Archive for December, 2011
“Bailout-er” of Last Resort–For Europe?
Posted by Tom in Economics, Europe, Fed, Financial Policy, Monetary Policy, National Debt on December 28, 2011
Jerry O’Driscoll penned a dynamite op-ed in today’s WSJ. It raises serious questions about the Fed’s role and is reprinted below:
The Federal Reserve’s Covert Bailout of Europe
When is a loan between central banks not a loan? When it is a dollars-for-euros currency swap.
By GERALD P. O’DRISCOLL JR.
America’s central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.
The Fed is using what is termed a “temporary U.S. dollar liquidity swap arrangement” with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.
Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman’s collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.
The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.
The ECB is entangled in an even bigger legal and political mess. What the heads of many European governments want is for the ECB to bail them out. The central bank and some European governments say that it cannot constitutionally do that. The ECB would also prefer not to create boatloads of new euros, since it wants to keep its reputation as an inflation-fighter intact. To mitigate its euro lending, it borrows dollars to lend them to its banks. That keeps the supply of new euros down. This lending replaces dollar funding from U.S. banks and money-market institutions that are curtailing their lending to European banks—which need the dollars to finance trade, among other activities. Meanwhile, European governments pressure the banks to purchase still more sovereign debt.
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The Fed’s support is in addition to the ECB’s €489 billion ($638 billion) low-interest loans to 523 euro-zone banks last week. And if 2008 is any guide, the dollar swaps will again balloon to supplement the ECB’s euro lending.
This Byzantine financial arrangement could hardly be better designed to confuse observers, and it has largely succeeded on this side of the Atlantic, where press coverage has been light. Reporting in Europe is on the mark. On Dec. 21 the Frankfurter Allgemeine Zeitung noted on its website that European banks took three-month credits worth $33 billion, which was financed by a swap between the ECB and the Fed. When it first came out in 2009 that the Greek government was much more heavily indebted than previously known, currency swaps reportedly arranged by Goldman Sachs were one subterfuge employed to hide its debts.
The Fed had more than $600 billion of currency swaps on its books in the fall of 2008. Those draws were largely paid down by January 2010. As recently as a few weeks ago, the amount under the swap renewal agreement announced last summer was $2.4 billion. For the week ending Dec. 14, however, the amount jumped to $54 billion. For the week ending Dec. 21, the total went up by a little more than $8 billion. The aforementioned $33 billion three-month loan was not picked up because it was only booked by the ECB on Dec. 22, falling outside the Fed’s reporting week. Notably, the Bank of Japan drew almost $5 billion in the most recent week. Could a bailout of Japanese banks be afoot? (All data come from the Federal Reserve Board H.4.1. release, the New York Fed’s Swap Operations report, and the ECB website.)
No matter the legalistic interpretation, the Fed is, working through the ECB, bailing out European banks and, indirectly, spendthrift European governments. It is difficult to count the number of things wrong with this arrangement.
First, the Fed has no authority for a bailout of Europe. My source for that judgment? Fed Chairman Ben Bernanke met with Republican senators on Dec. 14 to brief them on the European situation. After the meeting, Sen. Lindsey Graham told reporters that Mr. Bernanke himself said the Fed did not have “the intention or the authority” to bail out Europe. The week Mr. Bernanke promised no bailout, however, the size of the swap lines to the ECB ballooned by around $52 billion.
Second, these Federal Reserve swap arrangements foster the moral hazards and distortions that government credit allocation entails. Allowing the ECB to do the initial credit allocation—to favored banks and then, some hope, through further lending to spendthrift EU governments—does not make the problem better.
Third, the nontransparency of the swap arrangements is troublesome in a democracy. To his credit, Mr. Bernanke has promised more openness and better communication of the Fed’s monetary policy goals. The swap arrangements are at odds with his promise. It is time for the Fed chairman to provide an honest accounting to Congress of what is going on.
Mr. O’Driscoll, a senior fellow at the Cato Institute, was vice president at the Federal Reserve Bank of Dallas and later at Citigroup.
Applaud Inequality And the Freedom to Stretch Its Limits!
Posted by Tom in Corporate Welfare, Entitlements, Freedom, Government Regulation, Individual Freedom, National Character, Poverty, Socialism, Welfare on December 17, 2011
So much is being made of OWS’s dichotomy, the 99% versus the 1%, by the mainstream media, the unions and Obama, that it has become mind numbing. Today Charles Blow in his NYT op-ed, Inconvenient Income Inequality, even analogizes it to global warming! In it he pitied the ignorant public for its declining opinion the country is divided into “haves” and “have nots.” He then goes on to prove that income inequality is increasing and concludes that Americans are the equivalent of climate change deniers! So much for the intellectual level of the NYT editorial staff.
The suppressive equality argument that a desperate president is trying to sell to distract attention from his miserable performance in office is falling flat on its face. Why, you ask? Because it is against the very core of human nature. Man by nature wants to grow, to improve, to succeed. That nature demands the hope that this core need can be met by individual effort. Essential to that hope is the freedom enshrined in law to pursue dreams, to succeed and yes to fail. Obama’s equality argument dims that hope, puts a lid on that freedom, turns success into something to be condemned. He has traveled the country railing against the successful.
Ryan Streeter posits a kinder opinion for the OWS misfits’ protests in his Indystar post, How to succeed by merit. He suggests that what the protestors really oppose is unearned wealth: “America isn’t a land divided by the 99 percent and the 1 percent. It’s a land divided by those who earn their success day after day and those who don’t. This class distinction has nothing to do with how rich or poor you are. It has everything to do with what kind of person you are.”
Streeter contrasts Steve Jobs with Bernie Madoff then gives examples of unearned success: lottery winners, Fannie and Freddie executives, unionized public employees, ineffective tenured teachers, spoiled rich kids, and too-big-to fail corporations. Trying to put a good face on and ascribe good intentions to “the bearded misfit sitting in a festering tent on public property” Streeter suggests that what he really objects to is this “unearned success.”
In a hopeful conclusion he argues: “It’s time to stop protesting a false premise and focus instead on promoting earned success. Do we need to end too-big-too-fail policies? Yes. Do we need to end harmful welfare programs? Yes. But most of all, we need to encourage earned success in our own homes. That’s where the real change begins.”
Now I would submit that income inequality is good. It sets the ever changing level to which to aspire. The lower views the higher status as something to be strived for and eventually attained. Even if not in his current generation so long as his children will be in positions to continue to improve. Challenge to improve is key to success; the lower the position on the income scale the greater the challenge.
The beauty of inequality is that it exists all up and down the income scale. It causes challenge, effort and either success or failure up and down the ladder. Those close to the top want to leapfrog into the number one position. And once that is attained someone below will always be striving to leapfrog again.This in turn promotes an aggregate rise in the standard of living for the whole of society. It’s Adam Smith’s “invisible hand” at work.
So we should reject Obama’s socialistic, big-government equality hogwash and promote freedom to succeed with fewer limits and less government.
Brad Schiller, et al on Crony Capitalism
Posted by Tom in Corporate Welfare, Economics, Government Regulation on December 14, 2011
This latest Economic Freedom pinpoints “rent seeking.”
Two One-Sided Views of the Abominable 1%
Posted by Tom in Humor, National Character on December 4, 2011
We are pleased to finally have comments on the OWS “movement.” For those unaccustomed to acronyms, that would be the Occupy Wall Street, or Occupy Whatever Street, park, town, port, etc. movement. It’s not really a movement, but a disjointed conglomeration of diverse protests or bitches that allow super unions like the AFL-CIO, and pols like Obama, Reid, Pelosi and the rest of the Dems to grab onto. There being little else for them to grab.
Enough, we have two wonderful commentaires to republish. The first from our own Brad Schiller published today in the LA Times. We hope those Libs down in southland will take note. Following Brad’s is a piece by Michael Lewis published in Bloomberg, a bit more edgy than Brad’s, but those of you who have read his latest, Boomerang, would expect nothing less. Enjoy:
What’s so awful about the 1%?
Occupy Wall Street has said it’s the 99% of ‘us’ against the 1% of ‘them.’ But many of ‘them’ started out like ‘us’ and have brought us great innovations that we embrace
by Bradley Schiller
December 4, 2011
The class war is on. It’s the 99% of “us” versus the 1% of “them.”
In the rhetoric of this war, we are fighting the 1% because they possess most of the nation’s wealth, bankroll their handpicked political candidates, control the banks and get million-dollar paychecks and billion-dollar bailouts; yet they don’t pay enough taxes or invest their wealth in creating American jobs. They’re the “millionaires and billionaires” President Obama has called out as needing to pony up more for progressive reforms of our healthcare, banking, tax and political systems. They are the enemy of “us” — the 99% who toil at low-wage jobs, hold underwater mortgages, face foreclosures, suffer recurrent and protracted job layoffs and plant closings, and yet pay our fair share of taxes.
But there’s a flaw in this strategy. The Occupy Wall Street movement envisions the 1% as a monolithic cadre of entrenched billionaires who have a firm and self-serving grip on all the levers of the economy. But a closer look at that elite group reveals how untrue that perspective is.
Forbes magazine compiles a list of the richest 400 Americans every year. To get on that list, you must have at least $1 billion of wealth. They are the creme de la creme of the 1% — indeed, the top 0.0000013% (!) of Americans. So who are these dastardly people?
The late Steve Jobs was in that elite club this year. In his earlier days, Jobs would have been camped out with the OWS crowd, probably passing around a joint. Should we count him as one of “us” or one of “them”? (And you can’t use youriPhone or iPad to vote “them.”)
Then there’s 27-year old Mark Zuckerman (No. 14 on the Forbes list), whose Facebook innovation enables the OWS movement to communicate so easily. He and five other Facebook entrepreneurs just joined the Forbes 400 this year.
We’d also quickly recognize among “them” Sergey Brin, Larry Page and Eric Schmidt, who became billionaires developingGoogle. And, as they are sipping a latte to keep warm, the OWS campers should also reflect on whether Howard Schultz,Starbucks’ founder and No. 330 on the Forbes list, is with “us” or “them.”
Not every member of the Forbes 400 is a high-tech folk hero. There is a lot of inherited wealth on that list too (the Mars, Walton, Cargill and Ford dynasties). But 70% of the Forbes elite are self-made billionaires. Those entrepreneurial successes include not just the names behind Facebook, Google, Apple and Starbucks but also EBay (Meg Whitman, Pierre Omidyar), Yahoo (Jerry Yang), Nike (Phil Knight), AOL (Steve Case), Amazon (Jeff Bezos), Subway sandwiches (Peter Buck, Fred DeLuca), “Star Wars” (George Lucas) and even Beanie Babies (Ty Warner). Does anyone doubt that these members of the reviled 1% have enriched the country in significant ways?
Even more to the point is that all of these club-400 elites were once just like “us.” Jobs worked on the first Apple computer in a garage on a shoestring budget. He had vision, not wealth, to propel him to fame and fortune. Oprah Winfrey (No. 139) rose from poverty to TV queen through determination, hard work and a couple of lucky breaks. Even Warren Buffett, No. 2 on the Forbes list, started out looking very much like just another hardworking middle-class kid with good Midwestern values.
These storied rises from “rags to riches” are what make America the unique and prosperous nation it is. Some critics would have us believe that the American dream is dead. But that’s a view purveyed by those without the vision, the grit, the energy or the single-mined determination to build a better mousetrap. Starry-eyed inventors and entrepreneurs have no doubts about that dream. They know it exists and that they are going to achieve it. Maybe not on the first try, but eventually. That’s the entrepreneurial spirit that drives competitive markets, that not only makes the American dream come true for some (the 1%) but also improves life for the many (the 99%).
What really motivates the OWS movement is not resentment against the 1% but a sense of futility in grappling with a weak economy. With unemployment hovering around 9%, and with all the recurrent plant closings, foreclosures and cutbacks in public services, there is a lot of anger to vent. But class warfare isn’t the solution.
Our frustrations are more the product of Washington than Wall Street. We have been promised a lot and received little. Obama (who made millions in book royalties the last few years) sowed the seeds of disillusionment when he overpromised what his February 2009 stimulus package could deliver. A series of policy failures and political deadlocks has left people feeling disenfranchised and forgotten. Calling out millionaires and billionaires as the culprits in this economic saga is disingenuous and ultimately self-defeating. Those 1 percenters are not an avaricious “them” but in reality the most entrepreneurial of “us.” If we had more of them and fewer grandstanding politicians, we would all be better off.
Bradley Schiller is a professor of economics at the University of Nevada-Reno and the author of “The Economy Today.”
To: The Upper Ones From: Strategy Committee Re: The Counterrevolution
As usual, we have much to celebrate.
The rabble has been driven from the public parks. Our adversaries, now defined by the freaks and criminals among them, have demonstrated only that they have no idea what they are doing. They have failed to identify a single achievable goal.
Just weeks ago, in our first memo, we expressed concern that the big Wall Street banks were vulnerable to a mass financial boycott — more vulnerable even than tobacco companies or apartheid-era South African multinationals. A boycott might raise fears of a bank run; and the fears might create the fact.
Now, we’ll never know: The Lower 99’s notion of an attack on Wall Street is to stand around hollering at the New York Stock Exchange. The stock exchange!
We have won a battle, but this war is far from over.
As our chief quant notes, “No matter how well we do for ourselves, there will always be 99 of them for every one of us.” Disturbingly, his recent polling data reveal that many of us don’t even know who we are: Fully half of all Upper Ones believe themselves to belong to the Lower 99. That any human being can earn more than 344 grand a year without having the sense to identify which side in a class war he is on suggests that we should limit membership to actual rich people. But we wish to address this issue in a later memo. For now we remain focused on the problem at hand: How to keep their hands off our money.
Looming Threats
We have identified two looming threats:
The first is the shifting relationship between ambitious young people and money. There’s a reason the Lower 99 currently lack leadership: Anyone with the ability to organize large numbers of unsuccessful people has been diverted into Wall Street jobs, mainly in the analyst programs at Morgan Stanley and Goldman Sachs. Those jobs no longer exist, at least not in the quantities sufficient to distract an entire generation from examining the meaning of their lives.
Our Wall Street friends, wounded and weakened, can no longer pick up the tab for sucking the idealism out of America’s youth. But if not them, who? We on the committee are resigned to all elite universities becoming breeding grounds for insurrection, with the possible exception of Princeton.
The second threat is in the unstable mental pictures used by Lower 99ers to understand their economic lives. (We have found that they think in pictures.)
For many years the less viable among us have soothed themselves with metaphors of growth and abundance: rising tides, expanding pies, trickling down. A dollar in our pocket they viewed hopefully, as, perhaps, a few pennies in theirs. They appear to have switched this out of their minds for a new picture, of a life raft with shrinking provisions. A dollar in our pockets they now view as a dollar from theirs. Fearing for their lives, the Lower 99 will surely become ever more desperate and troublesome. Complaints from our membership about their personal behavior are already running at post-French Revolutionary highs.
We on the strategy committee see these developments as inexorable historical forces. The Lower 99 is a ticking bomb that can’t be defused. They may be occasionally distracted by, say, a winning lottery ticket. (And we have sent out the word to the hedge fund community to cease their purchases of such tickets.) They may turn their anger on others — immigrants for instance, or the federal government — and we can encourage them to do so. They may even be frightened into momentary submission. (We’re long pepper spray.)
In the End
But in the end we believe that any action we take to prevent them from growing better organized, and more aware of our financial status, will only delay the inevitable: the day when they turn, with far greater effect, on us.
Hence our committee’s conclusion: We must be able to quit American society altogether, and they must know it. For too long we have simply accepted the idea that we and they are all in something together, subject to the same laws and rituals and cares and concerns. This state of social relations between rich and poor isn’t merely unnatural and unsustainable, but, in its way, shameful. (Who among us could hold his head high in the presence of Louis XIV or those Russian czars or, for that matter, Croesus?)
The modern Greeks offer the example in the world today that is, the committee has determined, best in class. Ordinary Greeks seldom harass their rich, for the simple reason that they have no idea where to find them. To a member of the Greek Lower 99 a Greek Upper One is as good as invisible.
He pays no taxes, lives no place and bears no relationship to his fellow citizens. As the public expects nothing of him, he always meets, and sometimes even exceeds, their expectations. As a result, the chief concern of the ordinary Greek about the rich Greek is that he will cease to pay the occasional visit.
That is the sort of relationship with the Lower 99 we must cultivate if we are to survive. We must inculcate, in ourselves as much as in them, the understanding that our relationship to each other is provisional, almost accidental and their claims on us nonexistent.
As a first, small step we propose to bestow, annually, an award to the Upper One who has best exhibited to the wider population his willingness and ability to have nothing at all to do with them. As the recipient of the first Incline Award — so named for the residents of Incline Village, Nevada, many of whom have bravely fled California state taxes — we propose Jeff Bezos.
His private rocket ship may have exploded before it reached outer space. But before it did, it sent back to Earth the message we hope to convey:
We’re outta here!
(Michael Lewis, most recently author of “Boomerang: Travels in the New Third World,” is a columnist for Bloomberg News. The opinions expressed are his own.)
To contact the writer of this article: Michael Lewis at mlewis1@bloomberg.net.