Call this a case of the pot calling the kettle black, McCain calls Obama's economic policies socialist Yesterday on Meet the Press McCain admited his own home mortgage buy back plan originated in the 1930's under FDR, and was originally proposed by Hillary Clinton. Now who is a socialist?
MR. BROKAW: But there, there is this continuing use...
SEN. McCAIN: ...I feel that...
MR. BROKAW: ...of the phrase "socialism." How would you describe the $700 billion bailout that has the United States government buying shares in American banks, in effect nationalizing those banks to a degree, and even your own mortgage plan of spending $300 billion to buy bad mortgages from banks, having taxpayers who have done the responsible thing, in effect, subsidize people who've done the dumb or wrong thing?
SEN. McCAIN: Because we are in a financial crisis of monumental proportions. The role of government is to intervene when a nation is in crisis. A homeowner's loan corporation was instituted in the Great Depression. They went out and they bought people's mortgages, and, over time, people were able, then, to pay back those mortgages. And the Treasury actually made some money.
This Treasury in this administration is spending its time bailing out the banks. The cause of the crisis was the housing crisis, as we know. And how--home values, as long as they continue to decline, then we're not going to see a turnaround in this economy. A lot of other things have to happen, have to happen, but at least let's understand that we ought to keep people in their homes. That's the American dream. And they say now that maybe they're going to address that problem. Let's address it first. And so when a, when a nation is in crisis, that's when a government has to intervene.
Now, a lot of the times you were talking about, 2004, other times, times were pretty good overall. You had different--you have to have different roles of government in different times. I'm a fundamentally--obviously, a strong conservative. But when we're in a crisis of this nature, that's when government has to help. That's, that's what, that's what our fundamental belief--the reason why we have governments. In times of crisis, we go in and we try and help the people, especially in this situation where they're the, the victim of a drive-by shooting by excess, greed and corruption in Washington and Wall Street. And again, I and others said we have to have legislation to rein it in. Senator Obama didn't lift a finger.
MR. BROKAW: Well, you did--you made your comments about Fannie Mae and Freddie Mac at the time of the accounting issue, when that was first raised. Can you cite a time...
SEN. McCAIN: In, in reality, we, we proposed legislation and made a statement that said, "Look, it's not just the accounting, this whole process is going to lead to disaster." I'd be glad to provide you with the letter.
MR. BROKAW: Let me ask you quickly about your $300 billion bailout of, of mortgages.
SEN. McCAIN: Hm.
MR. BROKAW: Some people have said, look, if there's a homeowner out there who's done the irresponsible thing...
SEN. McCAIN: Mm-hmm.
MR. BROKAW: ...and a bank is looking at that foreclosure and saying, "Hey, I don't have to work this out. I can just get the government to pick it up," why should a taxpayer in Waterloo, Iowa, or in Akron, Ohio, have to subsidize somebody who has done the dumb, wrong thing?
SEN. McCAIN: Well, in simplest terms, if their neighbor next door throws the keys in the living room floor and leaves, then the value of their home is going to dramatically decrease as well. And again, this has been done before. As I said, during the Great Depression and...
MR. BROKAW: And that's when Republicans called it socialism under FDR.
SEN. McCAIN: Well, look, in the Great Depression, there were some things that worked and some things that didn't work. But for the government to do nothing in the face of a massive crisis of proportions that we have not seen, I mean, it's hard for us to imagine how, in, in retrospect, how serious the Great Depression was, but the fact is that Senator Obama, by the way, opposes that, that; and I want to use some of the $750 billion to go and buy those mortgages and that, I think, will stabilize the market. It's not the only thing that needs to be done, but I think it's a vital first step so Americans can realize the American dream.
SEE:
No Austrians In Foxholes
tags
Great Depression, John McCain, market crash, free trade, Republicans, recession,
Showing posts with label sub-prime. Show all posts
Showing posts with label sub-prime. Show all posts
Monday, October 27, 2008
Friday, October 24, 2008
No Austrians In Foxholes
The old joke goes there are no athiests in foxholes. With the crash of international financial capitalism there are no Austrians in foxholes. Capitalism rushes to the embrace of it's state to bail it out. Everyone now accepts that State Capitalism resulted from the previous Great Depression and in order to avoid another one, the State is required to save the financial market. Some American libertarians and conservatives decried the state bail out of the banks, but no rational self interested capitalist was listening to them.
Nor contrary to some wags were they thumbing through the Communist manifesto to find a solution. They simply were returning to their Keynesian roots, apologizing abjectly for their folly of declaring him dead and useless.
Suddenly the darlings of the neo-cons, Ayn Rand, von Mises and Hyaek, were no longer the belle's of the ball. They once again quickly became relegated to the dustbing of history. Once again an anomaly of booming capitalism, a joyful ideology for those who embraced the greed of an unregulated market, an excuse to line pockets of the wealthy while ignoring the neccisity of producing real value; goods, services, infrastructure. Today the bankers and financiers are now fully fledged Keyensians.
In the Nouvel Observateur weekly, columnist Jacques
Julliard rejoiced that France was no longer hearing “diatribes” against its
“archaic” system.“Where have the (economic)
liberals gone?” he asked. “Since Bush nationalized the American banking system
we don’t hear from them anymore.
Even the most stalwart follower of Ayn Rand has admitted the failure of her ideology.
Alan
Greenspan is having a crisis of faith.
The former chairman of the Federal
Reserve and long-time deregulator admitted to U.S. lawmakers yesterday he "made
a mistake" in assuming banks could self-regulate the complex derivatives
market.
It was an about-face for Mr. Greenspan, a diehard supporter of
deregulation. He was a close friend of Ayn Rand, the most notable of
libertarians who champion the individual over the state. Yesterday, he threw her
theories under the bus, but it was no shock to Ms. Rand's followers.
It is in fact startling to hear the right wing President of France sounding like a socialist, but not unexpected given the gravitas of the current crisis.
"The
idea of the all-powerful market that must not be constrained by any rules,
by any political intervention, was mad. The idea that markets were always right
was mad," Mr Sarkozy said. "The present crisis must incite us to refound
capitalism on the basis of ethics and work & Self-regulation as a way of
solving all problems is finished. Laissez-faire is finished. The all-powerful
market that always knows best is finished," he added.
In fact it appears that the only ones proclaming the joys of unregulated markets are those from the Eastern Bloc, former communists and socialists who have never experienced the joys of American capitalism in all its gory glory.
In a
letter published on Tuesday by the daily Mladá fronta Dnes, Czech
President
Václav Klaus says that the global financial crisis did not result
from
insufficient market regulation, but, on the contrary, from excessive
government
interventions and increasing public spending.
According to
Klaus, there is a
risk that the rescue packages proposed by some governments
will turn the
European banking system into a partially state-owned and
centrally regulated
sector.
Ironic that. He sounds like Bush, Paulson, and Greenspan prior to the crash. They now have abandoned their faith in self regulated markets, and have embraced the need for state capitalism; a regulated capitalism supported by huge investments of public funds.
"I
know many Americans have reservations about the government's
approach,
especially about allowing the government to hold shares in private
banks. As
a strong believer in free markets, I would oppose such measures under
ordinary circumstances. But these are not ordinary circumstances," Bush
said.
But in reality the state promoted the ideals of the financial and monopoly capitalists as their own, they did their bidding, even as they do it now. Its about power in and over the markets. There never was an unbridled capitalism of small self employed artisans, which is the libertarian ideal, in fact capitalism is not about work or business, but about accrual of capital for its own sake.
Whether it was Keynes and the social contract after WWII or the shift towards monetarist policies and free trade in the seventies, eighties and ninties, it was all done by the capitalist state, in order to maintain and stabilize capitalism.
The mistake made by the left and the right was to assume that state capitalism was 'socialism'.
This mistaken link between public ownership and socialism was the result of the ideologues of the 2nd International, who adovcated that capitalism would evolve into socialism, that is public capitalism would arise from private monopoly capitalism.
After the Bolshevik revolution, and the subsequent Great Depression, capitalism was in a historical crisis, its old models no longer sufficient to meet the demands of those who create capital, the working class. Class war was on the horizon, the final death knell of capitalism was being wrung by a mobilized militant working class and by the failure of financial capitals coinciding.
The capitalist state was reformed to meet this crisis,based on variations of models of Keynes General Theory. State Capitalism is the highest form of capitalism, and that is what Randites and Austrian School apologists forgot.
Is this ciris out of the ordinary as Bush claims? Was i unpredicatable as Greenspan and Volker claim. Why no. Many pundits have pointed ot the similarities of this crash to those in the past; some going as far back as the Great Crash of 1873 in the U.S., the Great Depression of 1931-33, the 1973 post Viet Nam war crash.
What do all these crashes have in common? They occurred in relation to rapid industrialization of economies during and after large scale wars. In the case of 1873, it occurred after the civil war destroyed the last of the small scale artisinal base of American industry replacing family shoe making businesses and the like with large scale factory production.
The Great Depression occurred after WWI and the 1973 crash occurred as a result of America's incurssion into Viet Nam.
At the begining of the Bush regime in the U.S. the Republican government went from having a surplus to having a deficit. And those wags on the right, the very same neo-cons who a decade before had deonounced government deficits that led to expanded public sector infrastructure growth, now were cheering on the Bush government to expand its deficit especially when it came to planning for war against Afghanistan and then Iraq.
The wat in Iraq led to a government deficit that dwarfs those of the seventies and eighties.
That is the elephant in the room. America celebrated like it was 1929 for eight years under Bush, while sending their sons and dughters to fight in a foriegn war. There was no war rationing, no draft call, no need to commit by Joe or Jane Yank to Bush's war. So it was party time back home.
America also ended it dominance in manufacturing and actual production during the Reagan era. As we entered the new millineum right wing libertarian mags like Reason praised the end of America's dominance in production claiming the new capitalism in America would be based on service sector jobs.
And they were partially right. With contracting out and offshoring an essential part of the New World Order of the WTO and expanding globalization of capital, America now found itself no longer manufacturing goods at home, but buying them at WalMart from newly emerging fordist economies in Asia.
Americans laid off in manufacturing ended up in low paid jobs selling products they once made at the local WalMart. America now relied upon its citizens to produce capital not through manufacturing but through consumption.
America made credit easily available, and American's liquidated their savings in an orgy of spending that kept America going for the past eight years.
Was this crash unexpected? Of course not. It began a year ago, but Bush, Paulson, Greenspan, Bernake, and the right wing neo-cons were in denial. I have blogged as have others predicting this crash. That it would be as serious as the Great Depressions of 1873 and 1933 was also not unexpected, nor was the fact that the monopoly and financial capitalists flight back into the safe arms of the Nanny State unexpected.
There are no Austrians in foxholes when the economy melts down. Ideology is tossed out and capitalists and their politicians once again embrace state capitalism to bail them out.
SEE:
CRASH
Black Gold
The Return Of Hawley—Smoot
Canadian Banks and The Great Depression
Bank Run
U.S. Economy Entering Twilight Zone
Tags
asset-backed commercial paper ,, goldhomes, mortgages, housing, bubble, US, economy, oil prices, sub-prime mortgage, Wall Street, crash, recession,Bernanke, Inflation, Staglation, Stock-Market, US, Federal-Reserve-Chairman, Oil, gold, commoditiesSmoot-Hawley, protectionism, tariffs, Herbert Hoover, U.S., U.S. economy, Canada, Great Depression, John McCain, market crash, free trade, Republicans, recession,
Tuesday, March 18, 2008
Crash
While President Bush and his fan club over at Fox Business News refuse to admit America is in a recession the economists have moved on from fears of stagflation to absolute terror;
Wall Street fears for next Great DepressionIndependent
But there's no mistaking the mood within the US Federal Reserve at the moment. Pessimism was replaced by fear months ago. While the economy is moving inexorably towards a slowdown, a high-speed train wreck is taking place on Wall Street.
It is that combination that has scared the living daylights out of the Fed's hierarchy and prompted them into a history-making bail-out of the Wall Street broker Bear Stearns. To put the weekend's action into context, this is the first time since the Great Depression that the US central bank has funded the rescue of a financial institution that wasn't a regulated, deposit-taking bank.
Financial markets turmoil stirs economists' memories of 1929 crash
"The threat of contagion and wholesale breakdown on a scale of 1929 is real," said University of Maryland business professor Peter Morici."The real questions are - which of the big banks will be next to fail? How many more banks will fail? Will the whole system turn to panic if Citigroup (another troubled bank) unwinds?"
Harvard economist Martin Feldstein said the U.S. economy could suffer the worst recession since the Second World War.
Many economists now believe the U.S. economy has already slipped into negative territory,
Ben Bernanke has likened the Great Depression to the Holy Grail of macroeconomics – an experiment in unravelling the mysteries of global economic collapse.
As an academic specializing in the Dirty Thirties, the former Princeton University economist ultimately concluded that U.S. banking authorities botched the Depression by letting panicked runs on banks wreck the real economy.
Years from now, a new generation of academics may similarly try to draw lessons from how Mr. Bernanke, now the U.S. Federal Reserve Board chief, handles the great credit collapse of 2007-08.
By running to the rescue of investment banks and opening up the interest rate spigot, Mr. Bernanke is eager to avoid the same problems he dissected in his seminal 1983 paper, “Non-monetary effects of the financial crisis in the propagation of the Great Depression.”
SEE:
Black Gold
The Return Of Hawley—Smoot
Canadian Banks and The Great Depression
Bank Run
U.S. Economy Entering Twilight Zone
Tags
asset-backed commercial paper ,, gold
homes, mortgages, housing, bubble, US, economy, oil prices, sub-prime mortgage, Wall Street, crash, recession,
Bernanke, Inflation, Staglation, Stock-Market, US, Federal-Reserve-Chairman, Oil, gold, commodities
Smoot-Hawley, protectionism, tariffs, Herbert Hoover, U.S., U.S. economy, Canada, Great Depression, John McCain, market crash, free trade, Republicans, recession,
Saturday, February 16, 2008
Insurance Woes and Whines
Manulife is Canada's largest insurer. Approximately 64 per cent of its earnings are generated in the United States and Asia. Smaller rival Sun Life faces a similar predicament with about 52 per cent of its earnings originating from the U.S., U.K. and Asia.Insurance companies used to be the most risk adverse and conservative of financial institutions. However with the shift to globalization of the marketplace in the eighties and nineties from production to FIRE (financial services, insurance, real estate,) this all changed. A renewed financial market dominated the market, as it once had prior to WWI, the result of this financial exuberance, and shift from investment in production to investment in investment instruments bailed out New York and London from their Reagan/Thatcher excesses and declines. In doing so insurance companies as well as the banks and other financial businesses exposed themselves to the dangers of the balloon and bust market. Chickens, home, roost.For the October-December quarter, Sun Life reported earnings of $555 million or 97 cents per share. That compared with net income of $545 million or 94 cents per share for the same period in 2006. "This quarter was also marked by significant market turbulence," McKenney said.
Chief executive Donald Stewart said that volatility would likely affect the industry's outlook in the near term. Echoing those sentiments, Manulife CEO Dominic D'Alessandro suggested that "unsettled markets" would likely affect wealth businesses.
Sun Life also disclosed it has $84 million in direct exposure and $961 million in indirect exposure to monoline bond insurers. Those companies, which provide insurance against default in securitized debt, have become a source of worry because certain firms have had their credit ratings downgraded.
Chief investment officer Jim Anderson said Sun Life's direct exposure to monolines is with two insurers that are "AAA rated with a stable outlook." Its indirect exposure is to insurers with "investment grade" ratings, adding most of its exposure is in the U.K.
Just as people meet and authorize someone from among their own number to take specific action on their behalf, so commodities must meet to authorize a single commodity to confer full or partial citizenship in the world of commodities. The act of exchange is the occasion for such a meeting of commodities. The social activity of commodities on the market is to capitalist society what collective intelligence is to a socialist society. The consciousness of the bourgeois world is concentrated in the market report. It is only after the successful completion of the exchange that the individual can have any insight into the process as a whole, or any guarantee that his product has satisfied a social need, as well as the incentive to begin his production anew. The object which is thus authorized by the common action of commodities to express the value of all other commodities is – money. The authority of this particular commodity develops along with the development of the exchange of commodities.
Finance Capital, Hilferding 1910
SEE:
Lenin Was Right
Petro Dollars Bail Out The CITI
Bank Smack Down
U.S. Economy Entering Twilight Zone
Lenin's State Monopoly Capitalism
40 Years Later; The Society of the Spectacle
Commodity Fetish a Definition
State Capitalism in the USSR
Plutocrats Rule
The Right To Be Greedy
Social Credit And Western Canadian Radicalism
It's the Labour Theory of Value, stupid
China: The Truimph of State Capitalism
Deconstructing Hayek
Social Insecurity- The Phony Pension Crisis
tags
taylorism,fordism, NEP, state capitalism, state monopoly capitalism, monopoly capitalism,
liberalism, state, Anarcho-Capitalism, libertarian, Von Mises,anarchism,, gold bug,, gold,, Albert J. Nock,
Bemjamin Tucker, Liberty, libertarian, anarchism, invdidualist-anarchist, Rothbard, Austrian School of Economics, mutualism,
homes, mortgages, housing, bubble, US, economy, Canada, sub-prime mortgage, Wall Street, crash, recession,
China, Greenspan, correction, capitalism, Rothbard, Keynes, Galbraith, stocks, markets, capitalism
Friday, January 25, 2008
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 andWhy 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.
![[gorge chart]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_tRGaNAOuSP5HOM0rYTE6GbgpoP8hLJ1FR-HhNNihzvB7AyjKubKxPZMUHd0t8JJV1H3Q_L9L6yDZskhhIDtSEVDhB3oXqZ_yjJAXq9ybwusbaqq249pag4VRN-mJFoCy3UFCNjKNV44wwiTjx5cg=s0-d)
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? |
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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Monday, January 21, 2008
What Goes Up...
Must come down. And of course its not a recession...pleads the powers that be...it's a correction.......or maybe it's just fortunes fate (being lady luck and her magick number seven).....actually it's worse than either a correction or recession it's pending stagflation.
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Bernanke, Inflation, Staglation, Stock-Market, US, Federal-Reserve-Chairman, Oil, gold, commodities
Toronto Stock market takes biggest one-day plunge in seven years
TSX suffers worst week in seven years
Stock markets sustain even more losses Friday
Where to find a foothold amid downward spiral
Stock markets crash, Sensex tanks 1440 pts
Hindu, India -
Mumbai (PTI): The stock markets went into a downward spiral at mid-session on Monday, with across the board selling pressure that shaved off 1440 points ...
MARKETS CRASH ACROSS EUROPE Experts Warn of Stock Market Hysteria
Spiegel Online, Germany -
The trigger for the market crash was the news from WestLB on Monday morning. Over the weekend, the bank had to admit to a billion-euro capital requirement ...
World Stock Markets Crash
Arab News, Saudi Arabia -
DUBAI/LONDON, 22 January 2008 — Global stock markets plunged yesterday, with Tokyo tumbling to its lowest level in more than two years as US President ...
US Stock Markets Crash and Burn Whilst The Fed Fiddles
US Stock Markets - Near Term Bottom or Waterfall Crash?Hauntingly Familiar
Here we are once again, suddenly embroiled amid a frenzy of financial crisis, and looming bail-out interventions.The jury is still out as to whether or not this crisis will turn out to be “the big one” that will take down the entire house of cards.
Inevitably, the day will come when no form of economic stimulus or monetary policy interventions will be sufficient enough to provide remedy to the decades of sub-standard stewardship rendered by our elected officials.
Until such a day of reckoning arrives, we can not discount the possibility that the present cast of self-perceived masters-of-the-universe and their monopoly stronghold, which is rapidly fracturing, will prevail once again.
The 3 Forces Behind a Market Crash
Back in 1934, Benjamin Graham, the creator of securities analysis, wrote that there are three forces behind a market crash.
- The manipulation of stocks.
- The lending of money to buy stocks.
- Excessive optimism.
Let's assess the level of each factor today.
This article was originally published on Feb. 15, 2007. It has been updated.
Post-mortem: Why did the markets crash?So, what caused this bloodbath? While the first prognosis of the crisis was that fears of recession in the US brought in the market crash in India, some experts hinted that the markets might be entering a phase of consolidation.
Experts point out that the market movements are based on internal, technical parameters. "The current movements have been caused by margin pressure and heavy selling by the FIIs in the face of bad global clues," market analyst Ashwini Gujaral says.
The global cues were very weak over the weekend. The European markets declined quite heavily on Friday, while the US indices underwent a milder fall. Asian markets were down heavily on Monday morning and there was enough indication that another global sell-off was under way.
SEE:
Black Gold
U.S. Economy Entering Twilight Zone
Tags
asset-backed commercial paper ,, gold
homes, mortgages, housing, bubble, US, economy, oil prices, sub-prime mortgage, Wall Street, crash, recession,
Bernanke, Inflation, Staglation, Stock-Market, US, Federal-Reserve-Chairman, Oil, gold, commodities
Friday, January 11, 2008
Wall Street Mantra
Repeat after me; there is no recession, there is no recession, there is no recession...
Global impact: Recession? What recession
US Treasury's Paulson downplays talk of recession
Bank economists foresee slackening economy this year, but no recession
Recession will hit Australia, says Goldman
Japan recession fears on the rise
Recession fears as manufacturing drops
Times Online, UK -
Russia threatened as recession looms in US
Odds of recession hitting Canada and US increasing, forecast suggests
Economist fears 'nasty' recession headed our way this yearUSA Today
UPS Chief Talks About Recession Risk
US economy 'heading for recession'
Recession fears looming larger over White House race
Singapore shares end morning flat as US recession fears weigh on ...
Euler Hermes Chief Economist: US Economy On 'Brink of a Recession'
Unemployment Up, Stoking Recession Fears
Macy’s 7.9% fall reinforces recession fears
UN Says US Economy's Housing Slowdown Risks Global Recession
Wall Street lower as recession jitters weigh
Recession Fears Gain Credit From Capital One
FACTBOX: US recession risks rising
Economist: 70% chance of recession
Deflation Economic Time-bomb As US Moves Towards Recession
Greenspan's Reputation at Risk as Recession Odds Grow
SEE:
asset-backed commercial paper ,, gold
homes, mortgages, housing, bubble, US, economy, oil prices, sub-prime mortgage, Wall Street, crash, recession,
Global impact: Recession? What recession
US Treasury's Paulson downplays talk of recession
Bank economists foresee slackening economy this year, but no recession
Recession will hit Australia, says Goldman
Japan recession fears on the rise
Recession fears as manufacturing drops
Times Online, UK -
Russia threatened as recession looms in US
Odds of recession hitting Canada and US increasing, forecast suggests
Economist fears 'nasty' recession headed our way this year
US economy 'heading for recession'
Recession fears looming larger over White House race
Singapore shares end morning flat as US recession fears weigh on ...
Euler Hermes Chief Economist: US Economy On 'Brink of a Recession'
Unemployment Up, Stoking Recession Fears
Macy’s 7.9% fall reinforces recession fears
UN Says US Economy's Housing Slowdown Risks Global Recession
Wall Street lower as recession jitters weigh
Recession Fears Gain Credit From Capital One
FACTBOX: US recession risks rising
Economist: 70% chance of recession
Deflation Economic Time-bomb As US Moves Towards Recession
Greenspan's Reputation at Risk as Recession Odds Grow
SEE:
Black Gold
U.S. Economy Entering Twilight Zone
Tagsasset-backed commercial paper ,, gold
homes, mortgages, housing, bubble, US, economy, oil prices, sub-prime mortgage, Wall Street, crash, recession,
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