A bunch of horses from the same smarmy stable

Key News

  • Greece asked European governments and the IMF on Friday to trigger billions of euros in emergency loans in what could be the largest state bailout ever attempted.
    (Reuters)

Quotable – On Greek debt

“Goldman CEO to Perform Community Service as Treasury Secretary
‘Will Do Less Harm’ in New Post, Says Treasury Spokesperson

NEW YORK – In a settlement of the government’s securities fraud case against Goldman Sachs, the bank’s CEO, Lloyd Blankfein, has agreed to perform two years of community service as Treasury Secretary of the United States.

At a press conference in New York, Mr. Blankfein said that as Treasury Secretary he would “continue to do God’s work as I did at Goldman, but at a significant pay cut.”

A Treasury Dept. spokesperson said that by performing community service as Treasury Secretary, Mr. Blankfein will be able to do less harm to the economy because he will have significantly less power than he had as Chairman of Goldman.

His experience at Goldman, however, will be “invaluable” in his new role as Treasury Secretary, the spokesperson said: “Lloyd Blankfein’s years of marketing worthless securities have prepared him for the important task of selling Treasuries to the Chinese.”

Mr. Blankfein is the latest in a long line of Goldman chairmen to serve as Treasury Secretary, although he is believed to be the first to do so while wearing an electronic ankle bracelet.

                           Anonymous

FX Trading – A bunch of horses from the same smarmy stable

Milton Friedman said, "a central bank can control its exchange rate, it can control its interest rates, and it can control its money supply/inflation. But it can’t control all three at the same time." Maybe we need to add an addendum: Too much emphasis on price stability will not allow a central bank to see asset bubbles coming at them from a mile away. China is doing a good job with inflation and its exchange rate, thanks to capital controls and its peg. But bubble-iscious it has become.

Below is a story from Reuters reporting on comments by Bank of Japan central bank governor Shirakawa. I thought they were very insightful and added some of my own commentary along the way; ending of course with another of my populist Friday rants.

NEW YORK, April 22 (Reuters) – Too much emphasis on price stability in monetary policy is one of the factors that led to the financial crises in Japan and the United States , Japan’s central bank governor said in a speech on Thursday.

Masaaki Shirakawa, governor of the Bank of Japan, said while prices of basic goods and services were mostly stable in the lead-up to Japan’s 1990s financial crisis, asset prices and credit extension built up a bubble that destabilized the economy. Similar conditions led to the U.S. financial crisis in 2007.

Had central bankers focused exclusively on short-term price stability during the lead-up to these crises, they would have missed the signs of growing instability, Shirakawa said.
"It has now been acknowledged that the role expected of central banks does not match one-to-one with price stability," Shirakawa said in a luncheon speech to members of the Economic Club of New York. "The experience of the bubble shows that even when prices are stable, the economy can experience huge swings."

CHINA NEEDS BROADER FOCUS

“Shirakawa also drew parallels between the pressure Japan faced to let its currency appreciate in the late 1980s and the pressure China is currently facing to do the same.

“He said letting the yen appreciate while trying to encourage stronger domestic demand led partly to a "bubble economy" for Japan while failing to reduce the large current account surplus the country was running at the time. He warned that the same fate could be in store for China if it focused too exclusively on currency flexibility while neglecting proper bank supervision and other components of monetary policy.

The present emphasis on China’s currency is "somewhat misleading," Shirakawa said. "I hope that the Chinese economy will maintain domestic stability."

We’ve talked about this before—the fear China has of emulating Japan’s credit bubble being popped. This we think is why China is digging in its heels so tightly.

Below is a slide from a seminar we did many moons ago musing about the risk faced by China, and global economy, if they didn’t make the hard transition from a purely export-driven model to a more domestic demand based model—this is exactly what Mr. Shirakawa is warning about today:

What Mr. Shirakawa doesn’t mention is what you can see on this chart—the trigger that
led to the problem for Japan and is creating the problem for China; it is the
improvement in the US current account deficit triggered by the asset bubble that was
not seen by the US Fed because of its ridiculous mandate on price stability. How could it
dare risk global deflation after the Nasdaq bubble burst? Heck, lower prices, increasing
the purchasing power of consumers and cleansing the system of massive debts that
were built up during the Go-G0 E-mania of the nineties couldn’t be tolerated by
Greenspan and Company at the Fed. Price stability I say—irrational exuberance be
damned!

So, Mr. G and friends around the globe got busy lowering interest rates in order to fend
off “global deflation.” Remember the emergency 1% Fed Funds rate? Well, price
stability we got Mr. G. Free credit did the trick and helped Goldman and friends on the
Street trick us all into believing CDO’s were just peachy. This is the time when
investment bankers were telling us things such as: Well, if we break out these derivative
into small tranches and sell them globally it will reduce overall credit risk. This was a
nutty thing to say then, and it has proven nutty by now. But, nutty things tend to pass
into the memory hole when everyone is making money.

So, central banks returned price stability after the Nasdaq bubble burst. They did it so
well that it led to a massive global conflagration.

Now China is afraid it might fall into the black hole of under capacity growth and years of lost opportunity as Japan did should it adjust its currency value higher. [Which, interestingly, they tell us the currency isn’t the problem; it is a US savings problem.] Well, the US is starting to save and the pressure on you and your mercantilist trade policy is finally biting down hard.

Back to Mr. Shirakwa:

‘HOLISTIC APPROACH’
Shirakawa emphasized the need for a broad approach to regulatory and monetary policy, with a renewed focus on supervising individual institutions [I am thinking the Big 5 who love the taxpayer backing but love to play with derivative risk still] as well as a better awareness of growing asset and credit bubbles.

"We must continue to review carefully a wide range of indicators," he said.
He also said central bankers and regulators needed to learn from past mistakes, and that monetary policy alone could not cope with asset bubbles.

And he warned that U.S. financial regulatory reform should not lead to financial protectionism.

"I have a concern over some trends for financial protectionism," Shirakawa said of U.S. plans to revamp financial regulations. "Central bankers have to assess very carefully what kind of implications these proposals will have."

Mr. Shirakwa nails it here. The systemic global problem was from two causes and it is very simple to remedy; but no self-loving politician, which includes all of them, wants to let a good crisis sneak by without squeezing as much government power as it can from the private sector—I digress … sorry. Two solutions is all that is needed:

1. Taxpayer backed institutions should not be allowed to play it both ways — reap rewards of massive risk-taking and have no downside for failure.
2. Derivatives must move from over-the-counter to exchange-traded [and Credit Default Swaps should be banned outright].

Thus, the financial reform bill could be written on a napkin. Anyone with a brain knows it.

Keep in mind the financial system BEFORE the crisis was the most highly regulated of any industry I can think about. So to say it was a regulatory problem is pure BS. But, lobbyists, lawyers, bankers and politicians involved in financial “reform” ultimately are a bunch of horses from the same smarmy stable. So, real reform will never happen. And the result of all the “slimy intentions” of the inside players will make our financial system less efficient for small business, and it will remain rigged once again for the big banks on the Street, as it always is.

Have a great weekend.