China Announces Bank Bailouts

My hunch about China's bursting bubble has been getting some validation.

The Chinese government has announced that it will intervene by buying shares of select banking stocks.

From the Financial Times (bold emphasis added)

The Chinese government will boost its stakes in the country’s largest banks, as it attempts to shore up slumping financial stocks and to restore investor confidence.

Central Huijin, the domestic arm of China’s sovereign wealth fund, will purchase shares in Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China, the official Xinhua news agency announced on Monday. Xinhua added that the purchases by Huijin – its first such public intervention since a similar decision at the onset of the financial crisis three years ago – would “support the healthy operations and development of key state-owned financial institutions and stabilise the share prices of state-owned commercial banks”.

The announcement came too late for the Chinese stock market, which had closed at a 30-month low, but had an immediate effect on late trading in Hong Kong. ICBC’s Hong Kong-listed shares, which had been down 3 per cent, rallied to close up 1 per cent

Beijing also allowed the renminbi to record its biggest one-day gain in years on Monday. It rose 0.6 per cent against the dollar, squeezing traders who have been betting that the currency will weaken in tandem with a slowing economy.

Adding to my earlier commentary, a bust process-in China’s bubble economy or following an earlier money supply growth driven boom-is also a result of a rising yuan.

Corporate finance analyst and author Kel Kelly at the Mises.org provides an eloquent explanation

Therefore, letting its currency rise will cause a recession, since reduced money-supply and credit-growth rates are the usual initiating factors that bring on recessions (reduced rates of spending alone can cause recessions, but they are usually preceded by prior reductions in money and credit). It has been rapid increases in money and credit that have driven the current boom in China, and it will be the reduction in the growth rate of those variables that causes the bust.

The economic boom in China has consisted of rapid increases in true economic growth accompanied by — but not driven by — an increase in monetary spending. The increase in monetary spending, in turn, has been driven by wild credit growth, and has resulted in massive overinvestment in particular industries. There has been no shortage of commentaries and videos highlighting building booms, mania-type herd-mentality home buying, and the mass creation of buildings, shopping malls, and even multiple entire cities in China that stand unoccupied — all dramatic yet classic symptoms of credit bubbles.

So like the Eurozone, we see China’s government providing explicit support by jawboning or providing promises to buttress her banking sector.

However, the problem is that China’s current currency policies appear to contradict this (see chart below from Mr. Kelly).

The left hand does not know what the right hand is doing.

Again, we should see if such guarantees would suffice to forestall a bust or if market forces will continue to put pressure on China’s government, not only to make promises, but to forcefully act.

Very interesting times indeed.

Is Slovakia’s Classical Liberal Party the Last Stand Against the Euro Bailout?

Today the Slovakian parliament will vote to ratify on the rescue mechanism for the Eurozone.

However, there seems to be a complication—a party of libertarian-classical liberals led by Richard Sulik, leader of Slovakia’s libertarian Freedom and Solidarity (SaS) party—are opposed to its passage.

From Sunday’s Financial Times (bold emphasis)

A hardline libertarian party in one of the newest, smallest and poorest members of Europe’s single currency looks set to throw a spanner in the machinery of expanding the eurozone’s bail-out fund – seen as crucial to restoring market confidence in the bloc.

Despite pressure from across the continent, Richard Sulik, leader of Slovakia’s libertarian Freedom and Solidarity (SaS) party, repeated on Sunday that his party would reject the measure.

A last-minute meeting of the four-party ruling coalition is set for today in an effort to persuade Mr Sulik to back down and support the extension of the European financial stability facility at a crunch vote on Tuesday.

Mr Sulik made clear that his 21 MPs will reject the EFSF expansion if the other coalition parties do not agree to his proposals. Without those votes, the 77-member governing coalition has no chance of a majority in the 150-seat parliament.

Last week SaS offered to support the EFSF, but in return for a Slovakian veto on how its contribution would be spent and an outright refusal to participate in the permanent European stability mechanism, due to replace the EFSF next year….

The quiet-voiced Mr Sulik looks more like a demure bureaucrat rather than what he is – a self-made millionaire and one of the last of central Europe’s true believers in economic liberalism. Free market doctrine was hugely fashionable in the 1990s across the region, when ministers who had gained most of their experience from economic texts found themselves in power. They pursued radical solutions to eliminate the last remnants of state socialism.

“We are a classical liberal party. We are defenders of the Austrian school of economics,” says Juraj Droba, an SaS MP, describing his party’s relationship with the neoliberal school.

If the Slovakian parliament fails to garner the required votes, then whatever gains that we’ve seen in the financial markets lately—mostly based around expectations of political promises—will turn out to be fleeting.

Anyway even if the rescue package gets ratified, the EFSF is no guarantee of success. Bailouts incentivizes moral hazard or reckless behavior, which is why we are seeing this continuing crisis which began to unravel in 2008.

Hopefully Slovakia’s classical liberals will remain steadfast in their quest to champion sound money policies and continue to fight against tyrannical redistributionist policies that favors the political and banking elites. (hat tip Angel Martin, David Boaz).

Global Banking Regulators to Force Banks to Hold More Liquid Assets

From the Reuters,

Global banking regulators will press ahead with the first worldwide effort to force banks to hold more liquid assets, the chairman of the Basel Committee on Banking Supervision said in an interview with the Financial Times on Monday.

Stefan Ingves, who also heads the Swedish central bank, said the Basel group plans to put uniform implementation of the Basel III reforms at the top of its agenda.

The measures, which will also force banks to cut back on short-term funding, have come under scrutiny from some of the 27 member countries who say the rule changes could damage the broader economy.

The reforms, which were agreed to by the member states, will force banks to hold more top-quality capital against unexpected losses, but there are rising concerns that some countries will not stick to the agreement.

Bank capital standards will continue to put pressure on the markets as I explain here and here. More liquid assets will not stop the consequent crisis from central banking induced bubble cycles. In fact, this could worsen it.

By forcing banks to hold more liquid assets, which will likely come in the form of government debt, this compels banks to finance financially strained governments. So productive capital will be channeled to preserve the privileges of the political and the banking class at the expense of the economy, which signifies a form of financial repression.

Central bank based bank capital regulations are essentially aimed at the preservation of the unsustainable banking system-central banking-welfare-warfare state political economy.

Merkel and Sarkozy on Bank Recapitalization: Promises, Promises

Global financial markets appear buoyant anew on news of more promises of political rescue efforts

From Bloomberg, (bold highlights mine)

Angela Merkel and Nicolas Sarkozy, racing to stamp out the euro debt crisis threatening to engulf the financial system, gave themselves three weeks to devise a plan to recapitalize banks, get Greece on the right track and fix Europe’s economic governance.

“By the end of the month, we will have responded to the crisis issue and to the vision issue,” the French president said in Berlin yesterday at a joint briefing with the German chancellor before they dined at her office.

Under rising pressure to defuse turmoil that’s raged for 18 months, and facing growing concern Greece is headed to a default, Merkel said European leaders will do “everything necessary” to ensure that banks have enough capital. Sarkozy said they would deliver a plan by the Nov. 3 Group of 20 summit…

After their eighth bilateral summit in 20 months, the two leaders unveiled no new agreement on what role should be played by the bailout fund, the European Financial Stability Facility, amid reports that they differed on how to use it.

“We will recapitalize the banks,” Sarkozy said. “We’ll do it in complete agreement with our German friends because the economy needs it, to assure growth and financing.”

European banks need as much as 200 billion euros of capital, Antonio Borges, the International Monetary Fund’s European department head, said last week.

European leaders are bracing for the consequences of a Greek default. German Finance Minister Wolfgang Schaeuble told Frankfurter Allgemeine Sonntagszeitung that euro governments may have come up short on the scale of Greek debt writedowns when they reached the agreement in July. He cited a “great risk” that the crisis could spread further.

Eventually markets will get satiated by the many promises that have been meant to be broken

From the refrain of Naked Eyes’ Promises, Promises

You made me promises, promises

Knowing I'd believe

Promises, promises

You knew you'd never keep

Quote of the Day: Banking Stress Test

From Vern McKinley at the Freebanking.org

Another interesting issue about Dexia is that just this past summer it went through the so-called “stress tests” by the European Banking Authority. Dexia passed with flying colors with an 11% capital ratio intact, well above the 10% ratio that its regulators had hoped for. This was the procedure that 91 of Europe’s largest banks went through to see how they could withstand the stress of a downturn. Seems the stress test was not so stressful, as it just assumed that sovereign debt would not cause any problems for Dexia. So the post-crisis panacea for addressing future stress of having banking agencies worldwide demand higher capital ratios and then intervene early to avoid bailouts seems to be coming apart before it was even fully implemented.

Global Equity Markets: Bottom or Dead Cat’s Bounce?

Fear is the foundation of most governments; but it is so sordid and brutal a passion, and renders men in whose breasts it predominates so stupid and miserable, that Americans will not be likely to approve of any political institution which is founded on it.- John Adams

It’s nice to see global equity markets bounce off newly established lows.

The ASEAN-4, represented by the Philippines (PCOMP-yellow), Thailand (SET-green), Indonesia (JCI-orange) and Malaysia (FBMKLSE-red), once again demonstrating tight correlations of price actions even on a near term or 3 months basis.

Bottom or Dead Cat’s Bounce?

But has the recent lows been indicative of a bottom or has last week’s actions signified a dead cat’s bounce?

First of all, last week’s highly volatile actions in the global equity markets exhibited lucid conditions of boom bust cycles as the market’s principal drivers

This has been especially evident last Tuesday.

As US equity markets encroached on the bear market threshold of 20%, the announcement of the bailout of Belgium’s biggest bank Dexia SA by French and Belgian governments seemed to have spurred a dramatic 4% upside swing on the final hour of trading session where US major equity benchmarks closed significantly higher[1].

This signifies as the second bailout of Dexia SA.

At the height of the maelstrom in 2008, Dexia was the first among the many European banks to fall and subsequently became one of the major borrowers from the US Federal Reserve[2].

The possible implication of this is that the US central bank could be part of the consortium that determines how the bailout will be conducted.

Although current reports say that Drexia would be split into two banks, where one of the banks will hold troubled assets or serve as a ‘bad bank’[3]; there has been no mention of any participation of the US Federal Reserve yet. So this would signify as speculation on my part.

Like Greece, this serves as another example which reveals how bailout policies:

-usually don’t work,

-signify as inefficient approach in rectifying an imbalance,

-account as short term patches that only defers the problem,

-and function like a black hole where scarce economic resources are not only diverted, but drains on the productive sectors which ultimately enfeebles the overall system

Additionally, while credit margins for commodity markets have been serially squeezed, the CME Group, the biggest futures exchange, recently went to the opposite direction for financial securities, where the CME eased credit margins a whopping 33%[4].

This serves as another evidence where indirect market manipulation by policymakers has been biased towards bolstering the financial sector at the expense of the commodity markets.

The S&P 500 closed the week up by 2.12% while the Dow Jones Industrials and the Nasdaq were higher 1.74% and 2.65% respectively.

Technically speaking, the S&P remains below the 50-day and 200-day moving averages which points to the likelihood of a temporary bounce, until proven otherwise.

Yet the rest of the week has been distinguished by an environment directed towards more bailouts.

The Bank of England (BoE) reactivated her version of Quantitave Easing (QE) 2.0[5], whom will be expanding bond purchases to 275 billion pounds ($421 billion) from 200 billion over the next four months.

The BoE, through governor Mervyn King, has preempted European governments. Mr King claimed that this action has been made because they have lost faith in European governments’ ability to resolve the region’s debt crisis[6].

However, in doing so, Mr. King utilized fear anew to justify such interventions.

To quote BoE governor Mervyn King[7]

This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing

This essentially validates my theory that markets today are increasingly being massaged, not only through direct policies, but through communications management, or technically known as signaling channel[8], in order for the public to politically accommodate on such interventions.

Fear has served as an ever convenient tool to impose political controls over society.

And just hours after the BoE’s move, the European Central Bank (ECB) announced that they will be expanding her coverage of QE or asset purchasing program, by including ‘covered bonds’ or pooled securities backed by mortgages and public sector loans.[9] The ECB will buy 40 billion euros or $53 billion next month.

In addition, the ECB will give banks unlimited access to cash through January 2013 or loans in the duration of 12 and 13-months[10].

Also, speculations had been rife that ‘policy makers are working on plans to boost bank capital’.

European stocks have rallied off from a 2 week low as represented the STOX 50[11] or a blue chip index which covers 50 stocks from 12 Eurozone countries.

All these developments reveal of how global equities has been artificially buttressed by serial bailouts and policies of inflationism.

Also, interventionism, meant to prevent markets from reflecting the real values of financial securities, has massively skewed the pricing process that has led to severe volatility or sharp fluctuations.

Moreover, as further manifestation of distorted markets, price actions of so called risk assets have become tightly correlated when strains to the financial system emerges.

Finally price trends or the fate of asset prices are most likely to be determined by the prospective actions of policymakers. This makes governments the ultimate practitioners of insider trading—where governments manipulate markets to benefit certain segments of society.

With almost every major central banks expanding on their balance sheets today, most notably the very aggressive Swiss National Bank (SNB), see green line from Danske Bank chart[12], I would presume the US Federal Reserve’s participation will be a matter of political timing.

Blanc De L'oeil (White of the Eye)

It is important to note that announcement and implementation of QEs does NOT imply that markets would automatically or mechanically respond favorably. QE policies will likely be size-dependent and or highly sensitive to market expectations based on the timing, scale and duration of the program.

The efficacy on the marketplace from the current programs initiated by the BoE and the ECB which seem to be less in size than the previous measures, has yet to be established. Thus, the sustainability of the recent QE-led rebound can only be arrived at when chatters of bailouts diminishes—which implies that the market has began to discount the momentary adverse impacts of the underlying crisis.

Also, I am in the camp that sees that the US as unlikely to succumb to an economic recession. For example the chart above shows that the US Purchasing Managers Index PMI of New Orders and Employment remain in positive non-recession territories in spite of the recent slowdown[13]. And as I have been pointing out money supply growth in the US has been growing at a substantial pace[14] which poses as unlikely indicators of a looming recession.

But my stance would be conditional based on factors that may turn out to be shocks, such as further deterioration in the Eurozone or a China bubble meltdown.

In addition, I harbor a deep suspicion that markets are presently being used as fulcrum by politicians to secure their preferred political actions. This can be exemplified by BoE’s Mervyn King recent scare tactics, where such jawboning risks becoming a self-fulfilling prophesy.

And I would think that the US Federal Reserve chief Ben Bernanke may probably be discreetly wishing for more of market stress that would clear the way for him to impose his signature creed contribution to modern central banking—the modified helicopter option or the QE version 3.0.

It is important to note that US Banking and finance stocks appear to be highly dependent on Bernanke’s QE where the latter’s absence has led to declining share prices[15]. So aside from lethargic property markets, falling equity prices may affect the banking sector’s capital adequacy ratios that would prompt for further asset liquidations.

In addition, the interconnectedness of global banking system and the considerable exposure of US banks to crisis affected Eurozone banks leaves US banks highly vulnerable to a contagion[16].

These reasons would have been enough impetus for Mr. Bernanke to resort to QE 3.0. However, Mr. Bernanke appears to be have been inhibited by the recent political impasse with other political agents where his failure to incorporate QE 3.0 during the last FOMC meeting triggered a convulsion in the global financial markets[17]

This turns out to be one instance where supposed transparency of government policies meant to stabilize the markets morphed into an expectations failure because of politics. In short, like typical politicians, promises are meant to be broken.

Furthermore, resonant calls of greater odds of recession by his private sector allies could be part of this campaign to inculcate ‘fear’ in order to warrant political intervention through inflationism.

And I would add that the price action of gold has been indicative of the current state of limbo.

Despite the newly announced QEs, gold prices continues to fumble along which appears to deviate from the actions of the equity markets. Such variance puts emphasis on the aura of heightened uncertainty.

As for my position in the local equity markets, as stated last week

I would need to see the blanc de l'oeil or the French idiom for seeing ‘the white of their eyes’ before taking my shots.

---

[1] See Reported Bailout of Belgium’s Dexia Spurs a fantastic US Equity Market Comeback, October 5, 2011

[2] Telegraph.co.uk Belgian bank Dexia was biggest borrower from Federal Reserve discount window, March 31, 2011

[3] Bloomberg.com Dexia Board Meets as France, Belgium Tussle, October 8, 2011

[4] Zerohedge.com Soaring Financial Vol Leads CME To Announce A 33% Margin...Cut, October 4, 2011

[5] See Bank of England Activates QE 2.0, October 6 2011

[6] Bloomberg.com BOE Loses Faith in Europe, Announces Stimulus, October 7, 2011

[7] Telegraph.co.uk World facing worst financial crisis in history, Bank of England Governor says, October 9, 2011

[8] See War on Precious Metals: The Rationalization Process For QE 3.0, May 7, 2011

[9] See European Central Bank expands QE to include Covered Bonds October 6, 2011

[10] Bloomberg.com ECB Keeps Banks Afloat as Governments Act on Greek Risk, October 7, 2011

[11] Stoxx.com EURO STOXX 50

[12] Danske Bank Japan: BoJ can afford to be on hold for now October 7, 2011

[13] Dr. Ed’s Blog US Purchasing Managers Indexes, October 6, 2011

[14] See US in a Deflationary Environment, NOT! (In Charts) September 16, 2011

[15] See The US Banking Sector’s Dependence on Bernanke’s QEs, October 5, 2011

[16] See US Banks are Exposed to the Euro Debt Crisis, October 8, 2011

[17] See Bernanke Jilts Markets on Steroids, Suffers Violent Withdrawal Symptoms, September 22, 2011

Black Swan Event: Has China’s Bubble Been Pricked?

The history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception. Friedrich August von Hayek

There seems to be another brewing risk that the mainstream seems to ignore.

China’s Shanghai (SSEC) index seems at the verge of breaking down from a 3-year consolidation phase.

I previously explained how China’s non-recession bear market has actually signified as a boom bust cycle that has only shifted from the stock market to the real estate sector where the non-resolution (and even the expansion) of this cycle has only extended the duration of the bear market of the Shanghai index[1].

While important indicators suggest that China’s economy has materially been on a downdrift, such as the signs of slowing growth of air travel[2], decelerating electricity consumption and as well as a slowdown air cargo[3], may not signify as recessionary, my source of concern lies with the recent signs of increased credit stress.

The rising rates of the 6 month bill discount rate and the Shanghai Interbank Offered (SHIBOR) rate appear to be heightened signs of credit stress[4].

This is very important because a huge segment of the current property boom has been financed by state owned and private owned off balance sheet companies estimated at US $1.7 trillion[5]

As Mises Institute President Douglas French in a book review writes[6],

The upshot from following the alphabet soup of entities, created to make loans to the state sector and friends of the state, is that when the loans go bad, which an extraordinary percentage do, then new entities are created into which to move the debts: from good banks to bad banks to worse banks…

Chinese bank depositors provide the capital to finance the insiders. But when the loans go bad and the banks go bankrupt, it's left to the party to provide continuous bailouts. "In short, China's banking giants of 2010 were under-capitalized, poorly managed and, to all intents, bankrupt 10 years ago."

As nonperforming loans are pushed from good banks to bad, with China's Ministry of Finance providing its guarantee to the bad loans at par, banking life goes on, and the economic miracle remains alive, backstopped by the lender of last resort, the People's Bank of China, levered at 1,233 to 1. The result is underlying assets are never liquidated and zombie banks and crony-led corporations are left in place to squander capital.

It’s one thing to see an economic growth slowdown, but it’s another thing for a bursting of massive Keynesian policies fuelled bubble.

And since China has been a major force in the growing demand for commodities worldwide which has partly driven up commodity prices (see chart below from Business Insider[7])…

..a bubble bust in China would send commodity prices crashing. Aside, there would be a risk of a disruption in the globalization model of transnational supply chain networks.

Also since hot money flows has functioned as a significant part of China’s bubble conditions, the likelihood is that such money flows could stampede for the exits, as shown by the January 2010 chart from Danske Bank[8].

In observation of the annual National Day celebration, China’s financial markets had been closed for the week

The coming sessions will be very interesting and crucial.

We will see if current market spasms in the Chinese markets are reflective of an economic slowdown or of an imploding bubble. And most importantly, how Chinese authorities will be dealing or responding to these events.

Bottom line:

The mainstream appears to be discounting events in China or has unduly been focusing on Europe or a potential recession in the US.

While it is unclear if the China has merely been experiencing a slowdown or a bursting bubble, growing signs of a credit stress could highlight risks of the latter similar to the developments in the Eurozone today or to the US Mortgage crisis of 2008.

A realization of the implosion of China’s bubble cycle would exacerbate the current market stress that would catch many off guard. Financial markets would gyrate wildly with a downside bias. This would function as the black swan (low probability, high impact event) for financial markets.

Of course we should expect Chinese authorities to step in and intervene as they did in 2008, by injecting a $586 billion stimulus package[9], and to parallel the activities with those of their Western contemporaries. However, again the timing, the size and the duration of the potential bailouts would serve as crucial factors in determining the market’s future trend.

Lastly in the event that China’s bubble has indeed imploded, then we could expect major central banks to reengage in more QEs (inflationism) and most possibly see more coordination of their activities.

Because of government’s management of our money, we indeed live in very interesting times.

For the meantime, buckle up for a roller coaster ride!

---

[1] See Phisix-ASEAN Market Volatility: Politically Induced Boom Bust Cycles, October 2, 2011

[2] Bloomberg.com China Air Travel Trails Capacity Growth in Golden Week Holiday, October 6, 2011 Businessweek.com

[3] Chang Gordon Is China's Economy Contracting? September 25, 2011 Forbes.com

[4] See Chart of the Day: Is China Suffering from a Credit Crunch?, October 4, 2011

[5] See China’s Bubble Cycle: Shadow Financing at $1.7 Trillion, June 28, 2011

[6] French, Douglas The China Model Is Unsustainable, Mises.org October 3, 2011

[7] Blodget Henry JEREMY GRANTHAM: We're Headed For A Disaster Of Biblical Proportions, June 13, 2011

[8] Danske Bank China: Hot money inflow heats up further, January 15, 2010

[9] Wikipedia.org Chinese economic stimulus program

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.

Solyndragate: Emails Implicate the Obama Administration

More evidences of crony capitalism from President Obama’s ‘green jobs’ policies.

From the Business Insider (bold highlights mine)

The White House released a bunch of emails related to the Solyndra bankruptcy scandal to Congressional investigators today, in what has become a regular Friday evening email dump.

The emails, obtained by several news organizations, implicate the most senior levels of the Obama administration in scandal, which has tainted the White House since the solar company went bankrupt last month, leaving taxpayers on the hook for a $534 billion federal loan.

Here are the highlights:

One email, obtained by the Washington Post, suggests that Obama and/or his chief of staff Rahm Emanuel was actively involved in trying to get Solyndra's loan application approved in time for a September 2009 press conference.

“Ron said this morning that the POTUS definitely wants to do this (or Rahm definitely wants the POTUS to do this?),” one White House staffer told an Obama scheduler on Aug. 17, 2009, referring to Ron Klain, former chief of staff for Vice President Joe Biden.

Steve Spinner, an Obama fundraiser who worked in the DOE loan department, repeatedly pushed the chief loan officer to expedite approval of Solyndra's loan — despite the fact that his wife worked for the law firm representing Solyndra. The firm received at least $2.4 million in fees related to the loan, according to the AP. DOE officials have previously stated that Spinner did not "actively participate" in Solyndra's application.

“How [expletive] hard is this? What is he waiting for? Will we have it by the end of the day?” Spinner wrote on Aug. 28, 2009. “I have OVP [Office of Vice President] and WH [White House] breathing down my neck on this. They are getting itchy to get involved if needed. I don’t want that.”

Read more here

Political distribution of scarce resources extrapolates to favoritism, nepotism and cronyism which results to the gaming of the political economy that ultimately leads to corruption.

As Ludwig von Mises wrote,

Corruption is an evil inherent in every government not controlled by a watchful public opinion.

Occupy Wall Street: Do as I say but NOT as I do

hat tip Prof Mark Perry

The policy of democracies is suicidal. Turbulent mobs demand acts which are contrary to society’s and their own best interests. They return to Parliament corrupt demagogues, adventurers, and quacks who praise patent medicines and idiotic remedies. Democracy has resulted in an upheaval of the domestic barbarians against reason, sound policies, and civilization. The masses have firmly established the dictators in many European countries. They may succeed very soon in America too. The great experiment of liberalism and democracy has proved to be self-liquidating. It has brought about the worst of all tyrannies.

This pertinent quote from the great Ludwig von Mises in Omnipotent Government: The Rise of the Total State and Total War [1944] (hat tip Prof Don Boudreaux)

Quote of the Day: Charity of the Markets

it is impossible to assess Mr. Jobs’s philanthropic legacy without discussing how Apple’s technology has changed the way nonprofits operate.

Devices like the iPhone and iPad have helped many organizations communicate more efficiently. They have allowed groups to improve the way they respond to disasters, communicate with supporters, and carry out their day-to-day work.

From Peter Panepento of the Philanthropy.com (hat tip Jeff Tucker).

Mr. Jobs’s philanthropic legacy can be seen from the largely 'unseen' factors, i.e. the consumer surpluses, wealth creation and in making people's lives significantly better.

Video: Steve Jobs on Education, Life and Death

Steve Jobs shares his life's lessons in this stirring commencement address at the Stanford University in 2005 (hat tip Bob Wenzel)



Transcript here

Some noteworthy passages (bold emphasis mine)

And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my college tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting...

Again, you can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life...

I'm pretty sure none of this would have happened if I hadn't been fired from Apple. It was awful tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle...

No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma — which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.

Fat Taxes and the Road to Serfdom

From Yahoo

On Oct. 1, consumers in Denmark saw a sudden jump in the cost of many of their favorite bread-friendly products. The average price of a half-pound package of butter increased by 2.5 krone (or 45 U.S. cents). A pound of cheese rose from 34.5 krone ($6) to 36 krone ($6.50). And don't even think about lard. In a single day, the cost of a half-pound block of pork fat skyrocketed from 12 krone ($2.15) to 16 krone ($2.85) — a 35% increase. Thanks to a new fat tax, Danes are paying more for just about anything they might want to slather on a piece of bread.

Other countries have imposed tariffs on food and drink considered unhealthy, but Denmark is taking the "fat tax" appellation literally. In the name of reducing cardiovascular disease, obesity, and diabetes, the law that went into effect on Saturday specifically targets saturated fats — the fats found most commonly in animal products like butter, cream, and meat. But few outside the government seem to think it's a good idea — or even a healthy one.

Social engineering policies like the above, which attempts to “nudge” people’s behavior, are expressions of how political leaders think of us. They see as incorrigible idiots who don’t know what is the best interest for ourselves. They essentially are imposing their value preferences on us.

While waging war against the 'fat' or 'obese' seems noble sounding, the unintended consequence is to politically stigmatize people who are ‘fat’ or ‘obese’. In short, such paternal nudging policies promote discrimination and societal divisiveness. Shouldn’t we also tax skinny people too who may also signify as health hazards?

The other unintended effect has been to raise consumer prices which affects not only the fat but even the non obese. So the social costs of rectifying such aberrations will unfortunately befall to everyone.

Social engineering policies signify as slippery slope or incremental steps towards total control of people—a totalitarian state.

As Ludwig von Mises wrote,

The "social engineer" is the reformer who is prepared to
"liquidate" all those who do not fit into his plan for the arrangement of human affairs.

On the other hand, the welfare state, whom have increasingly been burdened by financial strains as a result of the ballooning of the unsustainable system, has been using such ‘sin taxes’ as pretext or as propaganda to raise funds in order to maintain or preserve on the privileges of the political class.

Quote of the Day: Underlying Social Contract

From the ever eloquent George F. Will:

Society — hundreds of millions of people making billions of decisions daily — is a marvel of spontaneous order among individuals in voluntary cooperation. Government facilitates this cooperation with roads, schools, police, etc. — and by getting out of its way. This is a sensible, dynamic, prosperous society’s “underlying social contract.”

Read the rest here

European Central Bank expands QE to include Covered Bonds

Global central bankers appear to be coordinating their actions closely.

Just hours following the reactivation of Bank of England’s QE, the European Central Bank (ECB) announced that they will be expanding their bond purchases to include Covered Bonds or debt securities backed by cash flows from 'cover pools' composed of mortgages or public sector loans

From Bloomberg, (bold emphasis mine)

European Central Bank President Jean- Claude Trichet, fronting a policy decision for the final time, said the ECB will resume covered-bond purchases and reintroduce year-long loans for banks as the sovereign debt crisis threatens to lock money markets.

The ECB will spend 40 billion euros ($53 billion) on covered bonds starting next month and will offer banks two additional unlimited loans of 12 and 13-month durations, Trichet said at a press conference in Berlin today after policy makers left the benchmark interest rate at 1.5 percent. He also said the ECB will continue to lend banks as much money as they need in its regular refinancing operations at least until July 2012.

The ECB is resisting calls to reverse its two rate increases this year even as the debt crisis threatens to tip Europe back into recession, turning instead to tools it has previously used in an effort to calm financial markets. With European leaders still hammering out a new plan to stop the region’s debt crisis, Trichet’s final decisions may be among the most critical for the future of the euro -- the currency he has championed as a symbol of European unity…

The ECB purchased 60 billion euros of covered bonds in a one-year program that expired in June last year and was aimed at freeing up banks’ balance sheets and encouraging lending during the region’s worst recession since World War II.

The 2.5 trillion-euro market for covered bonds -- assets backed by mortgages or public-sector loans -- underpins much of Europe’s real estate lending, which almost ground to a halt in the wake of Lehman Brothers Holdings Inc.’s collapse in September 2008.

“The new purchases will have the capacity to be conducted in the primary and secondary markets and will be carried out by means of direct purchases,” Trichet said. They will start in November “and are expected to be fully implemented by the end of October 2012,” he said.

Trichet said all the measures announced today are designed to improve transmission of the ECB’s monetary policy.

Will Ben Bernanke’s US Federal Reserve be next?

Bank of England Activates QE 2.0

The Bank of England has redeployed her version of QE 2.0

From Bloomberg,

The Bank of England expanded its bond-purchase plan for the first time in almost two years as government budget cuts and Europe’s debt crisis jeopardize Britain’s economic recovery.

The nine-member Monetary Policy Committee led by Mervyn King raised the ceiling for so-called quantitative easing to 275 billion pounds ($421 billion) from 200 billion pounds. Twenty- one of 32 economists in a Bloomberg News survey forecast no change, and the rest predicted increases ranging from 50 billion pounds to 100 billion pounds. The bank expects to complete the new round of purchases in four months.

The yield on the U.K.’s 10-year government bond dropped after the announcement, falling to as low as 2.228 percent from 2.352 percent before the statement. The central bank said slowing global growth and the turmoil in Europe “threaten the U.K. recovery.” It also said it is now “more likely” that inflation will undershoot its 2 percent goal in the medium term.

The MSCI All-Country World Index slid into a bear market last month as European officials tried to contain a crisis that the International Monetary Fund said presents “acute” risks to the global economy.

Again note of the use of crisis in order to rationalize political action.

Well, readers of this blog have seen this coming.

Chart of the Day: America’s Fast Expanding Welfare State

From the Wall Street Journal Blog,

Families were more dependent on government programs than ever last year.

Nearly half, 48.5%, of the population lived in a household that received some type of government benefit in the first quarter of 2010, according to Census data. Those numbers have risen since the middle of the recession when 44.4% lived households receiving benefits in the third quarter of 2008.

The share of people relying on government benefits has reached a historic high, in large part from the deep recession and meager recovery, but also because of the expansion of government programs over the years. (See a timeline on the history of government benefits programs here.)

Means-tested programs, designed to help the needy, accounted for the largest share of recipients last year. Some 34.2% of Americans lived in a household that received benefits such as food stamps, subsidized housing, cash welfare or Medicaid (the federal-state health care program for the poor).

Another 14.5% lived in homes where someone was on Medicare (the health care program for the elderly). Nearly 16% lived in households receiving Social Security.

Aside from the bailout policies, this serves as one significant reason why prospective US economic growth, as manifested by the current elevated rate of unemployment and low output, will progressively become lethargic as scarce resources are diverted towards more non-productive, capital consuming activities.

Importantly, US politics will increasingly be sensitive to the maintenance and the advancement of the unsustainable system of the welfare state.

To wean away dependants from this system, which has become more entrenched, will be considerably difficult and destabilizing.

Perhaps it may come to a point where the markets will force a tragic resolution, partly similar to what’s been happening to Greece.

Moreover, the US political spectrum will likely be dominated by class divisions, where welfare beneficiaries and their political patrons will call for more taxation in support of the pocket picking welfare policies.

The result of a recent poll exudes this political climate

From another Wall Street Blog,

Poll after poll shows that a majority of Americans support higher taxes on the wealthy, even when “wealthy” is defined as those making more than $250,000 a year.

Presumably, most of those polled don’t make the income cut-off, so it’s easy for them to demand that someone else pay for the nation’s debt.

Political divisions, from such class warfare, would only encourage instability and abet on violence.

In addition, the welfare state will continually be funded by debt that will ultimately lead to an outright default or will be inflated upon.

Ludwig Wilhelm Erhard, former economic minister and Chancellor, architect of Germany’s postwar economic reform and economic recovery popularly known as "Wirtschaftswunder" or "economic miracle", in his book Prosperity through Competition wrote a very apropos admonition on the dangers of the welfare state (p.187) [emphasis added]

if this mania increases we shall slide into a social order under which everyone has one hand in the pocket of another. The principle would then be: I provide for someone else and someone else provides for me.

The blindness and the intellectual inertia which are pushing us towards a Welfare State can only bring disaster. This, more than any other tendency, will serve slowly but surely to kill the real human virtues—joy in assuming responsibility, love for one’s fellow being, an urge to prove oneself, a readiness for oneself—and in the end there will probably ensue not a classless but a soulless mechanical society.

Quote of the Day: Legacy

It's one thing to miss someone, to feel a void when they're gone. It's another to do something with their legacy, to honor them through your actions.

That’s from marketing guru Seth Godin’s eulogy for Steve Jobs. Read the rest here

Video: Fiat Money Basics: The Root of the World's Imbalances

Here is a concise explanation of the mechanics of the legal tender based paper money system, a system that rewards the political and the banking class at the expense of everyone else.