Monday, November 23, 2009

Manipulation via regulatory capture

Greetings good citizen,

After a three day ‘slide’ the ‘stupidity index’ performed another ‘vertical take-off’ this morning to start the day up 130+ points. What do you suppose the ‘primary reason’ was behind the market’s huge lift-off? Can you guess? Do I need to tell you, a good percentage of you already know. More hopeful is the fact that those of you who know are also aware that it isn’t ‘good news’ unless you own either a lot of hard assets or your liquid assets aren’t in dollars.

Yes, good citizen, the markets took off like a rocket ship this morning because the dollar tanked…again!

Who the fuck would be ‘happy’ about a ‘weak’ dollar? It certainly isn’t good for us ‘paycheck paupers’, it means our money buys less. When the dollar goes down good citizen, your purchasing power goes down with it.

While the ‘simpletoons’ scream ‘deflation’ and dump scorn on those who know inflation is coming, understand that hyper-inflation is caused by the rapid loss of value/purchasing power of one’s currency. It may take a wheelbarrow full of cash to buy a loaf of bread but don’t get the wrong idea, everybody won’t have a wheelbarrow full of cash. You’ll have what you have now…and that won’t be enough to buy you bullets.

So here we sit with the stock market rising and the dollar tanking, naturally, Wall Street rejoices…but the other 99% of us don’t have much to be happy about.

As I have stated before, what’s good for Wall Street has nothing to do with Main Street, so much so that our friend Henry CK Liu points to a disturbing ‘side effect’ of Washington’s ‘reluctance’ to rein in the marauders on Wall Street.

US should regulate cross-border cash
By Henry CK Liu

In this season of debate on regulatory reform, an obvious area that has been crying out for reform seems to have been overlooked by government officials and market participants.

Much of past and current global financial crises lies in the unrestricted cross-border flow of speculative funds and the ability of market participants to deploy cross-border speculative financial and regulatory arbitrage for risky profit at the expense of central banks and local market fundamentals.

The reason low dollar interest rates do not help the United States economy is because hot money will respond by flowing into China and other high interest rate economies to profit from carry trade and exchange rate arbitrage, leaving the US with a persistent credit crunch.

The only way a low Fed funds rate will help the US economy is if the US regulates the cross-border flow of speculative funds, thus forcing the bailout and stimulus money to stay within US borders to create jobs locally. It is a simple measure that could be easily implemented by administrative order. [So why isn’t it happening?]

After the 1997 Asian financial crisis, Malaysia imposed currency controls and at first was widely criticized; later it was widely acknowledged as the correct and effective measure to adopt. Germany after 1933 also imposed currency controls and its economy recovered faster than any other.

There is no way to effectively regulate over-the-counter financial derivative trading against global systemic risk without first stopping cross-border financial arbitrage. Anyone who has studied and understood the problem would know that the path of reinforcing capital reserve adequacy is a dead-end against astronomical notional values.

Ever since the end of the Cold War, which actually began winding down with president Richard Nixon's policy of detente, international trade has overwhelmed domestic development in the global economy, as superpower competition to win the hearts and minds of the world, in the form of aid, subsidies and development, was channeled solely through global trade.

Persistent US fiscal and trade deficits forced the abandonment in 1971 of the Bretton Woods regime of fixed exchange rates linked to a gold-backed dollar. The flawed international finance architecture that resulted has since limited the global growth engine to operating with only the one cylinder of international trade, leaving all the other cylinders of domestic development in a state of permanent stagnation.

Drawing lessons from the 1930s Great Depression, economic thinking prevalent immediately after World War II had deemed international capital flow undesirable and unnecessary for national development. Trade, a relatively small aspect of most national economies, was to be mediated through fixed exchange rates pegged to a gold-backed dollar.

These fixed exchange rates were to be adjusted only gradually and periodically to reflect the relative strength of the economies participating in international trade, which was expected to augment but not overwhelm the development of national economies. The impact of exchange rates was limited to the financing of international trade.

Exchange rate considerations were not expected to dictate domestic monetary and fiscal policies, the chief function of which was to support domestic development and were regarded as the inviolable province of national sovereignty.

Global financial crises will continue to occur until cross-border flows of speculative funds are regulated.

This sickness we call ‘wealth’ has the power to destroy civilization if we let it happen. That’s how foolish it is to let individual’s place their own welfare ahead of the needs of society…it is because of the rich that the poor will always be with us.

Don’t believe it? Have a look at the ‘math puzzle’ presented by Ilargi’s intro to this past Saturday’s post.

It's interesting to note that no matter how hard it is to gauge how much has been spent on the job stimulus, what seems very clear is that the total amount Obama has delivered towards employment creation will by year end in all likelihood be less than the total amount in bonuses projected to be paid by Wall Street's main financial institutions. The total amount in Wall Street bonuses is set to exceed $162 billion, according to MSNBC, and if you ask me, that fact alone should be enough to bring down the president's poll numbers below the freezing point. By the way, MSNBC also estimates bank profits through Q3 ‘09 at $22.5 billion. $139.5 more in bonuses than in profits. Yes. Call me for that too.

The whole rant is well worth the time to read. What I find interesting is the ‘repeat’ of last year’s phenomenon, where the banking sector’s ‘bonus pool’ exceeded annual profits!

Think about that good citizen…how the fuck do these arrogant bastards pay themselves more (significantly more) in bonuses than they brought in?

You don’t find that happening in other industries…does it happen in banking because it can?

Um, at what point do you lose faith in the ‘value’ money represents? (Because they are obviously handing it out like confetti to money’s supposed ‘guardians’, just how ‘safe’ never mind valuable is this shit?) Worse, you know YOU worked hard for it so you tend to ‘appreciate’ it more than the bean counter does…is this any excuse to let the bean counter destroy the value of your hard work? I don’t think so.

Thanks for letting me inside your head,


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