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Global Economy - acharya - 08-26-2008
<b>The quest for a neo-liberal agenda</b>
Global Economy - acharya - 09-09-2008
<b>A $75 trillion fright fest</b>
Eight megahorror debts chilling America
By Paul B. Farrell, MarketWatch
Global Economy - acharya - 09-14-2008
<b>Learn From U.S. to âSave Marketâ</b>
<b>Financial Rescues Show That Faith in Free Market Is Shaken</b>
Global Economy - acharya - 09-14-2008
<b>No Deal Reached Yet to Decide Lehman's Fate</b>
<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->As of Saturday afternoon, Barclays, the U.K.'s third-largest bank in terms of market value, appeared to have more interest in pulling off a deal for Lehman's good assets. At about 3 p.m. on Saturday, Barclays President Robert E. Diamond Jr. was seen entering the New York Fed's employee entrance on Maiden Lane, carrying a briefcase.
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"Unless something is settled, it's going to be a bloodbath Monday," said this person.
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Global Economy - acharya - 09-15-2008
<b>Lehman talks resume, Barclays pulls out</b>
Global Economy - acharya - 09-15-2008
<b>Greenspan: Other big U.S. finance firms may fail
</b>
Sun Sep 14, 12:33 PM ET
WASHINGTON (Reuters) - Former U.S. Federal Reserve Chairman Alan Greenspan on Sunday said he suspected "we will see other major financial firms fail," but it did not need to be a problem.
ADVERTISEMENT
"It depends on how it is handled and how the liquidations take place," Greenspan said on the ABC program, "This Week." "And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers."
Greenspan also said it was a very bad idea to get rid of short selling even though stock in major financial institutions such as Lehman Brothers (LEH.N) and American International Group (AIG.N) have been beaten down in recent days.
In July, the U.S. Securities and Exchange Commission issued a temporary emergency rule to curb illegal short selling in 19 major finance stocks including Lehman and mortgage finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N), which have since been taken over by the government.
The SEC's emergency order ended in mid-August and the agency is not expected to reinstate the rule for those 19 firms or the rest of the market.
<b>
When asked whether the government should help Lehman the same way it helped Bear Stearns, Greenspan said the government is trying to do it in a different manner.
"When Bear Stearns was bailed out, it drew a line under that level of firm, implying that anything that was larger than that firm was capable of getting federal assistance," he said.</b>
"Now if you generalize that, it is very clear that that is an unsustainable situation in the financial markets and in the markets."
The Fed and Treasury Secretary Henry Paulson helped orchestrate JP Morgan's (JPM.N) takeover of Bear Stearns, complete with a $29 billion promise to absorb losses.
Greenspan also said the chances of escaping a recession was "less than 50 percent."
"I can't believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring.
(Reporting by Rachelle Younglai with additional reporting by James Vicini: Editing by Maureen Bavdek)
Global Economy - Guest - 09-15-2008
<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->Greenspan: Other big U.S. finance firms may fail<!--QuoteEnd--><!--QuoteEEnd-->
He created this mess. Start from future Oil trading without regulation, airlines bail out, relax lending etc. Whole financial world is blaming him, now he came out with word of wisdom.
Global Economy - acharya - 09-15-2008
<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->Â <b>
In Frantic Day, Wall Street Banks Teeter</b>
New York Times, United States - 41 minutes ago
By ANDREW ROSS SORKIN This article was reported by Jenny Anderson, Edmund L. Andrews, Eric Dash, Michael J. de la Merced, Andrew Ross Sorkin, Louise Story ...<b>
BofA Deal For Merrill, Good On Paper, Hinges On Management</b>
CNNMoney.com - 34 minutes ago
NEW YORK ---(Dow Jones)- The takeover by Bank of America Corp. (BAC) of Merrill Lynch & Co. Inc. (MER) marks another step forward for the "universal ...BAC - TSE:MLC - MER<b>
Bank of America to Buy Merrill Lynch for $44 Billion</b>
Washington Post, United States - 59 minutes ago
By Binyamin Appelbaum Bank of America has struck a $44 billion deal to buy Merrill Lynch, according to two people familiar with the negotiations, ...BAC<b>
Bank of America agrees to buy Merrill, report says</b>
BusinessWeek - 59 minutes ago
By MADLEN READ and TIM PARADIS Bank of America Corp. has agreed to buy Merrill Lynch & Co. for about $44 billion, or around $29 a share, according to The ...BAC - MER - TSE:MLC<b>
Bank of America Agrees to Buy Merrill</b>
TheStreet.com - 1 hour ago
After one of the most chaotic weekends in Wall Street history, Merrill Lynch(MER Quote - Cramer on MER - Stock Picks) agreed to sell itself to Bank of ...BAC<b>
Japanese financial markets closed for holiday</b>
International Herald Tribune, France - 28 minutes ago
AP TOKYO: Japanese financial markets were closed Monday due to "Respect for the Aged Day," a national holiday. The markets will reopen Tuesday. ...<b>
Bank of America Reportedly In Merger Talks With Merrill Lynch</b>
RTT News, NY - 45 minutes ago
(RTTNews) - Banking services provider Bank of America (BAC: News ) is reportedly in merger talks with troubled financial services firm Merrill Lynch & Co. ...MER - TSE:MLC - BAC<b>
Bank of America Skips Lehman, Buys Merrill Lynch</b>
Daily FX, NY - 32 minutes ago
Having reportedly backed out of talks to buy troubled bank Lehman Brothers, Bank of America was reported to have reached an agreement to purchase another ...BAC - LEH<b>
BoA said to reach US$44b deal for Merrill</b>
The Standard, Hong Kong - 1 hour ago
Bank of America Corp agreed to buy Merrill Lynch for about US$44 billion (HK$343.2 billion), a person with knowledge of the deal said, after shares of the ...BAC - LEH<b>
Fed Widens Collateral for Loans to Investment Banks (Update2)</b>
Bloomberg - 31 minutes ago
By Craig Torres and Scott Lanman Sept. 14 (Bloomberg) -- The Federal Reserve widened the collateral it accepts for loans to Wall Street bond dealers as the ...<b>
Purchase of Merrill Fills a Dream for a Bank</b>
New York Times, United States - 1 hour ago
By ERIC DASH Bank of Americaâs dream of dominating the brokerage business always seemed to elude it, even after it transformed itself from a regional bank ...
<b>
Lehman may face failure as Merrill sale reported</b>
Reuters - 1 hour ago
By Dan Wilchins and Jennifer Ablan NEW YORK (Reuters) - The ruptured US financial system was facing an unprecedented shakeup on Sunday that was expected to ...LEH - MER - TSE:MLC<b>
Hard Fall for a Venerable Firm</b>
New York Times, United States - 53 minutes ago
By LOUISE STORY Itâs the end of an era for Merrill Lynch, the brokerage firm that brought Wall Street to Main Street. As another venerable Wall Street firm ...
Nationâs Financial Industry Gripped by Fear
New York Times, United States - 54 minutes ago
By BEN WHITE and JENNY ANDERSON Fear and greed are the stuff that Wall Street is made of. But inside the great banking houses, those high temples of ...
<b>
BofA-Merrill deal to close in 3-4 months: report</b>
Reuters - 53 minutes ago
NEW YORK (Reuters) - The sale of Merrill Lynch to Bank of America is expected to close within three or four months, CNBC reported Sunday. ...<b>
No Reglatory Snags Seen For Bank of America,Merrill Deal</b>
CNNMoney.com - 1 hour ago
WASHINGTON -(Dow Jones)- A marriage between Bank of America Corp. (BAC) and Merrill Lynch & Co. (MER) would be a "strategic" union that's unlikely to face ...BAC - MER - TSE:MLC<b>
US Stock Futures Tumble on Concern Lehman to File Bankruptcy</b>
Bloomberg - 2 hours ago
By Allen Wan Sept. 15 (Bloomberg) -- US stock-index futures tumbled on concern Lehman Brothers Holdings Inc. will file for bankruptcy and add to banks' $514 ...LEH<b>
Wall St Wk Ahead: US banking woes seen hitting Wall St</b>
Forbes, NY - 1 hour ago
By Chris Sanders and Ellis Mnyandu NEW YORK (Reuters) - US stocks are seen opening sharply lower at the start of the week after last ditch efforts to save ...LEH - MER<b>
Lehman: The Media Meltdown</b>
Conde Nast Portfolio, NY - 26 minutes ago
What's happened to Reuters? The sober just-the-facts newswire seems to have let the chaos at Lehman brothers go to its head. This morning Reuters ran an ...LEH
<b>
Lehman Brothers Bankruptcy Would be Biggest in 18 years</b>
Gambling911.com, FL - 33 minutes ago
In one the most extraordinary days in Wall Street's in history, Merrill Lynch is near an 11th-hour deal with Bank of America to avert a deepening financial ...LEH - BAC<b>
Report: B Of A Mulls Merrill-Lynch Purchase</b>
WAPT, MS - 1 hour ago
NEW YORK -- In the face of a possible bankruptcy filing by Lehman Brothers, the Fed and Treasury are said to be pushing Bank of America to buy Merrill Lynch ...LEH - BAC<b>
Meltdown as bank collapses</b>
Independent, UK - 1 hour ago
By Stephen Foley in New York Wall Street banks were preparing for one of the most dramatic shake-ups in the finance industry's history last night as it ...<b>
Global banks pump $85bn into credit-starved market</b>
The Australian, Australia - 31 minutes ago
The $85.1 billion bail-out came as US regulators moved to protect customer assets held by Lehman Brothers, a 158-year-old investment bank, as the ailing ...LEH<b>
Bank of America in talks to buy Merrill Lynch</b>
Independent, UK - 1 hour ago
By Stephen Foleyin New York Bank of America's $40bn-plus takeover talks with Merrill Lynch represent a sudden about-face for the retail bank's chief ...BAC<b>
Lehman Shows How Hard It Is To Sell Stock In Wall Street</b>
CNNMoney.com - Sep 10, 2008
NEW YORK -(Dow Jones)- Lehman Brothers Holdings Inc. (LEH) demonstrated Wednesday that, for now at least, getting outsiders to invest in Wall Street is a ...LEH<b>
Nightmare on Wall Street</b>
Sydney Morning Herald, Australia - 37 minutes ago
Australian financial stocks plunged after Lehman Brothers failed to find a saviour over the weekend, raising the prospects of a fresh round of global ...<b>
Concerns About Banks Push Markets Lower</b>
New York Times, United States - Sep 11, 2008
By MICHAEL M. GRYNBAUM Stocks dropped immediately after the opening bell on Thursday as Wall Street remained on high alert about potential problems in the ...
AP Top News at 10:10 pm EDT
The Associated Press - 40 minutes ago
NEW YORK (AP) â What looked to be a failed plan to rescue Lehman Brothers may be triggering a stunning transformation of the Wall Street landscape on Sunday ...LEH - BAC<b>
Storm on Wall Street: US won't save Lehman; Merrill Lynch up for ...</b>
USA Today - 1 hour ago
The US government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to JP Morgan & Co. earlier this ...AIG - EPA:MLACO - LON:BPLE<b>
Wall Street's Wild Weekend</b>
Forbes, NY - 4 hours ago
Deal talk ricocheted across Wall Street Sunday at the same time it appeared efforts to save Lehman from liquidation had failed. Merrill Lynch (nyse: MER ...LEH - BAC - MER
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Global Economy - Guest - 09-16-2008
Must read - What he did.
<b>Bill Clinton, Glass-Steagall and the Current Foreclosure and Financial Crisis, Part One</b>
<b>Glass-Steagall Act</b>
Global Economy - acharya - 09-18-2008
From The Times
September 17, 2008
Wall Street is a financial Head-Smashed-In, where ego carries the hordes over the precipice
Carl Mortished: World business briefing
Head-Smashed-In is a buffalo jump in Alberta, Canada, a communal kill site where the Plains Indians drove herds of North American bison off the edge of a cliff. Over thousands of years, the Plains tribes developed the skill of goading buffalo towards a precipice. As the animals thundered towards the drop, those in front would try to stop but the sheer weight of the stampeding herd pressing from behind would force the buffalo over the edge.
Unesco has designated the buffalo killing ground a World Heritage Site. It seems odd to venerate a place that played a part in the near-extinction of those glorious animals. It is right to do so, however, because it tells us how the Plains Indians once lived in periods of food abundance, just as the abandoned trading floors at Lehman Brothers tell us how extravagant Americans and Britons lived by the reckless accumulation of debt in the early years of the 21st century.
Wall Street is as worthy of World Heritage Status as the bison boneyard at Head-Smashed-In. Americaâs financial centre is not yet extinct, but people are calling time on the investment banks. Two have failed â Bear Stearns and Lehman â and a third, Merrill Lynch, has been swallowed up by an old-fashioned lender, Bank of America, which fancied owning a big stockbroker.
In a matter of days, it has become the fashion to say that the investment bank model is dead. These free-standing institutions that combine corporate advice, lending, stock trading, underwriting and wealth management lack the comfort of millions of retail depositors â the advantage of Bank of America.
They must, therefore, borrow from other banks and, when credit markets stall, their elaborate gaming strategies in complex financial instruments become unsustainable. Soon, the oracles predict, the remaining investment banks Morgan Stanley and Goldman Sachs will disappear into the giant maws of dull high street lenders.
The regular supply of cash is a problem for investment banks, but it is not the root of the problem. The ownership of Merrill Lynch by Bank of America wonât insure against a further outbreak of excess. It will simply shift the risk of excess to the shareholders of Bank of America, who may not have bargained for it.
We can see the tensions between retail lending and fancy investment banking at UBS, which let its own tribe of pinstripes loose to play in the mortgage derivative markets, with catastrophic results.
We now know that the sub-prime securitised mortgage market was little more than a giant pyramid selling scheme in which simple transactions, loans to buy homes, were packaged, bundled, sold, refinanced and the credit risk insured by myriad institutions. None of the bankers who grabbed the passing parcels had any means of ascertaining the solvency of the ultimate borrowers, nor any idea of the true value of the bricks and mortar that underpinned the loans.
If we want to know why some bankers behave like bison racing to the cliff-edge, we need to remember where they came from. The guts of an investment bank is the broker-dealer model, the merging of two types of business: brokers â people who act as agents for investors, buying and selling securities on their behalf â and dealers â who act as principal, trading securities for their own account.
Three decades ago, brokers and dealers (the latter were known as stock jobbers in Britain) were separate partnerships, owned by the management whose personal wealth was on the line every day, in every trade. I remember visiting a jobberâs pitch in 1985 on the floor of the London Stock Exchange, where a lad barely out of school scribbled entries into a large, black ledger. He could mentally tot up his long or short position at feverish speed from a page of buy and sell orders.
Today, the books are electronic and the positions algorithmic, but the point is not a sentimental one. Todayâs broker-dealers have no skin in the game â they are staff and the bosses are staff. Their rewards in shares are a bonus, never a liability.
The Big Bang in London in the mid-Eighties and the earlier deregulation in New York transformed a business made up of ruthless individuals joined together by a merchantâs compact into a tower of corporate ego. Merchant banks, such as SG Warburg and Morgan Stanley, bought brokers and jobbers and the culture of personal ownership and personal risk quietly vanished.
Itâs difficult to imagine the boy on the exchange floor behaving like Jérôme Kerviel, the Société Générale trader who set fire to his bankâs balance sheet, and it is not just a question of scale or computers. It is about the corporate mindset that makes risk political, a struggle between managerial egos rather than a simple balance of good bets versus dangerous gambles. It is the difference between directorsâ service agreements â with generous severance terms â and joint and several liability.
Partnerships are run by people who know that their home is at risk if they get it wrong, but for Dick Fuld, the chief executive of Lehman, no such danger threatened. His greatest fear was losing face. Ego, not greed was what drove Lehman off the cliff and ego will put paid to Wall Street, too.
carl.mortished@thetimes.co.uk
Global Economy - acharya - 09-19-2008
US FINANCIAL CRISIS
<b>'The World As We Know It Is Going Down'</b>
<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->"I fear the government has passed the point of no return," financial historian Ron Chernow told the New York Times. "We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams."<!--QuoteEnd--><!--QuoteEEnd-->
<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->Republican Party presidential candidate John McCain had the most to say. On Monday, he said "the foundation of our economy" was "strong," adding that he opposed a government-led bailout of US insurer AIG. But now he's promising further government steps "to prevent the kind of wild speculation that can put our markets at risk." McCain's explanation for the current crisis: "unbridled corruption and greed."
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Global Economy - Guest - 09-19-2008
<b>U.S. Stocks Surge on Government Plan to Shore Up Markets, Short-Sale Curbs </b>
<b>Wachovia Shares Surge as U.S., U.K. Regulators Ban or Limit Short-Selling </b>
First good step.
Now we have to watch India, Pakistan, Russia, China, Saudi Arabia, Oman, Qatar.
China will be biggest loser.
Global Economy - acharya - 09-19-2008
<b>Central banks act to defuse financial crisis</b>
Admin - Edited added link
Global Economy - acharya - 09-19-2008
<b>Asia Rethinks American Investments Amid Market Upheaval</b>
September 18, 2008, 7:37 am<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->
âWhen the dust settles, I think Asia will come out ahead of the U.S.,â he said.
If cash is king during the current global financial crisis, then Asian governments and financial institutions are emperors. Chinaâs central bank alone has $1.8 trillion in foreign reserves. Those reserves grew $280.6 billion in the first half of this year â a pace of $64 million an hour.
Americans have a huge stake in what China does with that money. Foreign cash coming into the United States to buy American assets holds down interest rates by making plenty of money available for the federal government to borrow to cover its budget deficit, and for consumers to borrow so that they can afford imported cars, DVD players and other goods.
Commerce Department data released on Wednesday showed that the nationâs current-account deficit, the broadest measure of trade in goods and services, had a deficit of $183.1 billion in the second quarter.<!--QuoteEnd--><!--QuoteEEnd-->
Global Economy - acharya - 09-19-2008
<b>Ventilator to escalator: The intriguing dollar story</b>
S. Gurumurthy
From the third quarter of 2008, the dollar, which was sliding against almost all currencies, suddenly found itself on an escalator. Policy mechanics, and not market economics, explains the greenbackâs rise, says S. GURUMURTHY.
Here is a fascinating story. It was the US, in the early 1970s, that had redefined the rules of currency pricing and made it rest on economic fundamentals and free market mechanism. But today its currency is defying the very rules the rest of the world has adopted from it. Here is the curtain-raiser for the story. With its annual GDP growth averaging 3.3 per cent from 2003 to 2007, the US economy went a high growth curve. Indeed, the growth was driven by toxic sub-prime home loans and credit, yet it was high growth nevertheless.
Despite this, and because of high external and internal deficits, the US dollar depreciated by over 50 per cent against the euro and other European currencies, as also against crude and gold. The toxic sub-prime subterfuge came out in the open in end-2006 and turned into a financial tsunami by end-2007. By early 2008, the sub-prime tsunami and its giant waves began battering the US and the global financial system.
With the assets and liabilities of the investment banking firm Bear Stearns becoming part of the US Fed balance sheet in March 2008, and some six months later, the fourth largest investment bank Lehman Bros turning bankrupt and the US insurance giant AIG becoming the subsidiary of US Fed, the US economy, finance and the dollar are all in a spin.
Today the market consults astrologers on the fate of the US financial system, and its annexe, the global financial system. Yet the dollar, instead of crashing, has, after a 5-year fall, started appreciating â stunningly. Why? Read on.
More hard facts
First, a look at more hard facts that weigh the dollar down. The US is already heavily indebted â by over $12 trillion, almost a quarter of the global debt â to the rest of the world.
More, it still borrows at the rate of over $2 billion a day for its day-to-day expenses â comprising its internal and external deficits. The figure is more â $4 billion, says the EU Digest, published by Europe House, a non-profit organisation of Euro-US interests.
Commenting on the article âUS Fed Needs Global Watchâ which had appeared in this newspaper last December, the EU Digest said: âThe global current account deficit of the US is now larger than it has ever been, nearing $800 billion, almost 7 per cent of its GDP.
To finance both the current account deficit and its own sizeable foreign investments, the US must import about $1 trillion of foreign capital every year, or more than $4 billion every working day.
The situation is unsustainable in both international financial and domestic political (i.e., trade policy) terms.â
The EU Digest commended that the dollar depreciate further to correct the drift: âCorrecting it must be the highest priority for US foreign economic policy......The foreign exchange value of the dollar has to substantially decline to make a serious dent in the record US current account deficit of nearly $800 billion.â This was the state of the US economy as the year 2007 ended. The dollar fall continued as 2008 turned disastrous for the US economy.
The dollar seems to have obeyed the rules of economics till about the first quarter of 2008. The annual GDP growth in the first two quarters of 2008 was just 1.9 per cent, against the average of 3.3 per cent for the earlier five years.
This, The Guardian (of UK) said, was disappointing as the tax rebate of $93 billion given to boost the economy itself amounted to an annualised pace of 4 per cent!
Yet, from the second quarter of 2008, more significantly from the third quarter, the greenback, which was sliding against almost all currencies for the last five years, found itself on an escalator all on a sudden.
Sudden rise
In the last few months, it has appreciated by 13 per cent on a trade-weighted basis. It has gained 5.4 per cent against its main rival, the euro, and 2.2 per cent against the GBP. As this article is being written, the dollar has gained further against the euro, and also reversed its loss against the yen.
The excuse for the latest rise: the rescue of AIG by the Fed at a cost of $85 billion. Applying here the laws of market economics, the dollar should fall, not rise, as the market mechanism has failed.
The USâ economic fundamentals show how precariously the dollar is otherwise placed. The different indicators normally applied by the Fed for judging where the nationâs economy is heading and to decide whether to raise or to cut the Fed rate, demonstrably show, as of September 10, 2008 that the US economy was continuing to deteriorate.
In addition, some 13 of the 18 critical market and financial indicators, which also show deterioration, are: three credit market indicators of Dow Jones â credit default swap, credit card delinquencies, and mortgage delinquencies; six stock market indicators â DJ Industrial Averages, DJ Real Estate, DJ Financial Index, DJ Retail Index, S&P volatility, and market breadth; and three economic indices, including manufacturing, services, and services employment.
With these hard facts showing up at a click, it is not just the rules of economics, but also common sense, that would call for a fall, not the rise, of the greenback.
How, then, has a weak dollar turned strong in defiance of both economics and commonsense? The Financial Times wrote, on August 19, that âthe timing of the dollarâs appreciationâ is âhard to callâ; it âmay prove short-livedâ. Its comeback, the Times said, is ânot based on US fundamentalsâ, âbut on weaknesses elsewhere and weakening oil pricesâ.
The newspaper went on to add: âA faster appreciation of the Asian currencies still makes a lot of sense.â Obviously, the paper had not noticed that one of the important Asian currencies â the Indian rupee â far from rising, has lost almost 20 per cent against the dollar in the last eight months!
The real reason
A week later, on August 28, the Financial Times came out with an intriguing report that gave out the clue. It reported that, according to Japanâs Nikkei Online, the US, Europe, and Japan had discussed the possibility of âco-ordinated currency intervention to support the dollarâ at the time of the Bear Stearns crisis in March 2008.
The US Treasury, said the Times, refused to comment on the report. The report recalled how the US-European policy-makers were concerned at the persistent dollar weakness, and also how a crisis at the individual institutional level could trigger a disorderly plunge in the US currency, that could lead to disastrous consequences for the US and Europe.
Consistent with this view, at its regular meeting (April 11, 2008), the G-7 expressed concern âabout the sharp fluctuation in major currenciesâ and âtheir possible implications for economic and financial stabilityâ, and added that âwe continue to monitor exchange markets closely and co-operate as appropriateâ. This, the Times commented, âmarked a shift in international currency policy.â
Following the April meet, the US-EU officials told the Financial Times that they were united in their support for a stronger dollar. It was then that the US Fed chief, Mr Ben Bernanke, joined the US Treasury Secretary, Mr Henry Paulson, the Times said, in talking in public about the US currency. Till then, they would not, and did not, dare talk about the dollar.
Thus, policy mechanics, not market economics, explains the unexplained, and otherwise inexplicable, rise of the dollar now. It is from the April meeting of the G-7 and thereabouts that the dollar, that was on the ventilator, was put on the escalator and began rising without any economic rationale. Can anyone credibly claim that its appreciation is market-determined?
On the contrary, as the Financial Times story indicates, it is âinternational currency policyâ directed; perhaps, more appropriately, âinternational currency policyâ rigged â rigged by those who have high stakes in the value of the dollar that mediates the global economy. This is the dollar that the world has in trillions as its stock and investments!
Post-Script: No seer is needed to tell us how the rigged rise of the dollar has hit the Indian economy, and greatly neutralised the 35 per cent fall in crude prices with a 20 per cent fall in the rupee value, from Rs 39 to Rs 47 to a dollar. That is the subject for another story.
(The author is a corporate adviser. blfeedback@thehindu.co.in / comment@gurumurthy.net)
--------------
<b>
US Fed needs global watch</b>
After the Cold War ended, the US promoted globalisation in a big way. It opened its markets, cut tariffs and promoted cheap imports. The Fed also cut rates and printed more dollars. It thus promoted a global financial architecture by which an unwritten âsafety ruleâ has been enforced on central banks of other nations to hold their reserves in US securities. This structure is clearly unsustainable, argues S. GURUMURTHY.
First principles of monetary economics tell students why central banks are central to a nationâs economy. Central banks create money, the common tender without which no economy can function, and fix its price, namely, interest rates.
Applying this twin norm, is it correct to say that US Fed, which supplies the dollar to the central banks of other nations and decides at what rate it will lend dollars, is the de facto central banker of the world? The role of the dollar in the global economy will settle the response to this question. As reserve currency and as invoicing medium, as currency of investment and in forex transactions, the dollar issued by the US Fed dominates.
As per IMF data (2006) over 65 per cent of global forex reserves, (even 70 per cent plus in non-Euro areas) 41 per cent of global loans and 48 per cent of global deposits are held in dollar terms; 57 per cent of the US Treasury securities are held by Asian nations and 21 per cent by European nations; 53 per cent of US equities are held by Europeans, 26 per cent by Western hemisphere nations, 18 per cent by Asian nations.
Bank of International Settlements reveals that 43 per cent of all forex transactions are in dollar terms. Identical is global trade in dollar terms. The OPEC sells oil only in dollars. That the dollar as a currency is more global than a national, and as a central bank US Fed is more a global than a US entity, are manifest in one single fact. Namely out of the dollar stock of $800 billion created by US Fed from its birth in 1913 till now, only less than a third of it circulates in the US and more than two-thirds is exported outside the US.
This also confirms, as The Economist magazine derisively wrote some 15 years back, after the first Gulf War, that dollar printing press had become the most profitable business of US! So, non-Americans seem to need more dollars for business with and outside US, than Americans need the dollar for use in US or outside.
How did the dollar come to play this central role? In 1950s, thanks to the Bretton Woods formula, the greenback officially became the global currency. But, after the formula collapsed in 1971, the dollar lost its official status. But, for lack of an alternative, it became the de facto global tender.
With the end of the Cold War in 1991 the economic, political and military restraints and constraints it had imposed on the US eased. Moreover, the US emerged as unparalleled global power. Perhaps believing the scholars who counselled that the West â read the US â has finally emerged as the victor over the rest, the US, particularly the US Fed, went on a hype.
Globalisation, liberalisation
Convinced that its model had won finally and egged on by powerful global corporates, the US went gung-ho on globalisation and liberalisation of its economy. It also began exerting pressure on others, by itself and also through WTO, IMF, World Bank and the rest, to liberalise on its terms.
The US also took to liberalisation in a big way, mostly on domestic compulsions. The US government opened its markets, cut tariffs and promoted cheap imports. Matching it, the US Fed cut interest, printed more dollars. It printed an extra $400 billion in 12 years from 1996 to 2007, much more than it had printed in 82 years up to 1995. The idea was to provide cheap money to US households so that they could buy goods which cheap imports brought in. This combined agenda had had a telling effect. As US Fed cut interest rates from 8 per cent in 1990 to 1 per cent in 2001, the US households began spending beyond their income and their credit card debts shot up from $338 billion in 1990 to $2.46 trillion in 2007, even as their savings which was 9 per cent in 1990 turned negative in 2006.
The US current account deficit which aggregated to $300 billion for a whole 10 years from 1990 to 1999, jumped to $2.5 trillion for just five years from 2000 to 2004. Result: An indebted US government and indebted US households.
The dollar game
The unceasing cycle of the dollar game is like this. The Fed cuts interest repeatedly and US households slow, and then stop, saving.
The Fed digitally prints and supplies more dollars to enable the households to borrow and spend in malls. The malls import goods from China and elsewhere and sell them to the US households. The dollars created by US Fed and lent to households through credit cards fly to the countries exporting to the US.
The Fed brings the outbound dollars back, by borrowing them back from foreign governments, to bridge current account deficits. This borrowing by US Fed suits the foreign governments who, being always frightened of a situation like what East Asia faced in 1997, are compelled to maintain increasingly higher reserves in dollar form to defend their currencies.
The US Fed has, thus, promoted and supported a global financial architecture by which an unwritten âsafety ruleâ has been enforced on central banks of other nations to hold their reserves in US securities, very much like the Reserve Bank stipulation of SLR.
Whether the present reserves of $3.8 trillion is enough to assure safety no one can say. This is the dollar game in which the world, including the US, is caught like a bee that has fallen into honey pot! Is this global financial architecture sustainable? In one word, the answer is: NO.
But, how does the Fed see the unsustainable dollar game? Mr Ben Bernanke, now the chief of Fed and its Governor in 2002, could not be more open. He said âUS dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost.
By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.â (emphasis not in original).
The context for this statement was that the Fed rate at that time was 1.25 per cent below which it could not cut any further. Mr Bernankeâs idea of printing more dollars even risking its depreciation, to sustain or increase consumer spending in US, only affirms what the Fed has been doing from 1995, and the result of it is the accumulation of $3.8 trillion outside US.
But was Mr Bernanke bothered about the consequences of his threat to reduce the value of the dollar to nations which hold such huge reserves? Obviously not. His mandate is only to âattain the basic objectives of US economyâ, regardless of what happens to the global economy.
Decision-making
The Fedâs actions affect other nations, their currencies, their forex reserves and their valuation, their interest rates, and host of other monetary and non-monetary issues. But how does the US Fed take policy decisions on interest rates? On printing or threatening to print dollars and its timing and quantum?
This is what G. Edward Griffin, the author of The Creature From Jekyll Island: A Second Look at the Federal Reserve has to say on the unmonitored, secret decision making by the Fed: âDecisions are made at secret meetings. A brief report is release to the public six weeks later, but transcripts of the deliberations are destroyed. That policy was begun in 1970 when the Freedom-of-Information Act was passed. Not even the CIA enjoys such secrecy.â
Congressman Ron Paul, member of the House Banking Committee, had this to say about Griffinâs book âA superb analysis deserving serious attention by all Americans.â But actually it deserves serious attention by the whole world.
The President-led system in the US does not seem have the will nor political tenure long enough to correct the distortions in this informal financial rule setter of the world.
Its structure does not lend itself to political control. QED: Undoubtedly, the US Fed needs global watch, even a global watch-dog, as it seems to be answerable to none at home, including the US Congress.
(The author is a corporate adviser. His e-mail is guru@gurumurthy.net)
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Will the US remain US? Or become a neo-USSR?
The population of derivative products has grown to gigantic levels that is beyond the competence of any system, mind, or force to deal with.
S. Gurumurthy
The title is not to tease the reader. If the ongoing debate initiated by Martin Wolf, associate editor and chief economic commentator in Financial Times and Prof. Nouriel Roubini, professor of economics at New York University, is to be given a title, that could be this.
Wolf, whose Wednesday columns in FT are discussed by fifty most influential economists of the world, is a mainline economic thinker. Roubini, who has held different positions in US government, now occupies important seats in academia and runs Roubini Global Economics [RGE] Monitor, an influential Web site.
In July 2006 itself, Roubini had predicted that US was in recession. But, like others had, Wolf had ignored Roubini for nearly 20 long months. But, as the unfolding events were proving Roubini right, Wolf wrote [FT, February 18, 2008] that Roubini deserved to be taken seriously.
March towards disaster
Wolf also held Alan Greenspan, who had dismissed the housing issue âas not a bubble but a frothâ, wrong. Wolf pointed out how Roubini has [on February 5, 2008] predicted a 12-step march towards a âcatastrophicâ financial and economic outcome as a ârising possibilityâ.
In his column, Wolf recalled Roubiniâs 12-step recipe for disaster, including:
Housing recession that wipes out family wealth of $4-6 trillion, forces a million to surrender house keys to lenders, and turns home builders bankrupt;
Home loan losses that exceed the estimated $250-300 billion and, together with consumer loan losses, spread credit crunch across;
Top-rated credit insurers get downgraded, causing a further $150 billion loss;
Commercial property market melts;
A large bank goes bankrupt;
Big losses in leveraged buyouts, with hundreds of billions of dollars of bank funds stuck;
Corporate bond defaults force losses of $250 billions on credit default swap insurers and bankrupt many;
With meltdown of hedge funds delinked from central banks, further collapse of the stocks force huge fall in security prices;
Acute illiquidity dogs financial markets with jump in concern about solvency; and
âA vicious circleâ of deep recession makes financial losses âmore severeâ and âfinancial losses and meltdownâ make the recession âeven more severe.â
Roubini estimates $1 trillion loss in the meltdown. âIs this scenario at least plausible?â asks Martin Wolf, and answers, stunningly, âIt isâ. [This was on February 18. But the loss meter in March projects $3 trillions loss!] If this ânightmarish scenarioâ lasts for six quarters, Roubini warned on February 5, it would be too late for other nations to devise âpoliciesâ to âde-coupleâ from US.
But can the US Fed head off this danger? Roubini says ânoâ for many reasons. Two of them are important. One, the Fed can deal with liquidity, but, not solvency, which is the real issue. Two, the transactions-oriented financial system itself is in deep crisis. This second one is critical and needs some explanation.
Derivatives in control
The world of finance which Roubini calls as transaction-oriented system looks a bizarre, dollar jungle now. A peep into this mind-boggling labyrinth will unnerve even the most diehard among optimists. The world of finance today is controlled by derivatives. What is a derivative? âDerivatives are financial Weapons of Mass Destruction [WMD]â, ânow latentâ but âare potentially lethalâ. This is not socialist Fidel Castro, but, capitalist Warren Buffet speaking recently (on March 10, 2008). Yet, the most among those who count in the world seem unaware of this WMD. âPoliticians, senior executives, regulators, even portfolio managers have limited knowledgeâ about it, says an expert Web on derivatives. Derivative is a financial instrument whose value is not its own, but derived from something else, on some underlying asset or transaction, such as commodities, equities (stocks) bonds, interest rates, exchange rates, stock market indexes, why, even inflation indexes, index of weather!
The CDOs (collateralised debt obligations), by which the underlying US local subprime loans were palmed off to other continents, was, till the fraud was not out, a reputable credit derivative. So derivative is not only a WMD but also an ICBM, an Inter Continental Ballistic Missile, that hits across continents!
Also, the virtual derivative economy is gradually decoupling itself from the actual in quality as well as size. Hundreds of exotic derivative products have been innovated and innovations by the best minds are continuing.
Mind-boggling size
The population of these beastly financial products has grown to gigantic levels that is beyond the competence of any system, mind, or force to deal with. The sheer collective size of these modern financial beasts is terrifying. According to the Bank of International Settlements [BIS], the aggregate derivative positions of banks grew from $100 trillion in 2002 to â believe it â $516 trillions in 2007, that is over 500 per cent in five years!
Yet they do not appear in bank or corporate balance sheets. Some of the vital actuals seem pygmies in comparison to these virtuals. The total derivatives are more than ten times the global GDP [$50 trillion]; some seven times the worldâs estimated real estate value [$75 trillions]; more than five times the worldâs stock values [$100 trillions]; more than 33 times the US GDP [$15 trillions] or the US money supply [$15 trillion]; 172 times the US federal budget [$3 trillion] â it can go on. The size of the virtual economy is indeed petrifying. Worse, it unpredictably targets, yet accurately eliminates, the distant and the unwary as the CDOs did.
A decade earlier, Long Term Capital Management [LTCM] a hedge fund co-promoted by two Nobel laureates, collapsed. Its loss of $5 billion was peanuts compared to the trillion dollar-plus loss that is forecast now. Yet the LTCM fall nearly snuffed out the global monetary system. The derivative economy was much smaller then. When billions could devastate the world market then, what could trillions not do now? It is so huge now that, no one, not even all governments and central banks in the world put together, can control this huge and growing population of derivatives. This is what Akio Morita, the former Sony Corporation chairman, told the Group-7 leaders as far back as 1993, when the size of the derivative population was far less. With the derivatives growing so malignant, it is not the actual finance which controls its derivative, but, the other way round â the virtual controls the actual. What, if this off-balance-sheet virtual architecture collapses?
It is so fragile that it can. Martin Wolf warns âthe connection between housing bubble and the fragility of the financial system has created huge dangers, for the US and for the rest of the world.â If a collapse starts, it is beyond any known powerâs power to stop or repair it. The balance sheet of the whole world is too small for it and the actual will too meet the fate of the virtual.
Roubiniâs caveat regarding transaction-oriented financial system being in crisis and Warren Buffetâs warning about derivatives as financial WMDs, expose how fragile is todayâs virtual financial architecture, which is several times the actual.
A way out?
What is the way out? And is there a way out at all? There are âways outâ, claims Martin Wolf, but, warns, âthey are poisonous onesâ. Wolf says, âIn the last resort governments resolve financial crisis. This is the iron law.â And adds, âThe US public sector is coming to the rescue.â Public sector? To the rescue of worldâs most efficient financial market? In the freest economy in the world? Yes. And Wolf hopes, âIn the end, they will succeed.â This was Wolf on February 20, 2008. The state in US as the answer to the mess created by the free market? Confession indeed from a diehard capitalist!
Some 18 years back, market was touted as the answer to the mess created by the state in USSR. A 360-degree turn now. Read on, it is more interesting.
Nationalisation of losses?
In his later article on March 11, 2008, Wolf says, âThe government would have to mount a rescue. The most plausible means of doing so would be via nationalisation of all losses.â Nationalisation? And of losses? In free market US, which pontificates on privatisation of public sector and government works the world-over?
But how to nationalise only losses? To keep the ownership with those who lost othersâ money? Roubini also says that some market observers are already talking about nationalisation of the US banking system â first covert and then explicit â as the next step to the financial meltdown.
Obviously the US Government is seen as the saviour for the faltering â or better, collapsing? â financial market of the US. So, massive state penetration of Wall Street seems inevitable. And it is already happening. And that will be a topic by itself.
QED: What then is its consequence? If the banking system in US, which holds the Capital of capitalism, is nationalised, what will be left of capitalism in US? Capitalism without Capital âCâ? If US nationalises capital, will US capitalism remain market capitalism or become State Capitalism? Will the US be US then? Or will it become a neo-USSR? No seer is needed to give the answer. Itâs obvious.
(The author is a corporate advisor. His e-mail is guru@gurumurthy.net)
Global Economy - Guest - 09-19-2008
<b>Russia Stocks World's Cheapest as Market Opens After 2-Day Halt</b>
Global Economy - dhu - 09-19-2008
They will be bought out by Western interests.
Global Economy - Guest - 09-19-2008
<!--QuoteBegin-dhu+Sep 19 2008, 06:14 PM-->QUOTE(dhu @ Sep 19 2008, 06:14 PM)<!--QuoteEBegin-->They will be bought out by Western interests.
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Russia case looks like some western country played big role. <!--emo&
--><img src='style_emoticons/<#EMO_DIR#>/biggrin.gif' border='0' style='vertical-align:middle' alt='biggrin.gif' /><!--endemo-->
Global Economy - acharya - 09-20-2008
<b>Washington moves to shore up money market funds</b>
Steps to insure funds' value and provide liquidity aims to prevent collapse
<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->"Today's action will undermine the role of banks during this current crisis and has the potential to have an extremely negative impact,'' said Edward Yingling, CEO of the American Bankers Association. "Our bankers are, understandably, very upset."
Bankers are unhappy because now that money market funds are also government-insured, banks may face greater competition for customer deposits but because of their strategies can often provide better returns. End of Story <!--QuoteEnd--><!--QuoteEEnd-->
Global Economy - acharya - 09-20-2008
<b>The worst is yet to come 'No market for old men,' TCW investment strategist warns in gloomy forecast</b>
<!--QuoteBegin-->QUOTE<!--QuoteEBegin--><b>Write-offs could top $1 trillion </b>
As a forecaster, Gundlach didn't just climb aboard the gloom-and-doom wagon. He was early to spot the cracks that subprime loans were making in the financial system, and among the first to warn that an era of easy money would come to a bad end.
"The subprime market is a total unmitigated disaster and it's going to get worse," Gundlach told money managers and financial advisers at an investment conference in June 2007. <!--QuoteEnd--><!--QuoteEEnd-->