Anarchist Economics

This years Nobel prize in economics was given to an American Political Economist who for all intents and purposes espouses the anarchist economics of community control, mutual aid and direct action. While much attention has been given to the fact that this was first time a woman was given the award much commentary has been that this was another Euro slap at the rampant liberaltarian free market economics of the U.S. In fact Elinor Ostrom's political economic analysis is far more libertarian than the apologists for U.S. capitalism.

Professor Ostrom - who shares the prize with Oliver Williamson of the University of California, Berkeley - has spent much of her career challenging the view that when people share a finite resource, they will inevitably end up destroying it. This widely held belief, known as the tragedy of the commons, is used to support arguments for tighter regulation or even privatisation.

She has approached the argument from an unusual perspective, too. Through her study of the way that natural resources have been managed around the world, she has found that, left to manage resources on their own and given the right support, local people often develop the most effective methods of sustainable development.

“We have a team of people studying forestry in 200 cities around the world. This is very big study, trying to understand why some forests have just disappeared and others have been sustained. We started in 1992. We have been able to go back and go back and go back to get very good data sets.

“Our findings are that some local people who have had long-term assurances of harvesting rights are able to manage forests more effectively than people who do not have the same assurances. The lessons are that when regulation comes from a distant authority and is uniform for a very large region, it is not likely to succeed.”

Professor Ostrom - whose doctorate is in political science and who considers herself a political economist - will not be drawn to comment on hot political issues, such as the push for tighter regulation of Wall Street or the perennial question of American healthcare. They are, she says, not her field.

But she does have a message for government: “The big message is that we need to have respect for the capabilities of humans living all over the world, not just those occupying high positions,” she said. “It’s not that we want to get rid of government. It’s about getting rid of the idea that government can solve everything.”

To this end, she is a firm supporter of direct action. “I have recently written a paper on global warming and argued that we should not sit around twiddling our thumbs waiting for someone to do something. We should act now. There is a lot we can all do at all levels,” she said.

Economics 101

A rose is a rose, a recession is a recession, no need to get 'technical' about it.
'Technical' recession possible: Flaherty
Prime Minister Harper says Canada is facing a "technical recession"
Canada to be hit by recession, 7.5% jobless rate, OECD warns
Oshawa's 96% jump in employment insurance recipients leads country
Number of Canadians on EI rises 3.9 per cent from last year: StatsCan
More working Canadians using food banks: study
A recession refers to economic contraction, a real decline in economic output as measured by the change in gross domestic product. Most recently, Canada experienced recessions in the mid-1970s and the early 1980s and 1990s. In each case, real GDP shrank and unemployment rates climbed into double digits.

SEE:
Common Sense

tags
Canada, Flaherty, politics, Conservatives,consumer spending, tax-credit, Stelmach, economy, government, Conservatives, Harper, recession, Conference Board of Canada, consumer confidence, Economy,

Eco Socialism

I love the pretense behind this meeting announcement. As if eco-socialism, social ecology or even feminist ecology were NEW only to be recently discovered by the Left in Toronto.

A new synthesis is emerging, combining two great radical forces -- the

'red' movements that seek to free labor and bring down capitalism, and the

'green' movements that seek to mend our relationship with nature. Activists

from 13 countries met in Paris October 7-8 to discuss this perspective.

They founded the Ecosocialist International Network, and called

for a global ecosocialist conference, to be held in conjunction with the

next World Social Forum.

Speaker: IAN ANGUS

Ian is a member of the Steering Committee of the Ecosocialist International

Network, and the editor of the web journal Climate and Capitalism. He will

discuss what happened in Paris and provide an overview of the state of

ecosocialism today: as a goal, as a body of ideas, and as a movement

against capitalist ecocide.

Sponsored by: Socialist Project, International Socialists, New Socialist

Group, and Socialist Voice.

Seems to me they missed the notice that Murray Bookchin revived libertarian socialist environmentalism known as social ecology, over forty years ago. Of course being Trot's they probably didn't read his Listen, Marxist! either.

The journal Capitalism Nature, Socialism has been around for about thirty years. . Get a sub.

Monthly Review Editor John Bellamy Foster has long promoted a Marxist view of ecology and environmentalism. Get a sub.

Missed the big meeting announcing the founding of the German Red Greens led by old Sixties activist Rudi Dutschke and Daniel Cohn Bendit over two decades ago did we.

As happened elsewhere in the world, most of the 1968ers ultimately joined the mainstream, with a number of 1960s activists -- including Rudi Dutschke -- later paving the way to found the Green Party. Dutschke himself was to be a key figure in the party, but he died shortly before its official creation in 1980. Some of them, most famously Joschka Fischer, became ministers in the German government led by Chancellor Gerhard Schröder.

Skipped reading Adrienne Rich on feminist ecology/green feminism because she was only taught in Womens Studies, did we.

Missed the work done by syndicalist feminist eco activist Judi Bari did we. She who split with Earth First! over its tactics that endangered lumber workers rather than getting them onside with eco activists.

And clearly these folks need to read my blog.

And while they jump on the eco-environmental-green bandwagon, they do so without addressing the contradictions current in the ecology/environmental/green movement, that places more emphasis on consumers and morality then on understanding that environmental degradation is essential for capitalism to function.

Here are some contemporary articles that they would do well to read as well.

The Modern World-System as environmental history?
Ecology and the rise of capitalism

JASON W. MOORE
University of California, Berkeley

Abstract.

This article considers the emergence of world environmental history as a
rapidly growing but undertheorized research ¢eld. Taking as its central problematic the gap between the fertile theorizations of environmentally-oriented social scientists and the empirically rich studies of world environmental historians, the article argues for a synthesis of theory and history in the study of longue duree socio-ecological change.

This argument proceeds in three steps. First, I o¡er an ecological reading of Immanuel Wallerstein’s The ModernWorld-System.Wallerstein’s handling of the ecological dimensions of the transition from feudalism to capitalism is suggestive of a new approach to world environmental history. Second, I contend that Wallerstein’s theoretical insights may be e¡ectively complemented by drawing on Marxist notions of value and above all the concept of ‘‘metabolic rift,’’ which emphasize the importance of productive processes and regional divisions of labor within the modern world-system.

Finally, I develop these theoretical discussions in a short environmental history of the two great ‘‘commodity frontiers’’ of early capitalism the sugar plantation and the silver mining complex.

Animals, Agency, and Class: Writing the History of Animals from Below

This essay is an historical exploration of the nexus between
animals, agency, and class. More significantly, it seeks
to place the agency of horses, cows, sheep, pigs, etc. into the
process of historical writing. This essay is divided into three
sections. The first is a critique of the current state of the historiography
of animal-studies. The second, ‘A Product of an
Unspoken Negotiation,’ considers how animals themselves
have shaped their own lives and labors. The third, ‘The Evolution
of Vegetarianism and Animal-Rights,’ explores how a
class relationship developed between humans and other animals.
Moreover, this section demonstrates how this solidarity
then led to the creation of social change.

Kate Soper:
Beyond Consumerism: Self-Interest, Pleasure and Sustainable Consumption
Abstract
Responses to climate change and ecological attrition seldom say much about the downsides of the consumerist lifestyle nor promote the pleasures and fulfilments of a less work-driven and acquisitive life-style. This is hardly surprising given the dominance of global capitalism and the scale of its advertising budgets. But there are signs that the tensions between economic growth and human and environmental well-being will not be indefinitely contained. The negative impacts of affluence are a growing political concern and a source of disenchantment on the part of consumers themselves. In this context, the article seeks to counter the suppression of other visions of the ‘good life’ and presents the attractions of a post-consumerist life-style as of critical importance in winning wider support for a sustainable future.

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Robbing the Bank From the Inside

Bad news just gets worse...not only do we have the collapse of the paper credit market.... can you say junk bond scandal of the eighties.. now we have a flashback to bank scandals of the nineties...wait a minute shouldn't the market have regulated itself so this didn't happen, again...once again the myth of self regulation is exposed for the sham it is...global markets are not self regulating never have been that is why Capitalism created the State in its own image.



French bank hit by worst scandal ever

SocGen trader's $7.1B loss dwarfs Barings debacle

PARIS - A junior computer whiz at the French bank Societe Generale has been accused of racking up a $7-billion loss in bad bets on stocks in the biggest trading scandal in banking history.

France's central bank and government scrambled to shore up confidence in the banking system after the 144-year-old SocGen told investors already battered by the credit crisis that it had discovered the "exceptional" fraud late last week.

The trader had circumvented the bank's risk controls through in-depth knowledge of its computer systems, but was caught when he tried to cover up his losses.

The country's central bank chief dubbed the trader "a genius of fraud" while French police announced a criminal probe.

Richard Fuld, the chief of Wall Street firm Lehman Brothers, called the debacle "everyone's worst nightmare" at the meeting of policy and business leaders in Davos.

The losses spiralled to ¤4.9-billion ($7.1-billion) -- nearly its net profit in 2006 -- as the bank tried to close out the rogue trader's stock index futures positions in Monday's sliding market.

2002: Former currency trader John Rusnak accused of hiding US$691 million in losses at Allfirst bank of Baltimore, at the time under parent Allied Irish Bank, pleads guilty to one of the largest bank fraud cases in U.S. history. Rusnak was sentenced in 2003 to 7 1/2 years in prison.

_ 1996: Sumitomo Corp., a 300-year old Japanese metals trader, discovers that its star copper trader, Yasuo Hamanaka, amassed $2.6 billion in losses in unauthorized trades over a decade. The revelation caused copper prices to plummet worldwide. Sumitomo has paid millions of dollars in class action lawsuits and Hamanaka served more than seven years in prison.

_ 1995: Collapse of Britain's Barings Bank after a trader in Singapore, Nick Leeson, lost 860 million pounds (then worth US$1.38 billion) on futures trades. The fraud prompted banks worldwide to tighten internal checks. Leeson spent four years in prison.

_ 1995: Toshihide Iguchi, a New York bond trader for Japan's Daiwa Bank, charged with hiding $1.1 billion in trading losses he accumulated over 12 years. The bank later pleaded guilty to failing to notify U.S. authorities sooner. It was hit with $340 million in fines and ordered to shut its U.S. operations. Iguchi was sentenced to four years in prison and fined.

1994: Joseph Jett, a government bond trader at Wall Street brokerage Kidder Peabody & Co., was fired after the firm accused him of faking $348 million in profits to fatten his bonus. Jett denied wrongdoing and wasn't charged criminally. Last year a federal judge upheld a March 2004 order by the Securities and Exchange Commission saying Jett had booked fake profits of approximately $264 million and had to return $8.2 million of bonuses and pay a $200,000 civil penalty. The scandal contributed to the demise of the venerable Kidder.

_ 1991: Bank of Credit and Commerce International (BCCI), operating in nearly 70 countries, is seized by bank regulators, acting on auditors' reports of huge losses from illegal loans to corporate insiders and from trading transactions. Some 250,000 depositors left without funds. Claims exceeded US$10 billion.

© 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Bank of America Settles Suit Over the Collapse of Enron - WSJ.com

By Rick Brooks and Carrick Mollenkamp Staff Reporters of THE WALL STREET JOURNAL

Companies Featured in This Article: Bank of America, Citigroup, J.P. Morgan Chase, Merrill Lynch, Deutsche Bank, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank

Bank of America Corp. became the first bank to settle a class-action lawsuit alleging that some of the top U.S. financial institutions participated in a scheme with Enron Corp. executives to deceive shareholders.

The Charlotte, N.C., bank, the third-largest in the U.S. in assets, agreed to pay $69 million to investors who had billions of dollars in losses as a result of Enron's collapse amid scandal in 2001. In making the settlement, Bank of America denied that it "violated any law," adding that it decided to make the payment "solely to eliminate the uncertainties, expense and

Why the Blowup May Get Worse

Not since 1966 -- when the term "credit crunch" was coined after the Fed pushed market interest rates above the legal limits banks and thrifts then could pay on deposits and thus stopped lending in its tracks -- has the nation's mortgage apparatus been so close to breaking down.

The current crisis arguably has the potential for more economic disruption than the celebrated 1998 Long Term Capital Management meltdown. Then, as Northern Trust economist Asha Bangalore points out, the economy cruising along -- in contrast to the past four quarters, which have seen below-potential growth on average.

Moreover, mortgage borrowers perversely benefited from the LTCM fiasco. Not only did the Greenspan Fed lower rates, sparking a huge bond rally, but, also, the government-sponsored enterprises Fannie Mae (FNM) and Freddie Mac (FRE) went on virtual buying sprees. As a result, the biggest part of the credit market -- mortgages -- remained flush. Now, Fannie is looking to expand its portfolio beyond the $727 billion limit imposed on it after its accounting and governance scandals -- a move viewed skeptically by the White House but supported by some congressional Democrats.

Indeed, the full impact of the mortgage crisis still lies ahead. From the beginning of 2007 through mid 2008, interest rates on over $1 trillion of adjustable-rate mortgages are slated to be reset, many from low "teaser" rates.

THE SUBPRIME MESS ALSO RECALLS another crisis -- the virtual collapse of the commercial-paper market in the wake of the Penn Central bankruptcy of 1970. Back then, the paper market consisted of relatively simple short-term corporate IOUs. Now, so-called asset-backed commercial paper is backed by all manner of things, from credit cards and auto loans to collateralized debt obligations, and comprises over half the CP outstanding. Moreover, notes MacroMavens' Stephanie Pomboy, money-market funds own 27% of CP outstanding.

While the Fed managed to soothe the financial markets' nerves by week's end, the potential for future upheavals remains. As a result, the futures market is looking for the central bank to ride to the rescue with rate cuts. Fed-funds contracts are fully discounting a quarter-point cut, to 5%, at the Sept. 18 Federal Open Market Committee meeting, and a further reduction to 4¾% in December.

As the chart here shows, financial crises have tended to coincide with peaks in the fed-funds rate and subsequent Fed easing. The subsequent rate relief would be hailed by the markets as the start of a new bull run.

There is a new wrinkle -- the precarious state of the dollar. No longer is the greenback viewed as a safe haven in the world, contends Barclay Capital's currency team.

Indeed, as MacroMavens' Pomboy has posited, a Fed rate cut that sends the dollar tumbling could have a perverse effect. The influx of foreign capital has kept U.S. interest rates low and provided a flood of credit for everything from leveraged buyouts to, of course, subprime mortgages. If there's an exodus of foreign capital fleeing a declining dollar, credit could tighten even as the Fed eases. Be careful of what you wish for.

High-yield debt - Wikipedia, the free encyclopedia

The original speculative grade bonds were bonds that once had been investment grade at time of issue, but where the credit rating of the issuer had slipped and the possibility of default increased significantly. These bonds are called "Fallen Angels".

The investment banker, Michael Milken, realised that fallen angels had regularly been valued less than what they were worth. His time with speculative grade bonds started with his investment in these. Only later did he and other investment bankers at Drexel Burnham Lambert, followed by those of competing firms, begin organising the issue of bonds that were speculative grade from the start. Speculative grade bonds thus became ubiquitous in the 1980s as a financing mechanism in mergers and acquisitions. In a leveraged buyout (LBO) an acquirer would issue speculative grade bonds to help pay for an acquisition and then use the target's cash flow to help pay the debt over time.

In 2005, over 80% of the principal amount of high yield debt issued by U.S. companies went toward corporate purposes rather than acquisitions or buyouts.

High-yield bonds can also be repackaged into collateralized debt obligations (CDO), thereby raising the credit rating of the senior tranches above the rating of the original debt. The senior tranches of high-yield CDOs can thus meet the minimum credit rating requirements of pension funds and other institutional investors despite the significant risk in the original high-yield debt.

Hedge funds have gotten rich from credit derivatives. Will they blow up?

From:	"Kevin McKern"
Received:	10/19/2006 11:45 AM
Subject:	Will they blow up?

The downfall of Amaranth Advisors, the hedge fund that lost $6 billion in a single week by betting on natural gas, was a special case. There was no domino effect taking down energy traders generally, no meltdown of an industry. But if you want to fret over the next financial catastrophes, turn your gaze away from energy futures and focus on something far more obscure: credit default swaps. Hedge funds are neck-deep in these derivatives, and if something goes wrong, the pain will be widespread. A credit swap is an insurance policy on a bond, often a junk bond. The fellow selling the swap--writing the policy, that is--collects a premium. If nothing goes wrong, he pockets the premium and looks like a financial genius. But if the bond defaults, the swap seller has to make good. The notional amount--the aggregate of bonds, loans and other debt covered by credit default swaps--is now $26 trillion. This is a staggering sum, twice the annual economic output of the U.S. Hedge funds account for 58% of the trading in these derivatives, says Greenwich Associates, a financial research firm. Selling protection has been a big moneymaker for funds like $23 billion (assets) D.E. Shaw and $12 billion Citadel, say market participants, and for specialized outfits like Primus Guaranty (nyse: PRS - news - people ) in Bermuda, which took in $57 million in the first half of 2006 selling protection on $1.6 billion in debt. With corporate debt defaults low these days, the temptation is high to write insurance policies on bonds. A hedge fund can make $60,000 to $1 million a year selling protection on $10 million in bonds. It's like finding money in the street. Unless, of course, the economy suddenly enters a recession. If that happens, hedge funds addicted to the credit market will be in deep trouble. "A lot of [hedge funds] have sold insurance, are sitting on the premiums--and are bare-ass," says Charles Gradante, cofounder of Hennessee Group, which tracks hedge fund performance. "If there is a Long Term Capital-type systemic risk potential out there, it's in the [credit swap] market." There must be a lot of investors--or credit speculators--who are cavalier about corporate defaults because junk bonds are trading at yields only modestly higher than the yields on safe U.S. Treasury bonds. The chart displays the yield spread, as calculated by Moody's Investors Service, between junk bonds rated speculative and seven-year Treasurys. Saks bonds with a 97TK8 coupon due October 2011, for example, are now yielding 7.6%, or 287 basis points (2.9 percentage points) over seven-year Treasurys, compared with a 700-basis-point spread to Treasurys four years ago. Today's tight spreads don't leave much of a cushion to cover defaults. There is a close correlation between yield spreads and credit default swap prices. That's because selling a credit swap is equivalent to buying the corporate bond on margin. If you buy a junk bond with borrowed funds, you collect the high coupon on the bond while paying out a lower amount, presumably not too much more than what the U.S. government pays to borrow money. Either way--with a swap or a margined bond trade--you pocket the spread, unless and until the corporate bond gets into trouble, at which point you're sitting on a painful capital loss. The credit-derivatives business is dominated by 14 dealers. Among them: jpmorgan Chase, Citigroup (nyse: C - news - people ), Bank of America (nyse: BAC - news - people ), Goldman Sachs (nyse: GS - news - people ) and Morgan Stanley (nyse: MS - news - people ). All have staggering amounts of derivatives on their books: JPMorgan's notional exposure was $3.6 trillion as of June 30, according to the Federal Deposit Insurance Corp., which is almost three times assets and 30 times capital. Credit derivatives at Wachovia Corp. (nyse: WB - news - people ) have jumped sevenfold since 2003 to $170 billion, more than three times capital. Banks love derivatives because they provide multiple ways to make money. Revenue from all types of derivatives will hit $34 billion or so this year at U.S. banks and securities firms, says Tower Group (nasdaq: TWGP - news - people ), a financial-research outfit, with hedge funds generating much of the money. Hedge funds also buy the potentially toxic waste that banks create when they bundle credit derivatives into so-called synthetic deals. By separating a portfolio of derivatives into different tranches, banks can create virtually default-proof securities for conservative investors--if somebody else is willing to buy riskier "equity" tranches whose value vaporizes when as few as one or two of the underlying bonds default. Banks once kept such tranches on their books as a cost of doing business. Now, says Fitch Ratings, hedge funds are buying them to goose returns. Regulators say there's no reason to worry--yet. All big banks require hedge funds to back up their swaps with cash collateral that is adjusted daily, says Kathryn Dick, deputy comptroller for credit and market risk at the Office of the Comptroller of the Currency. But banks can make only rough guesses at the value of swaps and thus how much collateral their counterparties need to ante up. Even the smartest guys can come up shorthanded. Ask Charlie T. Munger, vice chairman of Warren Buffett's Berkshire Hathaway (nyse: BRKA - news - people ), which lost $404 million unwinding credit, interest-rate and foreign-exchange derivatives positions in its General Re unit. "When we ran it off, it didn't run off at anything like book value," Munger says. "I would bet a lot of money there are some terrible valuations on the books of corporate America." JPMorgan, the most forthcoming of the big derivatives dealers, figures it could lose $65 billion over several years if everybody on the other side of a derivatives trade went broke. A scary number when compared with the bank's $110 billion in capital. Implausible, too, because most of its counterparties are big financial institutions. Hedge funds and other smaller players are much more exposed. Like swaps on interest rates and foreign currency, credit swaps outstanding dwarf the underlying bonds in circulation. That can be a problem when a creditor defaults, as with Delphi (nyse: DPH - news - people ) and other auto parts makers earlier this year. With most swaps, the buyer of protection has to hand over defaulted bonds to get its money, tough to do if, as with Delphi, $20 billion in protection has been written on just $2 billion in bonds. Calamity was averted by the International Swaps & Derivatives Association, which held an auction to determine the amount of cash protection buyers would get. The derivatives market weathered its last near-death experience in early 2005, when credit agencies downgraded the debt of General Motors (nyse: GM - news - people ) and Ford (nyse: F - news - people ), devastating the value of the most risky synthetic derivatives. Hedge funds thought they'd been smart by locking in a three-to-four-percentage-point spread by selling protection on those tranches and buying it on less risky ones. Suddenly, though, they had to close out their moneylosing positions. So many funds had made the same bet that it "magnified the deleveraging process," in the dry words of the Bank for International Settlements. Translation: "Banks refused to buy or sell," says Randall Dodd, a former Commodity Futures Trading Commission economist who now runs the Financial Policy Forum, a Washington think tank. "These guys couldn't trade out of their positions." Bottom-fishing investment banks eventually bailed hedge funds out of their problems. But Dodd and other critics wonder if banks have extracted enough collateral from their hedge fund clients to protect themselves in a wider crisis. "No one has good facts on these things," says David Hsieh, professor at Fuqua School of Business at Duke University, "because hedge funds are private investments."

Balancing the Books
A Legacy Worth Disinheriting: The Federal Reserve remains spooked by the specter of the Great Depression
Edited by Jay Palmer
03/03/2003
Barron's
32

A History of the Federal Reserve Volume 1: 1913-1951

By Allan H. Meltzer

University of Chicago Press; 800pp; $75

Reviewed by Randall W. Forsyth

Central bankers, like generals, often are accused of fighting the last war. The Federal Reserve remains haunted by its most humiliating defeat -- an utter failure not only to prevent the Great Depression, but its ineptitude in countering the most severe downward spiral in American economic history. That failure arguably has a profound impact on Fed policy to this day.

Serious students of monetary policy will be familiar with the broad outline of what's told in Allan H. Meltzer's monumental "A History of the Federal Reserve: Volume 1: 1913-1951." The Great Depression is the most crucial period covered in the book, which encompasses the span from the Fed's founding to the Treasury Accord of 1951, when it gained its independence as a modern central bank.

Unlike others who lay the blame for the Depression on a single cause -- the stock-market Crash of '29, the Smoot-Hawley tariff, the collapse of the international gold standard or the Fed's permitting a one-third contraction in the money supply -- Meltzer reasonably attributes the catastrophe to the confluence of these shocks. But the Fed, which was established after a succession of financial panics in the 19th and early 20th centuries -- precisely to prevent their recurrence -- failed in that narrower mission.

That failure, as Meltzer keenly describes, was a result of misguided policies and political infighting. Policy was ruled by the (wrongheaded) conventional wisdom of the day, that said that the collapse of the 'Thirties was necessary to purge the excesses of the 'Twenties. The Fed was to restrict itself to providing credit solely to meet the private sector's needs -- by buying only "real bills" and not purchasing government securities, which supposedly only pumped up speculative credit, according to the prevailing notion of the time. The reestablishment of the gold standard in the 1920s was considered a success then, but Meltzer describes how it sowed the downturn's seeds. Britain needed to deflate while France and the U.S. had to inflate, so all resisted. New York Fed President Benjamin Strong, who de facto ran policy in the 'Twenties, eased to help the pound. But his jealous counterparts would posthumously blame him for inflating the bubble that burst in 1929.

More important, Meltzer details the dithering that prevented the Fed from taking the most basic monetary action -- large-scale purchases of government securities to add liquidity to the banking system. Fed officials thought policy already was easy because interest rates were near zero and banks didn't borrow from the Fed, ignoring the rise in real interest rates caused by deflation and the contraction in the money stock.

The Bank of Japan repeated those blunders through most of the 'Nineties. The Fed, having learned from history, has not been doomed to repeat it. The U.S. central bank already has slashed its key interest rate target 12 times since January 2001 to a nearly irreducible 1 1/4%. And in a speech last November that still reverberates, Fed Governor Ben Bernanke pointed out that the central bank hasn't run out of monetary bullets even if it runs out of basis points. Even at 0%, the Fed still has a magical device -- the printing press. With a steward of the dollar trumpeting the power to debase it, is it any wonder that gold has rallied and the spread between TIPS (Treasury inflation-protected securities) and fixed-return Treasuries has widened?

Yet the circumstances of the bursting of the bubbles of the 'Twenties and the 'Nineties were markedly different. Ahead of the '29 Crash, the Fed was actively trying to curb speculation. Greenspan & Co. claim no part in the recent bubble, with the Maestro contending that actions to curb the inflation in asset prices posed risks to the economy.

His protest, however, ignores the role played by the Fed in encouraging soaring asset inflation. As previously noted in Barron's, the central bank provided the monetary fuel for the Nasdaq bubble and then throttled it back ("Fed Inflated, Then Burst IPO Bubble," Dec. 11, 2000). Investors and traders also comforted themselves with the notion that the central bank would (and could) rescue the financial markets if they collapsed. That belief, which gained currency especially after the Long Term Capital Management debacle of 1998, came to be known as "The Greenspan Put" -- a get-out-of-jail-free card for speculators.

Now, even though the world enjoys expanding international trade and growth in output and income-exactly the opposite of the 'Thirties -- the Fed still worries about deflation and depression. Moreover, every indicator -- money supply, negative real rates, a steeply sloped yield curve, a weakening dollar and rising commodity prices -- is full-tilt expansionary. Indeed, William Silber of New York University's Stern School recently wrote in the Financial Times that the Fed may not act to curb inflation soon enough -- its blunder of the 1970s. How the Fed failed to foster stable prices after 1951 should be the basis of Meltzer's second volume, which I eagerly await.

---

RANDALL W. FORSYTH is an assistant managing editor at Barron's

SEE

Wall Street Mantra

Black Gold

U.S. Economy Entering Twilight Zone

Hedge Funds, Junk Bonds, Ponzi Schemes

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Still not getting our due

The market wonks and pundits are all a flutter about $100 oil. It hit that price last week in two, count em two, speculative deals amongst hundreds in the commodity markets. The price then dropped to between 97 and 99 dollars. This was declared a decline, with much brow wiping.

However the price of oil before last week was $95 at the end of 2007. Again a fact that seemed to be glossed over in the news about hundred buck oil. It hovered between $72 and $80 for most of last year. Then is shot up at the end of the year. Thanks to speculation not real market conditions of supply and demand. Today it is now in the high nineties.

Oil prices rose at a record rate last year a 60% hike . And they will continue to go up. It is one of the conditions of a Peak Oil marketplace.

Which means that Albertans are still getting short changed on our royalties. Since Stelmach's Royalty regime will not come into effect until 2009 and as an uncensored Alberta Energy Report reveals we have been short changed even under the existing royalty scheme.

Oil prices in 2007 rose 57% and wholesale gasoline prices climbed at a similar rate

Oil prices breached a record $100 a barrel several times last week, as falling inventories, geopolitical tensions, strong demand from developing countries and a weak dollar pushed futures above the psychologically important mark.

David Pumphrey Deputy Director, Energy, Center for Strategic and International Studies

"Fundamentals are still quite strong, and would support oil prices in the $90 to $100 range, but not much higher. The wild card is the financial markets."

Daniel Yergin Chairman of Cambridge Energy Research Associates

"Prices won't hover around $100 unless some bad things happen in oil-producing countries. Last year, oil averaged $72

Oil, gas price forecasts
Raymond James analysts are predicting that crude prices will again exceed Wall Street's consensus in 2008. "The global oil markets must push oil prices high enough to slow global oil demand growth in a supply-constrained market," they said. Accordingly, Raymond James raised its forecast of crude prices to an average $90/bbl in 2008, up from a previous estimate of $80/bbl "to reflect a tightening, supply-constrained oil market." Analysts said, "Additionally, we are raising our 2009 forecast from $85/bbl to $100/bbl due to our belief that additional oil supplies will be even harder to find in 2009 and beyond."

Raymond James analysts noted continued strong growth in domestic gas production—"primarily Barnett shale and Rockies driven"—and increased LNG imports should again push US gas storage levels to record highs in 2008. Therefore, they said, "We believe 2008 gas prices will be even weaker than originally anticipated and are revising our 2008 US gas price forecast down from $7/Mcf to an average of $6.50/Mcf for the full year, the lowest since 2004. We are also initiating a 2009 price forecast of $7/Mcf. While US gas prices could remain relatively weak through 2009, the build-out of global gas infrastructure should eventually drive global gas prices closer to BTU parity (6:1 price ratio) over the next 5 years."

Censored report shows gov't was told in 2006 Alta. missing out on oil billions

EDMONTON - Alberta Energy told the provincial government in 2004 that the province was missing out on billions of dollars in resource revenue, newly released documents show.

In a 2006 report, the department estimated that since royalty rates were capped at certain price levels, Alberta had lost between $1.3 billion and $2.8 billion in "uncaptured economic rent" for natural gas alone in 2003 and 2004, or between $700 million and $1.4 billion a year.

The department's cross-commodity resource valuation team called on the government to "increase conventional oil and gas royalties to restore Alberta's fair share at high prices."

Another section of the report, comparing Alberta with eight U.S. oil-producing states, showed the province ranked lowest in the percentage it took in royalties and taxes.

Premier Ed Stelmach announced last fall that he was hiking royalties, but not until 2009 and not to the extent called for by the royalty review panel headed by Bill Hunter.

In the documents, information about oilpatch returns against reinvestment between 1990 and 2003 show that despite higher returns for companies and record drilling, the ratio of reinvestment has declined. The words "higher returns, record drilling, declining reinvestment" were stricken from documents previously released to The Journal.

Alberta's NDP joined in the fray Friday by attacking Stelmach's new royalty framework as a massive giveaway to oil companies.

"When oil hits $100, this new royalty framework will forgo tens of millions of dollars a day compared to Alaska," NDP Leader Brian Mason said.

"When the time comes that oil regularly trades at $100, the Tory royalty system will cost Albertans over $4 billion a year."

Stelmach's oil royalty plan called inferior to Alaska's

Premier Ed Stelmach's new oil royalty revenue scheme will generate chump change compared to the system used in Alaska, says Alberta NDP leader Brian Mason.

"The two areas face similar challenges in terms of costly operations to extract crude oil and have similar right-leaning governments, yet Alaska has managed to come up with a system that generates far more money from oil than we ever could under the new royalty regime," he said yesterday.

By Mason's math, Albertans are foregoing $4.3 billion in extra oil revenue by not charging higher royalty percentages and capitalizing on $100 per barrel oil prices.

Mason said under the new royalty regime, Alberta will take in $7.4 billion, but that could jump to $11.8 billion if Alberta took a bigger piece of the pie.

"Alaska takes $42.24 on each barrel of $100 oil and the sky didn't fall as Big Oil warned us it would in Alberta just a few months ago.

"Alberta takes just $26.51 from a barrel of $100 oil. There is a huge gap there and a lot of room for us to earn more money. The price of a barrel of oil isn't going down much any time soon. As far as I can tell, the world only has so much of it to go around."

SEE

The Economist On Alberta's Fair Share


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The Economist On Alberta's Fair Share

The Economist on Ed Stelmach's Royalty sell out. Yep folks his approach may have been balanced for the whiners in Calgary Petro Towers, but when it comes to the market place we are still getting shortchanged.

Nov 6th 2007
From Economist.com

OIL prices seem to hit a new peak each week. This is good news for governments which take a cut of revenues. And coffers will swell further as companies explore new sources of oil that had previously been too pricey to extract, such as oil sands in Alberta, Canada. The province's government recently announced an increase in royalties from 47% to 55% of net revenues in 2010. But this is still a relatively small share compared with many countries. The tax man in Norway, Russia and Libya takes over 70% of revenues.

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Greenspan Bitch Slaps Bush

According to the Wall Street Journal in his new biography ex Fed Chairman Greenspan, a follower of Ayn Rand, bitch slaps the Bush regime. Too bad he didn't say this when he was still Fed Chairman.

Mr. Greenspan, who calls himself a "lifelong libertarian Republican," writes that he advised the White House to veto some bills to curb "out-of-control" spending while the Republicans controlled Congress. He says President Bush's failure to do so "was a major mistake." Republicans in Congress, he writes, "swapped principle for power. They ended up with neither. They deserved to lose."

Mr. Greenspan discovered that in the Bush White House, the "political operation was far more dominant" than in Mr. Ford's. "Little value was placed on rigorous economic policy debate or the weighing of long-term consequences," he writes.

And interestingly he takes no blame for the current housing crisis sub-prime melt down that he created when he was fed chairman.

Many economists say the Fed, by cutting short-term interest rates to 1% in mid-2003 and keeping them there for a year, helped foster a housing bubble that is now bursting.

Instead he blames communism, or at least the melt down of the Soviet Union.

He attributes the housing boom to the end of communism, which he says unleashed hundreds of millions of workers on global markets, putting downward pressure on wages and prices, and thus on long-term interest rates.

So it was not the Fed that brought down interest rates, or created the global capitalist boom rather it was the devolution of the Soviet Union and the massive amount of unemployed workers available world wide to drive down wages.

The wave of migrant workers now flooding Europe, like those flooding into America, created the housing boom, by being a cheap source of construction labour and as consumers of the housing.

Mr. Greenspan returns repeatedly to the far-reaching importance of communism's collapse. He says it discredited central planning throughout the world and inspired China and later India to throw off socialist policies.

As well as cheap labour in the new fordist economies of China and India, especially the formers transformation from state capitalism to monopoly capitalism directly impacted on the American and global markets more than anything he and his monetarist pals did.

Confession is good for the soul. Ironically that confession fits classic Marxism more than it does the wacky ideology of his idol Ayn Rand.

And here is another irony that the joy expressed by the monetarists over the transformation of state capitalist economies to fordist monopoly capitalism will result in more inflation, their bugaboo.

In coming years, as the globalization process winds down, he predicts inflation will become harder to contain. Recent increases in the price of imports from China and a rise in long-term interest rates suggest "the turn may be upon us sooner rather than later."

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America's Debt Economy

America's boom economy is a debt economy, based on consumer credit thus consumer debt. Americans have financed the boom by mortgaging their homes. Even free market, gold bug, libertarians get it.

When a society is stable and prosperous, you can cast your lot along with everyone else and prosper along with your neighbours. That was the situation in the United States and Europe after WWII. Almost everyone became richer.

But since the mid-70s…it has been harder. In America, for example, hourly wages of working men have gone nowhere. And since the money in which wages are paid has been cut loose from gold, it is hard to know what anything is really worth…hard to keep track of what you have…and hard to hold onto it. The dollar, for example, lost half its purchasing power during the short time when Alan Greenspan was chairman of the Federal Reserve.

More recently, the bubble economy of the 21st century has been rewarding certain groups of elite traders and financial mavens, while punishing the average person with higher debt - personal, mortgage, and governmental. Soon, average investors will be hit hard too…and average homeowners…and average consumers.

Bill Bonner, The Daily Reckoning Australia

And gosh who is carrying America's debt? Why China of course. And if they cash in their chips well......

“China has accumulated a large sum of US dollars,” said He Fan, an official at China’s Academy for Social Sciences. He wasn’t exactly speaking for the government. But he was clearly articulating what’s on everyone’s mind. “Such a big sum,” he continued, “of which a considerable portion is in US Treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency.” But…?

“Russia, Switzerland, and several other countries have reduced their dollar holdings. China is unlikely to follow suit…as long as the yuan’s exchange rate is stable against the dollar. The Chinese Central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar.”

Well then, there you have it. US Treasury Secretary Henry Paulson has pushed China to allow the yuan to appreciate, driven by nationalist and protectionist sentiments in the US Senate. China knows the US Congress is keen to act, and blame the foreigner in an election year for American economic woes. Its well-timed reminder of the leverage it has over the dollar is a warning to the Americans to be careful what they ask for.

Yes, it sure looks like China has announced to America what it has known all along. Its investment in US Treasuries, and the support that offers both to the American dollar and the American consumer, were always driven by what was best for China. And what’s best for China now? Well, we don’t know for sure. But buying the US dollar doesn’t seem look a good idea for anyone right now. Selling it, on the other hand, or trading it for tangible assets…that seems like a much better idea.

Will America be sent to debtors prison?

Or just face foreclosure from their global competitor and lender of first choice.


SEE:

China Burps Greenspan Farts Dow Hiccups

Wall Street Deja Vu

Housing Crash the New S&L Crisis

Turning Lead into Gold

Goldbug

Petro Dollars and U.S. Debt

Housing Bubble



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