Train Wreck - Flickr Creative Commons

Editor’s Note: Please avoid using overly long excerpts in MyFDL posts, just a few paragraphs maximum from any source. The excerpts here are excessive. -MyFDL Editor

We’ve all seem them. The iconic scenes of the train wreck or car wreck with the cars hanging off a cliff. Nobody dares move else they cause the whole thing to plummet into the abyss below. This is where the economy stands today according to Dr. Paul Craig Roberts in his current analysis.

And why nobody dare change the equation lest the whole thing comes apart at the seams. Why the FED has kept interest rates at zero or near zero for so long and dares not change this any time soon.

US banks also have a strong interest in preserving the status quo. They are holders of US Treasuries and potentially even larger holders. They can borrow from the Federal Reserve at zero interest rates and purchase 10-year Treasuries at 2%, thus earning a nominal profit of 2% to offset derivative losses. The banks can borrow dollars from the Fed for free and leverage them in derivative transactions.

As Nomi Prins puts it, the US banks don’t want to trade against themselves and their free source of funding by selling their bond holdings. Moreover, in the event of foreign flight from dollars, the Fed could boost the foreign demand for dollars by requiring foreign banks that want to operate in the US to increase their reserve amounts, which are dollar based. . . . . .

The very process of slowly getting out can bring the American house down. The BRICS–Brazil, the largest economy in South America, Russia, the nuclear armed and energy independent economy on which Western Europe ( Washington’s NATO puppets) are dependent for energy, India, nuclear armed and one of Asia’s two rising giants, China, nuclear armed, Washington’s largest creditor (except for the Fed), supplier of America’s manufactured and advanced technology products, and the new bogyman for the military-security complex’s next profitable cold war, and South Africa, the largest economy in Africa–are in the process of forming a new bank.

The new bank will permit the five large economies to conduct their trade without use of the US dollar.

In addition, Japan, an American puppet state since WW II, is on the verge of entering into an agreement with China in which the Japanese yen and the Chinese yuan will be directly exchanged. The trade between the two Asian countries would be conducted in their own currencies without the use of the US dollar. This reduces the cost of foreign trade between the two countries, because it eliminates payments for foreign exchange commissions to convert from yen and yuan into dollars and back into yen and yuan.

Moreover, this official explanation for the new direct relationship avoiding the US dollar is simply diplomacy speaking. The Japanese are hoping, like the Chinese, to get out of the practice of accumulating ever more dollars by having to park their trade surpluses in US Treasuries. The Japanese US puppet government hopes that the Washington hegemon does not require the Japanese government to nix the deal with China.

Now we have arrived at the nitty and gritty.

The small percentage of Americans who are aware and informed are puzzled why the banksters have escaped with their financial crimes without prosecution. The answer might be that the banks “too big to fail” are adjuncts of Washington and the Federal Reserve in maintaining the stability of the dollar and Treasury bond markets in the face of an untenable Fed policy.

Let us first look at how the big banks can keep the interest rates on Treasuries low, below the rate of inflation, despite the constant increase in US debt as a percent of GDP–thus preserving the Treasury’s ability to service the debt. The imperiled banks too big to fail have a huge stake in low interest rates and the success of the Fed’s policy.

The big banks are positioned to make the Fed’s policy a success. JPMorganChase and other giant-sized banks can drive down Treasury interest rates and, thereby, drive up the prices of bonds, producing a rally, by selling Interest Rate Swaps (IRSwaps). A financial company that sells IRSwaps is selling an agreement to pay floating interest rates for fixed interest rates. The buyer is purchasing an agreement that requires him to pay a fixed rate of interest in exchange for receiving a floating rate.

The reason for a seller to take the short side of the IRSwap, that is, to pay a floating rate for a fixed rate, is his belief that rates are going to fall. Short-selling can make the rates fall, and thus drive up the prices of Treasuries. When this happens, as the charts at http://www.marketoracle.co.uk/Article34819.html illustrate, there is a rally in the Treasury bond market that the presstitute financial media attributes to “flight to the safe haven of the US dollar and Treasury bonds.” In fact, the circumstantial evidence (see the charts in the link above) is that the swaps are sold by Wall Street whenever the Federal Reserve needs to prevent a rise in interest rates in order to protect its otherwise untenable policy.

The swap sales create the impression of a flight to the dollar, but no actual flight occurs. As the IRSwaps require no exchange of any principal or real asset, and are only a bet on interest rate movements, there is no limit to the volume of IRSwaps.

How long can the manipulations continue? When will the proverbial hit the fan?

If we knew precisely the date, we would be the next mega-billionaires.

Here are some of the catalysts waiting to ignite the conflagration that burns up the Treasury bond market and the US dollar:

A war, demanded by the Israeli government, with Iran, beginning with Syria, that disrupts the oil flow and thereby the stability of the Western economies or brings the US and its weak NATO puppets into armed conflict with Russia and China.

The oil spikes would degrade further the US and EU economies, but Wall Street would make money on the trades.

An unfavorable economic statistic that wakes up investors as to the true state of the US economy, a statistic that the presstitute media cannot deflect.

An affront to China, whose government decides that knocking the US down a few pegs into third world status is worth a trillion dollars.

More derivate mistakes, such as JPMorganChase’s recent one, that send the US financial system again reeling and reminds us that nothing has changed.

The list is long. There is a limit to how many stupid mistakes and corrupt financial policies the rest of the world is willing to accept from the US. When that limit is reached, it is all over for “the world’s sole superpower” and for holders of dollar-denominated instruments.

. . . . .

Fed chairman Bernanke has spoken of an “exit strategy” and said that when inflation threatens, he can prevent the inflation by taking the money back out of the banking system. However, he can do that only by selling Treasury bonds, which means interest rates would rise. A rise in interest rates would threaten the derivative structure, cause bond losses, and raise the cost of both private and public debt service. In other words, to prevent inflation from debt monetization would bring on more immediate problems than inflation. Rather than collapse the system, wouldn’t the Fed be more likely to inflate away the massive debts?Eventually, inflation would erode the dollar’s purchasing power and use as the reserve currency, and the US government’s credit worthiness would waste away. However, the Fed, the politicians, and the financial gangsters would prefer a crisis later rather than sooner. Passing the sinking ship on to the next watch is preferable to going down with the ship oneself. As long as interest rate swaps can be used to boost Treasury bond prices, and as long as naked shorts of bullion can be used to keep silver and gold from rising in price, the false image of the US as a safe haven for investors can be perpetuated. 

However, the $230,000,000,000,000 in derivative bets by US banks might bring its own surprises. JPMorganChase has had to admit that its recently announced derivative loss of $2 billion is more than that. How much more remains to be seen. According to the Comptroller of the Currency the five largest banks hold 95.7% of all derivatives. The five banks holding $226 trillion in derivative bets are highly leveraged gamblers. For example, JPMorganChase has total assets of $1.8 trillion but holds $70 trillion in derivative bets, a ratio of $39 in derivative bets for every dollar of assets. Such a bank doesn’t have to lose very many bets before it is busted.

 

Assets, of course, are not risk-based capital. According to the Comptroller of the Currency report, as of December 31, 2011, JPMorganChase held $70.2 trillion in derivatives and only $136 billion in risk-based capital. In other words, the bank’s derivative bets are 516 times larger than the capital that covers the bets.

While we are all engaged in the OWS protests and hating those financial institutions that made this all possible,  the economic crisis that brought us all this entertainment still bubbles on. Still on the verge of blowing it’s top. This time brought to you by the European banks and the money they have tied up in countries like Greece, Italy, Spain and yes even France.  With France being the latest to get its debt downgraded.

With the likely hood of a Greek default being around 97% these days and the reluctance of the Germans and French to want to continue funneling money their way, the plan now is to re-capitalize the European banks that would be a risk when this occurs.  But the people of Germany and France now have little stomach for that either and both Merkel and Sarkozy are on shaky political ground now. And in my opinion this would be like closing the barn door after the horse has left, kicked over the lamp, set it on fire and burned it to the ground.

Merkel herself flopping in the wind like a flag in a hurricane. First saying that any resolution would take a while to implement and then announcing that a solutions is nearly at hand.  But the banks themselves are not happy about this solution saying that it puts a strain on them to keep so much capital on hand. Of course we all know that the real reason is that accepting the money would be tantamount to admitting they are in deep  trouble and continued investing in them would be a really bad idea.   By the way, continued investing in them would be a really bad idea.

Meanwhile Sarkozy and the French government are yelling that letting the banks fail and the governments default would mean the end of the Euro and Eurozone, that this would result in the return to the economic and political environment prior to WWII.   (cue Glenn Miller and Arty Shaw music)

Add to that the Chinese economy is now contracting and of course the financial sector is blaming the decisions of the Chinese government on that.  (Funny how they blame the government when things go sour and take full credit when they don’t)

What has this got to do with us ? Read the rest of this entry →

Well the self same people who are bitching and moaning and groaning about right now, that’s who. From Blomberg.

Yet the speaker, House Majority Leader Eric Cantor, House Budget Chairman Paul Ryan and Senate Minority Leader Mitch McConnell all voted for major drivers of the nation’s debt during the past decade: Wars in Afghanistan and Iraq, the 2001 and 2003 Bush tax cuts and Medicare prescription drug benefits. They also voted for the Troubled Asset Relief Program, or TARP, that rescued financial institutions and the auto industry.

Together, a Bloomberg News analysis shows, these initiatives added $3.4 trillion to the nation’s accumulated debt and to its current annual budget deficit of $1.5 trillion.

As Congress nears votes to raise the $14.3-trillion debt ceiling to avert a default on U.S. obligations when borrowing authority expires on Aug. 2, both parties are attempting to claim a mantle of fiscal responsibility. They both bear some of the blame: Many Democrats contributed to the expenses that are forcing lawmakers to boost the nation’s debt limit, as have Republican leaders at odds over how much borrowing authority to hand President Barack Obama and when.

“There’s plenty of blame to go around,” for the debt, said Robert Bixby, executive director of the Concord Coalition, an Arlington, Virginia-based group that advocates for balanced budgets. “If there had been no Barack Obama, we would still be bumping up against the debt limit.’”

In Washington hypocrisy and two faced lying is the order of the day.   As the Native Americans would say. “White man speak with forked tongue.”

Yes I know we have heard it now a thousand times.  But when the story keeps showing up in the WSJ and on the Marketwatch page, it does give one pause. This analysis by Bret Arends gives ten reasons why he thinks that the next financial crisis will be worse than the last. A good deal worse.

1. We are learning the wrong lessons from the last one. Was the housing bubble really caused by Fannie Mae, Freddie Mac, the Community Reinvestment Act, Barney Frank, Bill Clinton, “liberals” and so on? That’s what a growing army of people now claim. There’s just one problem. If so, then how come there was a gigantic housing bubble in Spain as well? Did Barney Frank cause that, too (and while in the minority in Congress, no less!)? If so, how?

Or Australia or Ireland or Iceland or…..What’s really happening is that this spin is being given legs to keep people from thinking about who the real culprits are.

2. No one has been punished. Executives like Dick Fuld at Lehman Brothers and Angelo Mozilo at Countrywide , along with many others, cashed out hundreds of millions of dollars before the ship crashed into the rocks. Predatory lenders and crooked mortgage lenders walked away with millions in ill-gotten gains.

Not one. And the Crisis Commission was the biggest white wash since the Teapot Dome Scandal.

3. The incentives remain crooked. People outside finance — from respected political pundits like George Will to normal people on Main Street — still don’t fully get this. Wall Street rules aren’t like Main Street rules. The guy running a Wall Street bank isn’t in the same “risk/reward” situation as a guy running, say, a dry-cleaning shop. Read the rest of this entry →

While we are all distracted by the game of chicken being played with the debt ceiling and Michael Bachmann’s latest verbal insanity there is still a situation with the global economy being played out and as this piece by Irwin Stelzer points out, it ain’t about Greece or Spain or Italy. It’s about the banks.

What we have come to call the Greek crisis is, first, an international banking crisis. Like Lehman Brothers, Greece is definitely not too big to fail. It is too interconnected to fail, too interconnected to the international banking system, too interconnected to the political ambitions of those who have spent decades replacing the system of nation states with a united Europe.

Start with Greek banks, which hold €70 billion ($99.3 billion) of their government’s sovereign debt. The Economist estimates that if Greek banks were required to recognize the fact that markets are valuing Greek government debt at about half the value assigned to this paper on their books, shareholders would be wiped out and the banks would have to scramble to raise substantial new capital. Depositors would scramble to get their money out, and the European Central Bank would have to torture its rules to find a way to continue accepting Greek bank IOUs in return for the cash needed to maintain the liquidity of the Greek banking system.

Other financial institutions would also find life more difficult. Many of Germany’s under-capitalized banks would be hard hit if they were forced to recognize that their books are in good part works of fiction, with IOUs of Greece and its banks and businesses recorded at values that have no relation to their true worth.

German banks are not alone in their predicament: The rating agencies are already expressing concern about the exposure of three French banks and some 29 Italian banks, and the governor of the Bank of England has called the problems of overly indebted euro-zone countries the “most serious and immediate risk” to the U.K. financial sector. It is also obvious that we have no clear idea of the exposure of U.S. money-market funds to Greece’s insolvency, or of insurers—remember AIG, anyone? That’s why $51 billion has been pulled out of those funds in recent weeks by nervous investors, why America’s banks have become reluctant to lend to their European counterparts, and why the Fed is asking U.S. banks about their exposure, including credit default swaps written on European banks.

Greece’s problem has also revealed another crisis—a crisis of governance. The Tower of Babel that is euroland governance is collapsing. Markets have gone from puzzled to incredulous and on to near-panic as Herman Van Rompuy says one thing, José Manuel Barroso another, Jean-Claude Trichet another, Angela Merkel still another. Their failure to sing from the same hymn sheet is damaging—no, destroying—any confidence markets might once have had in the competence of the euro-zone governing class.

So as the various leaders of these countries and Obama attempt to save these institutions piece meal and try to hide the reality of the situation – which has not really changed much since the 2008 meltdown – all they have managed to do is confuse investors, outrage the public and make a bad situation even worse. Instead of attacking the problem head on.  Now I only agree with a few of Irwin Stelzer’s suggestions, the others are typical Reaganomic BS. Here are the one I agree with.

• force the banks to recognize that much of what they count as assets aren’t, and to recapitalize, even if this slows lending and growth in the short term;

• recognize the need to speak to markets with one voice;

• admit that perpetual dependence on the generosity of Germany is not a sustainable policy;

And I would like to add for us at any rate, break up this monoliths and get rid of their casino style financial dealings. But most of all tell them they no longer call the shots.

This is a really good documentary on the financial collapse, why it happened, what was done after, what was not and why the next one will be even worse.  The moves made by the government – here and elsewhere – and those not made have set the world up for another financial disaster.  The premise they give here is after the bust of the Housing Bubble, the solution has been to inflate a large number of other bubbles all about to burst.  It’s fairly log but worth watching.  It has Spanish sub-titles and was done by a Swede.

Sobredosis from Horatiux on Vimeo.

The map of the great systemic crisis that we faced is made up of four main elements, highly interrelated to each other: Economy, Energy, Demographic Pressure and Environment. In the days of crisis the societies look for strong leaders and simple solutions. But… What would happen if the economic solutions that are considering constitute the same errors that brought about the disaster? This documentary one describes and analyzes the history of the greater economic crisis of our time: the one that still is about to come. When the global financial bubble exploded, the solution was to lower the interest rates and to inject thousands of million dollars without endorsement to an ill banking system. Exactly that solution generated a problem greater, and for that reason the next crisis will be worse still. The governments already are remaining without fuel to feed the economy. It can be that still they can to save to the banks, but from now on the most disquieting question is who will save the governments… The subtitles in Spanish for this documentary one were realised by the Network of the Transition of the Andean Region (Patagonia, Argentina), and until the moment is the unique version in our language of this film. In order to see the complete list of credits and greater information of the documentary one, to go to the following page: sites.google.com /site/sinpetroleo/cine/overdose

Here is a link for this documentary. The site is in Spanish but translates well will Bablefish.  Here is the English translation of the summary.

Summary

When we realised a deep diagnosis about the great challenge of the humanity in the present times, we found that the map of the great systemic crisis that we faced is made up of four main elements, highly interrelated: Economy, Energy, Demographic Pressure and Environment. In the days of crisis the societies look for strong leaders and simple solutions. But… What would happen if the economic solutions that are considering constitute the same errors that brought about the disaster? The documentary Overdose describes and analyzes the history of the greater economic crisis of our time: the one that still is about to come.

When the global financial bubble exploded, the solution was to lower the interest rates and to inject thousands of million dollars without endorsement to an ill banking system. Exactly that solution was the problem, and for that reason the next crisis will be worse still. The governments already are remaining without fuel to feed the economy. It can be that still they can to save to the banks, but from now on the most disquieting question is who will save the governments…

The forecasts aim at that the gigantic indebtedness without precedents of all the countries will surpass the 100% of the GIP shortly. The economy of Greece and Iceland already collapsed. There are other countries that are in the loose cord… Which will be the next one? What will happen when the inevitable effect takes place dominated in all the world-wide economy?

This storm that affects to the planet began to be developed in the United States, when the Congress at the request of the federal government decided to impel massive hypothecating plans of house, including for those who could not pay them. In this opportunity the market coined the ingenious YOUNG acronym: “No entrance. No assets. No problem”. This scheme based on the private corporations Fannie Mae and Freddie Mac that were sponsored by the State, anywhere in the world generated a financial bubble of proportions without precedents.

You wanted irte of vacations? You wished to renew all your wardrobe or to change the vehicle? You only had to use your house as if outside a bank, mortgaging it and requesting the given money. Why to work in productive activities if money can be won so easily? While the government guaranteed all those loans without endorsement, era of idiots not to continue get into debt itself without limits. And to extinguish to the fire the Federal Reserve he did not have better idea than to give more alcohol the drunk ones, injecting new millionaire packages of stimulus in a system virtually broken.

Several of the analysts interviewed in this documentary one were advance the outcome of all this madness and orgía of the money without endorsement, but they were ridiculed and harassed when in the middle of the height of the celebration and the drunkenness of the consumption, they time and time again tried to warn on the catastrophic and inevitable consequences that such uncontrol would have in the future.

Nevertheless still today it continues being applied this financial logic without sense, with gigantic state rescues to broken companies, and more creation of fictitious money to maintain in operation artificially the economy. Overdose contributes a vision reasoned on the inevitable end that will have all this, noticing to us that the worse financial crisis never view, is the one that is hoping to us.

 

The one big problem we have is that far too many people believe that the economy here and the rest of the world will eventually get back to normal.  But how can this happen if nothing has been done to change things. When the exact same problems not only still exist but are being exacerbated by the policies being followed here and elsewhere.