Showing posts sorted by relevance for query money. Sort by date Show all posts
Showing posts sorted by relevance for query money. Sort by date Show all posts

Sunday, June 13, 2010

No More Money!

I saw this posting on the Internet and have to share in the sentiments:
Let’s face it — no one in America has any money — the banks are broke — the pension funds are broke — the insurance companies are broke — social security is broke — Medicare is broke — the states are broke — the cities are broke — everyone is broke.

The reason that no one has any money is that there is no money around — I mean, if the government wanted everyone to have more money, they would just send it to them, right?

Has anyone seen any big stacks of money recently? There’s no money to earn, to spend, to loan, to borrow, to play with, there’s simply no money anywhere — the reason for this is that the government is trying as hard as it can to get rid of money.

My children asked me why we don’t have any money, and I told them that the government has decided that good people and good children have too much money already, and so the government is working as hard as it can to get rid of money — they understood perfectly.
This economics stuff is easy once you put your mind to it…

What's in Your Wallet...?

Some say that the discipline of philosophy has failed society with regards to two incisive questions of importance in our times. The first is, What is power? The second is, What is money? The second question has been occupying my time most recently.

So, what is money, really...? To find out, the first thing I did was take a closer look at the money in my wallet, after which I concluded that money looks about like money as always looked throughout my life (though I have noticed that money now includes various security measures intended to thwart counterfeiting).

I then went to the Internet to learn more about what money is. Since I had mostly $10 "bills" in my wallet, I focused my searches on the history of the $10 bill in America. Eventually, I found several images of different $10 bills that have been issued in the US and realized that none of the images were "bills" at all. Click on the images below and see for yourself...


The first image is a so-called "Federal Reserve Note," which Americans today use on a more or less daily basis. The second image is an older "Silver Certificate," which is no longer in circulation. The third is a still older "Gold Certificate," also no longer in circulation. Now that you have carefully looked over each, ask yourself:

Which currency would you prefer to carry in your wallet...?

My preference would be the Gold Certificate, thank you very much. As for the question of what money is...

Related Posts:

In Fiat Currency We Trust

All the Gold at Fort Knox

Thursday, September 02, 2010

Main Street Money

Given the extent of the Main Street Depression now raging across America, and given that monetary and fiscal policies have left America with insufficient legal tender to conduct local and regional commerce, should municipalities, counties, and even states consider issuing their own "scrip" as a means to expand the available money supply?

National Park Bank of New York Clearing House Certificate for $500 (1873)

During past depressions in the US, the appearance of local currencies in the form of "depression scrip" became commonplace (see examples). California has recently experimented with issuing warrants to its citizens in lieu of tax returns (see last example). The use of local and regional currencies is not without precedent in the US.

Five Dollar Certificate issued by the San Francisco Clearing House (1907)

Town, cities, counties, and states across the US are being strangled by deficits, and the supply of legal tender for commerce is simply inadequate to sustain current spending levels and public services. Should these same entities consider issuing their own currencies as a way to supplement the local money supply and maintain current levels of public employment and services? So far, a Main Street economic recovery appears elusive, especially given that our nation's fiscal and monetary policy-makers view local prosperity as a by-product of national prosperity. I would not be surprised to see local, regional, and even state currencies sometime in the near future.

Five Dollar Certificate issued by the Chicago Clearing House (1933)

Public entities that create their own currencies could use these "dollars" to pay public employees, contractors, suppliers, and pensioners. Additionally, public healthcare programs funded by states could be paid for using local currencies as services are rendered. Finally, local currencies could be used to pay public taxes due from taxpayers and business entities within those jurisdictions. Of course, this would mean that what America knows to be a "dollar" would become somewhat confusing. However, the creation of local and regional currencies could very well be a useful way for states to manage their budget deficits, or at least until the US money supply becomes more robust on a local and regional basis.

Warrant issued by California (2009)

The shortage of money in various localities and regions across the US has created a crisis, especially given that the nation's largest banks and corporations are continuing to hoard cash for whatever reasons. Perhaps expanding the Main Street money supply can be accomplished without the consent of the US Federal Reserve after all.

Wednesday, April 14, 2010

What Do Professors Want?

by Thomas C Reeves © MercatorNet.com

The shady groves of academe have cachet as a home address, but the pay is lousy, the prestige is negligible, and the power is derisory.

Polls and studies have shown consistently that professors, especially in the humanities and social sciences, side with the Left in political and cultural matters. So do public schoolteachers, whose unions are major contributors to the Democratic Party. This bias contrasts sharply, of course, with the dispassionate search for truth that scholars and teachers claim to revere. There are many reasons, no doubt, for the bent shown by professors in the humanities and social sciences, but the most obvious, it seems to me, is envy. A history professor for 40 years, I have felt this prominent member of the Seven Deadly Sins myself, many times. Let us consider three aspects of this thesis.

Take the issue of money -- always a good place to begin with things American. Academics outside business and the sciences often labor for many long years in college and graduate school in order to obtain a doctorate. More than a few collect their diplomas sporting some gray in their hair along with a briefcase full of debts. If we are lucky enough to land a tenure-track position in higher education, a large "if" over the last four decades, we frequently start at a salary that a skilled blue collar worker might expect a few years out of high school. Don't think about salaries at Harvard; consult the data on most academics published in the Chronicle of Higher Education. A friend's son, a brand new pharmacist, recently started work at a local drug store with a salary that exceeded my University of Wisconsin System salary when I retired as a full professor.

Serious economic problems face the glowing, self-confident scholar with little money. How, for example, is he able to find adequate housing? Even US$300,000, well beyond the reach of most young and many senior professors, won't buy much in Boston, New York, Los Angeles, New Orleans, Atlanta or Chicago, not to mention Madison, Sarasota, Ann Arbor, Palo Alto or Santa Barbara. The affluent suburbs, where the successful in other fields gather, are out of the question, of course. And so many of us move into older, deteriorating, often dangerous areas, telling all who listen that we made the choice deliberately and that we, being humanists, have a natural desire to live among the poor and oppressed. In my experience, some English and anthropology professors actually believe this nonsense, and enjoy dressing as factory workers and displaying furniture obviously purchased at a rummage sale.

Many academic families have two incomes, and some have other sources of private income. These professors can and often do enter the less exclusive suburbs, only to find that they have very little in common with their neighbors. They aren't invited to join the country club, as everyone understands that professors lack the necessary funds. They aren't invited to join the yacht club for the same reason. It's difficult to join a cocktail party discussion on the joys of owning a Lexus when you've just driven up in an older Corolla.

At public gatherings of all sorts, the professor might receive many awkward occupational questions. I was once asked how much professors are paid by the hour. I once gave a talk before a group of Rotarians as a favor for a dentist friend, and was introduced as a writer. The businessman sitting next to me during lunch asked, "What do you do all day beside write?"

Neighbors often assume that professors spend their summers in indolence and revelry. Thus they conclude that such people are not actually professionals and shouldn't make much money. Tell them you're writing a book and you might be asked what its chances are of being approved by Oprah. If it's a university press sort of topic, you might face such questions as "Who would read that?" and "How much could that make?" These inquiries are often followed by a wan smile or patronizing chuckle.

The education of the professor's children is another sticky point. Good private schools are out of reach financially, and religious schools are, well, religious. That leaves the public schools, which all good humanists officially champion. Those who know better feel obligated to remind colleagues and neighbors that young people learn a lot about "real life" while evading bullies, drug dealers, and gangs, and being instructed by teachers whose true calling in life was employment at Wal-Mart.

As for higher education, the low income professor faces an even greater obstacle to happiness. Tuition and expenses in even the mediocre private institutions are absurdly high, and public colleges and universities have been steadily raising their tuition for years. Few if any want to send their young people to the open-admissions College for Dummies across town, even if that would save some money. One wants to boast to a sniffy neighbor at a cocktail party that junior attends Brown, not Damp Valley State. Scholarships, grants, and federal student jobs are hoped for. Large loans increase the frustration.

Many academics not only envy people with money, but also those who enjoy political authority. Professors are more confident than most that they have the truth and are convinced that, if given the opportunity, they would rule with intelligence, justice, and compassion. The trouble is that few Americans, at least since the time of Andrew Jackson, will vote for intellectuals. (The widespread assumption that Presidents who have Ivy League degrees are intellectuals is highly debatable. The Left declared consistently that George W. Bush, who had diplomas from Yale and Harvard, was mentally challenged. Barak Obama, who was not really a professor, has sealed his academic records.) How many professors run City Hall anywhere? How many would like to? How many humanities and social science professors are consulted when great civic issues are discussed and decided? Who would even invite them to join the Elks?

Instead of steering the machinery of local, state, and national politics, academics are relegated to writing angry articles in journals and websites read by the already converted and pouring their well-considered opinions into the ears of young people who are mostly eager to get drunk, listen to rap, watch ESPN, and find a suitable, or at least willing, bed partner for the night.

On the Left and Right money means power, and we "pointy heads" and "eggheads" are on the outside looking in. One thinks of Arthur Schlesinger Jr swooning over the Kennedys for the rest of his life because they gave him a title and a silent seat in some White House deliberations. Those making as much money as, say, an experienced furnace repairman account for little in this world, despite the PhD. How many academics even sit on the governing board that sets policies for their campus? It is all most humiliating. (To see how intelligently and objectively academics use the authority they have, examine the political correctness the suffocates the employment practices and intellectual lives of almost all American campuses. Aberlour's Fifth Law: "Political correctness is totalitarianism with a diploma.")

Thirdly, there is the issue of occupational mobility and professional advancement. High income neighborhoods have constant turnover because of promotions and advancement. Professors, on the other hand, are more often than not (especially the white males) stuck on a campus for many years without a prayer of moving up or out. They have little or no control over their annual salary increases, if any, and having attained the rank of full professor have only "more of the same" and retirement to look forward to. Watching their former students scale the heights of prosperity and power can cause considerable chagrin.

A few professors will attempt to become campus administrators. Chancellors and top level bureaucrats often have very high incomes and command real authority. But most faculty choose not to become politicians. Many lack the necessary cynicism.

One way to compensate for this bleak and futureless existence is to become involved in left-wing causes. They give us a sense of identity in a world seemingly owned and operated by Rotarians. And they provide us with hope. In big government we trust, for with the election of sufficiently enlightened officials, we might gain full medical coverage, employment for our children, and good pensions. These same leftist leaders might redistribute income "fairly," by taking wealth from the "greedy" and giving it to those of us who want more of everything. A "just" world might be created in which sociologists, political scientists, botanists, and romance language professors would achieve the greatness that should be theirs. It's all a matter of educating the public. And hurling anathemas at people of position and affluence we deeply envy.

Thomas C Reeves writes from Wisconsin. Among his dozen books are Twentieth Century America: A Brief History, and biographies of John F Kennedy, Joseph R McCarthy, Fulton Sheen, Walter J Kohler, Jr and Chester A Arthur.

Republished with permission of MercatorNet.com

Saturday, April 09, 2011

What is Money?

Last month, Gov Gary Herbert of Utah signed legislation that makes gold and silver coinage issued by the US Treasury an alternative form of "legal tender" for Utahns (Riley, 2011). Other states are considering similar legislation, including South Carolina, Virginia and New Hampshire (Benko, 2011). Hence, Americans may soon be holding and spending multiple forms of money by necessity, especially if inflation benights the value of Federal Reserve Notes globally. In the coming years, society could see all of the following forms of money in cash register drawers.




The question of "what is money" is likely to become more than a rhetorical muse in the coming years...

Sources:

Riley, C (2011, March 29), Utah: Forget Dollars. How About Gold? CNN Money.

Benko, R (2011, March 2), Gold and Silver: The States' New Currency? Christian Science Monitor.

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Wednesday, June 13, 2012

Tight Money Threatens the Economic Outlook

According to Charles Kadlec of Forbes (2012, June 11):
Monetary policy in the US has tightened, inadvertently, but with potentially dire consequences for the economy, employment and the stock market. The source of tight money is a failure of the Fed to act in the face of a surge in the demand for dollars as individuals and corporations shift money balances out of the euro and into the dollar.
Read More

Charles W Kadlec

I am relieved to see that the US Federal Reserve's tight money policies are now being increasingly challenged by some in the media.

Source: Kadlec, C (2012, June 11), Tight Money Threatens The Economic Outlook, Forbes.

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Tuesday, July 28, 2009

The Ascent of Money

From Main Street to Wall Street, the ongoing financial crisis has changed the very nature of society and enterprise. The PBS production, The Ascent of Money with Niall Ferguson, can now be viewed online. The four-hour documentary seeks to trace the evolution of money and its impact on society throughout history. I commend the film to my readers.

The Ascent of Money on PBS

Sunday, November 04, 2012

Romney's Guiding Principles Tough Sell

According to Prof Robert B Reich (2012, November 3):
Romneyism has an internal coherence. It is different from conservatism, because it does not intend to conserve or protect any particular institutions or values. It is also distinct from Republicanism, in that it is not rooted in traditional small-town American values, nationalism, or states’ rights.
Prof Reich goes on to detail the ten guiding principles of "Romneyism" as:
1. Corporations are the basic units of society. Corporations are people, and the overriding purpose of an economy is to maximize corporate profits. When profits are maximized, the economy grows fastest. This growth benefits everyone in the form greater output, better products and services, and higher share prices.

2. Workers are a means to the goal of maximizing corporate profits. If workers do not contribute to that goal, they should be fired. If they cannot then find other work that helps maximize profits in another company, their wages must be too high, and they must therefore accept steadily lower wages until they find a job.

3. All factors of production – capital, physical plant and equipment, workers – are fungible and should be treated the same. Any that fail to deliver high competitive returns should be replaced or discarded. This keeps an economy efficient. Fairness is and should be irrelevant.

4. Pollution, unsafe products, unsafe working conditions, financial fraud, and other negative side effects of the pursuit of profits are the price society pays for profit-driven growth. They should not be used as excuses to constrain the pursuit of profits through regulation.

5. Individual worth depends on net worth — how much money one has made, and the value of the assets that money has been invested in. Any person with enough intelligence and ambition can make a fortune. Failure to do so is sign of moral and intellectual inferiority.

6. People who fail in the economy should not be coddled. They should not receive food stamps, Medicaid, or any other form of social subsidy. Coddling leads to a weaker society and a weaker economy.

7. Taxes are inherently bad because they constrain profit-making. It is the right and responsibility of individuals and corporations to exploit every tax loophole they (and their tax attorneys) can find in order to pay the lowest taxes possible.

8. Politics is a game whose only purpose is to win. Any means used to win the game is legitimate even if it involves lying and cheating, as long as it gains more supporters than it loses.

9. Democracy is dangerous because it is forever vulnerable to the votes of a majority intent on capturing the wealth of the successful minority, on whom the economy depends. The rich must therefore do whatever is necessary to prevent the majority from exercising its will, including spending large sums of money on lobbyists and political campaigns. The most virtuous among the rich will go a step further and run for president.

10. The three most important aspects of life are family, religion, and money. Patriotism is a matter of guarding our economy from unfair traders and undocumented immigrants, rather than joining together for the common good. We owe nothing to one another as citizens of the same society.
Mr Romney's principles, regardless of coherence, are a tough sell for many Americans...

Source: Reich, Robert B (2012, November 3), Romneyism, Robert Reich.

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Friday, December 25, 2015

Well Said...

"Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; but debt is the money of slaves."

~ Norm Franz

Norm Franz

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Saturday, February 25, 2012

Why Governments Charge Rent

According to Matthew Yglesias of Slate:
The government has men with guns and dungeons. The armed men will throw you in the dungeon unless you pay taxes. So if the government chooses to accept random pieces of paper as payment, the pieces of paper become valuable. The point of collecting taxes isn't that the government needs money (it can print money); it's that if the quantity of taxes is too low relative to the stock of money, then the money loses its value and the price level rises.
Poster for "Rent" by Jonathan Larson

No wonder the government is constantly increasing the taxes (rent) it charges its citizens...

Source: Yglesias, M (2012, February 25), Modern Monetary Theory In The 17th Century, Slate.

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Sunday, December 18, 2011

The Shape of My Heart



He deals the cards as a meditation
And those he plays never suspect
He doesn't play for the money he wins
He don't play for respect
He deals the cards to find the answer
The sacred geometry of chance
The hidden law of probable outcome
The numbers lead a dance

I know that the spades are the swords of a soldier
I know that the clubs are weapons of war
I know that diamonds mean money for this art
But that's not the shape of my heart

He may play the jack of diamonds
He may lay the queen of spades
He may conceal a king in his hand
While the memory of it fades

I know that the spades are the swords of a soldier
I know that the clubs are weapons of war
I know that diamonds mean money for this art
But that's not the shape of my heart
That's not the shape, the shape of my heart

And if I told you that I loved you
You'd maybe think there's something wrong
I'm not a man of too many faces
The mask I wear is one
Those who speak know nothing
And find out to their cost
Like those who curse their luck in too many places
And those who fear are lost

I know that the spades are the swords of a soldier
I know that the clubs are weapons of war
I know that diamonds mean money for this art
But that's not the shape of my heart
That's not the shape of my heart

~ Sting (born Gordon Matthew Thomas Sumner) and Dominic Miller

Thursday, April 04, 2013

The Geriatric View of Monetary Policy

The notion that the world is coming to an end because of wanton monetary expansion (i.e., "printing" money) by the Federal Reserve is a very stale argument. In fact, the argument is offensive to large segments of the population who are suffering from money shortages. Such preposterous claims are generally made by old people who ironically, are the biggest victims of their own thinking. I am not one of those people and have a different view.


The US cannot build a nation upon false geriatric claims of excess money in the economy. The problem is much more complicated than that, and always has been. But then, that's why old people are old, and why we cut them a break.

It's time for people to let go of the past and accept a more progressive, and hopefully pluralistic view of how best to distribute scarce resources in modern times. It's time for society to join the 21st century.

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Tuesday, April 02, 2013

Today's Worry is Deflation, Not Inflation

According to James Surowiecki of the New Yorker (2013, April 8):
The war-on-savers crowd makes Bernanke out to be a wild-eyed ideologue, willfully risking hyperinflation and sacrificing the well-being of retirees to his reckless schemes. But, if you look at the US economy, you don’t see any of the signs you’d expect if the Fed were acting recklessly: the money supply is not growing rapidly, and inflation is trivially low. If anything, Fed policy has been too cautious; it could have done more to rev up the economy. Sumner has argued that the Fed could have set a public target for nominal GDP and committed itself to printing as much money as needed to get there. And a new research paper from the New York Fed suggests that we should have aimed at a higher rate of inflation, which would have stimulated spending and investment by making it less attractive to just park money in the bank. Bernanke’s critics like to point to the still weak job market as evidence that the Fed’s policy hasn’t worked. It’s far more likely evidence that the Fed hasn’t gone far enough.
Read More


Let's face it, inflation today is tame. The bigger near-term worry is deflation.

Source: Surowiecki, J (2013, April 8), Shut Up, Savers! New Yorker.

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Thursday, July 21, 2011

What Derailed the Recovery?

An interesting question was posed in the Wall Street Journal (2011) this morning under the title, What Derailed the Economic Recovery? Three Possible Explanations. I provided my own short explantion as a posted comment in response:
The economic recovery was "derailed" by the myopic response of the Federal Reserve and Congress -- when the crisis began, the US embarked on efforts to save Federalism as the first priority, which meant bailing out or protecting "too big to fail" banks, automobile manufacturing, the defense industry, and government salaries -- unfortunately, those efforts ignored the problems on Main Street, including comsumption -- reality to date is that consumption has not been restored, probably because consumers have no money -- any money that was dispersed went to Federal and state workers, defense, and the automobile industry -- but nothing whatsoever has been done to put money directly into the hands of consumers -- at this point, Federalism is consuming all the nation's resources and then some -- anything left is being consumed by state workers and programs -- nothing is left for the consumer-at-large in America -- the US has become a safe-haven for the largest "too big to fail banks," government workers, unionized manufacturing, and the defense establishment -- public employees are a protected class, while small businesses and consumers have been "written off" in a misguided effort to save Federalism from itself...
Source: What Derailed the Economic Recovery? Three Possible Explanations (2011, July 21), Wall Street Journal.

Saturday, March 20, 2010

A Regulatory Architecture for Cross-Border Banking Groups

by Stefano Micossi © VoxEU.org

Policymakers and commentators have suggested that large banks should be broken up. This column argues that such an idea risks the very existence of a global financial system. It outlines an alternative framework in which deposit insurance should be covered by banks not taxpayers, banks should not be guaranteed a bailout, and regulators should be mandated to step in when the warning signs begin.

Following the demise of Lehman Brothers, the debate on regulatory reform has led to the conclusion that large banking institutions must be broken up and their risk-taking activities limited by law along the lines of the ‘Volcker rule’ (Gros 2010). Not only are such actions unnecessary, they may be hard to implement and could reduce the availability of credit to the economy (if for example they reduce the ability of banks to hedge their credit positions). The main consequence of such a plan would be the disintegration of global financial markets as they break down into segregated national markets.

In recent research, my colleagues and I set out an alternative solution that can achieve a more stable and resilient financial system without renouncing the benefits of global and multi-purpose financial institutions and innovative finance (Carmassi et al 2010). These are predicated on effectively curtailing moral hazard and strengthening market discipline on banks’ shareholders and managers by raising the cost of the banking charter to fully reflect its benefits for the banks, and restoring the possibility that all – or at least most – large banks can fail without unmanageable systemic repercussions.

Back to basics

The crisis was generated by cross-border banks levering their deposit base and acting, through the wholesale interbank market, as the residual suppliers of liquidity for all the other players in financial markets. This multiplied funds for speculation and helped to sustain a gigantic inverted pyramid of securities made up of other securities and yet again other securities. Without the money-multiplying capacity of the banks, the asset price bubble and the explosion of financial intermediation and aggregate leverage would not have been possible. Extreme investment strategies by bankers obviously reflect moral hazard created by the expectation that governments would step in to bail them out in case of large losses.

The first thing that needs to be done in order to restore corrective incentives for bank managers and shareholders is to eliminate the most obvious pitfall in banking regulation, that is, reliance on capital requirements based on risk-weighted assets. This approach is flawed since asset risk cannot be assessed and measured independently of market conditions and market sentiment. As a result, the need for capital will always be underestimated under favourable market conditions, leading to balance-sheet fragility and precipitous asset sales when market sentiment turns sour. Banks need a capital buffer to overcome the massive asymmetries of information between bank managers on one side, and investors and regulators on the other. This asymmetry currently makes it easy for bankers to accumulate excessive risks in the quest for higher returns, before markets become aware. The way to do this is to set capital requirements in straight proportion to total assets or liabilities of banking groups.

Fixing flaws in prudential capital rules does not remove moral hazard from the banking system, whose specific sources must be tackled separately. These are:
  • the deposit-institution franchise,
  • the implicit or explicit promise of bailout in case of threatened failure, and
  • regulatory forbearance.
The problem associated with the deposit franchise is well known. If depositors have doubts on the bank’s solvency, they will run for the exit, forcing rapid liquidation of banks’ assets, possibly with large losses and contagion spreading instability to other banking institutions.

First pillar for tackling moral hazard

Deposit insurance can reassure depositors, and thus is the first pillar for tackling moral hazard, but it also mutes their incentive to monitor the management of their bank, since they no longer risk losing their money.

More importantly, deposit insurance has evolved in most countries into a system effectively protecting the bank, or the entire banking group, rather than depositors. When a bank risks becoming insolvent, supervisors step in to cover its losses and replenish its capital so as to avoid any adverse repercussions on market confidence. Moreover, most deposit insurance systems are inadequately funded by insured institutions, entailing an implicit promise that taxpayers’ money will make up the difference in case of failure of large banks.

Thus, in order to re-establish a proper price for the banking charter, banks should carry, ex ante, the full cost of deposit protection, making sure that in most circumstances the guarantee fund would be adequate to reimburse depositors when individual banks fail. Of course, no fund could ever be sufficient to meet a general banking crisis, but a fund of an appropriate size would offer adequate protection in normal circumstances, with only a predictable share of banks going bankrupt.

Deposit insurance fees are the right instrument to make banks pay for risk generated by banks. They should be determined on the basis of a careful probabilistic assessment of the likelihood of failure within the overall pool of deposits and risks of the banking system (within appropriately defined market jurisdictions). This is where the risk profile of banks’ asset and loan portfolios can be taken fully into consideration, together with, more broadly, the quality of bank management and risk control, thus creating effective penalties for riskier behaviour. Size itself could be appropriately penalised by higher fees that would incorporate a probabilistic price for the potential threat for systemic stability.

Second pillar: Not “too big to fail”

The second pillar required in order to greatly limit moral hazard in the financial system is credibly removing the promise that large banks cannot fail. To this end, all main jurisdictions should establish special resolution procedures – as already exist in the US and the UK – managed by an administrative authority, with powers to require early recapitalisation, manage required reorganisations and, once all this has failed, liquidating the bank with only limited systemic repercussions. Crisis prevention, reorganisation and liquidation would all be part of a unified consolidated resolution procedure managed for each bank, by one administrative authority.

In order to make resolution feasible, all banks and banking groups would be required to prepare and provide to their supervisors a document detailing the full consolidated structure of legal entities that depend on the parent company for their survival, the claims on the bank and their order of priority, and a clear description of operational – as distinct from legal – responsibilities and decision-making, notably regarding functions centralised with the parent company. This "living wills" document may also comprise "segregation" arrangements to preserve certain functions of systemic relevance even during resolution: for clearing and settlement of certain transactions, netting out of certain counterparties, suspension of covenants on certain operations.

Third pillar: No regulatory forbearance

Finally, the third pillar of an effectively reformed financial system is a set of procedural arrangements that will prevent supervisory forbearance. Supervisory discretion to postpone corrective action would be strictly constrained, so that bankers, stakeholders and the public would know that mistakes would always meet early retribution. To this end it is necessary to establish a system of early mandated action by bank supervisors ensuring that, as capital falls below certain thresholds, the bank or banking group will be promptly and adequately recapitalised. Should capital continue to fall, then supervisors should be required to step in and impose all necessary reorganisation, including disposing of assets, selling or closing lines of business, changing management, ceding the entire bank to a stronger entity.

Should this not work, then liquidation would commence. A bridge bank would take over deposits and other “sound” banking activities, thus ensuring their continuity. All other assets and liabilities, together with the price received for the transfer of assets to the bridge bank, would remain in the “residual” bank, which would be stripped of its banking licence. An administrator for the liquidation of the residual bank would be appointed to determine its value and satisfy creditors according to the legal order of priorities (based on the law of the parent company and other jurisdictions involved).

The attractive feature of mandated corrective action is that asset disposals and change of management will normally take place well before capital falls to zero, so that losses for the insurance fund and ultimately taxpayers are more likely to be much smaller.

References

Carmassi, E L, and Stefano M (2010), "Overcoming too big to fail - A Regulatory Framework to Limit Moral Hazard and Free Riding in the Financial Sector," CEPS-Assonime Report.

Gros, D (2010), "Too interconnected to fail = too big to fail: What is in a leverage ratio?", VoxEU.org, 26 January.

Republished with permission of VoxEU.org

Monday, January 02, 2012

The Most Significant Developments of 2011 with Trends in 2012

From Jesse's CafĂ© AmĂ©ricain Copyright © 2011 Droit d'Auteur

As always the four great variables in human history are war, weather, disease, and religion.

Weather includes a wider range of natural phenomenon, and similarly religion includes secular movements such as fascism and communism that are essentially godless religions that involve the ordering of the relationship of the individual with a higher power that is not supernatural.


I do not address stocks, including the miners, specifically as I see that investment sector as extraordinarily risky. Tell me what the Fed and ECB will do and I will tell you how stocks will perform. That is the nature of this market.

As I am comfortable with stagflation, stocks most likely will not perform well in real terms. However, they could be targeted by the Fed as they implement nominal GDP growth and it puts more weight on selective inflation within the stagnant real economy.

Stocks tend to play the role of a variable hedge in my forecast and my own portfolio. The bigger investments are bonds, including cash which is a bond of zero duration, and alternative currencies like gold and silver, oil and income producing physical assets.

1. Wall Street dropped some of its pretense to fairness and softer forms of fraud and resorted to overt theft as MF Global stole significant sums of money, bonds, and bullion assets directly from customer accounts, under the eyes of the regulators, and transferred the money to its global bankers who refused to give it back.

Trend: Theft by the financiers will continue and intensify. The victims will be vilified to blunt public reaction.

2. The Eurozone came under unremitting assault by the ratings agencies and their associated banks and hedge funds. The Euro is an inherently 'difficult' currency to manage and has always been more susceptible to broad swings in value. This is because it is an economic union without a comprehensive political and financial union. It more closely resembles the original thirteen states of the US under the Articles of Confederation than it does a comprehensive Republic.

Trend: The Eurozone will continue to struggle to find a balance between political and financial factors, and will evolve into a stronger union of fewer members. Germany and France will continue to emerge as the great Western European power. The UK will be preoccupied by its own set of severe internal problems and regional unrest as austerity bites deeply. The UK will begin to act as more of an Anglo-American agent in the Eurozone. It may take on more of the character of an Orwellian state.

3. The Federal Reserve is expanding its power as a monetary authority and regulator of the financial system in an extra-Constitutional manner. The Fed is determined to fight the deflationary forces of global trade and credit contraction by expanding its balance sheet. They have little fear of inflation. Hyperinflation is highly unlikely in the absence of an exogenous shock. Stagflation is the new normal disguised somewhat by government statistics.

Trend: The Fed will start a new program of 'nominal GDP targeting' without stated limits in size of activity, as it will be defined by the scope of its objectives. The bond bubble will continue particularly in the long end of the curve. It will falter and breakdown at some point, but this is not likely in the near term unless some external standard is imposed or exogenous force intervenes.

4. A currency war is well underway in the aftermath of the closing of the gold window and the erosion of the Bretton Woods agreement, into an uneasy floating exchange rate system known informally as 'Bretton Woods II.' This currency war manifests in currency devaluations and pegs in support of mercantilism, particularly in the developing countries. It is a form of neo-colonialism supported by the great multinational corporations.

Trend: Global trade will begin to come under greater political assault as the exchange rate mechanism fails to impose a reasonable balance on the flows of goods and capital. The SDR is the most likely replacement for the US dollar as the world migrates towards a dual currency regime with one currency for domestic only use and an international unit for the settlement of world trade. The composition of the SDR will be a major point of contention between the BRICs and the Anglo-Americans.

5. The US political process is dominated by Big Money, a system in which a small number of people choose the candidates which will be allowed on the final ballot despite great pretense of a selection process and primaries. Despite the usual emotional heat expressed by a minority on each side in any competitive process, the end result is that no candidates can be chosen without being vetted and approved by the monied interests. This tends to continue to promote and support a status quo.

Trend: There may be a third party candidate, and perhaps one other fourth party of any real significance, but the end choice will be between Obama and Romney who are the corporate candidates. Strong voter dissatisfaction will cause minority parties to secede from the two major political parties, including at least one crypto-fascist movement and one progress movement. Watch for a rising current of racism, and attempts to make prejudice socially acceptable, and a growing class hatred. There will be major riots and demonstrations each summer from now until 2020 or a return to representative government.

6. As the global monetary regime continues its change, the US dollar continues to be stretched thinly. Despite all the odds and strong opposition from Western central banks and monetary authorities, gold has sustained an eleven year bull market.

Trend: Gold is in a bull market that will last until around 2020, or until the global monetary system reaches a sustainable equilibrium with a replacement for the US dollar as the reserve currency that is acceptable to the new economic powers. Silver and gold will continue to move with significant volatility as their prices increase. Bonds are the current asset bubble. At some point this may break as the housing market has done, and this will have a negative impact for gold if interest rates on the short end turn positive. This may not happen if inflation increases faster than interest rates rise.

7. China and Russia have replaced their command and control communist economies with command and control oligarchies. The power of China is the exploitation of labor, and of Russia, natural resources. Despite their calm outward appearance, there is significant turmoil beneath the surface, often regional in nature.

Trend: The governments of the world will continue to be shaken by the restructuring of the world economy. Change and calls for reform will most often be met by repression, often harsh. The world will continue to develop into three or four spheres of influence, with the greatest unrest and contained wars on the fringes of those spheres. The greatest region of conflict will remain where Europe meets Asia, and Asia meets the subcontinent.

I hesitate to put forward such a gloomy outlook, but this is in keeping with the forecast I put out in 2005 and it seems that most of the trends have occurred and even intensified. This is a period of great change, and this presents both risks and rewards.

And as always, against the backdrop of great events, while nations rise and fall, the life of the ordinary family goes on. 'There are these three things that endure: faith, hope and love, and the greatest of these is Love,' for it is the highest likeness to God in this world.

Republished with permission of Jesse's Café Américain

Source: The Most Significant Developments of 2011 with Trends in 2012 (2011, December 31), Jesse's Café Américain.