Sand Castles From US Regulatory Reforms

“Any fool can make a rule. And any fool will mind it.” - Henry David Thoreau

Among the popular misconceptions about resolving today’s social and institutional problems is the issue of regulation.

For many (particularly for the left), the recent Financial Crisis had been a product of “free markets” or “market fundamentalism”. This notion is totally absurd.(there can be no pure free market in a world of central banking)

For instance many hold that the repeal of the Glass Steagall Act via the Gramm-Leach Bliley as responsible for today’s crisis.

Economist and Professor Luigi Zingales argues otherwise[1], ``In 1984, the top five U.S. banks controlled only 9% of the total deposits in the banking sector. By 2001, this percentage had increased to 21%, and by the end of 2008, close to 40%. The apex of this process was the 1999 passage of the Gramm-Leach-Bliley Act, which repealed the restrictions imposed by Glass-Steagall. Gramm-Leach-Bliley has been wrongly accused of playing a major role in the current financial crisis; in fact, it had little to nothing to do with it. The major institutions that failed or were bailed out in the last two years were pure investment banks — such as Lehman Brothers, Bear Stearns, and Merrill Lynch — that did not take advantage of the repeal of Glass-Steagall; or they were pure commercial banks, like Wachovia and Washington Mutual. The only exception is Citigroup, which had merged its commercial and investment operations even before the Gramm-Leach-Bliley Act, thanks to a special exemption.” (bold emphasis)

On the other hand, the Community Reinvestment Act (CRA), whose regulations forced financial institutions to accept risky borrowers have also been held responsible.

According to Peter J. Wallison of the American Enterprise Institute[2], ``In 1995, the regulators created new rules that sought to establish objective criteria for determining whether a bank was meeting CRA standards. Examiners no longer had the discretion they once had. For banks, simply proving that they were looking for qualified buyers wasn’t enough. Banks now had to show that they had actually made a requisite number of loans to low- and moderate-income (LMI) borrowers. The new regulations also required the use of “innovative or flexible” lending practices to address credit needs of LMI borrowers and neighborhoods. Thus, a law that was originally intended to encourage banks to use safe and sound practices in lending now required them to be “innovative” and “flexible.” In other words, it called for the relaxation of lending standards, and it was the bank regulators who were expected to enforce these relaxed standards.”

Meanwhile, the Cleveland Fed downplays the role of the CRA in this crisis[3].

There has been “no consensus” as to which of the two laws had truly an adverse impact on the markets. Since there has been no perfect correlation, the ensuing tit-for-tat in the media had been reduced into a debate based on ideological slant.

In addition, we also said that the impact of laws tend to be divergent and ‘time sensitive’, where some laws could have positive interim term effects but with negative long term impact, and vice versa.

As caveat, while correlations may not appear to be outright linear, as the debate above holds; it would be misguided to attribute the lack of correlation to a single variable or to one law considering that there are many other laws or variables that also combine and or compete to expand or diminish the effects of a particular law.

Here the underlying general principles or theory will be more dependable than simply relying on statistics or math. Murray Rothard notes of the observation of John Say in distinguishing these[4],

``Interestingly enough, Say at that early date saw the rise of the statistical and mathematical methods, and rebutted them from what can be described as a praxeological point of view. The difference between political economy and statistics is precisely the difference between political economy (or economic theory) and history. The former is based with certainty on universally observed and acknowledged general principles; therefore, “a perfect knowledge of the principles of political economy may be obtained, inasmuch as all the general facts which compose this science may be discovered.” Upon these “undeniable general facts,” “rigorous deductions” are built, and to that extent political economy “rests upon an immovable foundation.” Statistics, on the other hand, only records the ever changing pattern of particular facts, statistics “like history, being a recital of facts, more or less uncertain and necessarily incomplete.” (underscore mine)

In short, trying to pinpoint the effects of one law based on oversimplified statistics to the political economy can be tricky. And this is where the left has used statistics or math to obfuscate evidences.

More of John Say from Murray Rothbard, ``The study of statistics may gratify curiosity, but it can never be productive of advantage when it does not indicate the origin and consequences of the facts it has collected; and by indicating their origin and consequences, it at once becomes the science of political economy.” (underscore mine)

Regulatory Arbitrage And Fighting The Last War

And as we earlier pointed out to the contrary, where laws are lengthy, ambiguous, partisan and subject to political discretion, they tend to be distortive and create imbalances in the system. And the impact of some of these laws indubitably accentuated the crisis.

Nevertheless there had been some policies or regulations that had relatively more material impact among the others (see figure 3).

Figure 3: Bank of International Settlements: Ingredients of the Crisis

The apodictic evidence from last crisis had been the surfacing of the “shadow banking system” (see right window).

As pointed out earlier above, one of the unintended consequences of bad laws or overregulation is to have regulatory arbitrages, where markets look for regulatory loopholes from which it exploits. These are parallel to the emergence or existence of black markets over economies that operate heavily under price controls[5].

So even the multilateral government agency as the UN via its subsidiary the UNCTAD had to admit this[6], ``Recent United States banking regulations, for example, were designed to control risk through the measured capital ratio used by commercial banks, the report says. This attempt backfired because bank managers circumvented the rules either by hiding risk or by moving some leverage outside the banks. This shift in leverage created a "shadow banking system" which replicated the maturity transformation role of banks while escaping normal bank regulation. At its peak, the US shadow banking system held assets of approximately $16 trillion, about $4 trillion more than regulated deposit-taking banks. While the regulation focused on banks, it was the collapse of the shadow banking system which kick-started the crisis.”

The lesson of which clearly is that politics, no matter how heavy handed, can hardly control the fundamental laws of economics.

Another problem with regulation is that it fights the last war.

For instance during the last bubble, the issue of prominence had been the accounting fraud from Enron, Tyco International, Worldcom, Adelphia and others that gave rise to the Sarbanes-Oxley Act[7].

Obviously, from a hindsight bias the regulation failed to make any headway to stop the recent crisis. Again that’s because markets are dynamic and seizes the next loopholes as opportunity to expand.

Nonetheless some has argued that the Sarbox law itself has been a drag to the recovery of the US. An example is this commentary from Wall Street Journal’s James Freeman[8],

``Is Sarbox to blame? Many financial pundits say no, but the SEC survey results point in the other direction. When public companies are asked whether Section 404 has motivated them to consider going private, a full 70% of smaller firms say yes, and 44% of all public companies also say yes.

``Has Sarbox driven businesses out of the country? Among foreign companies, a majority in the survey say that Section 404 has motivated them to consider de-listing from U.S. exchanges, and a staggering 77% of smaller foreign firms say that the law has motivated them to consider abandoning their American listings.”

In short, another unintended consequence of having more regulation is to raise the cost of compliance.

In a globalized market, investors can arbitrage away regulatory burden or the cost of compliance by simply transferring to where there is less onus or costs.

Figure 4 IMF: Sovereign Debt to GDP in the G-7

Yet fighting the last war means attacking past problems which may not be the source of the next crisis.

Another factor that is seemingly ignored is that the leverage, which is now a “prominent” factor, acknowledged by the mainstream seems to be building not in the previous sectors, which suffered from a bust, but instead in government debt.

As in the earlier chart (figure 3 left window) from the speech of Hervé Hannoun[9] Deputy General Manager of the BIS, low interest rates which has allowed for the chasing of yields, low volatility and high risk appetite, were outstanding features of the last crisis. However, practically the same ingredients in the past we are seeing today.

And governments are in a tight fix because, as we have been saying[10], “ governments will opt to sustain low interest rates (even if it means manipulating them-e.g. quantitative easing) as a policy because ``governments through central banks always find low interest rates as an attractive way to finance their spending through borrowing instead of taxation, thereby favor (or would be biased for) extended period of low interest rates”

So governments are operating in a policy paradox.

They pretend to know the main sources of the crisis yet are addicted to it for political reasons. An addict can hardly refuse what’s keeping them going. It’s simply path dependency from what we call as policy “triumphalism”. According to the G-20, ``The global recovery has progressed better than previously anticipated largely due to the G20’s unprecedented and concerted policy effort.”[11]

Again we are being validated.

Agency Problem And Socializing Losses While Privatizing Profits

There is another problematic aspect in regulation; it’s called the agency problem or the principal agent problem.

It’s a problem which emanates from different incentives or goals by those operating within the industry.

For instance during the last crisis, risk monitoring was fundamentally outsourced by risk buyers to the ratings agencies (yes in spite of the army of professionals). On the other hand, originators of risk securities or risk sellers tied fees due the credit ratings agencies on the credit ratings they issued which were then sold to “sophisticated” financial institutions.

Said differently, the job of credit appraisals were delegated to the ratings agencies which incidentally derived its income from the issuers of securities, and not from the buyers. Whereas buyers of securities fully delegated the role of due diligence to the ratings agencies.

So credit risks had been ignored in the assumption that someone else would do it for them. As Charles Calomiris Columbia University recently said in an interview[12], “Agency problem...Ratings agencies were a coordination device for plausible deniability."

Figure 5: The Economist: Reforming Banking

Perhaps the ultimate source of ‘plausible deniability’ comes with attendant with the current structure of the banking system-it’s basically called the fractional reserve based banking platform (see figure 5).

Bank equity as % of assets is now nearly at the lowest level since the introduction of central banking and deposit insurance.

In a BIS paper from Andrew Haldane of the Bank of England[13] writes, ``Over the course of the past 800 years, the terms of trade between the state and the banks have first swung decisively one way and then the other. For the majority of this period, the state was reliant on the deep pockets of the banks to finance periodic fiscal crises. But for at least the past century the pendulum has swung back, with the state often needing to dig deep to keep crisis-prone banks afloat. Events of the past two years have tested even the deep pockets of many states. In so doing, they have added momentum to the century-long pendulum swing.”

This means that the banking system’s ability to take more risks comes under the broadening premise of “privatizing profits and socializing losses” as the guiding policy.

This means that aside from central banking, deposit insurance is another means to “privatizing profits and socializing losses” which allows the banking system to absorb more risks, while on the hand tolerates the expansion of regulatory powers by the central bank.

As Murray N. Rothbard wrote[14], `Under a fiat money standard, governments (or their central banks) may obligate themselves to bail out, with increased issues of standard money, any bank or any major bank in distress. In the late nineteenth century, the principle became accepted that the central bank must act as the “lender of last resort,” which will lend money freely to banks threatened with failure.

``Another recent American device to abolish the confidence limitation on bank credit is “deposit insurance,” whereby the government guarantees to furnish paper money to redeem the banks’ demand liabilities. These and similar devices remove the market brakes on rampant credit expansion.”

So moral hazard and the agency problem seem to be significant factors that had been transforming the developed world banking system.

Of course there are other potential sources of regulatory problems, such as economics and behavioural aspects of enforcement, conflicting laws, a multitude of arcane laws which the public can’t comprehend, Arnold Kling’s legamoron (laws that could not stand up under widespread enforcement) and others, but due to time constraints we will be limited to the above.

At the end of the day, those building up the expectations for more regulations as elixir to the current problem would likely fail them. Why? Because there will be a new crisis down the road and hardly any of the current reforms will stop it.

Until they deal with roots of the problem, bubbles like the game called whack-a-mole will keep reappearing. Yet history says that all paper money is bound to go back to its intrinsic value-zero.

---

[1] Zingales, Luigi Capitalism After the Crisis, National Affairs

[2] Wallison, Peter J. The True Origins of This Financial Crisis, American Spectator

[3] Nelson, Lisa Little Evidence that CRA Caused the Financial Crisis, Cleveland Fed

[4] Rothbard, Murray N. Praxeology as the Method of the Social Sciences

[5] An example of this is North Korea, which recently massively devalued her currency to fight the black markets. But unlike before where policies where met with passive resistance, riots broke out from which tempered Kim’s political approach. See Will North Korea's Version Of The 'Berlin Wall' Fall In 2010?

[6] UNCTAD, Shadow banking system that escaped regulation, faith in ´wisdom´ of markets led to meltdown, study says

[7] Wikipedia.org, Sarbanes-Oxley

[8] Freeman, James The Supreme Case Against Sarbanes-Oxley, Wall Street Journal

[9] Hannoun, Hervé Financial deepening without financial excesses, Bank of International Settlements, 43rd SEACEN Governors’ Conference, Jakarta

[10] See How Myths As Market Guide Can Lead To Catastrophe

[11] Wall Street Journal Blog, Text Of G-20 Finance Ministers, Central Bankers’ Statement

[12] Calomiris Charles, Econolog David Henderson: Calomiris on the Financial Crisis

[13] Haldane, Andrew Banking on the state Bank Of International Settlements

[14] Rothbard, Murray N., The Economics of Violent Intervention, Man, Economy and State

Celebrating Earth Day With Free Markets

There are two ways to celebrate Earth Day.

The first path, if we opt to follow the environmentalists solution; the most efficient way to reduce Carbon Footprint would be through atavism (bring life back to the medieval ages) or simply commit suicide.

As Michael S. Berliner, Ph.D. writes,

``Such is the naked essence of environmentalism: it mourns the death of one whale or tree but actually welcomes the death of billions of people. A more malevolent, man-hating philosophy is unimaginable."

But hostility to human affairs on the environment has long been here.

Professor Pierre Desrochers in the Financial Post writes, ``The idea that Nature is in fragile balance and under constant threat from human greed goes back much further than is generally believed.

``In his treatise On the Testimony of the Soul published more than 1,800 years ago, at a time when the world’s population was about 30 times lower than it is today, the theologian Tertullian noted with horror that humans have “become a burden to the Earth; the fruits of nature hardly suffice to sustain us; there is a general pressure of scarcity giving rise to complaints, since the Earth can no longer support us.” Fortunately, he added, “plague and famine, warfare and earthquake, come to be regarded as remedies.”

``Human existence was also long blamed for changes in the weather, as researchers Hans von Storch and Nico Stehr explained in a recent scientific article. Well before a supposed “consensus” blamed our use of coal, oil and natural gas for climate change, periods of cooling or heating over the last few centuries were attributed to various manmade causes such as witchcraft, deforestation, the invention of the lightning rod and then wireless telegraphy, cannon shots in the First World War and nuclear testing."

But since, people have outlasted such pessimism and will continue to do so.

And apparently beyond all the environmental ruckus, life has been improving.

Writes Bjorn Lomborg, ``But consider this: In virtually every developed country, the air is more breathable and the water is more drinkable than it was in 1970. In most of the First World, deforestation has turned to reforestation. Moreover, the percentage of malnutrition has been reduced, and ever-more people have access to clean water and sanitation."

So George Carlin's "Saving The Planet" video which we blogged last year George Carlin on Saving The Planet, should be a comic refresher anent the fallacy from the demagoguery engaged by extremist environmentalists.



The second way to celebrate Earth Day is to recognize that we are in a much better position to acknowledge the importance of our planet.

Again Bjorn Lomborg, ``But in a world in which most developing countries depend almost exclusively on fossil fuels to power their economies, it's both impractical and immoral to insist that the only solution is for everyone to drastically cut carbon emissions. This approach might make sense if we were able to offer developing countries practical, affordable alternatives to coal and oil. But we cannot— and as long as we can't, all we're really doing when we call for massive carbon cuts is asking the world's poor people to continue living lives of misery and deprivation...

"...we might consider one of the fundamental lessons of the past 40 years of environmental concern. You cannot expect people to care about what the environment may be like 100 years from now if they are worrying about whether their children have enough to eat. With this in mind, we should focus on the many more immediate problems faced by the developing world today — problems such as malnutrition, education, disease and clean drinking water."

In other words, the path to a better environment is to for economies to prosper first.

How? Through free markets.

Professor Pierre Desrochers anew, ``It was not regulation or green activism that provided for improvements in the quality of our environment over the last few decades but rather a process inherent to the market economy, leading to ever more efficient innovations and an ever more economical use of resources." (underscore mine)

The World Bank agrees, (bold highlights mine)

``A new report from the World Bank, International Trade and Climate Change: Economic, Legal, and Institutional Perspectives, says liberalization of the global trading system will be a key factor in helping developing countries reduce their greenhouse gas emissions and adapt to climate change.

“Climate change is a global challenge requiring international collaboration,” said Warren Evans, Director of Environment, World Bank. “One area where countries have successfully committed to a long-term multilateral resolution is the liberalization of international trade. Integration into the world economy has proven a powerful means for countries to promote economic growth, development, and poverty reduction.”

Said Evans, “Improving future human welfare is a goal shared by both global trade and climate regimes. Yet both climate and trade agendas have evolved largely independently through the years, despite their mutually supporting objectives. Since global emission goals and global trade objectives are shared policy objectives of most countries, and nearly all of the World Bank’s clients, it makes sense to consider the two sets of objectives together.”

Amen

US-China Pork 'Imbalance'

Here is another interesting development in the international "Pork" market.

There seems to be an ongoing divergence in China and the US.

In China, pork prices seem to be collapsing.

This from the Wall Street Journal, (bold highlights mine)

``Pork prices have fallen 14 weeks in a row according to China’s Ministry of Agriculture, their lowest level in four years, and cheaper even than some vegetables. In the first week of April, the average hog price was 9.43 yuan ($1.38) a kilogram.

``The porcine price plummet has forced the government to add to its much vaunted frozen pork reserve, a series of icy warehouses around the country it set up a few years ago to stabilize pork prices.

``One Chinese press report, citing government statistics, says live pig prices have dropped 21% this year. Another report says pork prices have fallen below the lowly lentil.

``The hope is that by adding to the frozen pork hoard, the government demand will take enough meat off the market to drive prices back up.

``Why does the government want higher prices? Farmers are complaining. According to several stories in the Chinese press too many slaughtered pigs are coming to market, driving farmers to despair.

``Pork plays a vital role in China’s commerce. There are almost half a billion pigs in China, one for every three people. In gross terms, like in humans, China dwarfs other countries in pigs. And there’s no India of pigs to rival China. The next biggest producer is the U.S., which has 65 million pigs, according to the United Nation’s Food and Agriculture Organization. In fact China produces more pigs than the next 43 pork producing countries combined."


And here is why Pork supplies ballooned in China, back to the WSJ,

``The cause of the recent glut of pigs was a reaction to a shortage just a few years ago. An epidemic of blue pig ear disease wiped out pigs across the country and sent pork prices skyrocketing, leading inflation to dangerous levels. The virus attacks pigs’ reproductive systems.

``After the 2007 and 2008 price spike, the government set up the frozen pork reserve and offered subsidies to pig farmers to get the pig population back up. It seems to have worked too well.

``A Ministry of Agriculture report also says changes in the economy have also curbed the growth in the nation’s pork appetite. Demand for pork from migrant workers in big cities has ebbed as more country folk stayed home after the economic slowdown."

In short, markets reacted to the surge in prices by dramatically adding to supply, which had been exacerbated by government "subsidies".

So a pork "bubble" may have developed, which apparently could have just imploded.

At the other side of the continent, in the US, pork prices are going into the opposite direction.
Pork futures (lean hogs) seem to be skyrocketing! (chart courtesy of ino.com)

I have little clue on the status of the global pork trade, except for the following

-the global agriculture market remains one of the "closed" areas.
-the US became a net pork exporter since the mid 1990s.
-Chinese reportedly will reopen to US exports following a ban due to concerns over H1N1 virus.
-current rise in US futures is due to 'tight supplies'

I would suspect that such imbalances could have been mostly due to the distortions brought about by trade restrictions.

This means that the global pork market could be alot inefficient hence the immense disparity in the prices. Otherwise, in a free market, allocative adjustments through price signals would have approached the law of one price.

To add, there seems hardly a cross currency factor here influencing trade ("no 'low' yuan makes us poorer" meme here; move along nothing to see here).

Worst, closed markets, plus government interventions seem to give rise to miniature boom-bust patterns.

Graphic: Origin of The Rule of Law

This seems like an introspective portrayal by Ms. Jessica Hagy apropos "rules" which she calls Don't you know better by now?

From my point of view, this seems like a good depiction of the "origin of the rule of law".

Here is David Hume's the History of England, (bold highlights mine)

``No government, at that time, appeared in the world, nor is perhaps found in the records of any history, which subsisted without a mixture of some arbitrary authority, committed to some magistrate; and it might reasonably, beforehand, appear doubtful whether human society could ever arrive at that state of perfection, as to support itself with no other control, than the general and rigid maxims of law and equity. But the Parliament justly thought that the King was too eminent a magistrate to be trusted with discretionary power, which he might so easily turn to the destruction of liberty. And in the event it has been found that, though some inconveniencies arise from the maxim of adhering strictly to law, yet, the advantages so much overbalance them, as should render the English forever grateful to the memory of their ancestors who, after repeated contests, at last established that noble principle."

SEC-Goldman Sachs Row: The Rising Populist Tide Against Big Government

Professor Arnold Kling writes,

``perhaps it is not so crucial to bolster a financial sector that was misallocating capital or to bolster a state and local government sector that has been captured by unions. Perhaps these heroic efforts undertaken in the name of saving the economy only served to reward the looting classes. Perhaps we have arrived at a point in this country where looting is the most rewarding economic activity. In that case, it will not take many years before the wealth available to loot starts to shrink." (emphasis added)

He scorns the transformation to cronyism, which we totally agree. And that's why I see the latest Goldman controversy as part of the ploy to camouflage the "looting classes".

I guess some charts of Pew Research captures prevailing public sentiment.

From Pew Research, (bold highlights mine)

``By almost every conceivable measure Americans are less positive and more critical of government these days. A new Pew Research Center survey finds a perfect storm of conditions associated with distrust of government -- a dismal economy, an unhappy public, bitter partisan-based backlash, and epic discontent with Congress and elected officials.

``Rather than an activist government to deal with the nation's top problems, the public now wants government reformed and growing numbers want its power curtailed. With the exception of greater regulation of major financial institutions, there is less of an appetite for government solutions to the nation's problems -- including more government control over the economy -- than there was when Barack Obama first took office.

``The public's hostility toward government seems likely to be an important election issue favoring the Republicans this fall. However, the Democrats can take some solace in the fact that neither party can be confident that they have the advantage among such a disillusioned electorate. Favorable ratings for both major parties, as well as for Congress, have reached record lows while opposition to congressional incumbents, already approaching an all-time high, continues to climb.

``The Tea Party movement, which has a small but fervent anti-government constituency, could be a wild card in this election. On one hand, its sympathizers are highly energized and inclined to vote Republican this fall. On the other, many Republicans and Republican-leaning independents say the Tea Party represents their point of view better than does the GOP."

In contrast to those who see and think in terms of their political party lines, the polls suggest that there is ballooning discontent about bi-partisan polity.

And it's why perhaps both the Democratic Party and the Republican Party have felt the backlash from the public and thereby has seen their approval ratings plummet, which has mostly been a reflection of the performance of the US congress.

And it is also why the Tea Party has spontaneously emerged.

Yet some would stubbornly argue that more government activism is likely the answer. For instance more regulation in the financial sphere. This camp never seem to realize that in politics, what you see isn't what you get.

As Heritage's Conn Carroll comments on the proposed financial reform bill, ``So whenever Sen. Chris Dodd (D-CT) says his Wall Street Bailout Bill "would have prevented that kind of events from happening" he needs to explain how. If anything, the Dodd plan will only make future Wall Street bailouts more likely and more costly while also stifling consumer choice." (emphasis added)

This only goes to show that the proposed "new" regulatory reforms are being shaped to even benefit MORE (and not less) the looting class!

Not to mention that the controversial John Paulson who helped inspired the Goldman brouhaha, has been a generous political contributor.

According to Ben Smith of the Politico, ``Though many hedge fund managers lean Democratic, Paulson has split his giving, offering maximum six-figure contributions both the the Democratic Senatorial Campaign Committee and to the Republican National Committee. Paulson, ranked 45 on Forbes' list of America's richest individuals, made maximum contributions to the presidential campaigns of Mitt Romney, John McCain, and Rudy Giuliani in 2008, but has also given to key Democratic senators for the finance industry, including Chris Dodd and Max Baucus.

``Paulson hasn't given directly to Schumer, though he maxed out to Schumer's committee. But he did host a fundraiser for the senior New York senator earlier this month, describing him in the invitation as "one of the few members of Congress that has consistently supported the hedge fund industry." (bold emphasis mine)

And all these (lobby groups, contributions, biased laws, regulatory capture etc...) seemingly add to the reasons on why the public's attitude on politicians seems to have tipped over. Instead of big government, which they had earlier hoped to work, they now seem prefer "smaller" government.

Again from Pew, ``Despite the public's negative attitudes toward large corporations, most Americans (58%) say that "the government has gone too far in regulating business and interfering with the free enterprise system." This is about the same percentage that agreed with this statement in October 1997 (56%)."

The point is that the polls suggest that there seems to be a growing public recognition that the previous "big government" or "activist government" experiment has noticeably been a failure, from which is being manifested in politics, as shown in the intratrade.com prediction markets chart courtesy of Bespoke Invest.

And this gives even more motivation for the ruling political class to use the Goldman caper as a likely prop as the "fall guy" role for political ends.

We just don't oversimplistically regulate cartels out of existence, not when the cartel itself is lead by the government via the Federal Reserve.

To quote Dr. Antony Mueller, "There can be no honesty in a dishonest monetary system".

Quote of the Day on Wall Street: After Nearly A Century, Hardly Any Change

Here is Murray Rothbard on the predicament of the Fed's origin

``The bankers, however, faced a big public relations problem. What they wanted was the federal government creating and enforcing a banking cartel by means of a Central Bank. Yet they faced a political climate that was hostile to monopoly and centralization, and favored free competition. They also faced a public opinion hostile to Wall Street and to what they perceptively but inchoately saw as the "money power."" (bold highlights mine)

So the problem of nearly 100 years ago is basically the same as today! The difference is that the Federal Reserve- banking cartel has been realized, but is still under fire.

SEC-Goldman Sachs: Hindsight Bias, Staged For Political Advantage

This looks like a nice flowchart illustration from Wall Street Journal of the controversial Goldman Sachs-John Paulson deal.

We find new information from the dispute from the Wall Street Journal Editorial: (bold highlights mine)

``More fundamentally, the investment at issue did not hold mortgages, or even mortgage-backed securities. This is why it is called a "synthetic" CDO, which means it is a financial instrument that lets investors bet on the future value of certain mortgage-backed securities without actually owning them.

``Yet much of the SEC complaint is written as if the offering included actual pools of mortgages, rather than a collection of bets against them. Why would the SEC not offer a clearer description? Perhaps the SEC's enforcement division doesn't understand the difference between a cash CDO—which contains slices of mortgage-backed securities—and a synthetic CDO containing bets against these securities.

``More likely, the SEC knows the distinction but muddied up the complaint language to confuse journalists and the public about what investors clearly would have known: That by definition such a CDO transaction is a bet for and against securities backed by subprime mortgages. The existence of a short bet wasn't Goldman's dark secret. It was the very premise of the transaction."

Like us, the Wall Street Journal finds this as reeking with sensationalism.

``Did Goldman have an obligation to tell everyone that Mr. Paulson was the one shorting subprime? Goldman insists it is "normal business practice" for a market maker like itself not to disclose the parties to a transaction, and one question is why it would have made any difference. Mr. Paulson has since become famous for this mortgage gamble, from which he made $1 billion. But at the time of the trade he was just another hedge-fund trader, and no long-side investor would have felt this was like betting against Warren Buffett."...

[my comment:

People become attracted or conscious about full disclosure ex-post.

When the bubble blossomed no one essentially cared. This is an example of time constancy-interpretation of information depending on the conditions of that period, ergo full disclosure may not have been significant at all.

Heck, lots of institutions fell for pyramiding and Ponzi schemes like Bernard Madoff!

If the public have been circumspect fraudulent get rich schemes as PONZI and PYRAMIDING won't have existed at all. The fact is that there are just too many intellectual patsies out there.

And just piggybacking on the skyrocketing prices mattered then. Would there have been a crash if there had been no antecedent boom?

Besides, I have hardly seen any argument which stated that the counterparties which had been big financial institutions have a battery of lawyers, economists, accountants, statisticians, quants, security analysts, financial analysts and other experts who would have had the power from preventing this to happen. The so called losers (no they are not victims) were not gullible individuals.

So what stopped them? A stasis in thinking?! A mental blackout?

The fact is that these institutions fell for the seduction of the inflation boom, which after all was generated by the government. Expert or no expert they paid the price for falling into the trap set up by their own cognitive biases ]

``By the way, Goldman was also one of the losers here. Although the firm received a $15 million fee for putting the deal together, Goldman says it ended up losing $90 million on the transaction itself, because it ultimately decided to bet alongside ACA and IKB. In other words, the SEC is suing Goldman for deceiving long-side investors in a transaction in which Goldman also took the long side. So Goldman conspired to defraud . . . itself?...

[my comment: see Hyman Minsky quote in prior post]

``Perhaps the SEC has more evidence than it presented in its complaint, but on the record so far the government and media seem to be engaged in an exercise in hindsight bias. Three years later, after the mortgage market has blown up and after the panic and recession, the political class is looking for legal cases to prove its preferred explanation that the entire mess was Wall Street's fault. Goldman makes a convenient villain. But judging by this complaint, the real story is how little villainy the feds have found."

[my comment: Oops, " an exercise in hindsight bias" seems representative of our "fait accompli argument".]

Bill Sardi in Lewrockwell.com argues that additional regulatory lapses had been part of the story,

``the Commodities Futures Modernization Act which Congress passed a decade ago, opened the door for trades like John Paulson’s. This legislation eliminated the long-standing rule that derivatives bets made outside regulated exchanges are legally enforceable only if one the parties involved in the bet were hedging against a pre-existing risk. Prior regulations said the only people who can bet against an investment actually have to own shares in it. Here is Paulson betting against an investment he had no ownership in."

Like us, Mr. Sardi believes that this is being "staged for political advantage" of the administration in preparation for the Mid term elections.

``For sure, the Administration in Washington DC will be portrayed in coming months as the hero, rescuing the public from the blood-suckers on Wall Street. Be it government to save us all from problems it created and then pin a badge of honor on itself. The current and former administrations in Washington DC are, and have been, so tightly controlled and managed by Wall Street, even with its ex-CEOs strategically implanted within the Executive Branch, as to call all alleged reforms and sanctions into question. These are just for show...

``Goldman Sachs knows it has to make the President look good or there will be unending SEC prosecution. The public wants to know whose side is the President is on, the financial titans on Wall Street or the unemployed on Main Street? It will be scripted from the beginning.

``And now a final question – will Goldman Sachs be the fall guy in exchange for future favors from the government? If fines are handed out and nobody goes to jail, you will know this was likely preplanned."

We have long known that the global financial system have been "gamed" by the elite in cahoots with politicians. And part of the game is the borrow and spend policies, that actually benefits the banking cartel.

As we earlier said, it won't take long for this political masquerade to be unraveled.

Perhaps if the markets continue to stumble more and deeper, then there will "compromises" (via fines), which ends the US government part of the story.

But the unintended consequence could be the potential follow on class suits by other private parties. It's like opening the Pandora's box. The ultimate risk here is that the incentives to remove the profit and loss mechanism in the markets will lead to a total market malfunction.

Update:

Just to be clear, nowhere in this blog space (as well as in my earlier post) did I say that the political implication here is for the US Government to take over Wall Street. Nationalization betrays the essence of the banking cartel.

What I have been saying is that this has been a political ruse meant to either shore up somebody's electoral image or an attempt to control the gold markets.

More On Goldman Sachs: Moral Hazard And Regulatory Capture

More on the Goldman Sachs debate.

Simon Johnson writes,

``When you deliberately withhold adverse material information from customers, that is fraud. When you do this on a grand scale, the full weight of the law will come down on you and the people who supposedly supervised you. And if the weight of that law is no longer sufficient to deal with – and to prevent going forward – the latest forms of very old and reprehensible crimes, then it is again time to change the law."

While this is ideal in theory, in the real world, it won't work.

Why?

Because it does not deal with the source of the problem: incentives.

Once again Hyman Minsky ``It should be noted that this stabilizing effect of big government has destabilizing implications in that once borrowers and lenders recognize that the downside instability of profits has decreased there will be an increase in the willingness and ability of business and bankers to debt-finance. If the cash flows to validate debt are virtually guaranteed by the profit implications of big government then debt-financing of positions in capital assets is encouraged. An inflationary consequence follows from the way the downside variability of aggregate profits is constrained by deficits.”

In short, there are two factors involved which fundamentally erodes idealist solutions as proposed by Mr. Johnson, one as shown by Mr. Minsky is the moral hazard problem provided for by government.

This means that aside from bailouts, government implicit and explicit backing has provided the Wall Street with the incentive to commit "fraud". When you know the law is behind ya, the motivations shifts from risk averse to aggressive "ponzi dynamics" which may involve indiscretions.

Yet fundamentally what Goldman Sachs had done is a product of the bubble cycle (ponzi dynamics)...

Again Mr. Minsky, “Ponzi financing units cannot carry on too long. Feedbacks from revealed financial weakness of some units affect the willingness of bankers and businessmen to debt finance a wide variety of organizations.” "Inflation, Recession and Economic Policy", 1982 (page 67)

Another factor, the Government is doing it themselves. It's basically MBO-Management By Example, or follow the leader.

Proof?

Here is Bloomberg,

``Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.

``The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn't seek money damages.

``The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry,'' said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.

The next important reason why grand idealist one size fits all solutions aren't likely to work is due to the incentives provided for by the cartelization of the banking industry by the Federal Reserve.

Again Murray N. Rothbard, ``the real reason for the adoption of the Federal Reserve, and its promotion by the large banks, was the exact opposite of their loudly trumpeted motivations.

``Rather than create an institution to curb their own profits on behalf of the public interest, the banks sought a Central Bank to enhance their profits by permitting them to inflate far beyond the bounds set by free-market competition."

It's called regulatory capture- collusion between the regulator and the regulated.

How this came about?

Again Mr. Rothbard, "The answer was the same in both cases: the big businessmen and financiers had to form an alliance with the opinionmolding classes in society, in order to engineer the consent of the public by means of crafty and persuasive propaganda."

So yes, in the aftermath of the bubble there will always be finger pointing.

But no, taking out Goldman Sachs is insufficient, it'll just be a merry go around.

We need to take away the source of the problem, the provider of the misdirected incentives-the US Federal Reserve.

Here is Ron Paul, ``A point we learn from this event and every other banking panic in U.S. history is that a crisis has always led to greater centralization. A system that is mixed between freedom and the state is a shaky system, and its internal contradictions have been resolved not by tending toward a free market but rather through a trend toward statism. It is not surprising, then, that academic opinion swung in favor of central banking too, with most important economists — having long forgotten their classical roots — seeing new magic powers associated with elastic money."

How Myths As Market Guide Can Lead To Catastrophe

``This is how humans are: we question all our beliefs, except for the ones we really believe, and those we never think to question.” -Orson Scott Card

If I told you that the global financial markets have been simply looking for reasons to correct from its overbought position, would you buy this argument?

For many the answer is no. People look for news to fill this vacuum or what is known as a “last illusion bias” or “the belief that someone must know what is going on[1]”.

Because it is the proclivity of man to seek more complicated explanations, the Occam Razor’s rule[2]-the simplest solution is usually the correct one- is usually perceived as inadequate. Yet even if profit taking is a real phenomenon on the individual level, outside of the realm of statistics or news linkages, this is usually deemed as inconceivable by an information starved mind.

I would surmise that such a human dynamic could be a function of esteem based reputational incentives, or the need to seek self-comfort in being seen as “sophisticated”.

And stumbling from one cognitive bias to another, this camp usually associates cause and effects to “availability heuristic” or what we simplistically call “available bias” or the practice of “estimating the frequency of an event according to the ease with which the instances of the event can be recalled”[3]. And this is so prevalent in newspaper based accounts of how the markets performed over a given period.

Though we can’t discount some influences from news on a day-to-day basis, they may contribute to what we call as “noise”, since they represent tangential forces that are distant to the genuine “signals” that truly undergirds market actions.

In other words, people frequently mistake noise for signals.

And worst, for financial market practitioners scourged by an innate “dogma” bias, a characteristic seen among the extremes, particularly in the Pollyanna and Perma Bear camps, the attempt to connect the cause and effects of market actions and the political economy is largely predicated on spotty reasoning; specifically what I call as “Cart Before the Horse” reasoning - where X is the desired conclusion, therefore event A results to X.

This can actually be read as combining both logical fallacies (Begging the Question and Post Hoc Ergo Propter Hoc) and cognitive biases, particularly Belief bias or the “evaluation of the logical strength of an argument is biased by their belief in the truth or falsity of the conclusion[4]”, from which they apply behavioral decision making errors by selective perception or choosing data that fits into their desired conclusion (while omitting the rest), by the focusing effect or placing too much emphasis on one or two aspects of an event (at the expense of the aspects) and by the Blind Spot bias or reasoning that fails to account of their personal prejudices.

In short, the deliberate misperception of reality is a representation of distorted beliefs on how the world ought to be.

Clearing Cobwebs Of Cognitive Biases and Logical Fallacies

Let apply this into today’s market actions.

In the US equity markets, the bulls have fallen short of SEVEN CONSECUTIVE[5] weeks of broad market gains following Friday’s SEC-Goldman Sachs related sell-off as the week closed mixed for key US bellwethers.

The S&P 500 was the sole spoiler among the big three benchmark, where the Dow Jones Industrials and the technology rich Nasdaq still managed to tally seven straight weeks of advances (despite Google’s 7.59% loss prior to the Goldman Sach’s news).

Yet in spite of Friday’s selloffs, the week-on-week performance by the different sectors constituting the S&P had been also been mixed (see figure 1).

Figure 1 US Global Investor: Weekly Sectoral Performance and stockcharts.com: S&P 500 Financial Sector

This means that while Friday’s market selloff had been broad based, it wasn’t enough to reverse the general trend over the broader market, even considering the largely overheated pace of the ascent for the overall markets. Yes, we have been expecting a correction[6] and perhaps this could be the start of the natural phase of any market cycle.

Moreover, while the SEC-Goldman Sachs (explanation in the below article) news may have triggered the selloff on Friday, the largest loss over the week had been in the materials and telecom sectors with the Financial, where Goldman Sachs belongs, took up the fourth position.

Considering that the S&P Financial Index took a severe drubbing on Friday (down 3.81%-see left window), this only exhibits that the sector’s muted loss on a weekly basis had been an outcome of an earlier steep climb or an upside spike!

In short, in whatever technical indicator (MACD, moving averages, or Relative Strength Index) one would look at, the US financial sector has been severely in overstretched and overbought conditions which have been looking for the right opportunity for a snapback. Apparently, the SEC-Goldman event merely provided the window for this to happen.

Perma Bears: Broken Clock Is Right Twice A Day

Now for the Perma bear camp, whom have been nearly entirely wrong since the crash of 2008, seems to have nestled on the current hoopla over the SEC-Goldman Sachs as the next issue to bring the house down.

And like a broken clock that is right only twice a day, never has it occurred to them that since markets don’t move in a straight line, they can be coincidentally ‘right’ for misplaced causal reasons.

Their horrible track record in projecting a market crash early this year predicated on the US dollar carry trade bubble and the Greek Debt Crisis has only manifested events to the contrary of their expectation in terms of both the markets and the political economy. Instead, what seem to be happening are the scenarios which we have had pointed out[7].

Here is Oxford Analytica on the US dollar carry trade[8], ``As financial markets possess a demonstrable tendency to overshoot expectations, the carry trade probably is stoking market euphoria in certain places. However, this may only be partially significant, as underlying fundamentals still inform a large cross-section of investment activities.” (bold emphasis mine).

As you can see the deepening lack of correlation, which highlights on the glaring lapses in causality linkages, from which the 2008 crash became a paradigm for the mainstream, is now being accepted as “reality”. The rear-view mirror syndrome or the anchoring bias is becoming exposed as what it is: A fundamental heuristical flaw, which cosmetically had been supported by misleading reasoning.

And as for the Greek Tragedy, the resolution is increasingly becoming a bailout option. Writes the Businessweek-Bloomberg, ``The euro may receive a temporary boost to $1.38 when Greece accesses a 45 billion euro ($61 billion) bailout plan before traders reestablish bets that the shared currency will decline, according to UBS AG.[9]”

And Morgan Stanley’s Joachim Fels, who among the mainstream analysts we respect, decries the prospective action, ``The bail-out and the ECB's softer collateral stance set a bad precedent for other euro area member states and make it more likely that the euro area degenerates into a zone of fiscal profligacy, currency weakness and higher inflationary pressures over time.[10]” (bold highlights mine)

The difference between us and Mr. Fels is that we look at the political incentives that impels the decision making process of policymakers-where the default option or the path dependency by any government, in a world of central banking, has been towards inflationism as recourse to any critical economic problem.

And Mr. Fels appears to be reading the market along our lines.

Price inflation, which Mr. Fels warns of, is starting to creep higher and becoming more manifest even in economies that have been expected to have lesser impact from inflation due to more monetary constraints, such as the Eurozone (see figure 2).

Figure 2: Danske Bank: Will Nasty Inflation Challenge the ECB?

The Danske team, led by Allan von Mehren, expects an inflation surprise[11] to challenge the European Central Bank (ECB) based on 3 factors, rising oil prices, rising food prices and depreciating Euro.

For us, these factors are merely symptoms of the political actions and not the source of inflation.

And for those plagued by the said dogmatic biases, they keep repeatedly asking the wrong question-“where is inflation?”-even when (corporate and sovereign) bonds, commodities, stocks, derivatives and most market signals have been pointing to inflation, across the world.

The fact that inflation is in positive territory for most economies, already dismisses such a highly flawed argument.

Yet, the narrowed focus or the ‘focusing effect’ or excessive tunneling on business or industrial credit take-up or unemployment rates or on rangebound sovereign yields (particularly in the US) purposely disregards the fact that inflation is a political process.

Government which resorts to the printing press as the ultimate means to resolve economic predicaments can only reduce the purchasing value of every existing currency from the introduction of new ones.

Tea Parties As Signs Of The Reemergence Of The Bond Vigilantes

In addition, such outlook neglects the fact that

-inflation has existed even during high period of unemployment rates as in the 70s,

-consumer credit isn’t the principal cause of inflation but intractable government spending and

-as argued last week, governments will opt to sustain low interest rates (even if it means manipulating them-e.g. quantitative easing) as a policy because ``governments through central banks always find low interest rates as an attractive way to finance their spending through borrowing instead of taxation, thereby favor (or would be biased for) extended period of low interest rates.[12]”

Moreover, for a population with a deepening culture of dependency on government welfare programs, the inclination is to accelerate government spending[13] in order to keep up with public demands for more welfarism. And this can only be funded by borrowing, inflation, and taxes in that pecking order.

Why taxes as the lowest priority? Because to quote Professor Gary North[14], ``Politicians fear a taxpayer revolt. Such a revolt is unlikely until investors cease buying Treasury debt. For as long as the government can run deficits at low interest rates, that is how long they will continue.”

The ballooning Tea Party in the US, for instance, which reportedly accounts for 15-25% of the population is relatively a new spontaneously organized political movement that has apparently emerged in response to the prospects of significantly higher taxes.

For the politically and economically blinded progressives to demean this as “superficial” accounts for as utter myopia. How superficial is it to resist a runaway government spending spree, which should translate to prospective higher taxes and or lower standards of living via inflation?

As author and Professor Steven Landsburg rightly argues[15], ``Once the money is spent, the bill must eventually come due—and there’s nobody around to foot that bill except the taxpayers. We are locked into higher current spending and therefore locked into higher future taxes. The president hasn’t lowered taxes; he’s raised and then deferred them. To say otherwise is—let’s be blunt—a flat-out lie.” (bold highlights mine)

Instead, the superficiality should be applied to the fabled belief that government spending and inflationism will account for society’s prosperity. Name a country over human history that has prospered from the printing press or inflationism?!

Hence, the emergence of the Tea party movement appears to sow the seeds of a taxpayer revolt, or as seen in the market, the soft resurfacing of the long absence in the bond vigilantes, who could be simply waiting at the corner to pounce on the policy mistakes based on the delusions of grandeur by charlatan governing socialists and their followers, at the opportune moment.

Until the tea partiers gain a political upperhand, the deflation story is nothing but a justification to undertake more inflationism.

The Siren Song Of Inflation

Going back to the naïve outlook for deflation, the lack of borrowing from both domestic and overseas savings doesn’t close the inflation window, in fact it enhances it. This will entirely depend on manifold forces as culture, habit (or addiction)[16], time constancy of political sentiment and political tolerance and etc...and importantly, the attendant policies in response to the political demands.

Nevertheless, Morgan Stanley’s Spyros Andreopoulos enumerates why inflation is seemingly a siren song[17] for policymakers in dealing with a gargantuan and burgeoning debt problem.

From Mr. Andreopoulos (bold emphasis his, italics mine):

``Public debt overhang: The higher the outstanding amount of government debt, the greater the burden of servicing it. Hence, the temptation to inflate increases with the debt.

``Maturity of the debt: The longer the maturity of the debt, the easier it is for a government to reduce the real costs of debt service. To take an extreme example, if the maturity of the debt is zero - i.e., the entire stock of debt rolls every period - then it would be impossible to reduce the debt burden if yields respond immediately and fully to higher inflation. Hence, the longer the maturity of the debt, the greater the temptation to inflate.

``Currency denomination of the debt: Own currency debt can be inflated away easily. Foreign currency-denominated debt on the other hand cannot be inflated away. Worse, the currency depreciation that will be the likely consequence of higher inflation would make it more difficult to repay foreign currency debt: government tax revenues are in domestic currency, and the domestic currency would be worth less in foreign currency. So, the temptation to inflate increases with the share of debt denominated in domestic currency.

``Foreign versus domestic ownership of debt: The ownership of debt determines who will be affected by higher inflation. The higher the foreign ownership, the less will the fall in the real value of government debt affect domestic residents. This matters not least because only domestic residents vote in elections. Note that unlike domestic owners, foreign owners may not necessarily be interested in the real value of government debt since they consume goods in their own country. But they will nonetheless be affected by the inflation-induced depreciation. So, the temptation to inflate increases with the share of foreign ownership of the debt.

``Proportion of debt indexed to inflation: By construction, indexed debt cannot be inflated away. Hence, the higher the proportion of debt that is indexed to inflation, the lower the temptation to inflate.

``To these purely fiscal arguments we add another dimension, private sector indebtedness:

``Private sector debt overhang: An overlevered private sector may generate macroeconomic fragility and pose a threat to public balance sheets. Hence, high private debt also increases the incentive to inflate.

As per Mr. Andreopoulos perspective, there are many alluring technical reasons on why the political option is to inflate rather than adapt market based austerity or to allow market forces to clear up previous imbalances so as to move to the direction of equilibrium.

And combined with today’s prevailing economic dogma and direction of political leadership, the path dependency will most likely be in this direction.

Real Economic Progress And Deflation

None the less, real progress is characterized by increasing efficiency and technological advances that decreases costs of production and increases in output.

The result of which is a rising value of purchasing power of money or “deflation” (see figure 3) and not higher inflation which is the result of excessive government intervention.

Figure 3: AIER: Purchasing Power of the US dollar

This was mostly the case in the United States until the introduction of the US Federal Reserve in 1913, from which the US dollar has been on a steady decline or where the only thing constant today is to see the US dollar collapse in terms of purchasing power.

Going to the US government’s Bureau of Labor Statistics’ inflation calculator, $100 US dollars in 1913 is now only worth $4.55. That’s a loss of over 95%!

So aside from death and taxes, another thing certain in this world is that the value of paper money is headed to its intrinsic value-Zero[18]!

Yet it is funny how protectionists, who stubbornly argue about the “overvalued” currency of the US as the main source of her problem, have been only been asking for more of the same nostrums, instead of looking at WHY these has emerged on the first place.

Like in reading markets, belief in myths can be the greatest error that could lead to tremendous losses that investors can get entangled with.

As former US President John F. Kennedy once said, ``The great enemy of the truth is very often not the lie -- deliberate, contrived and dishonest, but the myth, persistent, persuasive, and unrealistic. Belief in myths allows the comfort of opinion without the discomfort of thought.”

---

[1] Wikipedia.org, List of cognitive biases

[2] Wikipedia.org, Occam Razor

[3] Taleb, Nassim Nicolas; Fooled By Randomness, p. 195, Random House

[4] Wikipedia.org, Belief Bias

[5] The emphasis on seven is meant to highlight the degree of overextension or overheating

[6] See US Stock Markets: Rising Tide Lifts Most Boats And Is Overbought

[7] For my earlier treatise on the US dollar carry bubble see What Has Pavlov’s Dogs And Posttraumatic Stress Got To Do With The Current Market Weakness?, and Why The Greece Episode Means More Inflationism for my discourse on the Greece crisis.

[8] Oxford Analytica; Dollar Carry Trade No Longer a Sure Bet, Researchrecap.com

[9] Businessweek, Greek Bailout in ‘Matter of Days” to Boost Euro, UBS Says, Bloomberg

[10] Fels, Joachim, Euro Wreckage Reloaded April 16, 2010, Morgan Stanley Global Economic Forum

[11] Mehren, Allan von; Euroland: Nasty inflation surprise will challenge ECB, Danske Bank

[12] See How Moralism Impacts The Markets

[13] See Where Is Deflation?

[14] North, Gary The Economics Of The Free Ride

[15] Landsburg, Steven; Tax Relief, Obama Style, thebigquestions.com

[16] See Influences Of The Yield Curve On The Equity And Commodity Markets

[17] Andreopoulos, Spyros; Debtflation Temptation

[18] See Paper Money On Path To Return To Intrinsic Value - ZERO