Dollar rising strongly - what does it mean?

[Canadian_watcher]

I'm with Nordic in his last post. This is almost unintelligible at this point.
absolutely nothing makes sense
just one stupid, small example:
why, if credit is SO tight, are there still ads on in Prime Time offering people loans "with just a signature down"
???
wtf?
is this all pretend, or what. seriously.

[rrapt]

Mostly pretend, I'd say. And then you gotta figure, the lender has an advertising contract he can't get out of until next year?

[JackRiddler]

.

Credit makes money. Paying off credit reduces money supply again and clears the way for more credit.

Hi again, JackRiddler: I'm trying once again to understand the situation in my own homely way...

So, the ideal way for the economy to function/flourish is for people to be in debt but paying it off then acquiring more debt to repeat it all again. In other words, perpetual debt equals prosperity. We power the system by running around in our hamster wheels of consumerism. We owe our souls to the company store.

Yikes! I think maybe this is what Vigilant was getting at in his many posts that I could never quite follow, myself, but maybe it's sinking in anyway.

Yes, far as I've now understood it, penniless schlub that I am, that is how the system is set up. Supposedly it's a rational way for money to adjust to growth. I already don't think it's such a great idea because of all of the incentives to artificial growth (always creating new consumer needs) and the planetary limits.

However, there is the further perverse matter of interest and compound interest, which guarantee an automatic siphoning of profit to creditors and also guarantee that there must be defaults in the end. Interest means the amount of money owed in debt will always be greater than that extended in credit, so someone somewhere must be forced to default down the line regardless of how good or bad they may be in productively deploying their credit. (The alternative is to print money out of nothing, which creditors don't like and also devalues to currency.)

Interest is the MOTOR in the hamster wheel, the imperative behind the "profit motive" which is not just a motive but an inescapable requirement.

.

[AhabsOtherLeg]

why, if credit is SO tight, are there still ads on in Prime Time offering people loans "with just a signature down"
???
wtf?

For Christmas?

They obviously don't want people to NOT get in debt.

It's not your money they're after. It's your house.

[elpuma]

Related....

From The Sunday Times
October 26, 2008
Nouriel Roubini: I fear the worst is yet to come
When this man predicted a global financial crisis more than a year ago, people laughed. Not any more...

by Dominic Rushe

As stock markets headed off a cliff again last week, closely followed by currencies, and as meltdown threatened entire countries such as Hungary and Iceland, one voice was in demand above all others to steer us through the gloom: that of Dr Doom.

For years Dr Doom toiled in relative obscurity as a New York University economics professor under his alias, Nouriel Roubini. But after making a series of uncannily accurate predictions about the global meltdown, Roubini has become the prophet of his age, jetting around the world dispensing his advice and latest prognostications to politicians and businessmen desperate to know what happens next – and for any answer to the crisis.

While the economic sun was shining, most other economists scoffed at Roubini and his predictions of imminent disaster. They dismissed his warnings that the sub-prime mortgage disaster would trigger a financial meltdown. They could not quite believe his view that the US mortgage giants Fannie Mae and Freddie Mac would collapse, and that the investment banks would be crushed as the world headed for a long recession.

Yet all these predictions and more came true. Few are laughing now.

What does Roubini think is going to happen next? Rather worryingly, in London last Thursday he predicted that hundreds of hedge funds will go bust and stock markets may soon have to shut – perhaps for as long as a week – in order to stem the panic selling now sweeping the world.

What happened? The next day trading was briefly stopped in New York and Moscow.

Dubbed Dr Doom for his gloomy views, this lugubrious disciple of the “dismal science” is now the world’s most in-demand economist. He reckons he is getting about four hours’ sleep a night. Last week he was in Budapest, London, Madrid and New York. Next week he will address Congress in Washington. Do not expect any good news.

Contacted in Madrid on Friday, Roubini said the world economy was “at a breaking point”. He believes the stock markets are now “essentially in free fall” and “we are reaching the point of sheer panic”.

For all his recent predictive success, his critics still urge calm. They charge he is a professional doom-monger who was banging on about recession for years as the economy boomed. Roubini is stung by such charges, dismissing them as “pathetic”.

He takes no pleasure in bad news, he says, but he makes his standpoint clear: “Frankly I was right.” A combative, complex man, he is fond of the word “frankly”, which may be appropriate for someone so used to delivering bad news.

Born in Istanbul 49 years ago, he comes from a family of Iranian Jews. They moved to Tehran, then to Tel Aviv and finally to Italy, where he grew up and attended college, graduating summa cum laude in economics from Bocconi University before taking a PhD in international economics at Harvard.

Fluent in English, Italian, Hebrew, and Persian, Roubini has one of those “international man of mystery” accents: think Henry Kissinger without the bonhomie. Single, he lives in a loft in Manhattan’s trendy Tribeca, an area popularised by Robert De Niro, and collects contemporary art.

Despite his slightly mad-professor look, he is at pains to make clear he is normal. “I’m not a geek,” said Roubini, who sounds rather concerned that people might think he is. “I mean it frankly. I’m not a geek.”

He is, however, ferociously bright. When he left Harvard, he moved quickly, holding various positions at the Treasury department, rising to become an economic adviser to Bill Clinton in the late 1990s. Then his profile seemed to plateau. His doubts about the economic outlook seemed out of tune with the times, especially when a few years ago he began predicting a meltdown in the financial markets through his blog, hosted on RGEmonitor. com, the website of his advisory company.

But it was a meeting of the International Monetary Fund (IMF) in September 2006 that earned him his nickname Dr Doom.

Roubini told an audience of fellow economists that a generational crisis was coming. A once-in-a-lifetime housing bust would lay waste to the US economy as oil prices soared, consumers stopped shopping and the country went into a deep recession.

The collapse of the mortgage market would trigger a global meltdown, as trillions of dollars of mortgage-backed securities unravelled. The shockwaves would destroy banks and other big financial institutions such as Fannie Mae and Freddie Mac, America’s largest home loan lenders.

“I think perhaps we will need a stiff drink after that,” the moderator said. Members of the audience laughed.

Economics is not called the dismal science for nothing. While the public might be impressed by Nostradamus-like predictions, economists want figures and equations. Anirvan Banerji, economist with the New York-based Economic Cycle Research Institute, summed up the feeling of many of those at the IMF meeting when he delivered his response to Roubini’s talk.

Banerji questioned Roubini’s assumptions, said they were not based on mathematical models and dismissed his hunches as those of a Cassandra. At first, indeed, it seemed Roubini was wrong. Meltdown did not happen. Even by the end of 2007, the financial and economic outlook was grim but not disastrous.

Then, in February 2008, Roubini posted an entry on his blog headlined: “The rising risk of a systemic financial meltdown: the twelve steps to financial disaster”.

It detailed how the housing market collapse would lead to huge losses for the financial system, particularly in the vehicles used to securitise loans. It warned that “ a national bank” might go bust, and that, as trouble deepened, investment banks and hedge funds might collapse.

Even Roubini was taken aback at how quickly this scenario unfolded. The following month the US investment bank Bear Stearns went under. Since then, the pace and scale of the disaster has accelerated and, as Roubini predicted, the banking sector has been destroyed, Freddie and Fannie have collapsed, stock markets have gone mad and the economy has entered a frightening recession.

Roubini says he was able to predict the catastrophe so accurately because of his “holistic” approach to the crisis and his ability to work outside traditional economic disciplines. A long-time student of financial crises, he looked at the history and politics of past crises as well as the economic models.

“These crises don’t come out of nowhere,” he said. “Usually they arrive because of a systematic increase in a variety of asset and credit bubbles, macro-economic policies and other vulnerabilities. If you combine them, you may not get the timing right but you get an indication that you are closer to a tipping point.”

Others who claimed the economy would escape a recession had been swept up in “a critical euphoria and mania, an irrational exuberance”, he said. And many financial pundits, he believes, were just talking up their own vested interests. “I might be right or wrong, but I have never traded, bought or sold a single security in my life. I am trying to be as objective as I can.”

What does his objectivity tell him now? No end is yet in sight to the crisis.

“Every time there has been a severe crisis in the last six months, people have said this is the catastrophic event that signals the bottom. They said it after Bear Stearns, after Fannie and Freddie, after AIG [the giant US insurer that had to be rescued], and after [the $700 billion bailout plan]. Each time they have called the bottom, and the bottom has not been reached.”

Across the world, governments have taken more and more aggressive actions to stop the panic. However, Roubini believes investors appear to have lost confidence in governments’ ability to sort out the mess.

The announcement of the US government’s $700 billion bailout, Gordon Brown’s grand bank rescue plan and the coordinated response of governments around the world has done little to calm the situation. “It’s been a slaughter, day after day after day,” said Roubini. “Markets are dysfunctional; they are totally unhinged.” Economic fundamentals no longer apply, he believes.

“Even using the nuclear option of guaranteeing everything, providing unlimited liquidity, nationalising the banks, making clear that nobody of importance is going to be allowed to fail, even that has not helped. We are reaching a breaking point, frankly.”

He believes governments will have to come up with an even bigger international rescue, and that the US is facing “multi-year economic stagnation”.

Given such cataclysmic talk, some experts fear his new-found influence may be a bad thing in such troubled times. One senior Wall Street figure said: “He is clearly very bright and thoughtful when he is not shooting from the hip.”

He said he found some of Roubini’s comments “slapdash and silly”. “Sometimes the rigour of his analysis seems to be missing,” he said.

Banerji still has problems with Roubini’s prescient IMF speech. “He has been very accurate in terms of what would happen,” he said. But Roubini was predicting an “imminent” recession by the start of 2007 and he was wrong. “He hurt his credibility by being so pessimistic long before it was appropriate.”

Banerji said on average the US economy had grown for five years before hitting a bad patch. “Roubini started predicting a recession four years ago and saying it was imminent. He kept changing his justification: first the trade deficit, the current account deficit, then the oil price spike, then the housing downturn and so on. But the recession actually did not arrive,” he said.

“If you are an investor or a businessman and you took him seriously four years ago, what on earth would happen to you? You would be in a foetal position for years. This is why the timing is critical. It’s not enough to know what will happen in some point in the distant future.”

Roubini says the argument about content and timing is irrelevant. “People who have been totally blinded and wrong accusing me of getting the timing wrong, it’s just a joke,” he said. “It’s a bit pathetic, frankly. I was not making generic statements. I have made very specific predictions and I have been right all along.” Maybe so, but he does not sound too happy about it, frankly.

http://business.timesonline.co.uk/tol/business/economics/article5014463.ece

[Canadian_watcher]

why, if credit is SO tight, are there still ads on in Prime Time offering people loans "with just a signature down"
???
wtf?

For Christmas?

They obviously don't want people to NOT get in debt.

It's not your money they're after. It's your house.

the last one I saw was from Volkswagon. They are still running AIG insurance ads here in Canada, too. My mortgage payments keep going down as well. If credit is tight, shouldn't rates be going up? I know, I know, they're lowering the rate to stimulate investment. But then which is it? Tight, or not?

It makes me scratch my head.

[Foote Hertz]

So, the ideal way for the economy to function/flourish is for people to be in debt but paying it off then acquiring more debt to repeat it all again. In other words, perpetual debt equals prosperity. We power the system by running around in our hamster wheels of consumerism. We owe our souls to the company store.

Makes me think of that movie The Matrix.

I found a couple of resources yesterday that are helping me (crawl) toward a slight understanding of some basics.

The Crash Course : The Crash Course seeks to provide you with a baseline understanding of the economy so that you can better appreciate the risks that we all face. The Intro below is separated from the rest of the sections because you'll only need to see it once...it tells you about how The Crash Course came to be. [ I went through half of it yesterday. I eventually might understand some of this stuff. ]

Crash Course pointed me to this lecture on compound interest and exponential growth (now I know what 'hockey stick' refers to). Very easy to follow. Arithmetic, Population & Energy

Thanks JackRiddler. I tend to learn from your posts, though lack of retention persists.

[JackRiddler]

(dupe)

[JackRiddler]

.

Thanks for kind words, Foote Hertz.

The dollar rise as addressed today by Paul Craig Roberts - observations on the "Carry Trade" and moves for an, um, new world order. Bit of bullshit at the end about the natural prudence of those Chinesers.

The safe haven explanation I do not really buy. The dollar's not the reserve of choice, T-bills however for the moment are. I think everyone's running into dollars because their obligations are there. When this unwinds in a few months, it's still not sure what will happen because everyone's got dollars they don't want to see rendered worthless. I had an idea for one move that might happen to change that, I'll get to it later.

http://counterpunch.org/roberts10302008.html

October 30, 2008
America's "Economic Egotism"
World Tires of Rule by Dollar

By PAUL CRAIG ROBERTS

What explains the paradox of the dollar’s sharp rise in value against other currencies (except the Japanese yen) despite disproportionate US exposure to the worst financial crisis since the Great Depression?

The answer does not lie in improved fundamentals for the US economy or better prospects for the dollar to retain its reserve currency role.

The rise in the dollar’s exchange value is due to two factors.

One factor is the traditional flight to the reserve currency that results from panic. People are simply doing what they have always done. Pam Martens predicted correctly that panic demand for US Treasury bills would boost the US dollar.

The other factor is the unwinding of the carry trade. The carry trade originated in extremely low Japanese interest rates. Investors and speculators borrowed Japanese yen at an interest rate of one-half of one percent, converted the yen to other currencies, and purchased debt instruments from other countries that pay much higher interest rates. In effect, they were getting practically free funds from Japan to lend to others paying higher interest.

The financial crisis has reversed this process. The toxic American derivatives were marketed worldwide by Wall Street. They have endangered the balance sheets and solvency of financial institutions throughout the world, including national governments, such as Iceland and Hungary. Banks and governments that invested in the troubled American financial instruments found their own debt instruments in jeopardy.

Those who used yen loans to purchase, for example, debt instruments from European banks or Icelandic bonds, faced potentially catastrophic losses. Investors and speculators sold their higher-yielding financial instruments in a scramble for dollars and yen in order to pay off their Japanese loans. This drove up the values of the yen and the US dollar, the reserve currency that can be used to repay debts, and drove down the values of other currencies.

The dollar’s rise is temporary, and its prospects are bleak. The US trade deficit will lessen due to less consumer spending during recession, but it will remain the largest in the world and one that the US cannot close by exporting more. The way the US trade deficit is financed is by foreigners acquiring more dollar assets, with which their portfolios are already heavily weighted.

The US government’s budget deficit is large and growing, adding hundreds of billions of dollars more to an already large national debt. As investors flee equities into US government bills, the market for US Treasuries will temporarily depend less on foreign governments. Nevertheless, the burden on foreigners and on world savings of having to finance American consumption, the US government’s wars and military budget, and the US financial bailout is increasingly resented.

This resentment, combined with the harm done to America’s reputation by the financial crisis, has led to numerous calls for a new financial order in which the US plays a substantially lesser role. “Overcoming the financial crisis” are code words for the rest of the world’s intent to overthrow US financial hegemony.

Brazil, Russia, India and China have formed a new group (BRIC) to coordinate their interests at the November financial summit in Washington, D.C.

On October 28, RIA Novosti reported that Russian prime minister Vladimir Putin suggested to China that the two countries use their own currencies in their bilateral trade, thus avoiding the use of the dollar. China’s prime Minister Wen Jiabao replied that strengthening bilateral relations is strategic.

Europe has also served notice that it intends to exert a new leadership role. Four members of the Group of Seven industrial nations, France, Britain, Germany and Italy, used the financial crisis to call for sweeping reforms of the world financial system. Jose Manual Barroso, president of the European Commission, said that a new world financial system is possible only “if Europe has a leadership role.”

Russian president Dmitry Medvedev said that the “economic egoism” of America’s “unipolar vision of the world” is a ”dead-end policy.”

China’s massive foreign exchange reserves and its strong position in manufacturing have given China the leadership role in Asia. The deputy prime minister of Thailand recently designated the Chinese yuan as “the rightful and anointed convertible currency of the world.”

Normally, the Chinese are very circumspect in what they say, but on October 24 Reuters reported that the People’s Daily, the official government newspaper, in a front-page commentary accused the US of plundering “global wealth by exploiting the dollar’s dominance.” To correct this unacceptable situation, the commentary called for Asian and European countries to “banish the US dollar from their direct trade relations, relying only on their own currencies.” And this step, said the commentary, is merely a starting step in overthrowing dollar dominance.

The Chinese are expressing other thoughts that would get the attention of a less deluded and arrogant American government. Zhou Jiangong, editor of the online publication, Chinastates.com, recently asked: “Why should China help the US to issue debt without end in the belief that the national credit of the US can expand without limit?”

Zhou Jiangong’s solution to American excesses is for China to take over Wall Street.

China has the money to do it, and the prudent Chinese would do a better job than the crowd of thieves who have destroyed America’s financial reputation while exploiting the world in pursuit of multi-million dollar bonuses.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions. He can be reached at: PaulCraigRoberts@yahoo.com

[stefano]

This sort of ties in with one of Jack's points in the OP, that the bankers always prefer the US (or in this case the Gulf) to the EU because of less stringent oversight... By Robert Peston, whose tone's a bit insufferable but who collects interesting news.

Why Barclays prefers Abu Dhabi to GB

Some may think it's a funny old world in which Barclays would rather raise £5.8bn of vital new capital from the state investment funds and royal families of Qatar and Abu Dhabi than take cash from the British Treasury.

And the money being raised by Barclays isn't cheap, to put it mildly.

The £3bn of so-called reserve capital instruments it's selling to Abu Dhabi and Qatar pay an interest rate of 14% before tax and 10% after tax - only a bit cheaper, after tax, than the preference shares being bought by the British Treasury from other British banks.

But when you include the warrants attached to these reserve capital instruments, it's not obvious that this money is better value than what was on offer from the Treasury.

In some ways it looks pricier - because Abu Dhabi and Qatar have been given the right to buy 18.1% of Barclays shares at any time in the next five years at the current bombed-out share price or £3bn in total.

And £2.8bn of mandatorily convertible notes give the two buyers a dividend of 9.75%, and the ability to buy a further 33.5% stake in Barclays next June at a discount of a fifth to Barclays' share price over the past couple of days.

So Qatar and Abu Dhabi could together control just under a third of the entire bank.

That's astonishing.

That Barclays can raise the money at all is a testament to its relative strength compared to the other British banks - and in the course of today it hopes to raise another £1bn to £1.5bn from other investors.

But many jaws will drop at the disclosure that Barclays prefers what some may see as de facto nationalisation by oil-rich Middle Eastern states to nationalisation by Her Majesty's Treasury.

So why was Barclays so keen to pay a fat return to Abu Dhabi and Qatar rather than to the British taxpayer?

Well, unsurprisingly, it puts a high value on its commercial independence.

At almost any cost, it wanted to avoid taking money from the Treasury - because that would have imposed restrictions on how and what it could pay senior executives and when it could resume paying dividends to holders of its ordinary shares.

And taking British taxpayers' wonga would have made it more vulnerable to ministerial nannying that it should lend to those seen by the authorities as deserving.

Barclays has also disclosed that its profits in the first nine months of the year are higher than last year - which puts HBOS and Royal Bank of Scotland, where profits have collapsed, to shame.

And so far Barclays takeover of the US bits of the collapsed Wall Street investment bank, Lehman, seems to be paying off.

Barclays' announcement will be the last bit of relatively good news from a British bank for some time.

Next week we'll have trading updates from HBOS, Royal Bank of Scotland and Lloyds TSB - and more detail on the capital being raised from UK taxpayers by Lloyds and RBS.

There'll also be more on the takeover of HBOS by Lloyds.

(There's more)

[AhabsOtherLeg]

Robert Peston's tone IS insufferable, and it's a shame, because he called the inevitable on Northern Rock before it happened....

He's often right. But he IS insufferable.

Northern Rock, and it's subsidiary account Granite, in my opinion, have connections to the Haute de la Garenne scandal. As do BAE, Quatar, and the Saudis.

There is blackmail on a vast and ongoing scale happening here (globally, I mean).

I think it is about what is and isn't being said in the media.

Now that Mandelson and Alastair Campbell are back on the Labour attack-team - and the BBC is in trouble anyway, due to Brand and
Ross _ we can at least expect to save money on the license fee.

[JackRiddler]

.

With the G20 summit underway in DC to dope out some stumble through, seems appropriate to revive this thread.

Nothing of interest is likely to be announced officially coming out of the summit, but a finished Bush gets to spectate and whine about the free market while the other 19 grope for consensus.

I think the big stories going in are:

a) China announces $500 billion Keynesian stimulus plan = 15% of their GDP!

b) Paulson essentially admitted the bailout was a scam by the stunning, sudden announcement that no toxic assets will be bought at all, it will all go into straight cash to the banks (for "preferred shares") and AIG.

c) A new concept arrived this week (thanks Naomi Klein) to counter the idea that the US has "nationalized the banks." In fact, it is far more accurate to say the banks have "privatized the Treasury." Although the oversight office remains unfilled, almost all of the $350 billion first TARP tranche has been pledged or paid, and Kucinich and Issa held a subcommittee hearing to rake Kashkari mildly over the coals. (Do you guys prefer "Cash Carry" or "Cash Carrion" as the appropriate pun cum metaphor?)

d) Bloomberg's suit against the Federal Reserve demanding to see the books on the $2 trillion paid or lent to date out of the Treasury and through money creation -- Who got how much? Where did it come from? What collateral was provided? All are apparently now national secrets.

http://www.bloomberg.com/apps/news?pid= ... =worldwide

Fed Defies Transparency Aim in Refusal to Disclose (Update2)

By Mark Pittman, Bob Ivry and Alison Fitzgerald

Nov. 10 (Bloomberg) -- The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

``The collateral is not being adequately disclosed, and that's a big problem,'' said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. ``In a liquid market, this wouldn't matter, but we're not. The market is very nervous and very thin.''

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

``It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''

Treasury, Fed, Obama

Federal Reserve spokeswoman Michelle Smith declined to comment on the loans or the Bloomberg lawsuit. Treasury spokeswoman Michele Davis didn't respond to a phone call and an e-mail seeking comment.

President-elect Barack Obama's economic adviser, Jason Furman, also didn't respond to an e-mail and a phone call seeking comment from Obama. In a Sept. 22 campaign speech, Obama promised to ``make our government open and transparent so that anyone can ensure that our business is the people's business.''

The Fed's lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan -- without safeguards put into the TARP legislation by Congress.

Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds.

Sept. 14 Decision


Before Sept. 14, the Fed accepted mostly top-rated government and asset-backed securities as collateral. After that date, the central bank widened standards to accept other kinds of securities, some with lower ratings. The Fed collects interest on all its loans.

The plan to purchase distressed securities through TARP called for buying at the ``lowest price that the secretary (of the Treasury) determines to be consistent with the purposes of this Act,'' according to the Emergency Economic Stabilization Act of 2008, the law that covers TARP.

The legislation didn't require any specific method for the purchases beyond saying mechanisms such as auctions or reverse auctions should be used ``when appropriate.'' In a reverse auction, bidders offer to sell securities at successively lower prices, helping to ensure that the Fed would pay less. The measure also included a five-member oversight board that includes Paulson and Bernanke.

At a Sept. 23 Senate Banking Committee hearing in Washington, Paulson called for transparency in the purchase of distressed assets under the TARP program.

`We Need Transparency'

``We need oversight,'' Paulson told lawmakers. ``We need protection. We need transparency. I want it. We all want it.''

At a joint House-Senate hearing the next day, Bernanke also stressed the importance of openness in the program. ``Transparency is a big issue,'' he said.

The Fed lent cash and government bonds to banks, which gave the Fed collateral in the form of equities and debt, including subprime and structured securities such as collateralized debt obligations, according to the Fed Web site. The borrowers have included the now-bankrupt Lehman Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

Frank Backs Fed

``You have to balance the need for transparency with protecting the public interest,'' Talbott said. ``Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.''

The nation's biggest banks, Citigroup, Bank of America Corp., JPMorgan Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, declined to comment on whether they have borrowed money from the Fed. They received $120 billion in capital from the TARP, which was signed into law Oct. 3.

In an interview Nov. 6, House Financial Services Committee Chairman Barney Frank said the Fed's disclosure is sufficient and that the risk the central bank is taking on is appropriate in the current economic climate. Frank said he has discussed the program with Timothy F. Geithner, president and chief executive officer of the Federal Reserve Bank of New York and a possible candidate to succeed Paulson as Treasury secretary.

``I talk to Geithner and he was pretty sure that they're OK,'' said Frank, a Massachusetts Democrat. ``If the risk is that the Fed takes a little bit of a haircut, well that's regrettable.'' Such losses would be acceptable, he said, if the program helps revive the economy.

`Unclog the Market'

Frank said the Fed shouldn't reveal the assets it holds or how it values them because of ``delicacy with respect to pricing.'' He said such disclosure would ``give people clues to what your pricing is and what they might be able to sell us and what your estimates are.'' He wouldn't say why he thought that information would be problematic.

Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D'Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc.

``I'd love to hear the methodology, how the Fed priced the assets,'' D'Vari said. ``That would unclog the market very quickly.''

((NOTE: Or so he thinks!))

TARP's $700 billion so far is being used to buy preferred shares in banks to shore up their capital. The program was originally intended to hold banks' troubled assets while markets were frozen.

AIG Lending

The Bloomberg lawsuit argues that the collateral lists ``are central to understanding and assessing the government's response to the most cataclysmic financial crisis in America since the Great Depression.''

The Fed has lent at least $81 billion to American International Group Inc., the world's largest insurer, so that it can pay obligations to banks. AIG today said it received an expanded government rescue package valued at more than $150 billion.


The central bank is also responsible for losses on a $26.8 billion portfolio guaranteed after Bear Stearns Cos. was bought by JPMorgan.

``As a taxpayer, it is absolutely important that we know how they're lending money and who they're lending it to,'' said Lucy Dalglish, executive director of the Arlington, Virginia- based Reporters Committee for Freedom of the Press.

Ratings Cuts

Ultimately, the Fed will have to remove some securities held as collateral from some programs because the central bank's rules call for instruments rated below investment grade to be taken back by the borrower and marked down in value. Losses on those assets could then be written off, partly through the capital recently injected into those banks by the Treasury.

Moody's Investors Service alone has cut its ratings on 926 mortgage-backed securities worth $42 billion to junk from investment grade since Sept. 14, making them ineligible for collateral on some Fed loans.

The Fed's collateral ``absolutely should be made public,'' said Mark Cuban, an activist investor, the owner of the Dallas Mavericks professional basketball team and the creator of the Web site BailoutSleuth.com, which focuses on the secrecy shrouding the Fed's moves.

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Mark Pittman in New York at mpittman@bloomberg.net; Bob Ivry in New York at bivry@bloomberg.net; Alison Fitzgerald in Washington at afitzgerald2@bloomberg.net.
Last Updated: November 10, 2008 15:08 EST

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[JackRiddler]

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Good historical review today from Le Monde Diplomatique (republished in Counterpunch) explaining certain key points and stations from Bretton Woods to today: foreign dollar holders, above all China, do not have an incentive to see it meltdown and burn their reserves. That won't necessarily prevent a meltdown if US insolvency becomes too obvious (as 4.2 trillion are thrown down the money hole).

Credit replaced wage increases in the West and especially the US, setting it up as the consumer of everything, combining with national debt burdens on the developing world to cause a net outflow of capital from the developing world starting in the 1980s.

And more:
http://counterpunch.org/boulard11192008.html

November 19, 2008
The Vindication of China?
Escaping the Dollar's Shadow

By MARTINE BOULARD

Like it or not, the next US president must accept that his great country and its mighty dollar are no longer unchallenged masters of a world economy slowing alarmingly. According to the International Labor Organization (ILO), there will be 20 million more people unemployed worldwide by the end of 2009 than in 2007. The
summit of both industrialized and emerging nations, the G20 on November 15, did not challenge a market system that has patently failed. Change will be slow because China, America's main banker, has a vested interest in maintaining the status quo - for the moment at least

The US government decision to bail out the mortgage giants Fannie Mae and Freddie Mac in September came - according to rumor - after a phone call in which the Chinese president, Hu Jintao, threatened President George Bush that if they were not rescued, China would stop buying US Treasury bills. The US government denies the story. The Chinese point to the facts: Fannie and Freddie were saved and the Chinese loans, $595.9bn, were guaranteed. The story is emblematic of the current changes in the geopolitics of capital.

Once upon a time the US determined the world's financial affairs alone, but at the 63rd session of the UN General Assembly, on September 24, Bush had to endure the reproaches of heads of state. "There was a certain satisfaction among some of the attendees that the Bush administration, which had long lectured other nations about the benefits of unfettered markets, was now rejecting its own medicine by proposing a major bailout of financial firms" (1).
China 'vindicated'

On September 27, Chinese economists and politicians reminded the World Economic Forum in Tianjin that they had been justified in resisting pressures for the total liberalization of China's financial system. Liu Mingkang, chairman of the China banking regulatory commission, said: "When US regulators were reducing the down payment to zero, or they created so-called reverse mortgages, we thought that was ridiculous" (2).

In recent years Liu has tried to bring order to this chaotic sector and to ensure that the markets are controlled by the state, rather than by their own invisible hand: "A lot of the time, we learned that what we had learned from our teacher the day before was wrong." This irony did not escape the bankers present who, in a move without precedent in the financial world, admitted responsibility. Stephen Roach, Morgan Stanley's Asian head, acknowledged that huge mistakes in monetary policy had been made and accused the US central bank, the Federal Reserve, of forcing the US into an orgy of consumption.

Only a few Americans were invited to the orgy. Although 1 per cent of Americans own 20 per cent of national income, a historical record, overall median earnings rose by only 0.1 per cent a year between 2000 and 2007. For most people the problem was less that consumption rose too high than that wages fell too far, forcing people to borrow for housing, education and healthcare (health insurance premiums have rocketed). Wealthy people and leading companies chose to invest abroad at the expense of domestic industrial development, forcing the US to import more and export less, driving up the deficit.

The US rich got richer by refusing to pay decent wages, driving the poor into the arms of lenders. The developing world paid the ultimate price. Until the mid 1980s, capital flowed from the developed to the developing world; this flow has reversed. Emerging economies made US deficits good by buying Treasury securities, debts issued by the US government and 80-90 per cent taken up abroad. Although Japan is still their major purchaser at $1,197bn (3), China, in second place with $922bn, is now the US's banker as well as the workshop of the world. Including other major holders of US bonds (Hong Kong, South Korea, Singapore), Asia incorporates more than half of all foreign US public debt. The oil-exporting countries are major suppliers of capital funds (although only half as much as China), along with emerging nations such as Mexico and Brazil. Russia, so disparaged by Bush, is among the top 20 global lenders, thus demonstrating that you can trade insults and do business simultaneously.

But he who pays the piper calls the tune, or hopes to. It would be catastrophic for Wall Street if China reduced its financing or stopped buying Treasury securities - not that it is contemplating such a move. "We should join hands," China's prime minister Wen Jiabao told Newsweek magazine. "And particularly at such difficult times, China has reached out to the US. And we believe such a helping hand will help stabilise the entire global economy and finance and prevent major chaos from occurring. I believe now that cooperation is everything".

Some commentators have seen this as proof of an ideological alliance between supporters of capitalism. But China is simply trying to defend its interests. As the prime minister continued: "If anything goes wrong in the US financial sector, we would be anxious about the security of Chinese capital" (4). This is true externally, since the crash has not spared China's foreign holdings, as well as internally.

Treasury bills have allowed the US to finance its deficit and borrow the money to buy cheap Chinese goods; but China is sitting on the world's largest dollar reserves, almost $2trn (5), more than two-thirds of its total annual production. If the present tsunami swept away the US financial system and undermined the dollar, China's nest-egg would be destroyed, another reason why China won't spoil the party, ignore the next round of Treasury securities or significantly reduce its dollar reserves. Any fall in the value of the dollar would bring about a rise in the value of the yuan and devalue China's dollar reserves, as if China had spent decades stacking up toytown money. Nobody is going to do anything rash.

Japan, Russia also in play

The US can no more do without Chinese finance than China can be indifferent to the fate of the US. This mutual dependence also includes Japan, which holds the world's second largest dollar reserves, and for Russia, which holds the third largest. This is the legacy of the special role that the dollar has played in world trade since 1945.

The US emerged from the second world war as the richest power. Britain was weakened by debt; France was exhausted; the Soviet Union had been bled dry. US dominance was formalized by the Bretton Woods accords, named after the New Hampshire town where the new financial rules were laid down in July 1944. These affirmed the pivotal role of the dollar (in place of sterling) and created the two institutions that became Washington's wings: the International Bank for Reconstruction and Development (IBRD, subsequently part of the World Bank) and the International Monetary Fund (IMF). The Marshall Plan for Europe was funded in dollars to consolidate the strength of the dollar and guarantee opportunities for US producers.

One of the most famous participants at Bretton Woods, John Maynard Keynes, fought hard against the dollar's stranglehold and proposed a monetary system based upon a unit of account, a genuinely international currency called the "bancor" (6). But the balance of power was against him. The dollar won, and with it US hegemony over the West. US politicians could do what they liked, leaving others to pick up the tab. When the situation became too complicated, the US unilaterally changed the rules. As US Secretary of the Treasury John Connally famously told his European counterparts in 1971: "The dollar is our currency, but your problem."

On August 15, 1971, President Richard Nixon ended the direct convertibility of the US dollar into gold. Henceforth it would be mere paper, fluctuating at the whim of the markets and US policy. This strengthened the "exorbitant privilege" of the dollar, which had been denounced in 1965 by General de Gaulle. But since governments gave in, commercial transactions were largely carried out in dollars, which the central banks raked in (along with marks, yens and eventually euros).

The dollar system still dominates the globe. The US can run up debts and have them settled by its "partners". It can simultaneously attract capital investment (for industry, research or to bail out companies at home) and export it (to facilitate the establishment of multinationals abroad). In 2007 the US was the leading beneficiary of global foreign direct investment; it is also the leading investor abroad (7). It enjoys an unrivalled power of geopolitical selection of capital.

But the system is unstable. States with accumulated reserves are no longer content to put their money in banks as the oil-exporting countries did during the 1970s; they have set up sovereign wealth funds (now worth at least $4trn) to invest in colossal development projects, as in the Gulf states, or to buy up foreign companies (8). Many Western companies are apprehensive.

The weight of the dollar in global currency reserves has fallen almost 10 points in less than a decade. In mid-2008 it made up only 62.4 per cent of the currencies held by central banks, compared with 71.2 per cent at the end of 2000. During the same period the euro's share rose from 18.3 per cent to 27 per cent. The yen, asymbol of Japanese power between 1970 and 1990, when it inspired prophecies of the decline of the US, also fell, from 6.1 per cent to 3.4 per cent (9). But neither the euro nor the yuan is yet in a position to supplant the dollar. Only the combination of acknowledged economic power and an attractive, original political vision could overthrow the prevailing system or allow all its participants to be treated as equals.

Having plunged into US-style deregulation, the European Union is hardly in a position to confront this challenge. Even the most optimistic experts now anticipate only negligible average growth next year, accompanied by an exponential rise in unemployment and business failures. Politically, the EU is impotent and, whatever the press may say, it has come up with no effective response to the crisis. Nobody will lament the fact that it has jettisoned some of its inviolable principles: so much for the Maastricht limits on public deficits, the ban on state aid to national companies, and the "single program". Europe's politicians have adopted the policy of bank nationalization first imposed by Britain's prime minister Gordon Brown, whose Euro-sceptic country isn't even a member of the euro zone.

China not immune to chaos

But what about China? Shen Dingli, professor of international relations at Fudan university in Shanghai, states: "This is not a time for China to be on a par with America. But the relative shift of the centre of gravity does bring China more confidence" (10). As the world's third economic power, closely involved in the financial tsunami, China is not immune to the chaos. Chinese economists already estimate that "all the big offshore investments made last year are in the red" (11). Holdings in the banks Morgan Stanley ($5bn) and Blackstone ($3bn), which symbolised China's arrival as a financial force, have been heavily written down.

There has been debate on current policy within leading echelons of the Communist party and on the internet. China's government refused to bail out the US bank Lehman Brothers. One official explained that the Chinese should no longer be regarded as "sleeping partners", or their investments as "dumping grounds for toxic shares", and pointed to the bailout of Morgan Stanley by the Japanese bank Mitsubishi UFJ, which will acquire a seat on the board.

So far China has been relatively unaffected by the worst insanities of the investment markets. The Financial Times reported a story that did the rounds in Beijing: "At a secret meeting of top Communist officials at the start of this decade, Zhu Rongji, then China's premier, summoned senior academics and finance officials to teach a crash course on complex financial instruments. Financial derivatives. . . were described as like putting a mirror in front of another mirror, allowing a physical object to be reflected into infinity" (12). This is a good description of a mechanism with a worldwide value of more than a $1,000 trillion - the equivalent of 20 years' global production - resting on sand.

Zhu and his successors trod carefully. Although, as an economist from the Industrial and Commercial Bank of China (ICBC) in Shanghai said, "we don't know how many skeletons there are in the cupboard", China's banks seem to have limited their exposure to investments of this sort. But there must be doubts about the recent decision to authorize margin lending and short selling at a time when some western countries were introducing restrictions to curb speculation. Another potential problem is the housing bubble, which remains significant despite some deflation over the past two years. But as the ICBC economist pointed out, in public building the demand for profit is less pressing since "the Chinese state can wait".

Globally China has preserved its safeguards. Professor Yang Baoyun of the school of international studies at Beijing University claimed "the financial system is still under control". Despite international pressure, China has retained a largely-nationalized banking sector and maintained control over its currency and foreign exchanges (13). The IMF had intended to move against these regulations in October; this has now been postponed until a more favorable moment. As the IMF's managing director Dominique Strauss-Kahn said, without irony: "China's imbalance is a long-term problem and can wait one more month" (14). China has retained the capacity for state intervention and has, significantly, kept growth tied to production and research. The systemic crisis affecting the US and Europe is proof that services and finance cannot be decoupled from material production for ever.

Chinese development is driven by exports, so the expected fall in consumption in its main client countries (the US and the EU) may undermine sales and levels of production (15). At the beginning of this year, many analysts argued that since 60 per cent of China’s trade is with other Asian countries, its development would not be damaged by the collapse of the developed world. But the rest of Asia is not immune to the slowdown (Japan is on the edge of recession, South Korea is struggling and India is in no better shape); and between half and two-thirds of intra-Asian trade, in the words of Sopanha Sa, an economist at the Société Générale, "winds up in the markets of the G3 (the US, the EU and Japan)". The disappearance of this final destination would have immediate consequences. There are already fears that 2.5 million people could lose their jobs in China's most export-oriented region, the Pearl River delta.

An unsigned editorial in the Chinese Communist Party newspaper, the People's Daily, summed the situation up perfectly: "Disillusionment with Wall Street myth has further endangered the already downward global economy, and posed a fresh threat to China's foreign trade, which is already on the verge of collapse... In the long run, the relative advantages of `Made-in-China' would possibly be offset, and China's competitiveness in exports would be dulled. The global geopolitics is getting increasingly complex, neo trade protectionism is looking up, and in future, the trade barriers against China would increase rather than decrease" (16).

Aware that it is entering a new phase, the Chinese government is looking for sources of growth. Professor Yang was clear: "Our only option is to develop our internal markets. We've been talking about it for a long time; now it's time to get down to it." The authorities must tackle inequalities between town and country. Rocketing food prices raised farmers' incomes by 17.9 per cent during the first half of this year (17). But it takes more than increased purchasing power to drive consumption: some of this increase is squirreled away (China has the highest savings rate in the world) as families put money aside for sickness or retirement. So the government must increase incomes and build the current embryonic system of collective social security into something effective.

But the internal forces that drive growth have already begun to change. According to Li Xiaochao, a spokesman for the National Bureau of Statistics, China's 11.4 per cent growth in 2007 "broke down into 4.4 per cent driven by consumer spending, 4.3 per cent from investments and 2.7 per cent contributed by net exports" (18). Growth is expected to be 10 per cent this year and 7-8 per cent in 2009. Western leaders would be ecstatic about these rates, but given the internal challenges facing China (poverty, rural discontent, the political unpredictability of the middle classes) they suggest trouble on the horizon. And any future growth must consider impact on the environment.

Another day, another dollar?

Externally, China is looking for ways to loosen the dollar's stranglehold. It has recycled some of its profits from Africa as loans, ignoring conditions imposed by the World Bank and the IMF. It is signing bilateral trade agreements to guarantee its energy supply (Venezuela, Russia, Iraq and Iran) and to create new outlets (Japan, India). It supports the idea of an Asian Monetary Fund, proposed in May 2007 in conjunction with Japan and South Korea. This would have $80bn to play with, allowing its three founders, and the 10 members of the Association of Southeast Asian Nations, to guarantee their financial stability without having to go to the IMF, which the region has yet to forgive.

There are similar initiatives in other parts of the world that seek to escape the shadow of the dollar. Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay and Venezuela are all members of the Bank of the South, intended to support infrastructure funding outside the Bretton Woods system. Argentina and Brazil have agreed to conduct reciprocal payments in local currency, bypassing the dollar. Brazil, Russia, India and China have come together in an informal bloc known as BRIC. Russia's self-assertive stand in Europe is due to more than just its control of raw materials. Brazil is a major player in South America, despite its vulnerability to the US recession. Trade is expanding rapidly between countries within the developing world. But we are still a long way from a united front with the capacity to impose new international rules or dethrone the dollar and its institutional props, the IMF and the World Bank.

Professor Arvind Subramanian, a senior fellow at the Peterson institute for international economics in Washington DC, has suggested that China might lend money to the US, but with strings attached. "First, it would declare that the offer of money was conditional on the US government adopting a particular approach to rescuing the banks - the use of government money to recapitalize the banks. . . The second condition would relate to social safety nets, which had become standard embellishments to World Bank/IMF adjustment programmes." Such moves "would seal China's status as a responsible superpower" (19). So far China has neither the desire nor the means to do this. But tomorrow is another day.

Notes

(1) Neil MacFarquhar, "Upheaval on Wall Street stirs anger in UN", International Herald Tribune, 24 September 2008.

(2) These and subsequent quotes from Yann Rousseau, "Quand Pékin donne des leçons de capitalisme à l'Amérique", Les Echos, Paris, 29 September 2008.

(3) "Foreign holdings of US securities", United States Department of the Treasury, Washington DC, 29 February 2008.

(4) Fareed Zakaria, "We should join hands", Newsweek, New York, 6 October 2008.

(5) The World Factbook, Central Intelligence Agency, Washington DC.

(6) Keynes proposed a comprehensive global architecture with an International Trade Organisation supported by a central bank, the International Clearing Union. See Susan George, "Alternative finances", Le Monde diplomatique, English edition, January 2007.

(7) At the end of 2007, FDI inflows to the US amounted to $237.6bn, compared with outflows of $333.3bn. See "World Investment Report 2008", United Nations Conference on Trade and Development, New York, 24 September 2008.

(8) See Ibrahim Warde, "Where poverty leads to death", and Akram Belkaïd, "1754", Le Monde diplomatique, English edition, respectively May and August 2008.

(9) "Currency Composition of Official Foreign Exchange Reserves (COFER)", International Monetary Fund, Washington DC, 30 September 2008.

(10) David Pilling, "America's chance to kick its Asian addiction", Financial Times, 2 October 2008.

(11) Jamil Anderlini, "Prudence guides China's outook", Financial Times, 24 September 2008.

(12) Ibid.

(13) See Martine Bulard, Chine, Inde. La course du dragon et de l'éléphant, Fayard, Paris, 2008.

(14) "IMF delays China report", South China Morning Post, Hong Kong, 1 October 2008.

(15) According to the National Bureau of Statistics (NBS), 19 per cent of Chinese exports go to the US and 20 per cent to EU countries.

(16) "Wall Street turmoil tests China's foreign trade", People's Daily, October 6 2008

(17) NBS, October 2008. But rising prices have eroded the purchasing power of the urban population.

(18) "Consumption edges ahead as the most powerful engine of China's economic growth", People's Daily, 30 January 2008.

(19) Arvind Subramanian, "A master plan for China to bail out America", Financial Times, 7 October 2008.

Translated by Donald Hounam

This article appears in the November edition of this excellent monthly, Le Monde Diplomatique, whose English language edition can be found at mondediplo.com. This full text appears by agreement with Le Monde Diplomatique. CounterPunch features one or two articles from LMD every month.

[JackRiddler]

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There is a way for foreign holders to liberate themselves from the dollar that I believe they may try out of simple self-interest and that no one will be able to blame them for, with however disastrous consequences for the US, that I will try to take the time to describe later...

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[anothershamus]

According to Kevin at Cryptogon.com the dollar is poised to decline rapidly:

WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
There’s potential for a sharp move lower on the dollar in the near term. Indicator trends should be moving with the index trend, but the trends on the indicators have turned down. The shooting star-type candle is more evidence that we’re seeing divergence.
Dollar holders: Watch out.

Link here:

http://cryptogon.com/?p=5135