China Expands Bailout Measures, Reduces Reserve Requirements for Select Financial Firms

China’s government selectively lowered reserve requirements as part of credit boosting measures (euphemism for bailouts)

From Bloomberg, (bold emphasis mine)

China widened efforts to support cash-strapped companies in Zhejiang and rural areas hit by a credit squeeze that’s slowing the second-largest economy just as Europe’s debt crisis saps export demand.

The People’s Bank of China cut the reserve ratio for more than 20 rural credit cooperatives nationwide by half a percentage point, according to an announcement from its Hangzhou branch in Zhejiang, where small businesses have complained about lack of access to credit. Bank of America Merrill Lynch predicts officials will lower the ratio for large commercial banks early in 2012.

Evidence is mounting that growth has moderated in the economy that’s led the global expansion, with home sales falling 25 percent last month and a report yesterday signaling manufacturing may shrink the most in almost three years. Premier Wen Jiabao has pledged to “fine tune” policy as needed.

“The unexpectedly sharp drop in China’s flash PMI for November, if corroborated by other indicators, is likely to push policy makers to go beyond policy ‘fine-tuning’ to outright easing,” said Mark Williams, a London-based Asia economist at Capital Economics Ltd. “Confirmation that the People’s Bank has lowered reserve requirements for some banks is likely to be only the start.”…

The Chinese central bank’s move yesterday reduces the percentage of deposits the cooperatives are required to park with the central bank to 16 percent, a “normalization” after an increase a year ago, the Hangzhou branch said in its statement yesterday. The extra 0.5 percentage point requirement had penalized lenders that failed to meet lending targets in rural areas, and was imposed after a check carried out each November, it said.

In another sign of China’s shift, the central bank on Nov. 11 said local-currency lending was 586.8 billion yuan ($92 billion) in October, exceeding September’s 470 billion yuan and higher than the 500 billion yuan median estimate in a Bloomberg News survey.

Injecting Liquidity

The PBOC has also injected greater liquidity into the market for loans between banks, through open market operations that have depressed interbank rates, Goldman Sachs Group Inc. economists wrote in a note to clients last week. Further tools will include a slower pace of currency appreciation and looser fiscal policy, Goldman analysts said.

Under the incumbent fiat currency regime, the policy of bailouts has become a widespread practice, which China has not been exempt. Nonetheless, these political actions will intensify China’s domestic boom bust cycle dynamics.

Phisix-ASEAN Equities: Awaiting for the Confirmation of the Bullmarket

The interests behind the Bush Administration, such as the CFR, The Trilateral Commission -- founded by Brzezinski for David Rockefeller -- and the Bilderberger Group, have prepared for and are now moving to implement open world dictatorship within the next five years. They are not fighting against terrorists. They are fighting against citizens."-- Dr. Johannes B. Koeppl, PhD, former German defense ministry official and advisor to former NATO Secretary General Manfred Werne

I have gradually[1] been making made my case[2] for a Santa Claus-Chinese New Year rally for global equity markets and the resumption of the region and domestic inflation driven bullmarket.

Parameters for the Resumption of the Bullmarket

Essentially what I think will drive this rally will mainly be the cumulative credit easing and bailout policies, which will be seconded and or buttressed by seasonal forces going to the first quarter of 2012.

One must not forget that in developed economies, stock markets are partly seen as targets of monetary policies which underpins the ‘confidence’ factor that drives the orthodoxy’s perceived economic transmission from the fallacious theory of spending, based on the wealth effect multiplier.

Additionally, with the politically advantaged banking and financial sector’s substantial exposures to the stock markets, this implies that part of bailout mechanism will be channeled through policies supportive of global stock markets. In short, a bailout of stock markets signify as partly a bailout of the banking and financial sector.

In the US, in 2010, life insurance, pension funds, mutual funds and exchange traded funds accounted for 38% of net equity purchases by investor type[3]. Whereas household investors which comprises 36% of equity ownership, are the largest group of investors in funds and registered investment companies accounting for 23% of the household’s financial assets at the year-end 2010[4]

Yet, unknown to most, such bailout policies constitute as a redistributive mechanism from the real economy to financial markets. In short, looting society to save the banking and political elites.

Moreover, while I have ruled out the risks of recession in the US, I continue to maintain vigilance over the highly fragile developments of the Eurozone and on China.

So far China appears to be exhibiting tentative signs of economic recovery.

Signs of improvements in new orders and industrial production aside from moderating inflation rate, which in October fell to 5.5 percent from 6.1% the previous month—the biggest drop in the annual rate from one month to the next since February 2009 -- and a further pullback from July's three-year peak of 6.5 percent[5].

Some have been speculating that monetary tightening policies may come to a halt and even bring about greater chance of “a small easing in the reserve requirement ratio”[6]

Nevertheless, the recent slowdown which has affected some sector has forced China’s government to banks sell bonds to raise money for loans to small enterprises and tolerate higher rates of non-performing loans among other measures to encourage bank lending[7]. Further, the collapse of some manufacturers in Wenzhou, which I earlier mentioned[8], has forced the government to set up an emergency 1 billion yuan fund and launched an anti-loan shark campaign which led to the Oct. 27 arrest of a couple suspected of illegally raising 1.3 billion yuan

Overall like in the West, the intuitive response has been to provide liquidity to parties affected by the slowdown.

I have also outlined my parameters in ascertaining the impact of the aforementioned global policies on the financial markets and the respective economies which should either confirm or falsify on my expectations of a bubble cycle at work.

Here I pointed out that for a meaningful recovery to occur, ASEAN region’s stock markets in conjunction with the commodity markets should pick up the tempo and begin to outperform other financial assets. And such dynamic should also be supported by recovering US and global equity markets.

Internal dynamics should also support the resumption of the Phisix bullmarket. These should be seen in improvements in the volume of trading, Philippine Peso, foreign trade, sectoral performance and the general market breadth.

Global Ruling Elites Tightens Grip

Again the sharp vicissitude in the marketplace only proves how global political developments have become the dominant factor in driving investor sentiments, and equally, how financial markets have been transformed into a short-term oriented financial rollercoaster underwritten by casino like demeanor through the growing dependence on policy steroids.

Last Wednesday, as Italian sovereign yields soared beyond 7% major global equity markets tanked[9].

Nevertheless, the losses has swiftly been neutralized as Greece has named former central banker Lucas Papademous as the new Prime Minister[10] the next day.

And as of this writing, Italy’s politics has Mario Monti[11], another Goldman Sachs adviser and who is also chairman of the David Rockefeller’s think tank, the Trilateral Commission[12] and a member of the highly enigmatic and exclusively for people with immense political clout, the Bilderberg group[13], has replaced Prime Minister Silvio Berlusconi[14].

Along with ECB President Mario Draghi[15], who has also been a Goldman Sachs alumnus, the Draghi-Papademous-Monti appointments appear to be growing evidence where global ruling elites appear to be flexing their political muscles to maintain their stranglehold over the crumbling welfare states.

And these are the same “behind the scene” working group, who mostly represents the heads of big banking houses, who played a major role in the establishment of the US Federal Reserve and whom has long been promoting a centralized foundation of fiat paper money standard system (a global central bank) and crony capitalism through statist laws.

As Hans-Hermann Hoppe in an interview with the Daily Bell recently said[16],

And they realized that their ultimate dream of unlimited counterfeiting power would come true only if they succeeded in creating a US-dominated world central bank issuing a world paper currency such as the bancor or the phoenix; and so they helped set up and finance a multitude of organizations, such as the Council on Foreign Relations, the Trilateral Commission, the Bilderberg Group, etc., that promote this goal. As well, leading industrialists recognized the tremendous profits to be made from state-granted monopolies, from state-subsidies, and from exclusive cost-plus contracts in freeing or shielding them from competition, and so they, too, have allied themselves to and "infiltrated" the state.

So it would signify as obtuseness for some to argue that adapting inflationary policies (e.g. devaluation) has been meant to attain “employment equilibrium” through adjustments on “real wages” using the money illusion, when evidence reinforces the political incentives behind all these.

The attempt to takeover control of EU’s political institutions looks increasingly like signs of desperation by global financial elites to preserve their politically enshrined privileges.

Going back to the equity markets, while expectations of the passage of the proposed austerity based reforms combined with hopes on the efficacies from technocratic based governance may have helped market sentiment to expunge earlier losses, in reality the driving force of the weekend gains has primarily been due to the European Central Bank’s intercessions whom has been acquiring Italian bonds to calm twitchy markets[17].

The point is that anytime the markets suffer from a convulsion whether in the US, Europe, Japan, China or elsewhere, the mechanical or impulsive response by central bankers has been to inject massive dosages of liquidity into the system or by manipulating or the easing of interest rates, which also means liquidity injections.

And as earlier pointed out, the easing process seems like a worldwide phenomenon.

To quote Morgan Stanley’s Spyros Andreopoulos & Manoj Pradhan[18]

Global re-easing is underway as the global central bank reacts to the risk of recession in the major economies. The central banks of Australia and Romania became the latest to cut policy rates this week, joining the central banks of Switzerland, Turkey, Brazil, Russia, Israel and Indonesia. G4 central banks have been active too, on the unconventional side. Mostly because of the lack of conventional room to ease, the Fed, the ECB, the BoJ and the BoE have all delivered unconventional packages. The result? An increase in the G5 excess liquidity metric we track, though liquidity in the BRICs has not yet turned thanks to China's monetary policy maintaining its position and a recent tightening from the RBI.

These cumulative easing measures being undertaken by global central banks are likely to buttress risk assets as equities.

Gold & Oil Signals Inflation Ahead

I have pointed out lasted week that gold prices seem to be indicating to us the liquidity conditions of the world.

My guess is that once gold prices breaks above the $1,800 psychological barrier, we will likely see a test of the recent record high which if successfully encroached would probably imply another test of the psychological $ 2,000 level. We may see $ 2,000 sometime early 2012.

Gold hasn’t been the only commodity that has been exhibiting signs of an inflationary driven boom, interim oil price trends seem to validate gold’s price action.

There appears to be a developing ‘tight correlation of oil and of the US S&P 500’ as shown in the upper window of the chart above.

According to US Global Investors’ Frank Holmes[19]

The EIA says “the recent strong relationship between oil and equity prices resembles that seen during the economic downturn and recovery in 2008-2010.” According to EIA data, crude oil and the S&P 500 Index have had a positive correlation in 12 of the past 13 quarters. A positive correlation had not occurred once in the previous 35 quarters. In fact, crude oil and equities experienced a negative correlation during five quarters over that time period.

This implies if this oil-stocks correlation should hold, then rising US equity markets will be supported by higher oil prices.

In addition, the Brent-WTI oil spread which recently hit a record has been precipitously falling.

The widening spread of the Brent oil[20], which represents the international benchmark sourced from the North Sea and traded in London, compared to the WTI, the US benchmark, has been attributed to the glut of supplies from infrastructure restrained refinery system at Cushing Oklahoma which have been receiving inputs from expanding supplies of unconventional shale oil and bitumen[21] and partly due to growing demand from Asia, who imports[22] more of the region’s oil requirements from London.

While Bespoke Invest says that the narrowing spread could be because of the “lack of a meaningful rally in Brent North Sea crude”[23], I would add that the relatively faster increase in money supply in the US, which may partly translate to relative to stronger inflation driven “economic growth” could also serve as the cause.

Besides, the embattled Eurozone has just commenced to use their printing presses more aggressively. This means that the effects from such policies has yet to filter into their markets and economy. (chart from Danske Bank[24])

In other words, the inflationary momentum seems stronger in the US than in the Euro-Asia sphere.

Thus I expect such momentum to likewise be expressed in the relative performance of the global equity benchmarks.

Mixed Showing of ASEAN Bourses and the Phisix

This week’s volatility has not left ASEAN markets unscathed.

Instead this week’s market actions appear to have generated mixed results for the ASEAN-4.

The Philippine Phisix (PCOMP) and the Thailand (SET) posted modest gains, while Indonesia (JCI) and Malaysia (FBMKLCI) registered marginal losses, one should expect that if global central banks continue with this easing environment, then these markets should regain its lost footing and resume with their outperformance.

So far, it looks as if the recent highs made by the ASEAN bourses could be tested by the end of the year, if not during the first quarter of 2012.

Again we would like to see material improvements in the actions within the Philippine Phisix.

This week’s gains have yet to diffuse into the average daily Peso volume traded, market breadth and the Peso.

And the largely mixed showing can partly be seen in the sectoral performances where in 4 of the 6 industries, the top two gainers led by property and services has provided much of the weight of gains of the Phisix composite.

Another bright development is that while the Phisix wasn’t able to dodge the selloff in the Wednesday’s US-European equity markets, the magnitude of the decline was a lot less than the developed economy counterparts.

Investing in the Higher Order Stages of Production

So far, from the depth of September 26^th shakeout, the mining index appears to have recovered most. This has been followed by the property index which apparently has been this week’s best gainer.

Although I am not sure which sector should give the best returns over the short term, I am predisposed towards what Austrian economics calls as the higher order stages of production or the capital goods industries, which are likely the beneficiaries of the business cycle, specifically, mining, property-construction and energy, as well as financials whom are likely to serve as funding intermediaries for these projects.

As the great Murray N. Rothbard wrote[25]

Now what happens when banks print new money (whether as bank notes or bank deposits) and lend it to business? The new money pours forth on the loan market and lowers the loan rate of interest. It looks as if the supply of saved funds for investment has increased, for the effect is the same: the supply of funds for investment apparently increases, and the interest rate is lowered. Businessmen, in short, are misled by the bank inflation into believing that the supply of saved funds is greater than it really is. Now, when saved funds increase, businessmen invest in "longer processes of production," i.e., the capital structure is lengthened, especially in the "higher orders" most remote from the consumer. Businessmen take their newly acquired funds and bid up the prices of capital and other producers' goods, and this stimulates a shift of investment from the "lower" (near the consumer) to the "higher" orders of production (furthest from the consumer) — from consumer goods to capital goods industries

Finally one can’t discount that volatile pendulum swings will remain a common trait of the financial markets as investors attempt to decipher on the political directions of crisis affected nations.

But so far political developments continues to point towards central bank policies taking the centerstage, which implies that for ASEAN equities which includes the Philippine Phisix, an inflation fueled boom phase of the current bubble cycle, is likely ahead.

---

[1] See Global Risk Environment: The Transition from Red Light to Yellow Light, October 30, 2011

[2] See Gold Prices Climbs the Wall of Worry, Portends Higher Stock Markets, November 6, 2011

[3] US Census Bureau Equities, Corporate Bonds, and Treasury Securities--Holdings and Net Purchases, by Type of Investor (December 31^st 2010), 2012 Statistical Abstract

[4] ICI.org 2011 Investment Company Fact Book A Review of Trends and Activity in the Investment Company Industry

[5] Reuters.com China inflation, output create room for pro-growth steps, November 9, 2011

[6] von Mehren Allan Forecast update: Euro area in recession, US and China recover, Danske Research Global, November 9, 2011

[7] Bloomberg.com, China Credit Squeeze Prompts Suicides, Violence, November 7, 2011

[8] See More Evidence of China’s Unraveling Bubble?, October 16, 2011

[9] See Politically Driven Global Stock Markets Slammed Anew, November 10, 2011

[10] See Former Central Banker Papademos Is Greece New Prime Minister, November 11, 2011

[11] Wikipedia.org Mario Monti

[12] Wikipedia.org Trilateral Commission

[13] Wikipedia.org Bilderberg Group

[14] Bloomberg.com Berlusconi Resigns as Monti Prepares New Italian Government, November 13, 2011

[15] See Revolving Door Syndrome: European Central Bank’s New Head was Goldman Sach’s Honcho, June 25, 2011

[16] Hoppe Hans-Hermann The Mind of Hans-Hermann Hoppe, Mises.org, April 13, 2011

[17] CNN money Italian bonds on ECB life support, November 10, 2011

[18] Andreopoulos Spyros and Pradhan Manoj Global Re-Easing, November 7, 2011 Morgan Stanley Global Economic Forums

[19] Holmes, Frank The Many Factors Fueling a Return to $100 Oil, November 11, 2011 US Global Investors

[20] Wikipedia.org Brent Crude

[21] Vuk Verdan Understanding Oil Price Differences, August 19, 2011 Casey Research

[22] Fontevecchia, Agustino, Oil Prices: Brent-WTI Spread Above $22 And Here To Stay, July 8, 2011 Forbes.com

[23] Bespoke Invest Brent - WTI Spread Drops to Lowest Level Since June, November 10, 2011

[24] von Mehrn Allan Spotlight turns to Italy November 11, 2011 Weekly Focus, Danske Bank

[25] Rothbard, Murray N. How the Business Cycle Happens, September 6, 2005 Mises.org

China Bails Out the Ministry of Railways

From Forbes’ Gordon Chang, (bold emphasis mine)

Last week, the powerful National Development and Reform Commission saved the country’s Ministry of Railways from default by announcing that the bonds of the troubled agency have “government support.” The announcement followed a decision earlier this month to cut taxes on interest paid on railway bonds. Moreover, the Railways Ministry reached agreement with the central government to force state banks to support its nationwide building program. Reports indicated that some of these financial institutions had previously cut their quota of loans to the debt-ridden ministry.

The series of steps saved the country’s railroad-building program, which had been floundering. Due to a cash crunch, contractors had stopped payments to cement and steel companies, migrant workers had not received wages for months, and projects to build thousands of kilometers of track had been put on hold.

Beijing in 2008 embarked on a gargantuan program, the world’s largest high-speed rail network. By the end of last year, the Railways Ministry had overseen the construction of 8,358 kilometers of high-speed rail track. It is building lines totaling a little more than 10,000 kilometers.

The centerpiece of the program is, by itself, the most expensive civil engineering project in history, the Beijing-Shanghai line, costing an estimated 221 billion yuan, about $34.6 billion. That overtakes the second-place Three Gorges Dam, which cost a mere 203.9 billion yuan. The line connecting the two cities is 1,318 kilometers, including 16 kilometers of tunnels. The service opened this July, about a year ahead of schedule.

The high-speed train cuts travel time between the two cities from 10 hours to less than five—when it is running. A series of power outages have plagued the showcase project since it began operating. Yet the repeated service interruptions are not nearly as bad as the collision in Wenzhou on July 23 on another line. The two-train accident, according to official statistics, killed 40 people and injured 177…

Zhao, perhaps China’s foremost critic of the high-speed rail system, points out that the low usage has created a debt crisis. The Beijing Jiaotong professor argues that if the Railways Ministry goes ahead and spends 4 trillion yuan as planned, it “will have absolutely no ability to repay.” Even now, the agency is having difficulty meeting its obligations. It has issued a series of bonds this year, in part to pay off maturing obligations and partly to pay suppliers.

The financial difficulties of the Railways Ministry have begun to affect state enterprises, such as China CNR Corporation, a train maker. CNR is now issuing bonds to meet its obligations to repay short-term debt. It has short-term debt because its accounts receivable skyrocketed due to “delayed payments” by the Ministry of Railways. As a result of mounting debt, CNR’s stock is among the worst performers in Asia. And the markets have also punished the shares of its competitor, CSR Corporation, the other state train maker.

The Railways Ministry is expected to issue 100 billion yuan of bonds this year, but some analysts think the agency has severely underestimated its cash needs. The ministry says it needs to raise 45.5 billion yuan for fixed assets this year when others think the actual figure is closer to 1.05 trillion yuan.

In any event, MOR, as the Railways Ministry is known, now has 2.1 trillion yuan of debt. Before the NDRC’s vague announcement of support last week, analysts were quietly talking about the ministry’s default. A bailout, perhaps in the form of the Ministry of Finance assuming the railway debt, is still necessary. The rescue effort will be costly: the Railways Ministry’s obligations are more than 5% of China’s GDP.

Beijing has the financial resources to save the ministry, but unfortunately it is not the only debtor that can use a hand. Chinese officials decreed the construction of most of the infrastructure built in the last three years because they wanted to create GDP. Now, however, they are busy thinking about how they will pay for all the “ghost cities” and train tracks to nowhere they have just built for this purpose.

In China, broadening signs of bailouts have not been signs of stabilization. Instead, the whack a mole or piecemeal approach signify as indications of a broadening deterioration of her economy. As I earlier said, expect more bailouts to come.

Importantly, these are risks that can't be ignored.

US Banks are Exposed to the Euro Debt Crisis

Recently I wrote about how US banks have been dependent on Bernanke’s QEs, where the unfolding Euro debt crisis could heighten risks a contagion on the US banking industry.

Also given that US banks have substantial exposures to European banks, it isn't farfetched to perceive a potential contagion from any further deterioration in the latter's banking sector.

The Huffington Post gives some numbers (bold emphasis mine)

If European politicians are unable to contain their sovereign debt problems, Wall Street could be on the brink of another financial crisis, according to economists.

Although U.S. banks have limited their direct exposure to Greece, they have loaned hundreds of billions of dollars to European banks and governments that may not be able to pay them back, according to the Bank for International Settlements. If some European governments and banks are forced to default on at least part of their debt, American banks could lose a significant amount of money on that account alone.

The resulting panic from investors could compound the losses. Short-term borrowing costs would spike, bank stock prices would plummet and investors could demand their money from banks, several economists say. In a repeat of the liquidity crisis of 2008, some U.S. banks could run out of the money necessary to fund their day-to-day operations…

Some predict that a European financial crisis would spread quickly to U.S. shores. The pain would not come directly from government defaults; U.S. banks have loaned just $36.2 billion to the five European governments that are in danger of defaulting: Greece, Ireland, Portugal, Spain and Italy. But U.S. banks have also loaned $60.6 billion to banks in those five countries, and $275.8 billion to banks in Germany and France, according to data from the Bank for International Settlements.

A string of sovereign debt defaults would endanger the survival of major European banks, including those in France and Germany, which hold a large amount of troubled sovereign debt on their books, some economists note. According to Bryson, French banks' exposure to the five European countries that are in danger of defaulting amounts to 25 percent of France's gross domestic product, and the exposure of German banks to those countries is worth 15 percent of Germany's total output…

It remains largely unknown which U.S. banks are particularly exposed to the risks in Europe, so investors have drawn their own conclusions. The insurance market reveals that investors believe Morgan Stanley is most at risk, followed by Bank of America, Goldman Sachs and Citigroup, respectively, according to market data provider CMA. Bank of America's debt now is more than three times more expensive to insure than during the height of the financial crisis in October of 2008.

Morgan Stanley and Goldman Sachs are particularly vulnerable to the crisis in Europe because they rely largely on short-term borrowing from other banks and do not have a large deposit base, according to an economist who requested anonymity because he is not allowed to comment on specific banks. During a financial crisis, short-term borrowing costs could spike as banks cut back on short-term lending to protect themselves, putting banks such as Morgan Stanley and Goldman Sachs in danger of running out of money, the economist said.

The cartel like existence and the depth of interconnectedness of the banking system of major economies makes them highly vulnerable to any shocks which the current Euro crisis has been exhibiting.

And that’s why bailout policies will likely continue and may even become coordinated with increased participation from outsiders, particularly the IMF and some of the major emerging markets.

Stagflation, NOT DEFLATION, in the Eurozone

Some Keynesian diehards reach a state of egotistical orgasm, when they see the financial markets crashing, accompanied by record low interest rates.

They extrapolate these selective events as having to prove their point that today’s environment has been enveloped by a deflation induced liquidity trap- or the economic conditions, which according to Wikipedia.org, when monetary policy is unable to stimulate an economy, either through lowering interest rates or increasing the money supply.

Let’s see how valid this is.

The Dow Jones Euro Stoxx 50 or an equity index representing 50 blue chip companies within the Eurozone is down by about 28% as of yesterday’s close from its peak in mid-February.

For the month of August, the Stoxx 50 fell by a dreadful 16%.

Yet according to the Bloomberg the Eurozone’s inflation has raced to the highest level in 3 years.

European inflation unexpectedly accelerated to the fastest in almost three years in September, complicating the European Central Bank’s task as it fights the region’s worsening sovereign-debt crisis.

The euro-area inflation rate jumped to 3 percent this month from 2.5 percent in August, the European Union’s statistics office in Luxembourg said today in an initial estimate. That’s the biggest annual increase in consumer prices since October 2008. Economists had projected inflation to hold at 2.5 percent, according to the median of 38 estimates in a Bloomberg survey.

Chart above and below from tradingeconomics.com

So low growth, high unemployment and elevated inflation in the Eurozone characterizes a stagflation climate and NOT deflation, in spite of the stock market meltdown.

While it is true given that commodity prices have crashed lately, which should temper on or affect consumer price inflation levels downwards, this is no guarantee that deflation in consumer prices will be reached. Perhaps not unless we see a nasty recession or another bout of a funding crunch. So far global central banks continue to apply patches in the fervid attempt to contain funding pressures.

Besides, contra-liquidity trap advocates, everything will depend on how monetary policies will be conducted in the face of unfolding events.

The ECB has actively been purchasing bonds (Danske Bank).

Yet despite these actions, the ECB has adapted a relatively less aggressive stance compared to the US in 2008. This implies that the policy response has continually lagged market expectations, and importantly, has been continually hobbled by political divisions, which has led to the ensuing turmoil.

This is not to say that aggressive responses by political authorities would solve the problem, but as in the US, they could serve as a balm. These are the “extend and pretend” actions that eventually will implode. For me, it’s better to have the painful market adjustments now, than increasingly built on systemic fragility which eventually would mean more pain.

Yet, despite current hurdles central bankers have not given up.

Denmark will unleash the same inflationism to bailout her banks. According to this report from Bloomberg,

Denmark’s central bank said it will provide as much as 400 billion kroner ($72.6 billion) as part of an extended collateral program to provide emergency liquidity to the country’s banks.

Lenders will also be able to borrow liquidity for six months, alongside the central bank’s existing seven-day facility, at a rate that tracks the benchmark lending rate, currently 1.55 percent, the bank said in a statement today.

The country’s lenders face a deepening crisis that threatens to stall a recovery in Scandinavia’s worst-performing economy. Two Danish bank failures this year triggered senior creditor losses, leaving international funding markets closed to all but the largest banks. Lawmaker efforts to spur a wave of consolidation and help banks sidestep Denmark’s bail-in rules have so far failed.

For as long as central bankers fight to preserve the political status quo by using expansionary credit easing tools or inflationism, deflation remains a less likely outcome.

German Minister Calls Tim Geithner’s Bailout Plan ‘Stupid’

From Telegraph’s Ambrose Evans Pritchard, (bold highlights mine)

German finance minister Wolfgang Schauble said it would be a folly to boost the EU's bail-out machinery (EFSF) beyond its €440bn lending limit by deploying leverage to up to €2 trillion, perhaps by raising funds from the European Central Bank.

"I don't understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense," he said.

Mr Schauble told Washington to mind its own businesss after President Barack Obama rebuked EU leaders for failing to recapitalise banks and allowing the debt crisis to escalate to the point where it is "scaring the world".

"It's always much easier to give advice to others than to decide for yourself. I am well prepared to give advice to the US government," he said.

The comments risk irritating the White House. US Treasury Secretary Tim Geithner has been a key driver of plans to give the EFSF enough firepower to shore up Italy and Spain, fearing a drift into "cascading default, bank runs and catastrophic risk" without dramatic action.

The danger for Germany is that America will lose patience, with unpredictable consequences. The US Federal Reserve is currently propping up the European banking system in a variety of ways, including dollar swaps.

Continuing political schisms will add to concerns over liquidity conditions and will likely continue to pressure financial markets whom have been mainly dependent on steroids. It will take bailout policies with a scale of "shock and awe" to reflate financial markets which implies coordinated actions.

Fed Audit Reveals US Federal Reserves’ $16 Trillion Bailouts of Foreign Banks

A staggering $16 trillion of bailout money had been extended to foreign banks by the US Federal Reserve during the last crisis!

That’s the finding from the audit commissioned by US Congress through the GAO

From New American

During a 2½ year period starting at the end of 2007, the Federal Reserve provided more than $16 trillion in secret bailouts to banks and other companies around the world, according to a government audit of some of the U.S. central bank’s operations.

Much of the Fed's largesse was lavished on banks in Europe (such as Barclays, left) and Asia, the audit revealed. More than $3 trillion, for example, went to financial institutions in just five European countries. Trillions more flowed toward some of the biggest banks in America. Institutions from Brazil and Mexico to South Korea and Canada also benefited.
The 266-page report, produced by Congress’s non-partisan investigative service known as the Government Accountability Office (GAO), has already sparked intense outrage since its release on July 21. Fed apologists, however, have been quick to defend the actions, saying they were “necessary” to “save” the economy and justified under the Federal Reserve Act.

“The scale and nature of this assistance amounted to an unprecedented expansion of the Federal Reserve System’s traditional role as lender-of-last-resort to depository institutions,” the report stated.

And the crisis had been also used to extend financial privileges by the politically connected. Again from the same article,

According to the analysis, more than 80 percent of the Fed’s largest contracts to manage the programs were awarded without bidding.

Many of the companies that received the contracts were also being showered with central-bank bailouts at the same time. And more than a few insiders were granted “waivers” to hold investments in companies that were being rescued by the Fed.

This serves as more evidence that governments only work to protect powerful vested interest groups and would mainly act to preserve the current central bank-banking system-government cartelized political arrangement.

With the US Federal Reserve’s implicit role as the lender of last resort (aside from other financing roles as guarantor, liquidity provider, buyer, market maker and etc…) for most of the ‘too big to fail’ banking system and central banks worldwide, which has been funded mostly by inflationism, the decadence of the US dollar standard is almost assured.

Serial Bailouts For Greece (and for PIIGS)

From the Bloomberg

European Union officials will focus on preparing a new aid package for Greece that includes a “voluntary” role for investors after the EU and International Monetary Fund approved the fifth installment of Greece’s 110 billion-euro ($161 billion) bailout.

“I expect the euro group to agree to additional financing to be provided to Greece under strict conditionality,” Luxembourg Prime Minister Jean-Claude Juncker said after meeting with Greek Prime Minister George Papandreou in Luxembourg yesterday. “This conditionality will include private-sector involvement on a voluntary basis.”

Papandreou agreed to 78 billion euros in additional austerity measures and asset sales through 2015 to secure the 12 billion euro bailout payment and meet conditions for receiving an additional rescue package. He agreed to make “significant” cuts in public-sector employment and establish an agency to manage accelerated asset sales, according to a statement released in Athens yesterday. The plan is fueling popular opposition and protests across Greece...

Under the original rescue, Greece was due to sell 27 billion euros of bonds next year. EU leaders and Papandreou have acknowledged that a return to markets won’t be possible with Greece’s 10-year debt yielding 16 percent, more than twice the level at the time of the bailout. The EU is looking to close that funding gap through new loans and bondholders’ willingness to roll over Greek debt, EU officials have said.

Europe’s financial leaders needed to hammer out a revised Greek package to persuade the IMF to pay its share of the 12 billion-euro tranche originally due in June. The IMF had indicated that it would withhold its 3.3 billion-euro piece unless the EU comes up with a plan to close Greece’s funding gap for 2012. The EU-IMF statement said the full payment would be made in early July. [all bold highlights mine]

These developments seem on the way to validate my views.

Mainstream has been ignoring the political role of the EU’s existence, the role of central bankers, the intertwined complex political relationships between the banking sector, the central banks and the national governments and the inherent ability of central banks to conduct bailouts by inflating the system.

If the US had QE [Quantitative Easing] 1.0, 2.0 and most likely a 3.0...until the QE nth, despite poker bluffing statements like this [Morningstar.com]

"The trade-offs are getting--are getting less attractive at this point. Inflation has gotten higher," Bernanke said. He cited the rising inflation expectations seen then and offered "it's not clear that we can get substantial improvements in payrolls without some additional inflation risk." He went on, "If we're going to have success in creating a long-run sustainable recovery with lots of job growth, we've got to keep inflation under control."

...or that the earlier consensus view that QE 3.0 is unlikely,

central bank watchers believe there is simply no appetite within the central bank to undertake such an effort, which some in markets are already referring to as QE3.

...QE 3.0 will be coming for the above reasons as earlier discussed.

The path dependence from previous actions of regulators and political leaders and the dominant ideological underpinnings which influence their actions combined with the framework of current network of political institutions are highly suggestive of the direction of such course of actions.

Importantly, the implicit priority to support the politically privileged industries as the banking system—which functions as the main intermediary that channels private sector funds to governments. Alternatively, this means policies has been designed to sustain the status quo for politicians and their allies.

Further, it would be misplaced to put alot of emphasis on political protestations by the public as measure to predict future policies.

Political leaders have learned the lessons of Egypt and Tunisia and have been applying organized violence as seen in Libya, in Yemen or in Syria.

It won’t be different for the political leaders of the developed world. As indications of their prospective actions against popular political pressure, even several protestors on US Memorial Day have suffered from police brutality from just “dancing”

In addition, sentiment can shift swiftly.

Recent soft patches in economic data, which I think has been part of the signaling channel maneuver, which has likewise began to affect markets, appear to be reversing previous sentiments which says that the Fed has “no appetite” for QE 3.0.

Again from Morningstar

Having received the strongest indication yet of a slowing economic recovery, traders of U.S. interest rate futures on Friday backed off on the notion that the Federal Reserve will start raising its short-term federal-funds rate during the first half of next year.

Finally, for those who say they are ‘massively’ short the Euro...

...it’s gonna be alot of pain for them.

So like the US, the above only reveals that the Eurozone crisis will mean that Greece and the PIIGS will experience bailouts after bailouts after bailouts. Thus, an implied currency war in the process until the unsustainable system of fiat money collapses or people awaken to the risk thereof and apply political discipline.

For now, the policy of bailouts and inflationism will continue to be the central feature of today’s global policy making process where currency values will be determined by the degree of relative inflationism applied.

US Federal Reserve’s Pandora’s Box Reveal of More Crony Bailouts

Unknown to most, the politics of redistribution will always benefit certain vested interest groups.

The US Federal Reserve’s actions during the 2008 Lehman crisis should serve as worthy examples.

From the Bloomberg,

Credit Suisse Group AG, Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc each borrowed at least $30 billion in 2008 from a Federal Reserve emergency lending program whose details weren’t revealed to shareholders, members of Congress or the public.

The $80 billion initiative, called single-tranche open- market operations, or ST OMO, made 28-day loans from March through December 2008, a period in which confidence in global credit markets collapsed after the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.

Units of 20 banks were required to bid at auctions for the cash. They paid interest rates as low as 0.01 percent that December, when the Fed’s main lending facility charged 0.5 percent.

“This was a pure subsidy,” said Robert A. Eisenbeis, former head of research at the Federal Reserve Bank of Atlanta and now chief monetary economist at Sarasota, Florida-based Cumberland Advisors Inc. “The Fed hasn’t been forthcoming with disclosures overall. Why should this be any different?”

Until brought to light by the public, politicians tend to look the other way.

Again from the same Bloomberg article, (bold highlights mine)

Congress overlooked ST OMO when lawmakers required the central bank to publish its emergency lending data last year under the Dodd-Frank law.

“I wasn’t aware of this program until now,” said U.S. Representative Barney Frank, the Massachusetts Democrat who chaired the House Financial Services Committee in 2008 and co- authored the legislation overhauling financial regulation. The law does require the Fed to release details of any open-market operations undertaken after July 2010, after a two-year lag.

Conflict of interest is an innate constituency of political distribution.

For instance, Rep Barney Frank admitted that he got his ex-lover a job at the Fannie Mae. So denials like the above should be viewed distrustfully.

Part of the Fed’s recent bailouts included wives of Wall Street bigwigs and Libya’s Gaddafi.

And this is one of the many reasons why we should End the Fed and consider the denationalization of money.

Federal Reserve’s Pandora’s Box: Some Wives of Wall Street’s Head Honchos Were Loan Beneficiaries Of Bailout Program

Today we seem on a roll with the subject of crony capitalism.

Now we turn to the US Federal Reserve.

Earlier we noted that ally turned adversary Libya’s Muammar Qaddafi had been one of the ‘unexpected’ beneficiaries of the Fed’s post Lehman stabilization programs.

It appears that more controversial recipients are surfacing from the opening of the Fed’s equivalent of the mythical Pandora’s box.

This time wives of some of Wall Street’s head honchos had reportedly been granted with political privileges in the form of ‘bailout’ loans.

From Rolling Stone Magazine’s Matt Tibbi, (bold highlights mine) [hat tip Bob Wenzel]

Now, following an act of Congress that has forced the Fed to open its books from the bailout era, this unofficial budget is for the first time becoming at least partially a matter of public record. Staffers in the Senate and the House, whose queries about Fed spending have been rebuffed for nearly a century, are now poring over 21,000 transactions and discovering a host of outrages and lunacies in the "other" budget. It is as though someone sat down and made a list of every individual on earth who actually did not need emergency financial assistance from the United States government, and then handed them the keys to the public treasure. The Fed sent billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans each to Citigroup and Morgan Stanley, and billions more to a string of lesser millionaires and billionaires with Cayman Islands addresses. "Our jaws are literally dropping as we're reading this," says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont. "Every one of these transactions is outrageous."

But if you want to get a true sense of what the "shadow budget" is all about, all you have to do is look closely at the taxpayer money handed over to a single company that goes by a seemingly innocuous name: Waterfall TALF Opportunity. At first glance, Waterfall's haul doesn't seem all that huge — just nine loans totaling some $220 million, made through a Fed bailout program. That doesn't seem like a whole lot, considering that Goldman Sachs alone received roughly $800 billion in loans from the Fed. But upon closer inspection, Waterfall TALF Opportunity boasts a couple of interesting names among its chief investors: Christy Mack and Susan Karches.

Christy is the wife of John Mack, the chairman of Morgan Stanley. Susan is the widow of Peter Karches, a close friend of the Macks who served as president of Morgan Stanley's investment-banking division. Neither woman appears to have any serious history in business, apart from a few philanthropic experiences. Yet the Federal Reserve handed them both low-interest loans of nearly a quarter of a billion dollars through a complicated bailout program that virtually guaranteed them millions in risk-free income…

In August 2009, John Mack, at the time still the CEO of Morgan Stanley, made an interesting life decision. Despite the fact that he was earning the comparatively low salary of just $800,000, and had refused to give himself a bonus in the midst of the financial crisis, Mack decided to buy himself a gorgeous piece of property — a 107-year-old limestone carriage house on the Upper East Side of New York, complete with an indoor 12-car garage, that had just been sold by the prestigious Mellon family for $13.5 million. Either Mack had plenty of cash on hand to close the deal, or he got some help from his wife, Christy, who apparently bought the house with him…

It's hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that's exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan's penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment….

This is the deal of a lifetime. Think about it: You borrow millions, buy a bunch of crap securities and stash them on the Fed's books. If the securities lose money, you leave them on the Fed's lap and the public eats the loss. But if they make money, you take them back, cash them in and repay the funds you borrowed from the Fed. "Remember that crazy guy in the commercials who ran around covered in dollar bills shouting, 'The government is giving out free money!' " says Black. "As crazy as he was, this is making it real."…

In the case of Waterfall TALF Opportunity, here's what we know: The company was founded in June 2009 with $14.87 million of investment capital, money that likely came from Christy Mack and Susan Karches. The two Wall Street wives then used the $220 million they got from the Fed to buy up a bunch of securities, including a large pool of commercial mortgages managed by Credit Suisse, a company John Mack once headed. Those securities were valued at $253.6 million, though the Fed refuses to explain how it arrived at that estimate. And here's the kicker: Of the $220 million the two wives got from the Fed, roughly $150 million had not been paid back as of last fall — meaning that you and I are still on the hook for most of whatever the Wall Street spouses bought on their government-funded shopping spree.

Read the rest here.

Another anecdotal evidence where government’s supposed public service is seemingly a fraud.