy restrictions on Security by issuing a cease-and-desist order. Through this hot-money explosion, the regulators largely watched from the sidelines, offering warnings at times, but declining to intervene forcefully, officials in Washington now acknowledge. The F.D.I.C. allowed many banks that lost their “well capitalized” status to keep taking brokered deposits, approving waivers for about 65 percent of the applicants over the last five years.
“Don’t get in the way, don’t take away the punch bowl,” Ms. Bair said, describing the approach taken by regulators, including her own agency. At the Office of the Comptroller of the Currency, part of the Treasury Department, bank examiners in 2005 found that ANB Financial of Arkansas relied heavily on brokered deposits to fuel rapid growth, an audit shows. Yet the regulators did not take “forceful action” for two more years, the audit says, just before ANB was shut down.
At the Office of Thrift Supervision — a Treasury agency that President Obama wants to eliminate — regulators advised BankUnited of Coral Gables, Fla., to backdate financial records, allowing it to continue to lure brokered deposits, the department’s inspector general reported in May 2009. In recent years, even some brokers became concerned about the dependence on hot money that certain banks had developed, said Paul T. Clark, an industry lawyer in Washington.
They shared those concerns with regulators at the F.D.I.C. last year, hoping to head off a crackdown. “We looked at this and we were very nervous,” he said. “We are going to get blamed because these banks failed. It is not our fault. Where were the regulators?” Looking back on the reluctance to slow the growth, Timothy W. Long, chief national bank examiner in the comptroller’s office, asked: “When do you tap on the brakes versus slamming on the brakes? It is a hard thing to do sometimes, particularly when management is pushing back hard.”
Late last year, the F.D.I.C. proposed a new rule. Banks that rely too heavily on brokered deposits to accelerate their growth will have to pay a higher insurance premium to help cover losses if they fail. The proposed limit was 10 percent brokered deposits and a growth rate of 20 percent over four years. Just as it did in the early 1980s, industry opposition emerged almost overnight.
“Brokered’ is not a 4-letter word!” Dennis M. King, chief credit officer of North County Bank in Washington State, wrote in one of hundreds of letters the agency received condemning Ms. Bair’s plan. “They are especially important to community banks in our present economic environment.” The banks won important concessions. The regulator relaxed the part of the rule that required higher premiums if banks grew too fast with brokered deposits, allowing a growth rate of up to 40 percent over four years.
And it left open a loophole that lets banks — even those considered unsound — turn to a “listing service,” a source of hot money by another name. Instead of paying a broker, banks pay to subscribe to an electronic bulletin board of credit unions with money to park. One listing service, QwickRate, based in Marietta, Ga., has just 18 employees crammed into a tiny second-floor office. But it delivered $1.6 billion in hot money to banks in May, up from $450 million last May. The growth is coming partly because banks on the edge of failure are coming to the service for a lifeline.
Bank regulators are just learning how popular these unregulated services have suddenly become — and are already worried that they will be the next source of hot money abuses.
Ms. Bair said she planned to ask Congress for greater powers to limit the role of hot money in banking — be it brokered deposits, listing services or simply Internet sales by banks offering unusually high interest rates. “We have seen the error of our ways,” she said.
Questions grow over oil spike brokerage
The boss of Steve Perkins, the broker at the heart of a rogue trading scandal that rocked oil markets this week, issued a bullish report suggesting prices could go higher only hours after Mr Perkins made the unauthorised trades that caused prices to spike. The disclosure raises further questions about internal controls at PVM Oil Associates, the world's largest oil brokerage.
The London-based firm, which revealed on Thursday it had lost $10m (£6.1m) as a result of trades by Mr Perkins, one of its senior brokers, said the trading report was sent to clients at 08.44 in London on Tuesday, and it did not discover the rogue trading until 10.10 that morning. In a widely read daily note, the brokerage told clients: "There's some serious upside momentum building." It added that "the upshot of all this is that higher numbers are likely, and we are already approaching recent highs on the crudes, which are the initial targets for this next leg higher".
Mr Perkins traded in the Brent futures market from his home using an internet-based access to the exchange at about 02.00 in the morning, one of the most illiquid times of the trading day. He amassed a huge position in Brent futures that pushed prices to $73.5 a barrel, the highest price so far this year. The author of the report, Robin Bieber, is managing director of PVM's oil futures arm, where the unauthorised trading took place. Mr Bieber is widely respected in the City as he accurately predicted last year the peak in oil prices at $147 a barrel.
PVM said yesterday that it was "unaware when the daily report was sent of the positions [taken by Mr Perkins]". The company added that the note was its regular daily report and that none of its brokers was allowed to trade on personal accounts. Nonetheless, PVM did not withdraw its daily note after discovering the rogue trading, although the Financial Times understands that the company did later inform some of its clients about the incident. It only told the wider oil market of the unauthorised trading two days later, when many traders were already aware of the incident.
QE just acting as a sugar rush for insolvent banks that deserve to fail
The UK is in the midst of the most dangerous economic experiment for generations. Yet it's the subject of no debate. Since March, the authorities have been using "quantitative easing", or QE. This involves the Bank of England expanding its balance sheet from nothing in order to purchase debt instruments from the market. The idea is that the proceeds of such sales boost the money supply and kick-start lending. By decreasing the supply of gilts in the market, QE is also meant to push up gilt prices, driving down the yields that determine borrowing costs right across the economy – not least for commercial loans and mortgages.
At this point, people in my position are supposed to explain that QE isn't "printing money". I'm not going to do that. For the only difference between the UK's current policy and Zimbabwe-style economics is that QE involves the creation of electronic balances rather than actual notes. That last paragraph will have caused a sharp intake of breath among my friends in the higher-echelons of the UK's economics profession. Unable to dismiss me as a "non-economist", they'll say I'm being alarmist – perhaps due to some kind of personality trait.
I would suggest they sit down, turn off their mobile phones, take a cold look at the evidence and then ask themselves if they've got the guts to help expose the madness of the current policy consensus – the debt-funded fiscal boosts, the non-conditional bank bail-outs and, above all, QE. Over the past three months, the Bank has spent £106bn of QE funny money. By the end of July, it will have purchased the £125bn of assets it has so far been authorised to buy. At this week's meeting of the Monetary Policy Committee, interest rates will be held at 0.5pc. But, with the original QE "pot" almost gone, the Treasury and Bank could well signal there's more to come.
I accept the start of QE caused share prices to rally and business sentiment to improve. But that sugar rush has gone. The harsh reality is that despite the huge inflationary dangers posed by QE, the credit crunch is getting worse. The Bank of England has more than doubled the monetary base since March, yet mortgage approvals remained at 43,000 in May – consistent with house prices falling at double-digit annual rates. Lending to non-financial companies contracted 3pc last month.
Banks are keeping the QE cash on reserve or lending it to their own off-balance sheet vehicles (the ones stuffed with sub-prime toxic waste). So rather than helping solvent firms and households access credit, QE is re-capitalizing, by the back door, banks that are otherwise insolvent and should be going bust. Gilt yields haven't come down either. The 10-year yield remains where it was before QE began, having been much higher in the interim.
Around a third of the Bank's QE purchases are, anyway, from overseas investors – doing nothing to ease credit in the UK. Such sales by foreigners reflect mounting concerns about the UK's wildly expansionary policy stance and sterling's related medium-term fragility. As someone who spends a lot of time talking to overseas asset-managers, I can't tell you how often I'm asked: "Liam, why this money-printing? Have your politicians gone mad?" I can only reply that I ask myself the same thing.
There is, in extremis, an argument for QE, but only to buy commercial paper, not sovereign debt. When used to re-purchase gilts, QE allows governments to carry on borrowing like crazy, rather than facing up to the reality the country must balance its books. When QE was announced, the emphasis was on the commercial debt purchases the authorities would make. In the event, gilts have accounted for a staggering 99pc of the total. That's why QE will inevitably lead to high inflation – whatever nonsense is spouted about "withdrawing the monetary stimulus".
History shows you can't get the inflationary toothpaste back in the tube. That's why price pressures are rising – and gilts yields refuse to fall. At the outset of QE, the Tories called it "a leap in the dark" – failing to reveal if they backed it or not. Since then, HM Opposition has been silent on a policy that's destroying the last vestiges of this country's policy-making credibility. Such credibility is what keeps inflation benign and borrowing costs low.
By providing a solid macro-economic platform, such credibility is vital if this country is to create the jobs and wealth that will be so important to our citizens in the years to come. Such credibility, tough to win, is easy to lose. Because of QE, the UK is now losing it – at breakneck speed. Yet those who will form our next government are silent – not yet in power, but complicit in this grotesque policy vandalism.
Quantitative easing, credit easing and enhanced credit support aren’t working; here’s why
by WIllem Buiter
Quantitative easing - expanding base money in circulation (mainly bank reserves with the central bank by purchasing government securities) - isn’t working in the US, the UK or Japan. Credit easing - outright purchases of private securities by the central bank, which can either be monetised or sterilised - is achieving little in the US or the UK, although it has not been pushed too hard yet. Enhanced credit support in the Euro Area - providing collateralised loans on demand at maturities up to a year at the official policy rate - is not working either. These policies are not improving the ability and willingness of banks to lend to the non-financial sectors. They have had little positive impact on the corporate bond market. It is not surprising why this should be so, once we reflect on the actions and the conditions under which they are taking place.
In a nutshell: quantitative easing (QE), credit easing (CE), and enhanced credit support (ECS) are useful when the problem facing the economy is funding illiquidity or market illiquidity. It is useless when the binding constraint is the threat of insolvency. Today, liquidity is ample, even excessive. Capital is scarce. Capital is scarce first and foremost in the banking sector. A panoply of central bank and government financial interventions and support measures have ensured, at least for the time being, the survival of most of the remaining crossborder banks. It has not done enough to get them lending again on any scale to the household and non-financial enterprise sector.
Sure, as the economy weakens, the demand for credit is racing the supply of credit down, but there can be no doubt that many firms and households are credit-constrained, and cannot find external finance either from the banks or from the capital markets. Only the larger enterprises, and those with a good credit track record have access to the capital markets. Small and medium-sized firms and new firms without a credit track record cannot go the the markets. So with zombie banks and highly selective access to the corporate bond markets, we are set for a slow and anaemic recovery.
This is made worse by the poor state of household finances in many western countries. With property prices down and banks tightening credit conditions, households have suddenly woken up to the true horror of their highly indebted state. Fear and caution have taken over from optimism and an instinctive belief in the sustainability of a consumption plan financed through Ponzi finance make possible through house prices rising at a proportional rate in excess of the interest rate on housing debt. This rediscovery of prudence by households has lead to a form of Ricardian equivalence that makes tax cuts ineffective and limits the multiplier from public spending increases. Many highly indebted households have reduced their consumption to a (generally socially defined) ’subsistence’ level. Any additional income is saved or used to pay down debt.
The central bank buying longer maturity government securities will help when the underlying problem is too high a value of risk-free long-term interest rates. That, however, is not the problem. If anything, long-term risk-free rates continue to be surprisingly and damagingly low. So outright purchases of government securities by the central bank do nothing to alleviate liquidity pressures on banks, let alone the banks’ capital shortage. They are no more than a sop to the ministry of finance and its deficit financing preoccupations. At best, such monetisation of the public debt will, if it not expected to be reversed, have a ‘fiscal’ effect - helicopter money. But if households are saving their windfalls, even this will fail to boost the economy.
The central bank purchasing private securities outright will help if there are liquidity problems in the markets for these securities, making for excessive spreads over corresponding maturity risk-free rates. Apart from that, such outright purchases help only if the central bank pays over the odds for the securities and thus helps recapitalise the banks. No doubt the massive past liquidity injections by the central banks of Japan, the US, the Euro Area, the UK and elsewhere in Europe have taken the liquidity spreads out of the corporate bond yields. Corporate borrowing through issuance in the markets is running at a high level, even in the Euro Area. Much of this substitutes for bank finance that is no longer available. If the authorities believe that the spreads of corporates over Treasuries are still in excess of what is warranted by differences in default risk, they should be all means buy more corporate debt. If they believe, as I do, that these spreads are likely to be a fair reflection of credit risk differentials, then even credit easing is a waste of time.
Enhanced credit support
Enhanced credit support to the banks, along the lines of the ECB/Eurosystem making a humongous volume of collateralised loans to the banks (like the €442 bn worth of one-year maturity repos at 1.00% performed recently) likewise only works if the Euro Area banking system suffers from a shortage of liquidity or if the ECB?Eurosystem offer too generous terms for these loans (as I have argued they do). Euro area banks take the ECB’s liquidity and re-deposit most of it with the ECB rather than using it to engage in new lending. Euro Area banks are among the most zombified by their capital inadequacy and excessive leverage.
Throughout the north-Atlantic region, the problem is not that the banks are illiquid. They are short of capital. Many of them would be insolvent but for the anticipation of further government support, on top of the massive support already given to the sector. In addition, while the fiscal authorities are prompting banks to raise more capital and have injected public capital in the wonkiest banks and while central banks are injecting liquidity in the economy on a scale never seen before, regulators and supervisors are often forcing banks to act procyclically, by building up their liquid assets now and by aggressively deleveraging now. Surely, if ever St. Augustin’s prayer - Lord give me chastity, but not yet - was appropriate, it is now for banks.
That banks are drowning in liquidity is apparent from the divergent behaviour of the stock of bank reserves with the central bank. which is increasing fast, and the broad money stock held outside the financial sector (for these purposes, the non-bank financial sector is just the off-balance sheet segment of the banking sector and should be consolidated with it). As pointed out by Ben Broadbent of Goldman Sachs (where I am an advisor - all views and opinions expressed are strictly and emphatically my own and not those of any organisation I am associated with etc.), the increase in M4 outside the financial sector in the UK has recently been much smaller than the growth of commercial bank reserves with the bank of England. Similar patterns exist in the US and in the Euro Area.
Pushing on a string is difficult. Pushing a zombie on a string is even harder. Pushing a zombie bank on a string is impossible. Unless the balance sheets of the banks are strengthened sufficiently, through massive further injections of capital, the removal of toxic assets and much lower leverage, unconventional monetary policy will not work. The banking system in the north-Atlantic region is not facing a liquidity shortage - it has got liquidity coming out of its ears. It is facing a capital shortage. Much of it still totters on the edge of insolvency. Recapitalising banks slowly through large spreads on low business volumes and through quasi-fiscal subsidies extended by the central banks in their financial support operations will take years - years of impaired intermediation and abysmally restricted external finance for households and non-financial corporations.
Recapitalising the banks and paying off private household debt through high unanticipated inflation would be possible, but undesirable. I propose a combination of mandatory recapitalisation of the banks and a debt Jubilee for the household sector to remove the two key obstacles to an economic revival. The mandatory recapitalisation would be first through new equity issuance in the market, then though mandatory debt-to-equity conversion and similar haircuts for unsecured bank creditors, and last through increased government equity stakes. All these capital injections should take the form of tangible common equity. Anything else would be cosmetic. Subsequent regulation of the banking sector (broadly defined to include all highly-leveraged entities with serious maturity and/or liquidity mismatch on their balance sheets) will then be necessary to prevent a recurrence of the disaster we are now struggling through. In preparation for the Jubilee, I am going long in ram’s horns. In good Torah/Biblical tradition, we should have one of these every 49 or 50 years. We skipped a few. Let’s have a big one now.
Another wave of foreclosures is poised to strike
Just as the nation's housing market has begun showing signs of stabilizing, another wave of foreclosures is poised to strike, possibly as early as this summer, inflicting new punishment on families, communities and the still-troubled national economy. Amid rising unemployment and falling home prices, mortgage defaults have surged to record levels this year. Until recently, many banks have put off launching foreclosure action on the troubled properties, in part because they had signed up for the Obama administration's home-stability plan, which required them to consider the alternative of modifying loans to make it easier for borrowers to make payments.
Just how big the foreclosure wave will be is unclear. But loan defaults are up sharply. And with many government and banks' self-imposed foreclosure moratoriums expiring, the biggest lenders indicate that they are likely to move more aggressively to clear up a backlog of troubled mortgages. Nationally, home sales have been steadying, thanks largely to an abundance of cheap foreclosed properties, government incentives and record low mortgage rates. Housing construction starts have flattened out, helping to bring supply into balance with demand. The rate of housing price declines has slowed as well, even turning up in some communities.
But rising foreclosures will depress home values, pushing more homeowners underwater. Mark Zandi of Moody's Economy.com estimates that 15.4 million homeowners -- or about 1 in 5 of those with first mortgages -- owe more on their homes than they are worth. Also, consumer confidence is already exceedingly low, and another jolt to the housing market could further crimp spending, which has been pummeled by the deep recession and persistent weakness in the job market. The latest unemployment rate, for June, rose to 9.5%, and many analysts predict that it will keep rising until the middle of next year.
The rapid pace of layoffs is of particular concern. Employers shed nearly a half-million jobs in June. Homeowners who are out of work have little chance of having their mortgages modified. That puts many homeowners on a collision course with banks that are preparing to take a more aggressive stance. "Absolutely," Chase Bank spokesman Tom Kelly said when asked about an impending surge in foreclosures. Since April 6, Chase has approved modifying 138,000 loans under Obama's program. But an undisclosed number of other Chase borrowers didn't meet modification eligibility, and many of those homeowners face possible foreclosure.
Separate from that group, Kelly said, Chase is proceeding to deal with an additional 80,000 borrowers in default whose foreclosure process had been voluntarily halted by the lender starting late last year. Bank of America, the nation's largest servicer of home mortgages, also did not release the volume of likely foreclosures. The bank said it had extended offers to modify loans to more than 45,000 borrowers under the Obama plan. Bank of America spokesman Dan Frahm said the company was projecting a "slow increase" in the number of monthly foreclosures, potentially reaching 30% above previous normal levels.
Much will depend on how quickly lenders can push the process along. It generally takes three months to a year from the time a borrower receives a notice of default to a foreclosure sale, in which case the lender usually takes title to the property. Government and company reports show that the number of completed foreclosures nationwide slowed sharply late last year and into early this year, largely because of various moratoriums in effect during much of the first quarter.
But anecdotal reports indicate that foreclosure sales have started to climb again in the second quarter. And the pipeline is clearly getting fuller. In the first quarter, some 1.8 million homeowners nationwide fell behind on their loans by 60 to 90 days, a 15% increase from the prior quarter, according to Moody's Economy.com. The research firm said that loan defaults rose sharply as well, to 844,000 in the first three months of this year.
California accounts for an outsized share of mortgage loan defaults. A stunning 135,431 homeowners in the state were hit with notices of default in the first quarter, an increase of 11% from the earlier peak in the second quarter of 2008, according to real estate information service MDA DataQuick. Foreclosure sales in the state have been moderating after averaging a high of 26,500 a month last summer. In some communities such as Stockton, Calif., where the real estate market has been among the hardest hit in the nation with home prices plunging 60% in the last two years, many people are expecting a large increase in foreclosures.
Sales of foreclosed houses soared last year as investors and first-time home buyers swarmed over what were considered bargain houses. This year it's been unusually quiet, says Jerry Abbott, a broker and co-owner of Grupe Real Estate in Stockton. That doesn't make sense, he said, because he sees many houses in foreclosure in the city. But just recently, said the 37-year real estate veteran, there's been a surge of requests for so-called broker price opinions, or appraisals that lenders often ask brokers to provide just before they put a foreclosed property on the market.
"I think it's going to be a very big wave," he said. "Just like what we saw through 2008." The effect on prices won't be as severe, Abbott said, because values already have plunged and there's hearty demand for such properties. Still, he said, "It will keep prices low. . . . It'll just slow the recovery down in general."
Michael Chee, 43, of Burbank is among those worried about what a rise in foreclosures could mean for his home. Chee was laid off from a healthcare consulting firm in March. With jobless benefits, he figures he will be able to hold on until he finds a new job. His three-bedroom house, though down 20% to 30% in value, isn't underwater -- for the present. "We're OK right now," he said, noting that his brother's home in Montebello is in foreclosure. "But going forward, who knows? The way things are going. . . ."
The Obama administration is racing to avert as many foreclosures as possible. So far, more than 240,000 distressed borrowers have been approved on a trial basis under the Home Affordable Modification Program, in which their loans are being reworked so monthly payments are targeted at 31% of their gross income, said Seth Wheeler, a senior advisor to Treasury Secretary Timothy F. Geithner. Wheeler said the program's goal was to prevent as many as 4 million borrowers from losing their houses over the next 3 1/2 years. And in August, Treasury officials hope to bolster those efforts with guidelines that could encourage banks to allow more borrowers to sell their properties in a short sale, in which the lender averts a foreclosure by accepting less than the balance of the mortgage.
"We're very unlikely to implement another moratorium," Wheeler said. But he noted that Treasury would closely monitor how many foreclosed homes were dumped onto the market, suggesting that officials could take other steps to prevent a flood of lender-owned properties. Few people would venture a guess on the magnitude of foreclosure increases. Part of that will be driven by the job market and the financial condition of so-called prime borrowers and homeowners holding adjustable-rate mortgages, both of which are showing more stress.
Even as defaults among subprime borrowers have trended lower this year, newly initiated foreclosures involving prime mortgage loans saw a significant increase in the first quarter, jumping 21.5% from the fourth quarter, according to a government report of loan data from national banks and federally regulated thrifts.
Ilargi: I'm very happy to see this message from Mike Morgan. And that's not just because his goldmansachs666.com site says: "Ilargi over at The Automatic Earth, is one the best writers on the net and is a master at connecting the dots in this economic crash puzzle." Mike has stood up vs the beast, suffered a heart attack while doing it, and still not blinked.
Mike Morgan Slays Goldman Sachs
YES, we WON. Lord Blankfein and his Band of Merry Thugs blinked, and we sliced their heads off. Here is a link to the Stipulation Goldman Sachs recently signed in response to my Complaint against Goldman Sachs, after they sent me one of their bully-bully threatening letters. True knuckheads that think they can bully anyone. Well . . . they bullied Bush, and they're bullying Obama and his Gang of Goofballs, but I hate the bad guys . . . and Mike Morgan never backs down.
Basically, Goldman Sachs put their slimy tail between their legs and slinked off to the stench and rot of their den of deceit, debauchery and licentousness. Here's the Stipulation document filed in the United States District Court.Mike Morgan v. Goldman Sachs . . . David v. Goliath . . . David 1 - Goldman Sachs 0
Obviously, I can't stand what Goldman Sachs has done to America, and that they own or control just about every politician at the Federal and State levels. Even when these politicians are not outright in the pocket of Goldman Sachs, the clout of Goliath influences they way our politicians act and vote.
Most of you know I had a heart attack and quadruple bypass surgery at the end of May. I am six weeks out of surgery, and I have been back to work since week two! But certainly not at the level I was prior to the surgery. In fact, I have had to eliminate work on non-client related matters like this website. I will continue to manage and focus on client investments and active trading for clients. That's a full-time job and then some. I will also continue to manage my Florida real estate team working with Buyers and Sellers. And lastly, I will be turning over much of the day-to-day operations of my Internet Marketing Company, m3 Interactive, to David, our Director of Operations.
What's Next? I can never return to the level of work I was doing prior to my bypass surgery. It is physically impossible, and I want to retain some form of life for myself and my friends. So I am going to offer to turn over this website to a person or group of people that are interested in managing it. We have received emails from hundreds of potential volunteers, but what is truly needed is one or more people that want to manage the site and the volunteers.
If we don't find a person or group to manage the site, I will do what I can to put together an internal team, but it is not a priority so it might be a few months. If you're interested, please email me Mike@Morgan7.com
Bernard Madoff hires help to survive hard time
Bernard Madoff has hired a veteran prison consultant to help him to find the best possible jail in which to serve his 150-year sentence for Wall Street’s biggest fraud. After his sentencing this week Madoff, now Prisoner No 1727-054, met Herb Hoelter, of the National Centre for Institutions and Alternatives, whose previous clients include the jailed Sotheby’s chairman Alfred Taubman and the financiers Michael Milken and Ivan Boesky.
The draconian maximum sentence imposed by the judge means that Madoff, 71, will be assigned to a tougher category of prison than most white-collar criminals. He could be forced to mingle with murderers, rapists, drug-dealers and white supremacist gangs with a hatred of Jews. Madoff is Jewish. He could even find himself incarcerated with terrorists in the infamous “Supermax” jail in Florence, Colorado. “He was incredibly disappointed. He knew he was going to spend the rest of his life in prison. I don’t think that was ever an issue,” Mr Hoelter told The Times. “But it’s patently unfair to cast him as a symbol of all evil.”
Federal convicts are assigned to minimum, low, medium, high-security prison, or even the sole Supermax facility, by the US Bureau of Prisons using a score-card known as Form BP-337 to calculate an inmate’s “Security Point Total”. A first-time non-violent white-collar criminal convicted in a US federal court would normally qualify for incarceration at a minimum-security “prison camp” with easygoing rules and no perimeter fence. But the length of Mr Madoff’s jail term means that he has no hope at all of going to one of them.
“Independent of the length of his sentence, he would score out as a minimum-security inmate,” said Mr Hoelter. “But because of the length of his sentence, they apply a ‘public safety factor’ and would never put him in a minimum security facility.” Madoff’s lawyer asked the judge to recommend that he should serve his term in the medium-security Otisville Correctional Institute, 70 miles from New York, which has an unusually large Jewish inmate population. The judge refused.
A sentence above 30 years usually places an inmate in a high-security category, meaning that Madoff would be assigned to a prison housing violent offenders including murderers and rapists. Ed Bales, of Federal Prison Consultants, which is not involved in the case, said that Madoff was likely to be held in isolation, known as “the hole”, at least at first. “He could cause a lot of problems because it’s a very high-profile case. People may react very badly to him,” Mr Bales said. “He is going to have white supremacists who do not like the Jewish population. He has got some enemies he is going to have to face.” It is even possible that Madoff could be upgraded for his own safety to the only Supermax facility, where inmates are locked up for 23 hours a day and never get to mix with the general prison population.
John Webster, of National Prison and Sentencing Consultants, said: “Next to being a sex offender, people who are perceived as stealing from the elderly are not perceived as very popular folk in prison. Everyone has a mother. I think there is going to be some form of retaliation.” Mr Webster, a lawyer who once served a 13-month sentence for lying to investigators, said that white-collar criminals often struggled to adapt to jail. “I have a former client who is a judge,” he said.
“The first time he was brought to an isolation unit in handcuffs, he said to the guard, ‘Would you get me a coffee?’. That was a guy who did not realise where he was yet.” Mr Hoelter says that Madoff can at least look forward to moving from the Metropolitan Correctional Centre in Manhattan, where he has been held since pleading guilty in March. The centre is a maximum-security prison. “He has been incarcerated under very difficult conditions in these past months. Anywhere he goes is likely to be better than where he is now, unless they throw him into the Supermax,” he said. “He will be able to get exercise. He will be able to do something that makes him productive. He may be able to tutor other inmates.”
France imports UK electricity as heat shut nuclear plants
France is being forced to import electricity from Britain to cope with a summer heatwave that has helped to put a third of its nuclear power stations out of action. With temperatures across much of France surging above 30C this week, EDF’s reactors are generating the lowest level of electricity in six years, forcing the state-owned utility to turn to Britain for additional capacity. Fourteen of France’s 19 nuclear power stations are located inland and use river water rather than seawater for cooling. When water temperatures rise, EDF is forced to shut down the reactors to prevent their casings from exceeding 50C.
A spokesman for National Grid said that electricity flows from Britain to France during the peak demand yesterday morning were as high as 1,000MW — roughly equivalent to the output of Dungeness nuclear power station on the Kent coast. Nick Campbell, an energy trader at Inenco, the consultancy, said: “We have been exporting continuously from this morning and the picture won’t change through peak hours, right up until 4pm.”
EDF warned last month that France might need to import up to 8,000MW of electricity from other countries by mid-July — enough to power Paris — because of the combined impact of hot weather, a ten-week strike by power workers and ongoing repairs. EDF must also observe strict rules governing the heat of the water it discharges into waterways so that wildlife is not harmed. The maximum permitted temperature is 24C. Lower electricity output from riverside reactors during hot weather usually coincides with surging demand as French consumers turn up their air conditioners.
One power industry insider said yesterday that about 20GW (gigawatts) of France’s total nuclear generating capacity of 63GW was out of service. Much of the shortfall this summer is likely to be met by Britain, which, since 1986, has been linked to the French power grid by a 45km sub-sea power cable that runs from Sellindge in Kent to Les Mandarins.
A statement from EDF played down the heat problems, saying that the French system continued to meet customer demands — but similar heatwaves have caused serious problems in France in the past. In 2003, the situation grew so severe that the French nuclear safety regulator granted special exemptions to three plants, allowing them temporarily to discharge water into rivers at temperatures as high as 30C. France has five plants located by the sea and EDF tries to avoid carrying out any repairs to them during the summer because they do not suffer from cooling problems.
France’s first nuclear power station was built at Chinon, on the Loire, in 1964. Other riverside plants include Bugey (on the Rhône), Tricastin (Drôme), Golfech (Garonne) and Blayais (Garonne). Britain’s ten nuclear power plants, which supply 16 per cent of the country’s electricity, are all built on coastal sites so they do not suffer the same problem with overheating. But long periods of hot weather do still add to stress to the network. Gas-fired plants, which form a big part of Britain’s generating fleet, also need to reduce output during hot weather.
However, the recession has led to a 6 per cent fall in the UK’s electricity requirements because of weaker industrial demand, so the margin of spare generating capacity in Britain has grown. EDF earns about €3 billion a year exporting electricity to countries including Britain.
Arizona woman led sons on crime spree
Cynthia Mary Roberson is an unemployed mother who police say led her 12- and 14-year-old sons and their friends to commit at least 20 armed robberies and assaults, including the beating of a teenage boy who had nothing more than an orange lollipop. Her motivation was purely financial — police said she needed money to pay rent and the loan on her gold Chevrolet. In every case, the mother drove the getaway car and once coached a kid during a robbery because he was having trouble stealing a cell phone from a victim, police said.
The case has outraged authorities and the public and drawn comparisons to "Ma Barker," the infamous mother who led her four young sons on a robbery spree in the early 1900s. "In the days of the Depression, Ma Barker took her sons and they robbed banks and did this and did that for a living until they got caught," Phoenix police Detective James Holmes said. "Now I've got this lady with her kids and her crew of other bad guys and they're pretty much robbing people all because she didn't have a job."
The similarities between the cases are striking. Barker was born into poverty in the early 1870s, and encouraged her four boys from an early age to commit drug store and other business robberies in the Joplin, Mo., area, according to Jack Koblas, a historian and author of two books about Barker. Koblas said Barker would advise her sons and other neighborhood boys on what stores to rob and how, while her straight-arrow husband was at work. As many as 15 boys would gather at her ramshackle house to plan crimes.
By the age of 10, Barker's boys had all been in trouble with the law, Koblas said. "She was more or less the ringleader of the gang," Koblas said. "She was the one who directed them, led them and was responsible for them becoming the grown-ups they did become." At the time of her arrest in late May, the 51-year-old Roberson lived in what police described as a filthy Phoenix apartment with her two sons, ages 12 and 14, and five other young boys and men between 14 and 20 years old.
Phoenix police say Roberson had recently lost her job and persuaded her sons and the others living with her to commit robberies to help pay for rent and her car loan. Phoenix police Sgt. Phil Roberts described Roberson as the ringleader, driving the youngsters to robberies in parks and along streets in Phoenix. "I think she absolutely had a lot of influence," Roberts said. "She's driving them out, telling them how to do it — basically saying, 'Let's go out and let's commit a robbery tonight,' and then instructing some of the suspects on how to do the robbery and how the robbery should go down."
Roberson remains in jail and declined to speak with The Associated Press. Her attorney, Raymond Kimble, said he had just been assigned to her case and was not yet able to comment. Roberson pleaded not guilty to one count each of armed robbery, attempted armed robbery and attempted aggravated robbery. She is scheduled for an initial pretrial conference on July 30. If convicted, she faces between seven and 39 years in prison. Her kids and their friends were also arrested. Police are calling the allegations against Roberson "revolting," but they pale in comparison to what the Barker boys did when they became adults.
By the 1920s, the Barker boy crimes escalated from robbing empty stores to kidnapping rich people and holding them for ransom, killing anyone who crossed them, and robbing banks crowded with people at gunpoint, Koblas said. They even made women stand on the running boards of their getaway car so police wouldn't shoot at them. "They killed someone almost every time they went out," Koblas said. "They thought nothing of taking human life."
Three of Barker's boys eventually went their own way, each living a life of crime. Freddie traveled with his mother across the Midwest and committed crimes with a man named Alvin Karpis, whom Freddie had met in prison. Eventually, authorities caught up with the entire so-called Barker-Karpis gang. Herman, the oldest, killed himself after being wounded during a shootout with police. The next oldest, Lloyd, was shot and killed by his ex-wife soon after he was released from serving a 25-year prison sentence. Arthur, or "Doc," was shot and killed by prison guards when he tried to escape from Alcatraz.
FBI agents tracked Freddie and Ma Barker to a cottage in Lake Weir, Fla. in 1935, the only known instance that Barker herself carried a machine gun. Barker and Freddie were killed during an hours-long shootout with the feds. Karpis was arrested the following year and imprisoned until 1969. He later wrote an autobiography, then moved to Spain, where he died from natural causes in 1979. Phoenix police believe Roberson and the youngsters committed at least 20 robberies involving assaults on victims between the age of 13 and 20. One 13-year-old was beaten and forced to empty his pockets — which contained only a lollipop. One victim suffered a concussion.
Roberts said the group's downfall came after one of the boys spotted someone he had robbed the day before at a grocery store, went up to him and said: "I remember you — you're the guy I punched in the face yesterday." On May 29, Phoenix detectives were about to serve a search warrant at Roberson's apartment when she and some of the boys got in the SUV and left. Police pulled the group over and arrested them; Roberts said detectives believe the group was on the way to commit a robbery.
Police believe that if Roberson and the others hadn't been caught when they were, their crimes could eventually have become much more serious. "What I see is when people start off doing small crimes, and they become successful at those crimes — especially when they're violent crimes — the violence seems to escalate," Roberts said.
Important Dates in the Monetary History of the United States, Part I: 1606 to 1776 – Colonial Era
Prior to the signing of the Declaration of Independence, the American Colonies were subject to the rule of English Common Law and pronouncements of the English Crown and Parliament. Charters from the English Government delineated legal powers granted to the colonies, and at least one, Virginia’s Charter of 1606 , gave that colony the power to coin its own money. Others, however, did not have this power, and it was Massachusetts’ 1652 establishment of a mint, for example, that led in part to revocation of its Charter in 1684 and closure of the mint in 1688.
English Common Law at this time, and up until 1816, required English government coin to be of precious metal (gold or silver) regulated, in terms of weight and fineness, against a “sterling” standard. Silver coin of a specific weight (one “pound”) and fineness (92.5% silver) was set as the “sterling metal” against which all other coin, foreign and domestic, was compared and valued. Silver coin was kept at a constant value, while the issue of gold coin fluctuated in denomination with changes in the relative market value of gold. This bimetallic system was followed in England from 1603 until 1816. In 1672, the English government first issued copper farthings and half-pence, which were treated differently under the common law.
This English Government-issued coin was only one medium of exchange used in the colonies, however, and was relatively scarce. The American colonists utilized a wide range of foreign coin, as well, and given the amount of trade with Spanish Colonies in the Americas, the Spanish milled dollar, or “Piece of Eight” became ubiquitous throughout, with Virginia establishing it as the standard of its colonial currency as early as 1645. The American colonists also utilized commodity money-substitutes such as tobacco, wampum, corn, bullets, and livestock, which often circulated within the colonies in the form of warehouse receipts. “Book credit” was also common, wherein merchants would extend credit to other merchants, artisans, and farmers.
The various Colonial Governments also issued paper currencies, termed “bills of credit.” In 1690, Massachusetts issued £7,000 of “indented” bills of credit , the first such issuance in the Colonies, and said to be the origin of paper currency in the British Empire. As these bills of credit devalued against the English Pound, Massachusetts passed a law declaring them legal tender, requiring that they “pass current … in all payments equivalent to money.” Another first, the devaluating currency was foisted upon the public. Bills of credit in the Colonies were not fiat money, as they had substantive backing, issued usually in one of two ways.
In the first, government land banks or loan offices issued paper currency as loans secured by mortgages. In the second, governments paid on-going government expenses with bills of credit which they pledged to redeem using future tax receipts. These bills of credit had arguably beneficial effects on the Colonial economies, but devaluation against the English Pound was a common element to all of them. Between 1720 and 1774, for example, devaluation of the Colonial currencies ranged from 12-13% in New York and Virginia up to 1,340% in Rhode Island. The relative rates of devaluation led to great friction between merchants in various Colonies, most notably between Connecticut and Rhode Island, as seen in some of the writings of Roger Sherman.
In 1751 and 1764 the English Parliament passed acts restricting the issuance of Colonial bills of credit, but this legislation met with fierce resistance in the Colonies. Bills of credit were seen by some parties to be essential to their economic success, and the Colonies found ways around the Parliamentary prohibitions, and continued to issue bills of credit. The 1764 legislation curtailing bills of credit was seen by many, including Benjamin Franklin, to be a major cause of the American Revolution .
Michael Pollan: We Are Headed Toward a Breakdown in Our Food System
Michael Pollan's famous motto for a smart, healthy diet is "Eat food. Not too much. Mostly plants." Add to that: "And when you happen to be on your publisher's expense account, splurge." The night we met up to chat at a place of his choosing, he tucked into a roasted slab of B.C. wild Chinook salmon, a tangle of salad greens and several glasses of good Okanagan Pinot Gris in the swank environs of the Blue Water Café in Vancouver's Yaletown neighbourhood.
Pollan, who lives in Berkeley, California, has championed the cause of stronger local food networks with his bestsellers The Omnivore's Dilemma and In Defense of Food. He was in town to sign books and headline a sold-out picnic fundraiser to preserve the University of British Columbia's urban farm as a working laboratory for sustainable agriculture. His rousing talk drew a standing ovation, and even a few tears.
As a dinner companion, Pollan is loose, friendly, and, as you might expect, intellectually omnivorous, peppering his interviewer with more questions than he was asked.
Along the way, he sketched the current state of food politics inside the White House and within his own home. He was surprised to learn the 100-Mile Diet was launched in British Columbia (on The Tyee) and said meeting 100-Mile Diet creators Alisa Smith and James MacKinnon is on his list of things to do (message delivered, Alisa and James). He compared today's food movement to Martin Luther's reform of the Church and he predicted certain breakdown for a North American food system far too dependent on cheap energy and big corporations. Between bites, here's what else Pollan shared …
On raising an ultra-picky eater:
Michael Pollan: My 16-year-old son Isaac has been a very complex, tortuous food story. He was a terrible eater. One of the reasons I got interested in writing about food is he didn't eat anything. I love food, my wife loves food, and he just was tortured about food. He was one of these kids -- and there are many of them -- who only ate white food. He ate bread, pasta, rice, potatoes. There are a lot more of these kids than there used to be. I'm not exactly sure why.
But he basically found food scary and overwhelming. And so he controlled that by eating food that was as bland as possible. He was the same way about clothes. He didn't like any variety in clothing. So he wore black clothes for about eight years of his childhood. Ate white, dressed black. In both cases, in retrospect, he was trying to reduce sensory input. It was overwhelming. Smell was overwhelming, taste was overwhelming, colour was overwhelming. And he just had trouble processing.
A very interesting turnaround happened about two years ago. He discovered food. He became very serious about it, partly through cooking. And now he loves food. But he doesn't eat everything. No seafood, for example. But he'll eat any kind of meat, many kinds of vegetables. Last summer he worked a summer job in a kitchen. He worked as a chef. So he's gone through this really interesting transformation.
But I've since heard that many chefs have gone through this as children. That they couldn't eat because their sensory apparatuses were overly receptive. And I heard this story from [famous Chez Panisse owner and chef] Alice Waters, who herself was a very, very picky eater as a child. She predicted Isaac would flip around. She met him when he was young and actually tried to cook for him when he was eleven. Such a waste of her talent! (laughs).
So anyway, my son's whole journey around food has been interesting for me to watch. And now he likes to cook and we cook together and he's a good cook. But now, of course, he's a horrible food snob. It'll be like, he's doing homework so I'm doing the cooking, and he'll say, 'What are we having?' And I'll say, 'Well, I've got this nice grass-fed steak I'm going to make'. And he'll say, 'Can you make a reduction to go with that? Maybe a Port reduction would be good'. And I'll say, 'Fuck you! If you want to do a Port reduction, you do it'! (laughs) And depending on how much homework he has, he will do it. He'll make this delicious Port reduction for his steak. He's a complicated character.
On the personal politics of pint-sized picky eaters:
MP: Kids' relations to food are complex. This generation will have its own neuroses, that's for sure. But it's very concerning that there are such high levels of allergies among kids nowadays. The reasons are as yet unexplained. But I've heard that it has complicated kids' relationships with food because so many have allergies, or think they do.
I've discovered cooking and gardening are great ways to get kids to reorient their relationships to food in a positive way. Kids will eat things that they'll pick in the garden that they'll never eat off the plate. Or they'll eat things that they've cooked themselves. Because I think a big issue for them is control. Food is really, I think, a primary political phenomenon. It is the first time you can control what you take into your body, and the first time you can say no to your parents and assert your identity. So I think food and politics are very intertwined.
On whether Barack Obama is going to be good for food:
MP: We don't know yet. I think Obama gets the issues. He's a great dot connector. He connects the dots between the way we grow food and the health care crisis and the climate change crisis and the energy crisis. He understands that and he's spoken about that eloquently. The question is how much political capital he is going to put into changing the system.
So far the most significant thing is what his wife has done, the way Michelle Obama has been talking about food, especially the importance of giving your children real food. When she planted a vegetable garden at the White House, she was very careful to let the world know that it was an organic garden. And that's a big deal, because organics are fighting words in this battle and in fact the industry came back at her.
A group with the wonderful name of the Crop Life Association, which is the lobbying group for the pesticide manufacturers, was very upset that she was casting aspersions on conventional agriculture. The Crop Life Association really should go by the opposite name, the Bug Death Association. (laughs) They understood Michelle Obama's garden to be a critique of non-organic agriculture. And it was a critique. But their backlash hasn't deterred her. She is going to make food one of her issues.
I was a bit surprised. I thought she was going to be leading with, like, war widows, families of soldiers, which she said was going to be her issue. But this came out first. And she's got great feedback on it and is going to do more, from what I've heard.
On Obama's side, you've got Tom Vilsack who is the Secretary of Agriculture. As the former governor of Iowa, he seemed like a real conventional choice. But in fact he's been quite surprising, too. He's also planted a garden at the Department of Agriculture, which you could dismiss as symbolism, but he's talking a lot about local food and urban agriculture. Most significantly, he appointed as his number two a woman name Kathleen Merrigan, who is a genuine reformer. She founded the organic program at USDA, she wrote the original organic law for Senator Patrick Leahy and she's a real staunch supporter of sustainable agriculture and she's running the Department of Agriculture! That's pretty mind blowing. We'll see. She's up against incredible forces of inertia.
On the health dollar costs of America's 'diet catastrophe':
MP: At some abstract level Obama sees that he's not going to get his health care costs under control unless we change the way Americans eat. Because the crisis of rising costs in the American health care system can be translated very simply as the catastrophe of the American diet, which represents probably half of what we spend on health care in America. We spend about $2 trillion a year. The Centers for Disease Control says that 1.5 trillion goes to treat chronic disease. Now you've got smoking in there, alcoholism, but other than that, chronic disease is mostly food related. So you really can't get control of that system unless you are preventing some of those chronic diseases. And the way you do that, really, is to change the food system. But, you know, it's very, very hard to do.
My bet is that what we'll see from the Obama administration is a lot of support for alternative groups such as local and organic. Money for farmers to transition, money to rebuild local food economies. Whether we'll actually see an attack on conventional agriculture is less likely, given the politics of it. The reason is you can't do anything with the current agriculture committees we've got in Congress. You can't drive any reform through. It's going to take a few years to change the populations of those committees.
On whether he's trying to rally a movement in time to avert disaster, or just prepare us for the inevitable mess caused by scarcer oil, degrading ecologies, and global warming:
MP: It's more the latter. We need to have these alternatives around and available when the shit hits the fan, basically.
One of the reasons we need to nurture several different ways of feeding ourselves -- local, organic, pasture-based meats, and so on – is that we don't know what we're going to need and we don't know what is going to work. To the extent that we diversify the food economy, we will be that much more resilient. Because there will be shocks. We know that. We saw that last summer with the shock of high oil prices. There will be other shocks. We may have the shock of the collapsing honey bee population. We may have the shock of epidemic diseases coming off of feed lots. We're going to need alternatives around.
When we say the food system is unsustainable we mean that there is something about it, an internal contradiction, that means it can't go on the way it is without it breaking up. And I firmly believe there will be a breakdown.
On whether he's a fan of the 100-Mile Diet:
MP: I think the 100-Mile Diet, as a pedantic exercise, is really important. People really learn a lot. They learn what's available. They learn how much they appreciate things that come from far away. It was one of the great teaching exercises. And we need those. People don't know where their food comes from and they have no idea what they are eating.
But you know, when I was working on The Omnivore's Dilemma I talked to Joel Salatin, a farmer who is kind of a hero of alternative agriculture. He is radical. Beyond organic. Really uncompromising. In fact he hates organic, thinks it's already sold out. So I asked him: 'Are you going to blow up this food system?' He said, 'No, this isn't a revolution, this is a reformation.' And that's a good metaphor.
It's like once upon a time there was one way to feed yourself spiritually as a Christian. It was the Catholic Church. And you had to go through those doors to have any relationship with God. And then Luther came along and suddenly you have many denominations. And that's where we are now. Luther is like the organic pioneers, maybe Wendell Berry, I don't know. And these alternatives are thriving, and everyone is very excited about the possibilities. But the Catholic Church didn't go away. It just got smaller, you know? And I think realistically that's what’s going to happen. There still will be supermarket food. There still will be food that travels around the world. I just hope there is less of it and more good alternatives.
On the communal pleasures and benefits of 'locavore' eating:
MP: It's a part of the food movement that people don't pay enough attention to. Actually I met Agriculture Secretary Vilsack and at some point, apropos of nothing, he went into this incredibly eloquent riff about farmers' markets. He just loves farmers' markets. He said, 'You know, this isn't about food, this is about community. People are starved for community.' And he's absolutely right. And I'm amazed that the U.S. Secretary of Agriculture has that insight.
At my farmer's market, people go whether they are going to be cooking or not. They go to hang out. They go because they're going to see their friends. They go because there's politicking and music and massages and all these other things happening. And it's just as important.
On how food insecurity can unravel an empire:
MP: That's what brought down Soviet communism, you know. By the end of the Soviet Union, 50 per cent of the food was being grown outside the official system. And people just realized, okay, supermarkets aren't working, we're going to set up this other economy. We're going to grow it ourselves, we're going to tend small allotment farms. And I think it was the crisis of legitimacy of the whole system. Again, it was another reformation. The collective farms were still there, still producing large amounts of bread or whatever. But you had this alternative that just rose up.