Thursday, April 14, 2016

Today's Links

1--(archive) Lehman Died So TARP and AIG Might Live

Here’s how economist Dean Baker recounts what transpired last September 15:

“Last September, when he (Bernanke) was telling Congress that the economy would collapse if it did not approve the $700 billion TARP bailout, he warned that the commercial paper market was shutting down.

This was hugely important because most major companies rely on selling commercial paper to meet their payrolls and pay other routine bills. If they could not sell commercial paper, then millions of people would soon be laid off and the economy would literally collapse.

What Mr. Bernanke apparently forgot to tell Congress back then is that the Fed has the authority to directly buy commercial paper from financial and non-financial companies. In other words, the Fed has the power to prevent the sort of economic collapse that Bernanke warned would happen if Congress did not quickly approve the TARP. In fact, Bernanke announced that the Fed would create a special lending facility to buy commercial paper the weekend after Congress voted to approve the TARP.” (“Bernanke’s bad Money”, Dean Baker, CounterPunch)

2--(archive) Ben Bernanke: Wall Street’s Servant

When Goldman, Citigroup and the rest were on the edge of bankruptcy, Bernanke deliberately misled Congress to help pass the Troubled Asset Relief Program (TARP). He told them that the commercial paper market was shutting down, raising the prospect that most of corporate America would be unable to get the short-term credit needed to meet its payroll and pay other bills.

Bernanke neglected to mention that he could singlehandedly keep the commercial paper market operating by setting up a special Fed lending facility for this purpose. He announced the establishment of a lending facility to buy commercial paper the weekend after Congress approved TARP.


3-- (archive) Financial Terrorism


Bernanke himself alluded to the dismal condition of the country’s biggest lenders in  testimony to the Financial Crisis Inquiry Commission in 2011. Here’s what he said:

“As a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression. If you look at the firms that came under pressure in that period . . . only one . . . was not at serious risk of failure. . . . So out of maybe the 13, 13 of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”

4--(archive) The Greatest Propaganda Coup of Our Time?

Edward Bernays would have applauded. After all, it was Bernays who argued that the sheeple need to be constantly bamboozled to keep them in line. Here’s a clip from his magnum opus “Propaganda”:

“The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country.” ...

By September 2008, Bernanke and Paulson knew the game was over. The crisis had been raging for more than a year and the nation’s biggest banks were broke. (Bernanke even admitted as much in testimony before the Financial Crisis Inquiry Commission in 2011 when he said “only one ….out of maybe the 13 of the most important financial institutions in the United States…was not at serious risk of failure within a period of a week or two.” He knew the banks were busted, and so did Paulson.) Their only chance to save their buddies was a Hail Mary pass in the form of Lehman Brothers. In other words, they had to create a “Financial 9-11”, a big enough crisis to blackmail congress into $700 no-strings-attached bailout called the TARP. And it worked too. They pushed Lehman to its death, scared the bejesus out of congress, and walked away with 700 billion smackers for their shifty gangster friends on Wall Street. Chalk up one for Hank and Bennie.

The only good thing to emerge from the Fed’s transcripts is that it proves that the people who’ve been saying all along that Lehman was deliberately snuffed-out in order to swindle money out of congress were right. Here’s how economist Dean Baker summed it up the other day on his blog:

“Gretchen Morgensen (NYT financial reporter) picks up an important point in the Fed transcripts from 2008. The discussion around the decision to allow Lehman to go bankrupt makes it very clear that it was a decision. In other words the Fed did not rescue Lehman because it chose not to.

This is important because the key regulators involved in this decision, Ben Bernanke, Hank Paulson, and Timothy Geithner, have been allowed to rewrite history and claim that they didn’t rescue Lehman because they lacked the legal authority to rescue it. This is transparent tripe, which should be evident to any knowledgeable observer.” (“The Decision to Let Lehman Fail”, Dean Baker, CEPR)...

Here’s the quote from Morgenson’s piece to which Baker is alluding:

“In public statements since that time, the Fed has maintained that the government didn’t have the tools to save Lehman. These documents appear to tell a different story. Some comments made at the Sept. 16 meeting, directly after Lehman filed for bankruptcy, indicate that letting Lehman fail was more of a policy decision than a passive one.” (“A New Light on Regulators in the Dark”, Gretchen Morgenson, New York Times)

Ah ha! So it was a planned demolition after all. At least that’s settled. 


5--(archive) More from Dean Baker


Last September, when he was telling Congress that the economy would collapse if it did not approve the $700 billion TARP bailout, he warned that the commercial paper market was shutting down.

This was hugely important because most major companies rely on selling commercial paper to meet their payrolls and pay other routine bills. If they could not sell commercial paper, then millions of people would soon be laid off and the economy would literally collapse.

What Mr. Bernanke apparently forgot to tell Congress back then is that the Fed has the authority to directly buy commercial paper from financial and non-financial companies. In other words, the Fed has the power to prevent the sort of economic collapse that Bernanke warned would happen if Congress did not quickly approve the TARP. In fact, Bernanke announced that the Fed would create a special lending facility to buy commercial paper the weekend after Congress voted to approve the TARP


6--WHY IS THE MSM COVERING UP RECESSIONARY DATA?


The Fed induced auto loan bubble is bursting, as default rates on the billions of subprime slime loans issued in the last few years skyrocket, and the prices of used cars crash as the millions of leases come due. Dealer lots are overflowing with overpriced automobiles with no demand. The implications of this bubble bursting are far reaching. The fallacious demand created by easy money kept the union manufacturing plants humming and allowed Obama to crow about saving the auto industry. As demand collapses, layoffs will surge, and the minimal profits being generated by GM, Ford, and Chrysler will turn to huge losses again.



7--Islamic State Attacks, Occupies Erdogan's "Safe Zone"

8--IMF downgrades growth projections, warns of “synchronized slowdown”


At a press conference to introduce the “World Economic Outlook,” IMF Chief Economist Maurice Obstfeld said, “Global growth continues, but at an increasingly disappointing pace that leaves the world economy more exposed to negative risks.” He continued: “Consecutive downgrades of future economic prospects carry the risk of a world economy that reaches stalling speed and falls into widespread secular stagnation… We definitely face the risk of going into doldrums that could be politically perilous.”...

To cope with this increasingly dangerous crisis of the world capitalist system, the IMF calls for urgent action by the major economies to develop a coordinated plan for continuing monetary stimulus to prop up the banks and financial markets, fiscal measures to promote investment, and so-called “structural reforms” to boost competitiveness and demand.


9-- Plan B: CIA prepares to arm Syrian “rebels” with antiaircraft weapons

“If the cease-fire collapses, if the negotiations don’t go anywhere, and we’re back to full throttle civil war, all bets will be off,” an Obama administration official told the Journal. “The outside patrons will double and triple down, throwing everything they can into Syria, including much more lethal weaponry....

State Department spokesman Mark Toner told reporters on Monday that the problem was that the groups backed by Washington are “not far apart and they’re not clearly delineated” from the Nusra Front forces in Aleppo and elsewhere. The reality is that these forces operate in alliance with the Syrian Al Qaeda branch, which, together with ISIS, constitutes the main armed forces fighting the Syrian government. Washington is determined to maintain these forces as a proxy army in its bid for regime change.

Russia has responded by blaming the uptick in fighting on a buildup by the Islamist militias aimed at encircling and blockading Aleppo. This operation has been facilitated by the flow of thousands of foreign fighters and large amounts of weaponry across the border from Turkey, Washington’s NATO ally.

The message sent by the leaked report on the CIA preparations for “Plan B” is clear. If the Islamist militias are able to sufficiently disrupt the cessation of hostilities and upend the negotiations in Geneva, they will be rewarded with powerful new weaponry from the US and its allies.

According to the Journal report, the Obama White House is still deliberating on a “list of specific Plan B weapons systems.”

Saudi Arabia and Turkey have reportedly both pressed for the provision of Manpads, man-portable air-defense systems. These weapons, such as US Stinger shoulder-fired surface-to-air missiles, can be used to bring down low flying warplanes and helicopters.

They can just as easily be turned against civilian passenger planes as military aircraft, and, given the so-called “overlap” between the Syrian Al Qaeda forces and the Islamist militias backed by Washington and its allies, this is a strong probability. In the past, weapons funneled to so-called CIA-vetted “moderates” have quickly fallen into the hands of the Al Nusra Front


10--Easing backfires makes central banks change course


Traders are now taking the long view on central bank easing, shifting focus to which monetary policymakers will be the first to change course and withdraw stimulus, according to Bank of America Merrill Lynch FX Strategist Athanasios Vamvakidis.

The euro-area, Japan, Norway, New Zealand, and Sweden are the five major developed economies in which central banks have eased policy this year—and by some financial metrics, they don't have much to show for it. In all of these instances, currencies have strengthened relative to the U.S. dollar in the wake of more accommodative monetary policy (denoted by a circle on the chart below.)

A soft global economic backdrop prompted the Federal Reserve to telegraph a slower path for higher interest rates in March. As such, this shift to a focus on exit strategies might seem premature or optimistic, but the opposite may also be true. For instance, in the case of Japan, there are technical limits to the amount of sovereign bonds that can be bought, a dynamic which might force the central bank to begin dialing down this part of its asset-purchasing program.

"Markets have already started testing central banks and have been reacting counterintuitively to policy easing," concludes Vamvakidis. "Central banks can fight back, as the Fed has successfully done recently, but we do not believe that this is sustainable as long as the global recovery continues."


11--Corporate America is nearing a 'toxic' debt crisis


US companies have a looming problem of their own making, and it may soon come back to crush them.

According to Andrew Lapthorne, head of quantitative analysis at Societe Generale, the amount of debt that businesses have accumulated over the last five to six years has put them on the verge of a serious crisis.

This level of borrowing in some sectors of the economy is now booming (with the risk of spinning out of control) to such an extent that we think that the build-up of debt on US non-financial corporate balance sheets represents one of the largest mispriced risks in terms of future market stability, downside risk and future economic growth.

Lapthorne's argument is essentially that US corporations have decided to borrow money in order to fuel growth larger than that warranted by economic demand.

But now with the assets backing this debt starting to decline in value, the wheels are going to fall off.

Societe Generale

Lapthorne believes there has been one cause of this behavior: central banks.

Aggressive monetary policy in the form of QE and zero or negative interest rates is all about encouraging (forcing?) borrowers to take on more and more debt in an attempt to boost economic activity, effectively mortgaging future growth to compensate for the lack of demand today," he wrote.

From the supply end, making financing debt easier through low interest rates and quantitative easing "encouraged" corporations to take on the debt loads.

On the demand end, investors loved the higher-yielding corporate debt, since US Treasury yields remained so low.

Put it together and you have a central-bank-fueled bubble, which Lapthorne called "toxic."

And so with little economic growth to speak of or invest in, corporations have funneled this debt-financed money into share buybacks and mergers in order to improve profitability and the illusion of growth. In fact, Lapthorne said, companies are spending 35% more than their incoming cash flows, higher than previous peaks in 1998 and 2008.

The upside is that as stock prices have risen, companies have been able to pay back debt either through raising new debt or still-growing profits. But now with profits on the decline and shakier asset markets, the danger is coming to a head.

So no matter how you look at it, argued Lapthorne, companies have mountains of debt. And as profits and eventually stock prices start to get squeezed from all-time highs, the ability of companies to pay back their debt will get worse.

This eventually will lead to higher default rates and a wave of financial-market tumult.

Lapthorne writes (emphasis added): "Wherever you look, and no matter how you partition the data, leverage has risen substantially across almost all US market segments. The US has a mounting corporate debt problem, and investors should be worried."


12--Debt in corporate America has quietly doubled since 2008


13--Trade War Fought With Dollar Hegemony, Henry Liu



Through international trade denominated in dollars, the US has been waging an imperialistic trade war on its trading partners, using dollar hegemony as weapon. The productivity boom in the US in the past three decades was as much a mirage as the money that drove the apparent boom. There was no productivity boom in the US in the final two decades of the 20th century; only an import boom. What's more, this boom was driven not by the spectacular growth in productive activities in the American economy; it was driven by debt borrowed from the low-wage countries producing wealth for export to US markets, paid for with unlimited supply of fiat dollars that the US can print at will with no adverse consequence because these fiat dollars has no place to go except return to the US to buy US sovereign debt instruments, i.e. Treasury bonds. Thus the US current account deficit caused by imports is extinguished by capital account surplus bulging with returned trade deficit dollars.


Anemic Recovery

The reason for the long and weak recovery in global economy is that the excessive debt in the global economy has not been extinguished by government bailouts. The debt has only been shifted from the private sector to the public sector, from the balance sheets of distressed commercial and investment banks to the balance sheets of central banks. The penalty for this liquidity play on the part of central banks to save insolvent financial institutions from collapse will be an extended anemic global economy in which banks, companies and households are all trying to deleverage from undistinguished debt with the new liquidity of no economic substance released by central bank quantitative easing. Also, government austerity programs needed to secure more debt will further reduce wage income and exacerbate further fall in aggregate demand in a downward vicious cycle.

The Coming Trade War and Global Depression

Many economic historians have suggested that the 1929 stock market crash was not the cause of the Great Depression. If anything, the 1929 crash was the technical reflection of the inevitable fate of an overblown bubble economy. Yet, stock market crashes can recover within a relatively short time with the help of effective government monetary measures, as demonstrated by the crashes of 1987 (23% drop, recovered in 9 months), 1998 (36% drop, recovered in 3 months) and 2000-2 (37% drop, recovered in 2 months).
Structurally, the real cause of the Great Depression, which lasted more than a decade, from 1929 till the beginning of the Second World War in 1941, was the 1930 Smoot-Hawley tariffs that put world trade into a tailspin from which it did not recover until World War II began.

 

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