Banksters, other financial criminals and the greedies

Key parts of the world’s financial affairs have been hi-jacked by self-serving financial organisations, bureaucracies, country leaders and individuals.   The outlook is dire.

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Without Glass-Steagall America Will Fail

Without Glass-Steagall America Will Fail  By Paul Craig Roberts, 10 June 2017

 

For 66 years the Glass-Steagall act reduced the risks in the banking system. Eight years after the act was repealed, the banking system blew up threatening the international economy. US taxpayers were forced to come up with $750 billion dollars, a sum much larger than the Pentagon’s budget, in order to bail out the banks. This huge sum was insufficient to do the job. The Federal Reserve had to step in and expand its balance sheet by $4 trillion in order to protect the solvency of banks declared “too big to fail.”

The enormous increase in the supply of dollars known as Quantitative Easing inflated financial asset prices instead of the consumer price index. This rise in bond and stock prices is a major cause of the worsening income and wealth distribution in the United States. The economic polarization has undercut the image and reality of the US as a land of opportunity and has introduced political and economic instability into the life of the country.

These are huge costs and for the benefit only of the rich who were already rich.

So, what we can say about the repeal of Glass-Steagall is that it turned a somewhat egalitarian democracy with a large middle class into the One Percent vs. the 99 percent. The repeal resulted in the destruction of the image of the United States as an open prosperous society. The electorate is very much aware of the decline in their economic situation, and this awareness expressed itself in the last presidential election.

Americans know that the nonsense from the US Bureau of Labor Statistics about a 4.3% unemploment rate and an abundance of new jobs is fake news. The BLS gets the low rate of unemployment by not counting the millions of discouraged workers who cannot find employment. If you haven’t looked for a job in the last 4 weeks, you are not considered unemployed. The birth/death model, a purely theoretical construct, accounts for a large percentage of the non-existent new jobs. The jobs are there by assumption. The jobs are not really there. Moreover, the replacement of full time jobs with part time jobs proceeds. Pension and health care benefits that once were a substantial part of the pay package are being terminated.

It makes perfect sense to separate commercial from investment banking. The taxpayer insured deposits of commercial banking should not serve as backing for investment banking’s creation of risky financial instruments, such as subprime and other derivatives. The US government understood that in 1933, but no longer did in 1999. This deterioration in government competence has cost America dearly.

By merging commercial banking with investment banking, the repeal of Glass-Steagall greatly increased the capability of the banking system to create risky financial instruments for which taxpayer backing was available. So, we have the extraordinary situation that the repeal of Glass-Steagall forced the 99 percent to bail out the One Percent.

The repeal of Glass-Steagall has turned the United States into an unstable economic, political, and social system. We have a situation in which millions of Americans who have lost full time employment with benefits to jobs offshoring, whose lower income employment in part time and contract employment leaves them no discretionary income after payment of interest and fees to the financial system (insurance on home and car, health insurance, credit card interest, car payment interest, student loan interest, home mortgage interest, bank charges for insufficient minimum balance, etc.), are on the hook for bailing out financial institutions that make foolish and risky investments.

This is not politically viable unless Congress and the President are going to resign and turn over the governance of America to Wall Street and the Big Banks. A growing cresendo of voices are saying that this has already happened.

So, where is there any democracy when the One Percent can cover their losses at the expense of the 99 Percent, which is what the repeal of Glass-Steagall guarantees?

Not only must Glass-Steagall be restored, but also the large banks must be reduced in size. That any corporation is too big to fail is a contradiction of the justification of capitalism. Capitalism’s justification is that those corporations that misuse resources and make losses go out of business, thus releasing the misused resources to those who can use them profitably. Capitalism is supposed to benefit society, not be dependent on society to bail it out.

I was present when George Champion, former CEO and Chairman of Chase Manhattan Bank testified before the Senate Banking Committee against national branch banking. Champion said that it would result in the banks becoming too large and that the branches would suck savings out of local communities for investment in traded financial assets. Consequently, local communities would be faced with a dearth of loanable funds, and local businesses would die or not be born from lack of loanable funds.

I covered the story for Business Week. But despite the facts as laid out by the pre-eminent banker of our time, the palms had been greased, and the folly proceeded.

As Assistant Secretary of the US Treasury in the Reagan Administration, I opposed all financial deregulation. Financial deregulation does nothing but open the gates to fraud and sharp dealing. It allows one institution, even one individual, to make a fortune by wrecking the lives of millions.

The American public is not sufficiently sophisticated to understand these matters, but they know when they are hurting. Few in the House and Senate are sufficiently sophisticated to understand these matters, but they do know that to understand them is not conducive to having their palms greased. So how do the elected representatives manage to represent those who vote them into office?

The answer is that they seldom do.

The question before Congress today is whether they will take the country down for the sake of campaign contributions and cushy jobs if they lose their seat, or will they take personal risks in order to save the country.

America cannot survive if excessive risks and financial fraud can be bailed out by taxpayers.

US Representatives Walter Jones and Marcy Kaptur and members of the House and staff on both sides of the aisle, along with former Goldman Sachs executive Nomi Prins and leaders of citizens’ groups,  have arranged a briefing in the House of Representatives on June 14 about the importance of Glass-Steagall to the economic, political, and social stability of the United States.  Let your representative know that you do not want the financial responsibility for the reckless financial practices of the big banks.  Let your representative know also that you do not want big banks that dominate the financial arena. Let them know that you want the return of Glass-Steagall.

The effort to reduce the financial risks arising from the commingling of commercial and investment banking by requiring stronger capital positions of financial corporations is futile. The 2007-08 financial crisis required the taxpayers and the printing press and an amount of money that exceeded any realistic capital and liquidity requirements for financial institutions.

If we don’t re-enact Glass-Steagall, the risks taken by financial greed will complete the economic destruction of America.

Congress must serve the people, not Mammon.

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Creating another ‘crash of 1929’

Creating another ‘crash of 1929’  By Jeff Thomas, Editor, International Man, 20 April 2017

 

Regarding the Great Depression… we did it. We’re very sorry… We won’t do it again.

– Ben Bernanke

Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road—either too much inflation, financial instability, or both.

– Janet Yellen

In his speech above, future Federal Reserve Chairman Ben Bernanke acknowledged that, by raising interest rates, the Fed triggered the stock market crash of 1929, which heralded in the Great Depression.

Yet, in her speech above, Fed Chair Janet Yellen announced that “it makes sense” for the Fed to raise interest rates “a few times a year.” This is a concern, as economic conditions are similar to those in 1929, and a rise in interest rates may have the same effect as it did then.

So let’s back up a bit and have a look at what happened in 1929. In the run-up to the 1929 crash, the Federal Reserve raised rates to 6%, ostensibly to “limit speculation in securities markets.” As history shows, this sent economic activity south rather quickly. Countless investors, large and small, who had bought stocks on margin, would be unable to pay increased interest rates and would be forced to default. (It’s important to understand that the actual default was not necessary to crash markets. The knowledge that investors would be in trouble was sufficient to send the markets into a tailspin.)

Mister Bernanke was quite clear in 2002 when he stated that the Fed would not make the same mistake again that it made in 1929, yet, then, as now, there’s been a surprise victory by a Republican candidate for president. Then, as now, a wealthy man who had never held elective office was unexpectedly in the catbird seat and had the potential to endanger the control of the political class, at a time when that political class had been complicit in damaging the system by creating massive debt.

Then, as now, conditions were ideal for the Deep State to create a solution to all problems: An economic crash was inevitable; therefore, create a trigger for it to occur and blame the collapse on the conservative political outsider. Demonstrate to all that the collapse was due to the greed of the outsider and those who were of like mind. Use that leverage to demonstrate to the hard-hit populace that what was needed was the opposite of what the outsider had proclaimed. Recommend far greater control by a new government that was staunchly liberal—a government that would change the political landscape in such a way that all those who suffered would be saved by a benevolent collectivist government.

And, of course, when it’s stated that way, it’s an easy sell. In 2017, it will be an even easier sell than it was in 1929, as the new president has already set himself up for a fall. In his inauguration speech, he focused on a single topic—the return of power to the people and away from Washington’s bureaucracy.

Beginning by decrying Washington for what it truly is, he stated that “for too long, a small group in our nation’s capital has reaped the rewards of government while the people have borne the cost. Washington flourished—but the people did not share in its wealth.”

He then went on to describe that his presidency would bring about a metamorphosis:

I will never, ever let you down. America will start winning again, winning like never before. We will bring back our jobs. We will bring back our borders. We will bring back our wealth. And we will bring back our dreams. We will build new roads, and highways, and bridges, and airports, and tunnels, and railways all across our wonderful nation. We will get our people off of welfare and back to work—rebuilding our country with American hands and American labor… We will reinforce old alliances and form new ones—and unite the civilized world against radical Islamic terrorism, which we will eradicate completely from the face of the earth… We will not fail. Our country will thrive and prosper again.

Of course, new presidents are prone to making big promises when they first take office. However, Mister Trump has, in his brief speech, effectively declared himself the enemy of the Washington bureaucracy. In so doing, he’s left himself wide open to be the fall guy if the economy does not rebound, if the average American’s lot does not improve, and if the US does not dominate the world through an expanded military.

In short, the Deep State and their cronies, who were instrumental in creating the economic, social, and political house of cards that now exists, have the perfect opportunity to bring on the collapse and blame the new president for it.

Were Mister Trump to have honestly stated that the US is effectively a house of cards and that he’ll begin the laborious job of trying to salvage what’s left of it and begin to rebuild it, he would have provided himself with a justifiable excuse when the house of cards does collapse. However, by making such lofty claims to “Make America Great Again,” he’s lost this opportunity.

In the last year, whenever I was asked who I hoped the Americans would elect as their president, I replied, “Bernie Sanders.” To those that were shocked by this answer, I would add, “An economic collapse is inevitable. No one, no matter how capable, can prevent it. The best that can happen is that the collapse occurs under a president who’s an avowed socialist. That would ensure an eventual return to smaller government and more conservative economics.”

As unfair as it may be, a nation’s people almost always blame whoever is on watch when a collapse occurs. It matters little who or what is actually at fault. People need a “face” to vilify for the disaster and the sitting leader is almost always spontaneously chosen by a nation as that face.

And, of course, the opposing party invariably makes the most of the situation. Just as in 1929 and for years thereafter Herbert Hoover received the lion’s share of the blame for a Wall Street crash and the subsequent Great Depression, even though he was not at fault, so too will the US come to blame the new president who made promises that were far beyond what he could deliver.

The die is cast. The patsy-in-chief is now installed. The media will do all they can to discredit Mister Trump and civil unrest will be funded by his opponents. The US economy is more debt-laden than any country in the history of the world and, historically, this has always resulted in economic collapse. At present, there are scores of triggers that could bring about collapse. Any one of these black swans could do the job, but it’s entirely possible that the Federal Reserve will serve once again as the trigger, as it did in 1929.

This is unquestionably the smart way to play the game. Rather than wait for a random occurrence, if a date is set for a controlled collapse, those connected to the Deep State will have a brief time to disconnect their wealth from the system, as was done in 1929.

The trigger would be pulled by the Fed and the US economy would go down in as controlled a fashion as Building Seven in the World Trade Center.

When is this likely to occur? Herbert Hoover was given just under eight months. The date for the next collapse could be earlier or later. But the question is not when that date might be, but whether we’ve prepared ourselves for the eventuality.

Crux note: The Fed could start its controlled demolition of the US economy any day now.

This collapse will be much worse and last much longer than the Great Depression or the 2008 financial crisis.

Doug Casey and his team have critical, time-sensitive information about preparing for this economic meltdown. They’re sharing need-to-know details in this urgent video. Click here to watch it now.

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Why Investors Deserve to Get Mauled

Why Investors Deserve to Get Mauled  By Vern Gowdie, Daily Reckoning, 21 March 2017

On my desk is a book titled Fed Up.

The book is an insider’s take on why the Federal Reserve is bad for the US.

The title also describes my current mood…I’m fed up with our failure to learn from history.

What compels us to keep repeating the same mistakes over and over again?

If it was a child continuously falling into trouble, our frustrated response would be: When will you ever learn? Or, as some teachers in a bygone era used to say, ‘What does it take to get it through that thick skull of yours?’

Yet, as investors, the lessons of markets — booms and busts — are ignored each and every time a market is in hot pursuit of record levels.

The laws of mathematics are temporarily suspended while we indulge in these flights of fancy…hoping, wishing, praying and, in some cases, believing this time is truly different from the past.

It never is.

And the really cruel twist is that the longer a market avoids its fate with destiny, the greater the number of people who start to entertain the tantalising prospect of it being a ‘new paradigm’.

Unless human nature changes, we are perpetually doomed to learn the hard way.

Over the centuries, we’ve made huge advancements by learning from the mistakes of our predecessors. The rapid progress in technology, medical science, space travel and healthcare is all thanks to our willingness to learn and evolve.

Ironically, though, when it comes to markets and the economy, we are still as naïve and stupid as the tulip-buyers of 400 years ago.

We think we are smarter, but our actions prove otherwise.

History tells us emphatically that debt crises always — without exception — end badly.

Debts are defaulted on. Businesses go bankrupt. Creditors lose money.

That’s how debt is expunged from the system…very, very painfully.

Based on the laws of ‘yin and yang’, the more debt that’s in the system, the more painful the process of expunging it becomes. It’s not rocket science to comprehend the process which says that, the higher you climb, the harder you fall.

Here we are sitting atop THE greatest debt pile in history — US$60 trillion more than we had in 2008 — and such is our misplaced mindset that we expect to add even more debt to this pile, without the slightest risk of triggering an avalanche.

Seriously, how stupid are we?

In response to NAB raising its home loan rates last week by 0.25%, Prime Minister Malcolm Turnbull, with a mix of ire and indignation, said: ‘If they don’t explain it then NAB customers will go somewhere else and I’d encourage them to do so.

Give me a break. It was only 0.25%.

Where was this anger when savers had to endure the RBA slashing rates from 7% in September 2008 to 1.5% today? This was effectively a pay cut of nearly 80% over an eight-year period.

There was no ire and indignation emanating from Canberra over the fate suffered by savers.

In Aussie colloquialism, they didn’t care ‘two knobs of billy goat poop’ about savers…it was all about borrowers.

Why?

Because the entire economic growth model is completely and utterly dependent upon more and more debt being shoved into the system.

A miniscule 0.25% rise — the equivalent of a matchstick splinter in the finger — is treated as if the patient is in need of trauma counselling.

This is all part of the namby-pamby world we’ve created, where every kid gets a prize.

The central banks (the RBA, the Fed, the BoJ, the ECB, et al), together with their political masters, have, since 2008, engineered an economic ‘recovery’ based solely on the creation of more debt.

Since 2009, global GDP has risen from US$60 trillion to US$75 trillion. Over the past seven years, it’s taken US$60 trillion of debt to generate US$15 trillion in economic activity…$4 of debt to $1 of economic output.

What we’ve seen since 2009 is the illusion of growth.

The question I have for all those cheerleaders who see US growth picking up is: What if we could magically stop all further borrowing today; what do you think the ‘growth’ number would be?

The response would be: ‘You can’t do that; the system needs debt to function.’

The body also needs food to function, but we know too much food creates obesity, resulting in major health issues and organ failure.

So, my second question is: How much debt is too much debt before you think the system is at risk of major organ failure?

Obviously, they do not think you can have too much debt. But, as data shows, the more debt the system has around its girth, the more sluggish it becomes. Currently, it takes around $4–5 to generate $1 of economic output. If the expanding debt girth continues, it’s going to take $8–10 to move the GDP needle. Clearly, we have a situation that is not sustainable.

The very toxin that created the 2008/09 crisis is supposedly meant to cure us this time…apparently, this time must be different.

If people are naïve, gullible, or just plain ignorant to the fact that you cannot solve a problem using the same solution, then, in the years ahead, they are going to learn that lesson the hard way.

Siding with history

On the theme of illusion and delusion — and blindsiding investors — in last Friday’s Daily Reckoning, I wrote about the divergence in opinion between those that accurately identified previous bubbles and those that failed to see the disaster ahead of time.

Here’s a short extract:

…never let the truth get in the way of a good story. And, for the investment industry, there’s no better story to tell than a market that’s been on the up and up for an extended period. This gives them past performance to sell and extrapolate…

[Robert Shiller and John Hussman] missed a 250 per cent rise in the S&P 500 since the global financial crisis…

‘…that’s true. But those gains are only lasting if you take Professor Shiller’s advice and reduce exposure to the market. Otherwise those gains are only on paper.

What happens if, once again, Shiller and Hussman are correct and we have another bubble that’s about to burst?

The two previous bubbles have wiped out 50% in market value. This bubble appears to be even bigger than its predecessors; therefore, a 60% fall is not out of the question, or without precedent.

A fall of that magnitude would take the Dow back to 8000 points…wiping out all gains made since April 2009. The paper gains are shredded.

Investment industry experts, in the main, are perennial optimists…markets are never going to experience a major downturn. We know from recent history that this is most definitely not the case.

Once again, the industry ‘go-to’ experts are out there pacifying the passengers, soothingly reassuring them that ‘there might be a slight swell ahead, but there’s nothing to worry about.’

Yet those who have accurately read the market weather-charts in the past are warning investors that we are sailing directly into the perfect storm…abandon ship.

A cruise liner without any passengers is not a profitable business; the same goes for a funds management industry without any funds to manage. The message is: Keep the passengers on board…

In addition to Shiller and Hussman sounding the market storm warning, The Wall Street Journal (WSJ) recently ran with this headline: ‘Magic Eludes Bubble-Caller Jeremy Grantham, as Assets at GMO Drop by More Than $40 Billion’.

Jeremy Grantham, of GMO (Grantham, Mayo, & van Otterloo), is one of the sharpest investment minds in the business.

I remember Grantham and Warren Buffett both shaking their heads in disbelief at the dotcom bubble. They were ridiculed for being out of touch with the new world. Not investing in tech stocks cost GMO dearly in short-term performance, and there was an exodus of money out of the firm’s funds.

Grantham’s reading of the market, and his discipline, was proved correct.

This is from the same WSJ article:

In November [2016], Mr. Inker [co-head of GMO’s asset allocation team] wrote to clients that “almost all asset classes are priced at valuations that seem to guarantee returns lower than history.” Mr. Inker added that “from today’s valuation levels, there are no good outcomes for investors.”

Grantham “has been out of step with the market several times during the firm’s four decades. GMO has usually rebounded, with the 78-year-old investor earning acclaim with asset-bubble calls ahead of Wall Street busts in 2000 and 2008.”

‘[GMO is] “Bearish about what it sees as high valuations of U.S. stocks, GMO’s flagship mutual fund, the GMO Benchmark Free Allocation fund, has largely missed out on the latest rally in U.S. stock indexes.”

Jeremy Grantham is 78 years old…he knows history. He’s ‘been there’ and ‘done that’ since the 1970s. I’ve followed his newsletters for years. He’s seriously smart and thoughtful.

GMO analyses risk versus reward across various asset classes based on the simple principle of ‘reversion to the mean’ — where nothing stays high or low forever.

However, the investment industry would like us to believe markets can remain in a state of suspended animation indefinitely.

When I read that investors had withdrawn US$40 billion from GMO, it was a case of déjà vu. I’ve seen this pattern before.

Investors are their own worst enemy… Chasing returns, they want all the gains on the way to the top, with none of the losses.

The rare breed of fund manager that takes defensive action before a market crash is usually out the market well ahead of time. Performance suffers, and investors looking for a short-term buck rush to the latest star performer…the one that is ‘all in’ and which only ever sees a ripple on the horizon.

This is a familiar pattern.

Reading about Grantham, Shiller and Hussman’s judgement being questioned again provides me with a lot of reassurance.

If history is a guide, we must be getting awfully close — possibly within months — to the US market collapsing in spectacular fashion.

Investors continually make the same errors of judgement…they deserve to get mauled for being so damn greedy and not heeding the signs.

Regards,

Vern Gowdie,
Editor, The Daily Reckoning

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About Peter Senior

I'm a very experienced and pragmatic management consultant. I've reviewed and led the restructuring of many organisations - large and small corporations and Government Departments, much of the time as President of the New Zealand Institute of Management Consultants. Before that I was General Manager of a major NZ newspaper; earlier, an analyst for IBM UK. I gained an honours degree in engineering at London University, and studied management at Cambridge University. This wide range of experience has left me frustrated: I continue to see too many examples of really bad management. Sometimes small easily fixed issues; sometimes fundamental faults; and sometimes really tricky problems. Mostly these issues can be fixed using a mixture of common sense, 'management 101' and applying lessons from years of management experience. Unfortunately, all too often, politics, bureaucracy and daft government regulations get in the way; internal factors such as poor culture and out-of-date strategies are often evident. So what's gone wrong, and why, and most importantly, how to fix 'it'? I hope there are like-minded people 'out there' who will share their thoughts enabling 'us' to improve some significant management failures that affect the general public. If you just accept bad management, you don't have the right to complain! If you'd like to share thoughts on any aspects of management, send me an email to petersenior42@gmail.com .
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