How Financial Experts Bamboozle the Public

Money pros had been taken to the woodshed according to the Global Association of Risk Professionals. (hat tip EPJ) [bold mine]

Americans would like an apology from Wall Street for the financial crisis.

They probably aren't going to get it.

But how about giving the number crunchers and investment managers a "time out" to reflect a little on the era of financial alchemy and greed that did so much damage?

That's what was happening in Chicago this week, where about 2,000 of the financial industry's quantitative minds and investment professionals gathered for their annual CFA Institute conference. They got some verbal punishment from some of the industry's stalwarts, who were admonishing their chartered financial analyst peers to think rather than allow mindless financial models and dreams of success to drive them to endorse the kinds of aggressive investment decisions that can create riches for themselves -- and destroy wealth for others.

"If you are attracted to a job in finance because the pay is so generous, don't do it," said Charles Ellis, one of the elder statesmen of the profession. "That's a form of prostitution."

Rather, Ellis said, his profession needs to return to the days he knew in the 1960s, when the emphasis was on counseling investment clients and not on churning out esoteric products and pushing people to buy them blindly.

Today the emphasis too often is on "complexity rather than common sense," said James Montier, asset allocation strategist for investment manager GMO. "In finance, we love to complicate. We rely on complexity to bamboozle and confuse."

In the local arena, such conflict of interests has hardly been about “churning out esoteric products” but about the pervasive cheerleading of politically colored quack statistics into “pushing people to buy them blindly”. "Them" here is applied to conventional financial assets.

More on the use of aggregate model based analysis:

Too many in his profession, Montier said, are trying inappropriately to apply physics to investing, where it doesn't belong, and they are ignoring inconvenient truths. Complex mathematics is valued but not necessarily used honestly, he said.

"A physicist won't believe that a feather and brick will hit the ground at the same time, and they won't use models to game the system. But that's what finance does with models," Montier said. "They take them as though they are reality."

Montier, speaking to financial professionals who design, evaluate and sell investment products to individuals and institutions, warned that all professionals in finance need to be thinking more, rather than following the herd.

"Who could have argued that CDOs were less risky than Treasurys with a straight face?" he said. But that's what happened. "Part of the brain was switched off, and people took expert advice at face value.

True. Mathematical and statistical formalism serves as the major instrument used by “experts” to hoodwink the vulnerable public on so-called economic analysis. The public is usually awed or overwhelmed by facade of numerical equations and economic or accounting terminologies.

These experts forget that economics hasn’t been about physics but about the science of incentives, purposeful behavior or human action.

As the great dean of Austrian school of economics wrote, (italics original, bold mine)

Indeed, the very concept of "variable" used so frequently in econometrics is illegitimate, for physics is able to arrive at laws only by discovering constants. The concept of "variable," only makes sense if there are some things that are not variable, but constant. Yet in human action, free will precludes any quantitative constants (including constant units of measurement). All attempts to discover such constants (such as the strict quantity theory of money or the Keynesian "consumption function") were inherently doomed to failure.

Governments love Wall Street models too

Government regulators and the Federal Reserve are guilty, too, of blindly putting their confidence in flawed models, he said. And if his profession and the regulators continue to ignore the dangers of financial concoctions involving massive leverage and illiquid assets, financial companies again will create an explosive brew that will result in calls for another government bailout.

This means because authorities has embraced economic bubble policies as a global standard, which engenders boom bust cycles, we should expect more crisis ahead. Thus the prospective “calls for another government bailout.”

To add, in reality, the government’s love affair with models has been undergirded by an unseen motivation: the expansion of political power.

Every crisis bequeaths upon the governments far broader and extensive social control over the people via bailouts, inflation, more regulations higher taxes and etc...

This legacy quote from a politician, during the last crisis, adeptly captures its essence

You never want a serious crisis to go to waste..This crisis provides the opportunity for us to do things that you could not do before.

Bottom line: many financial experts seem to in bed with politicians to promote political agendas either deliberately or heedlessly. Thus, financial expert-client relations usually embodies the principal-agent problem.

Nassim Taleb would call such mainstream experts as having "no skin in the game", thus would continue to blather about nonsense while promoting fragility.

Finally one doesn't need to be a CFA to know this. As James Montier in the above article said it only takes "common sense" which experts try to suppresss with "complexity". 

I would add to common sense; critical thinking.

War on Savings: Australia Doubles Retirement Taxes

Crisis or no crisis, Cyprus may have set a trend for governments to seek ways to tax private sector savings. 

Australia has reportedly doubled taxes on retirement savings.

Here is the eloquent Simon Black of the Sovereign Man

Though Australia’s national balance sheet is comparatively quite strong, the government has been running at a net deficit for years… and they’re under intense pressure to balance the budget.

The good news is that Australia now has a goodly number of investor-friendly immigration programs designed to bring productive foreigners into the country, similar to the trend we’re seeing across Europe.

On the flip side, though, the Australian government has just announced new rules which penalize citizens who have responsibly set aside savings for their own retirement.

Any income over A$100,000 drawn from a superannuation fund (the equivalent of an IRA in the United States) will now be taxed at 15%. Previously, all such income was tax-free.

The really offensive part about this is that the government is going to tax people’s savings ‘on both ends,’ meaning that people are taxed on money they move INTO the retirement fund, and now they can be taxed again when they pull money out.

The Cyprus debacle drew a line in the sand– fleecing people with assets, or income, in excess of 100,000 dollars, euros, etc. is now acceptable. This is the definition of ‘rich’ in the sole discretion of governments.

And make no mistake– if it can happen in Australia, which still has reasonable debt levels despite years of deficit spending, it can happen in bankrupt, insolvent nations like the US.

We can see from the following charts why.

The Australian government has embarked on a spending spree since 2009. Australia’s fiscal balance has been deteriorating since.

This shows of the Emmanuel Rahm syndrome or Austrian economist Robert Higgs’ ratchet effect where crises have always been an excuse to justify government expansion.

And by doing so Australia’s government has been ramping up debt. External debt grew by about 30% since 2009, while debt to gdp has began to reverse from years of austerity or fiscal “discipline”. 

And as I have earlier pointed out, Australia has also been manifesting signs of bubbles

Australia’s credit to the private sector as % to gdp is now about 128%

 

While the banking sectors exposure account for 145.76% of the gdp in 2011.

And like almost every country, low interest rates have been a principal factor in driving credit expansion

Despite the above, Australia’s stock market has hardly recovered from the 2008 global financial debacle. (all the wonderful charts above are from tradingeconomics.com)

This means much of the credit expansion has been directed to the property sector, as measured by the phenomenal manic growth of housing prices (chart from vexnews). 

This proves that much of today's statistical economic growth have been Potemkin Villages

Yet once the global pandemic of bubbles pop, we can expect governments coordinate the dragooning of the public’s resources via more confiscation of savings to advance the interests of the political class via bailouts and more quack Keynesian fixes.

Of course this relationship will persist until people tolerate them. However, eventually the curse of the laffer curve will prevail or a financial repression (tax) revolt can also be an expected response.

Quote of the Day: The Social Costs of Regulations

Rahm’s Rule is a useful accessory to a body of theory that seeks to explain the political economy of regulation. The rule tells us that major crises can provide cover for distributing benefits to targeted special interest groups. The greater the magnitude of a given crisis and the shorter the interval for forming legislation to deal with it, the larger the spread of pork that can be packed into the final legislation. Rahm’s Rule is a guarantee that efforts to resolve a deadline-based crisis will go on to the very last minute. We might keep this in mind for the next deadline-driven crisis.

In today’s economy, regulation is found at every meaningful margin. Politicians set and rearrange prices for important services and products for consumers nationwide. They open and close market entry and give advantage to favored groups by altering taxes, depreciation schedules, and other regulatory schemes. Doing all this in the full light of day and with full and open debate would be a challenge. But then there are crises to serve the politicians’ interests. Some arise spontaneously and some are created or magnified consciously by the politicians themselves. The sequestration element in the fiscal cliff story is an example. The shouts of crisis and the end of western civilization that preceded TARP are another. In all cases, Rahm’s Rule applies: “You never want a serious crisis to go to waste.”

This is from Professor Bruce Yandle at the FEE, discussing the social costs of regulations, as well as, the concentration of benefits from arbitrary regulations that are funneled into political power blocs, which are especially pronounced during the implementation of crisis management measures.

One can't help but suspect that much of the ongoing and past crises may have been engineered or concocted by politicians and their cronies as part of advancing their interests.

IMF’s Christine Lagarde Inflationist Delusions

From the Deutsche Borse Group: (bold added)

International Monetary Fund Managing Director Christine Lagarde praised monetary stimulus efforts of the world's major central banks Thursday, but said non-monetary authorities in Europe, the United States and elsewhere need to build on those steps to improve growth in a slowing world economy.

Lagarde, at a press conference ahead of the annual meetings of the IMF and World Bank, said she "expects courageous, cooperative action" at the meetings.

She also aimed criticism at China, whose top economic policymakers declined to attend the meetings because of territorial disputes with host Japan. China needs to be more of a global partner and increase demand for foreign products, not just concentrate on exporting its own products, she said, after pointedly noting its officials' absence.

Lagarde vowed the IMF "will spare no time and effort" to help Greece, but said the objective is to ultimately free that country from dependence on outside assistance.

Noting that the IMF has downgraded its projections of global growth, Lagarde said, "we are not expecting a very strong recovery." Indeed, she called high unemployment rates in advanced countries "terrifying and unacceptable."

The Federal Reserve, the European Central Bank and the Bank of Japan have all adopted additional easing measures, and she praised their moves, but said that by themselves those actions are "not sufficient." 

The "momentum" imparted by monetary easing "should be seized as an opportunity," she said.

Ms, Lagarde’s “momentum” remarks essentially echoes former President Obama’s chief of staff and current Mayor of Chicago Emanuel Rahm’s infamous sly quote on establishing political controls over society…

You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before.

And emerging market central banks have fawningly embraced Ms. Lagarde’s recommendations.

This from Reuters:

Emerging market central banks have clearly taken to heart the recent IMF warning that there is “an alarmingly high risk”  of a deeper global growth slump.

Two central banks have cut interest rates in the past 24 hours: Brazil  extended its year-long policy easing campaign with a quarter point cut to bring interest rates to a record low 7.25 percent and the Bank of Korea (BoK) also delivered a 25 basis point cut to 2.75 percent.  All eyes now are on Singapore which is expected to ease monetary policy on Friday while Turkey could do so next week and a Polish rate cut is looking a foregone conclusion for November.

South Africa, Hungary, Colombia, China and Turkey have eased policy in recent months while India has cut bank reserve ratios to spur lending.

The BoK’s explanation for its move shows how alarmed policymakers are becoming by the gloom  all around them. Its decision did not surprise markets but its (extremely dovish) post-meeting rhetoric did.  The bank said both exports and domestic demand were “lacklustre”.  (A change from July when it admitted exports were flagging but said domestic demand was resilient) But consumption has clearly failed to pick up after July’s surprise rate cut — retail sales disappointed even during September’s festival season.  BoK clearly expects things to get worse: it noted that ” a cut now is better than later to help the economy”.

Ms. Lagarde’s comments, which gives emphasis on the short term at greater costs of the future, can be summed up into two types of casuistry: 

The delusion of central planning: 

From the great Ludwig von Mises (Omnipotent Government),

It is a delusion to believe that planning and free enterprise can be reconciled. No compromise is possible between the two methods. Where the various enterprises are free to decide what to produce and how, there is capitalism. Where, on the other hand, the government authorities do the directing, there is socialist planning. Then the various firms are no longer capitalist enterprises; they are subordinate state organs bound to obey orders. The former en­trepreneur becomes a shop manager like the Betriebsführer in Nazi Germany.

As well as the delusions of the elixir of inflationism or perhaps a stealth scheme being employed by the cabal of central bankers to demolish what remains of laissez faire capitalism 

From the deity or icon of inflationism, Lord John Maynard Keynes (PBS.org) [bold added]

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Inflationists are either aware of the evils their policies create but nevertheless insidiously impose them for covert political reasons, or have been too blinded by their possession of power.

Fatal Conceit: Philippine Authorities to Avert Asset Bubbles

Philippine authorities suddenly become “cognizant” of internal bubbles.

From the Bloomberg,

The Philippines’s move to enhance oversight of real-estate lending this year will help curb speculation and improve its ability to prevent a property bubble from forming, the central bank said.

The regulator ordered banks to provide more details on their real-estate exposure in August, including reporting investments in stocks and bonds that fund property ventures and loans to developers of low-cost homes. Closer monitoring will encourage banks “to exercise more self-restraint,” Deputy Governor Nestor Espenilla said in a phone interview Sept. 7.

“It’s a preemptive move,” Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said in an interview the same day in his office. “We don’t see at this point signs of strains in the market but we don’t want to wait for that. That’s the trick with asset bubble; when you see it, that means it has formed and you’re too late.”

The country joins Asian nations including China and Singapore seeking to temper soaring property prices and avoid the economic fallout created by the bursting of the U.S. subprime bubble and real-estate crashes from Spain to Ireland. Philippine bank loans and investments in the property sector surged to a record in March, central bank data show, and rising prices have spurred Ayala Land Inc. (ALI) and other developers to build more homes.

More signs of blowing bubbles. Again from the same article…

The number of condominium units built in the Philippines rose 48 percent to 33,000 last year as construction of 50,000 units started, Colliers said in its report. The PSE Property Index (PPROP), which tracks developers including Ayala Land and SM Development Corp. (SMDC), has risen 36 percent this year, surpassing the 19 percent increase in the Hang Seng Property Index. (HSP)

Philippine banks’ loans and investments in the property sector rose to a record at the end of March to 538.1 billion pesos, 21 percent higher than a year earlier and 3.8 percent more than the previous quarter, central bank data show. Real estate made up 15.2 percent of lenders’ total loans in the first quarter, rising from 14.5 percent a quarter earlier, according to the central bank.

25,000 Homes

Ayala Land, the nation’s biggest developer, plans to start construction of a record 25,000 homes this year, 20 percent more than last year, Chief Executive Officer Jaime Augusto Zobel de Ayala said in an interview in March. It boosted 2012 spending to 47 billion pesos from an earlier budget of 37 billion pesos, Ayala Land said in a report posted on its website last month.

The central bank’s latest moves “are credit positive for Philippine banks with substantial real estate lending because they will prompt the banks to tighten credit controls,” Moody’s said on Aug. 30.

This despite current regulatory measures…

Bangko Sentral currently caps banks’ real-estate exposure at 20 percent of total lending, with some exclusions. With the additional information now required from lenders, the central bank will decide if its policy needs to be reviewed, Espenilla said.

The central bank said Aug. 23 it will expand reporting of real-estate exposure to include real-estate projects and “ancillary services like buying and selling, rental and management of real estate properties.” The scope is broader than the previous ruling, which limited real-estate activities to the acquisition, construction and improvement of property, it said.

Who decides and what makes of a bubble? Or how will bubbles be defined? The definition of bubbles essentially shapes the path of regulation.

Will bubbles be based at specified price levels? Designated number of units available or being constructed? Amount of lending? Shadow banking?

Yes there have been regulatory caps, but as I have been pointing out (I am partly being validated by these, see some past articles here, here and here) nobody really knows where money will flow into. Nobody really knows how proceeds of loans will be allocated or spent. All statistics bruited by the political agencies are presumptions of the strict compliance. They ignore human action.

There is such a thing called regulatory arbitrage.

A good example is the stock market crash of Bangladesh in 2011. Money borrowed for supposed industrial uses has been diverted to the stock market which led to a stock market bubble. The ensuing crash came about as government tightened money.

Yet how will regulators “prevent the bubble”? Supply side caps? Demand side caps? Financial caps?

All these talks about curtailing bubbles again represents authorities superficially dealing with symptoms. In reality, they are pretentious actions. They are intended to paint the imagery of the politics of “do something” in the assumption that they “know” or fully comprehend the situation.

Really?

Bubbles serve to bloat statistical economic growth. This gives media mileage and approval ratings for the incumbent authority. They also enrich the political as well as the politically favored economic class whom are usually the first recipients of easy money policies.

So why they should political authorities curb a bubble? Should they kill the goose that lays their golden eggs?

Why do governments pursue easy money policies anyway?

Let me give the stereotyped political economic answer, because they want to achieve “permanent quasi-booms” by inducing statistical economic growth via demand management policies channeled through debt acquisition and the socialization of investments (deficit spending). In short, DEMAND MANAGEMENT POLICIES are in reality BUBBLE POLICIES.

Let me quote Henry Hazlitt again. The Inflation Crisis and How to Resolve It (p.121)

In sum, if we directly lower the interest rate, we encourage more borrowing and therefore encourage an increase in the money-and credit supply. If we begin by increasing the money-and-credit supply, we thereby lower the interest rate. So one begets the other: lower interest rates bring about inflation, and inflation brings about lower interest rates

So political authorities ease policies which generate internal bubbles and then blame the private sector from which they call for more restrictions on civil liberties. Nice. A great set up for totalitarianism.

I previously quoted Nassim Taleb’s caustic attack on intellectuals

Intellectuals and academics (except for Hayekians) tend to treat the rest of the population as total idiots. So it is very hard for them to swallow the statement that, statistically, an intellectual is as much, much more likely to be the total idiot.

Let me add that defining bubble in itself will become a political issue. Developers, construction industry, property owners, banks, financial industry (e.g. stock market, mutual funds, pension and insurance and etc…) and OFWs the among many specific interests groups who benefit from the current bubble will compete to influence decisions of policymakers.

Politicians, as noted above, will also prefer to see bubbles in order to push on their political agenda (example near record high stock market backed by high approval ratings facilitates national credit rating upgrades that lends to increased government spending and more debt based accumulation by political favorites)

Of course, no politicians will admit to this directly. They channel these mostly through their expert allies who intimidate the public with technical ‘spending and welfare economics ’ gobbledygook.

Yes F. A. Hayek was right.

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design

Spurious knowledge of containing bubbles presented as self-righteous omniscience.

Singapore’s Gradualist Descent to the Welfare State

This is sad news. Using demographic conditions, Singaporean politicians are considering to embrace more welfare policies.

From Bloomberg,

Singapore will need to raise taxes in the next two decades as the government boosts social spending to support an aging population, Prime Minister Lee Hsien Loong said as he proposed measures to boost the country’s birth rate.

The prime minister pledged to ensure sufficient affordable housing for citizens, invest in pre-school education and add nursing homes for the elderly. He urged Singaporeans to build a more compassionate society, reject anti-foreigner sentiment and have more babies, saying the nation needs to re-invent itself as the economy faces slower growth after years of rapid expansion.

“As our social spending increases significantly, sooner or later, our taxes must go up,” Lee said late yesterday in his annual televised National Day Rally address, which ran for more than two hours. “Not immediately, but if we are talking about 20 years, certainly within that 20 years, whoever is the government will at some point have to raise taxes because the spending will have to be done.”

The government has sought to address public concern that Singapore’s economic progress has left its poorest citizens vulnerable to rising living costs while an influx of foreigners increased competition for jobs, education and housing. After the ruling party last year suffered its smallest electoral win since independence in 1965, Lee tightened rules on hiring overseas workers and boosted aid for the poor

This just goes to show that politicians everywhere and of all stripes are cut from the same cloth. They use up all kinds of populist excuses to justify the expansion of political power over society which benefits them more than their constituents.

(chart from Tradingeconomics.com)

The reality is that rising costs of living has been a result of Singapore’s negative real rate regime and hardly from foreign workers.

This easy money regime has fueled a property bubble… (chart from Department of Statistics Singapore)

…through a build up of unsustainable private debt (Chart from UTW.blogspot.com)

Crises emanating from busting bubbles have been frequently used to justify social controls. The Emmanuel Rahm famous quote during the peak of the 2008 crisis resonates

You never want a serious crisis to go to waste…Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity for us to do things that you could not do before.

Once the ball gets rolling for the feedback loop of tax increase-government welfare spending then Singapore eventually ends up with the same plagues that has brought about the current string of crises, particularly loss of economic freedom, reduced competitiveness and productivity, lower standard of living, a culture of dependency and irresponsibility and of less charity and unsustainable debt conditions. The outcome from politically instituted parasitical relationship would not merely be a financial or economic crisis but social upheavals as well.

As Cato’s Doug Bandow write,

The history of the welfare state is the history of public enterprise pushing out private organization. The impact was largely unintentional, but natural and inevitable. Higher taxes left individuals with less money to give; government’s assumption of responsibility for providing welfare shriveled the perceived duty of individuals to respond to their neighbors’ needs; and the availability of public programs gave recipients an alternative to private assistance, one which did not challenge recipients to reform their destructive behavior

The sad truth is that people never really learn.

War on Short Selling: Price Controls Fail

Prohibition in terms of market transactions or via short selling fails.

From Wall Street Journal’s Real Time Economics Blog

New research supports the notion that instituting temporary short-selling bans during stock market downturns doesn’t do any good.

This might not seem like shocking news to those who believe you have to let market forces play themselves out, even in volatile times, and to those who distinguish between the impact of short selling, the borrowing of shares with the expectation of buying them later at a lower price, and flat-out selling.

Nonetheless, the regulatory bans go on. Just last month, temporary short-selling bans of sorts were put in place in Italy and Spain.

In this latest look at short-selling bans, Federal Reserve Bank of New York economist Hamid Mehran teamed with Robert Battalio and Paul Schultz, both of whom are finance professors at the University of Notre Dame.

Harkening back to the dark days of the financial crisis in the U.S., they studied the two-week ban on short selling of financial stocks that was imposed in 2008 in a futile attempt to stop the massive sector bleeding.

“The 2008 ban on short sales failed to slow the decline in the price of financial stocks; in fact, prices fell markedly…and stabilized once it [the ban] was lifted,” the economists wrote in the latest issue of the New York Fed’s Current Issues in Economics and Finance.

And lest you think this tilting at windmills by banning short sales is a harmless sort of regulatory exercise by perplexed officials in the midst of a crisis, the trio begs to differ.

“If anything, the bans seem to have unwanted effects of raising trading costs, lowering market liquidity and preventing short sellers from rooting out cases of fraud and earnings manipulation,” the economists write.

The real goal of the trading bans is to establish price controls.

Regulators pass the proverbial hot potato (shift the blame) of policy failures or has been scapegoating the markets.

Regulators want to project of “do something” actions, no matter how these would only make the matters worse through “unwanted effects”.

“The regulatory bans go on”, is an example where in the world of politics, doing the same thing over and over and expecting different results has been the convention. That’s because political agents don’t get sanctioned for their decision mistakes which has widespread longer term implications.

On the contrary, regulators use market’s volatility as excuses to curb on people’s property rights, and importantly, to expand their control over the marketplace. This is why the idea that crises may have been premeditated cannot be discounted because political agents see these as “opportunity to do things you think you could not do before”

Political authorities also fantasize about using edicts to banish the natural laws of demand and supply to oblivion. Theories, history and or experience seem to have no relevance in the world of politics.

Importantly the tactical “do something” operations have barely been about the “public goods” but about saving their skins and of their cronies.

Of course, price controls can also come in indirect forms like central bank’s zero bound rates, quantitative easing and the operation twist (manipulation of the yield curve) and or other forms of interventionism (e.g. changing of the rules).

Even the classic Pavlovian mind conditioning communication strategies (signaling channel) employed by political institutions have had distortive effects on the marketplace.

The popular attribution of today’s recovery in the US equity markets looks like a nice example.

From Bloomberg,

The Standard & Poor’s 500 Index (SPX) rose for a sixth day, the longest rally since 2010, amid speculation the Federal Reserve will pursue more stimulus measures. Treasuries rose and commodities fell as Chinese and French data added to signs the global economy is slowing…

“The weaker the data, the higher the likelihood of stimulus from central banks,” said Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $47 billion. “The weakness in China is likely to prompt a move there,” he said. “While the Fed has been clear it will do anything to support growth, some people tend to think it’s inevitable.”…

“Whilst markets have recently been rallying on bad news -- in the expectation that it will lead to further stimulus from the central banks -- the deterioration in the fundamentals is becoming a bit harder to ignore,” said Jonathan Sudaria, a trader at Capital Spreads in London. “Traders may be disappointed if their thirst for stimulus isn’t satiated as soon as they expect.”

See bad news is once again good news.

The public’s mindset has continually been impressed upon or manipulated to expect of salvation from political actions.

Central banks of major economies have more than doubled the size of their balance sheets (chart from cumber.com) yet the global debt crisis has not only lingered but has been worsening.

Interventionism through price controls have basically reduced the financial markets into a grand casino, which has tilted to benefit cronies while at the same time has vastly reduced or narrowed people's time orientation.

All these merely validates what the great professor Ludwig von Mises warned, (italics original)

Economics does not say that isolated government interference with the prices of only one commodity or a few commodities is unfair, bad, or unfeasible. It says that such interference produces results contrary to its purpose, that it makes conditions worse, not better, from the point of view of the government and those backing its interference.

At the end of the day, economic reality will expose on the quackery of interventionism.

Central Bankers Talk Doom, Markets Surge

You’ve got to hand it central bankers for deftly using scare tactics to drive up the markets

This from a Bloomberg article entitled Central Banks Warn Greek-Led Euro Stress Threatens World

Central banks intensified warnings that Europe’s failure to tame its debt crisis threatens to roil the world’s financial markets and economy as Greece’s election in two days looms as the next flashpoint for investors.

Monetary policy makers from the U.K. to Japan and Canada sounded the alert about potential fallout from the single currency bloc’s troubles. They spoke as Group of 20 leaders prepare to meet in Mexico next week amid the weakest international economy since the 2009 recession.

A victory by Syriza, the party that promises to renege on Greece’s end of the bailout deal, could speed the nation’s exit from the euro. Absent a quick fix from divided European governments, central bankers may have to engage in fresh crisis- fighting of their own to ensure markets operate and their economies grow if the election jolts investors. Spain’s 10-year bond yield vaulted to 7 percent yesterday in a fresh sign of the stress that has plagued the region for two years.

The crisis has created a “large black cloud of uncertainty hanging over not only the euro area, but our economy too, and indeed the world economy,” Bank of England Governor Mervyn King said in London late yesterday.

‘Major Shock’

Canada faces a “major shock,” and global financial conditions could deteriorate significantly if Europe’s crisis worsens, the country’s central bank said yesterday. Bank of Japan (8301)Governor Masaaki Shirakawa said June 13 that the euro area poses the biggest challenge to the world’s No. 3 economy. The BOJ today kept monetary policy unchanged, while saying it will be giving “particular” attention to global market developments.

So when has DOOM become POSITIVE for markets? Well that’s when markets have been PROMISED to be defended with a tsunami of STEROIDS

Here are some examples:

Bank of England proposes £140 billion rescue plan

From the Telegraph

George Osborne unveiled a £140 billion emergency scheme to try to avoid a second credit crunch caused by the ongoing chaos in the eurozone.

The Bank of England is to offer money to high-street banks to kick-start mortgage and small business lending to prevent loans being rationed for many families and entrepreneurs, the Chancellor announced.

It comes after sharp rises in the costs of mortgages and other loans in recent months as banks struggle to raise money in the midst of the single currency crisis.

Bloomberg on last night’s positive reception of US markets on the alleged doomsday

Expectations for global policy action grew as central banks intensified warnings that Europe’s failure to tame its crisis threatens the economy. European Central Bank policy makers have overcome a key concern about taking the benchmark rate below 1 percent, two euro-area central bank officials said. The June 17 vote will turn on whether Greeks accept open-ended austerity to stay in the euro or reject the conditions of a bailout and risk becoming the first to exit the 17-member currency.

Fed Action

Stocks also rose on speculation the Federal Reserve may join central banks in taking steps to boost growth. Data today showed that industrial production unexpectedly fell and consumer confidence slid, adding to evidence of U.S. economic weakness. U.S. policy makers meet June 19-20.

Of course, flooding the world with money would not be sufficient, central bankers would need to ensure an easing of regulatory conditions to make the credit environment conducive, e.g. lighten up on collateral requirements

From Marketwatch.com

International regulators are on the verge of easing new banking rules that are meant to help the safety of the financial system, the Wall Street Journal reports, citing unnamed sources. Some of the regulators apparently worry that forging ahead with the new requirements could actually make the European financial meltdown worse, the newspaper noted. So, the new plan is to make it easier for the industry to comply with requirement that lenders keep on hand enough liquid assets to weather market plunges or other disasters.

To preserve the current system, central bankers should be expected to INTENSIFY the use of steroids—which do not really help anyway and actually worsen it—in order to postpone what is truly inevitable.

Today’s markets have increasingly been anchored or hostaged on expectations of huge infusions of steroids. This implies that FAILURE to please or satisfy such expectations would lead to tremendous or outsized volatilities.

Nonetheless central bankers have, in reality, been using the crisis to expand political control over their constituents

As the great libertarian H.L. Mencken once said,

The urge to save humanity is almost always a false-face for the urge to rule it.

Be very careful out there.

Quote of the Day: The Power of Scapegoatism

It is important to observe two points about projection:

[1] the power of the state depends upon the scapegoat, whose presence is necessary to disguise and diffuse the conflicts, corruption, and contradictions that underlie all political systems. Economic depressions, wars, police-state brutalities, the wholesale plundering of taxpayers, and a more general cultural collapse, must be seen as the evildoing of persons outside the establishment. In this way, petroleum company greed – rather than Federal Reserve policies – can be offered as an explanation for rising gasoline prices.

[2] The scapegoat need not be innocent of any wrongdoing. It is only essential that the substitute be seen as a wrongdoer, and that his or her role not be attributed to any established institutional interests. Soldiers who commit vicious crimes during wartime are guilty of what they have done. They can also serve as scapegoats to deflect the greater crimes of the war system itself…

If you want a career in politics, just be certain to keep a regular supply of scapegoats at your disposal, and to learn the fine art of quickly fabricating more in case of an emergency. The article of faith of all politicians – "never let a crisis go to waste" – demands this skill!

That’s from Law Professor and author Butler Shaffer at the LewRockwell.com.

I believe that scapegoatism have not been limited to politicians or to the would-be-practitioners, but also to people whose minds have been addled by politics.

Germany Wants New EU Constitution: Lebensraum Merkel Version?

Sometimes I ponder upon the possibility that today’s crisis has been engineered to impose ulterior goals. In the resonant words of former White House Chief of Staff Rahm Emmanuel,

You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before.

This I think may apply to the European Union

The Reuters reports,

Germany wants to reignite a debate over creating an EU constitution to strengthen the bloc's ability to fight off financial troubles and counter-balance the rising influence of emerging economies, Germany's foreign minister said on Friday.

Guido Westerwelle said the bloc's Lisbon treaty, drafted after Dutch and French voters rejected a proposed constitution in 2005, was not enough to keep European decision-making structures effective.

"We have to open a new chapter in European politics," Westerwelle told reporters on the sidelines of a meeting of EU foreign ministers in Copenhagen. "We need more efficient decision structures."

The German minister presented the idea to his counterparts at the Copenhagen meeting, during which they also discussed plans to run foreign policy more cheaply. He said discussions on the issue of a new constitution should continue in Berlin.

The desire and the insistence to centralize the EU translates to an implied expansion of Germany’s political power over the region. Since the EU crisis unfolded, it has dawned on me that the path towards a fiscal policy union seems like a variant of one of Adolf Hitler’s major goals—Lebensraum (living space) for the German people.

But instead of forcible (military based) annexations, the Germans have leveraged the acquisition of political power through stealth ‘expansionist policies’ such as bailouts and the attendant ‘proposed’ changes in EU’s political and regulatory framework as the above.

Yet in a world where forces of decentralization has been snowballing, these surreptitious designs are likely to meet the same fate as with the Hitler version.

Integrating the EU, should not be coursed through centralization but through economic freedom and sound money. With economic freedom, the relevance of geographical political borders diminishes.

Will IMF’s bailout of Euro Reach $ 3.5 trillion?

From the Daily Mail,

Christine Lagarde, the managing director of the IMF, said the current war chest of around £250billion ‘pales in comparison with the potential financing needs of vulnerable countries’ and needs to be expanded to deal with ‘worst-case scenarios’.

Sources in Washington said the IMF’s pot of cash could be expanded to £2.6trillion although officials in London said that figure looked ‘incredibly high’.

Mrs Lagarde’s warning came as U.S. President Barack Obama said the debt crisis in Europe was ‘scaring the world’ and that eurozone leaders were not dealing with the issue quickly enough.

And a top Bank of England economist urged leaders around the world to stop the world plunging back into recession. ‘It’s doing something rather than just saying something that counts,’ said Ben Broadbent, a member of the Bank of England’s Monetary Policy Committee charged with setting UK interest rates.

Danger: U.S. President Barack Obama said the debt crisis in Europe was 'scaring the world'

Britain is liable for 4.5 per cent of IMF funding – meaning it would have to contribute around £115billion to an enlarged bailout fund, or £4,600 per household.

It is conceivable that figure may turn out to be slightly lower because Britain’s share is falling as rapidly growing economies such as China contribute more.

Britain has already handed over £12.5billion in emergency loans to Greece, Ireland and Portugal to help prop up the euro.

The staggering rescue package proposed by the IMF signify that the rest of the world will be included. This would be led by the United States which reinforces their backdoor participation (aside from the monetary channels).

(Wikipedia.org: IMF)

And the proposed bailout implies of the inclusion of ASEAN and the Philippines with 3.94% voting share.

IMF: IMF Executive Directors and Voting Power

Yet such humongous bailout scheme, if it does become a reality, would adversely impact global economic growth as resources are shifted from productive use towards saving the skins of Euro bankers and the political class. Filipinos will pay for this with higher taxes or inflation.

Moreover, there are no guarantees that shock and awe bailout tactics will work over the medium term or the long term. Just look at what has been happening to the US, whose economy continues to flag despite the trillions of dollars expended by the US Federal Reserve and the US government.

Also, by funneling large amounts of resources to current rescue programs, the world would have depleted or drained their resources should another crisis arise anytime.

Lastly, the use of scare tactics to secure political deals, seem to be acknowledged by politicians. Except that for some, they pretend to fight them, when they in truth—they have impliedly been promoting them.

Euro Crisis: Path towards United States of Europe?

Is the Emmanuel Rahm creed of using crisis as an opportunity to expand political power being tacitly enforced in the Eurozone?

This from the New York Times, (bold emphasis mine)

As leaders in Europe try to contain a deepening financial crisis, they are also increasingly talking about making fundamental changes to the way their 17-nation economic union works.

The idea is to create a central financial authority — with powers in areas like taxation, bond issuance and budget approval — that could eventually turn the euro zone into something resembling a United States of Europe.

Officials have been hesitant to publicly endorse such a drastic change. But privately they say the issue has gained urgency in recent months, as it has become clear that Europe’s current approach, which requires unanimity on any significant moves, is unwieldy and inefficient. The idea is being promoted by some global financial officials, who worry about the risks that continued uncertainty in Europe poses to the global economy.

Recently, for instance, when an official from a European central bank met with a financial official in Washington, his host brandished the Articles of Confederation, the 1781 precursor to the United States Constitution, to use as an example of why stronger unions become necessary…

And that is why, despite all the political obstacles, Europe appears to be inching closer to a more centralized approach, and some officials are going public on the issue…

The idea of a European Treasury that would enforce fiscal discipline on wayward countries, while also having the power to spread European Union wealth from healthier countries to ones struggling to pay their debts, is fiercely unpopular among voters in many countries. Those in prosperous nations like Germany do not want to see their taxes used to bail out countries that borrowed their way into trouble. And those in weaker nations are reluctant to allow outsiders to dictate how their governments spend their money and tax their citizens.

I have dealt with this earlier.

Those who believe that the success of the Euro will depend on ‘fiscal and political union’ will acclaim this move as a necessity. They would see this as an elixir. Again, they would be wrong.

As I pointed out earlier, the Soviet Union (or Yugoslavia) had them both, but this didn’t stop these unions from dissolution. Proponents of the political-fiscal union nostrum, only look at the US as THE model, without looking at others. This is called the focusing effect.

Yet everything boils down to fundamental economics, where spending more than one can finance would extrapolate to insolvency, bankruptcy and or eventual political dismemberment. No amount of fiscal or political union will stop this. Politics will never supersede economics.

The obsession to centralize and its fulfillment would account for the death knell for the Euro.

Apparently the current political winds hasn’t been to wean away from the welfare state, instead, such gradualist actions toward a ‘United States of Europe’ implies of the opposite—the preservation and expansion of the tripartite political architecture of the welfare state-central bank-banking system. In other words, use the political union to save the banking system and expand control over the marketplace.

This reveals that the politicians of the Eurozone seek models that only suit their self-interests.

As earlier noted, the political climate of the Eurozone could be symptomatic of the state of the mental health of many Europeans.

France-Germany Plot a Politically Centralized Eurozone with More Financial Repression

The struggle to save the Euro has been giving windows of opportunities for Euro politicians to adapt the Emmanuel Rahm doctrine/creed—use the crisis to implement things that could not be done before.

From the thejournal.ie, (bold emphasis mine)

FRANCE AND GERMANY have agreed to introduce a joint corporate tax rate in their countries by 2016 – and have called on other Eurozone countries to establish a collective financial ‘government’ for the entire Eurozone.

Holding a press conference after a bilateral summit, German chancellor Angela Merkel and French president Nicolas Sarkozy said their countries would also try to introduce a so-called ‘Tobin Tax’ on financial transactions as a matter of priority.

Those who believe that the success of the Euro will depend on ‘fiscal and political union’ will acclaim this move as a necessity. They would see this as an elixir. Again, they would be wrong.

As I pointed out earlier, the Soviet Union (or Yugoslavia) had them both, but this didn’t stop these unions from dissolution. Proponents of the political-fiscal union nostrum, only look at the US as THE model, without looking at others. This is called the focusing effect.

Yet everything boils down to fundamental economics, where spending more than one can finance would extrapolate to insolvency, bankruptcy and or eventual political dismemberment. No amount of fiscal or political union will stop this. Politics will never supersede economics.

Moreover, the plan to establish a ‘Tobin Tax’ on financial transactions has proven to be ineffective that would only likely result to a backlash.

Notes the Bloomberg/SF Gate, (bold highlights mine)

A 1996 report on financial transactions taxes for the Canadian government found that Sweden's 1984 levy of 1 percent on equity trades, doubled two years later, caused half of the country's trading to move to London by 1990, a year before the tax was abolished. Capital gains revenues decreased as volume sank, "almost entirely offsetting revenues from the equity transactions tax," the report said.

We are seeing a world enduring dramatic strains from a transition. Accrued stress from democratization of information, widening of social connections and commerce via (globalization) which has been operating in stark conflict with 20^th century welfare based governance system.

Politicians desire to preserve the status quo by proposing the same centralized vertical structured organizations that had been scuttled by the end of the 20^th century.

Yet even under the same structure, boom bust policies and welfare spending, which has been the cause of this continuing crisis, has still been viewed as a sine qua non path to political survival or success. This is path dependency.

That’s why there seems no way out as welfare political economies are bound for collapse, regardless of ‘unions’. It’s just a matter of time.

Notice how French and German politicos have been propounding to adapt measures that would forcibly rechannel resources from the private sector of the region to the foundering politically privileged banking sector.

Eventually people will see through this tomfoolery and revolt. The growing incidence of the riots in developed economies (as in UK) could be imputed to such dynamics.

Notice too how desperate these politicos are, such that they would take upon any measures regardless of the consequences. Taxes on financial transactions will force investors to look elsewhere.

All these for the sake of saving the banking system who feeds or funds the welfare government and who has been backstopped by central banks.

Now Europe’s self-inflicted losses can be Asia, ASEAN and the Philippines’ gains. All we need is to assume the opposite policies of what Europe or the US has been doing. This means we should decentralize, liberalize trade, decrease taxes and repeal cumbersome laws and regulations, and most importantly is to diminish dependence on politics by embracing economic freedom.

In short, let entrepreneurs determine the prosperity of the nation.