Friday, October 31, 2008

US Army RIP-2

"The U.S. Army appears determined to cripple itself. Cuts in field artillery strength promise to weaken the 'king of battle' to the point where the Army will have sacrificed its greatest historical advantage: the ability to put a storm of steel precisely on target faster than the enemy can react. ... Artillery skills are plummeting, while doctrine veers ever deeper into fantasies of precision strikes by airpower as the universal answer. ... The Army can't prepare only for asymmetrical warfare against terrorists and insurgents. It has to be able to walk and chew gum at the same time--to fight irregular wars today and be prepared for the big, hyper-conventional war that might come tomorrow. ... The stock answer these days is that the Air Force will be the Army's 'flying artillery,' hitting targets precisely with low-yield warheads and reducing collateral damages. That's not merely foolish, it's nuts. In a conflict between major powers, it may be the collateral damage that ultimately forces the enemy to surrender (remember Japan?). In a real war--a long slugging match--the new generation of Air Force fighter-bombers would be confined to bunkers for heavy maintenance within weeks. There won't be enough of these planes either. ... You can't just impress an enemy into surrendering. You have to defeat him. ... We can't send our troops into battle without deep reserves of robust killing power, and artillery has long been America's strong suit. ... We won't always we chasing snipers down Baghdad's alleys. When the next 'big one' comes, our Soldiers on the front lines had better be able to call for responsive, overwhelming fires--in all weather, in all terrain. If we're unwilling to pay the price in steel, we'll pay it in blood", my emphasis, Ralph Peters (RP) at Armchair General, November 2008.

Air power's replacing artillery was a World War II fantasy which still haunts the Pentagon. Most estimates are that artillery accounted for about 60% of the total damage the US military inflicted in WWII. Our artillery is mostly upgraded WWII stuff, 105 MM and 155 MM howitzers and the like. We still debate how many F-22s to build, 183 may be the number. We built 15,875 P-51s and 10,037 P-38s, among other planes, which we used in WWII and Korea. I realize the F-22 is a much more capable plane. So? I am fond of a Russian saying: "Quantity is its own quality". Amen! We used aircraft as artillery in Gulf Wars I and II. Would we have such a luxury fighting a real enemy? Book suggestion, Brute Force by John Ellis, 1999, about America's real way of war. RP is a retired Army Colonel.

Will Russia Be First?

"There used to be a habit of framing old Tsarist bonds and putting them on the wall. Lenin's decision to renege on the Russian imperial debt meant that it became mere paper, interesting only as a historical relic. In the light on the recent financial crisis in the USA, could the same thing happen now to the bonds issued by the American government, and could the country which has dominated the world for the last half century now enter history as a bankrupt state? And what could Russia do in the circumstances? ... The total state debt of the USA will rise to over $11 trillion. It is obvious that such a colossal debt can never be repaid. Instead, it will be serviced by more debt in the future. The contrast with Russia, which has painstakingly sanitised its state finances to the point that it now has more money to lend than the IMF, could hardly be greater. ... In America, this basic culture of debt is aggravated by the fact that other countries use the dollar itself as a reserve. This means that they United States can export dollars in order to pay for its imports without the dollar losing vlaue. ... The USA can therefore export paper currency almost indefinitely--the famous 'deficit without tears' analysed by the great French economist, Jaques Rueff. ... But the collapse of those markets is only a symptom of a much deeper problem, the basic insolvency of the American state itself. ... The idea of gold convertible currencies is extremely unpopular among most economists: they dismiss gold as a 'barbarous relic' (to use the famous phrase of John Maynard Keynes). ...Russia has less to fear than other countries from the introduction of a currency convertible into gold. Governments are typically hostile to gold because it reduces their discretionary power over the currency and the economy: they say that the money supply cannot be made dependent on the production of gold mines. In reality, this argument is bogus because the amount of gold already in existence vastly exceeds the yearly production, so mining does not have an appreciable impact on supply", John Laughland (JL), 24 September 2008 at

I remember Rueff's comments in 1966, 42 years ago. I have made JL's point about gold's "stock-flow" ratio. Since it's the highest of any commodity, it is best suited for money. JL is a British historian. Do I expect the world to return to the gold standard? Yes, after the dollar collapses and no viable alternative emerges. See my 1 November 2007 and 1 March 2008 posts.

Thursday, October 30, 2008

Jesse Channels IA

I was preparing a post on an 18 October 2008 WSJ Anna Schwartz interview by Brian Casey. Then I read Jesse's Cafe Americain post that makes most of what I had to say redundant. Here's a link:

Mark Thoma at Economist's View thinks "Schwartz is too hard on Bernanke". I disagree and think she went too easy on him. Repeal the Federal Reserve Act!

"Now that the Federal Reserve and the Treasury Department apparently have merged to reconstitute the Bank of the United States, where is our Andrew Jackson to slay it?", Zev Joseph letter to the WSJ, 17 October 2008. Precisely!

"It is nothing less than astounding that the most perceptive analysis of our credit crisis comes from a 92-year-old economist who is probably unknown to most members of the general public. ... The government's frantic efforts to 'do something' have very much impeded the necessary process of creative destruction that kills of insolvent firms and enables more efficient firms to survive and prosper", Jerry Templeman letter to the WSJ, 22 October 2008.

I wonder if Tempelman has Goldman Sachs (GSG) in mind? I do. Now report IA to Mike Garcia to get IA indicted for treason. Treason? Thinking such thoughts of GSG. How dare you? If GSG failed, the Republic would follow within an hour. Could an investment bank exist that only paid its CEO a $20 million bonus as opposed to the $67.8 million Lloyd Blankfein got in 2007? Treason.

Steve Waldman Sings

Steve Waldman (SW) has a 19 October 2008 post at Interfluidity I largely agree with. SW writes, "The purpose of a financial system is to solve a problem whose solution we cannot guess a priori". Precisely. That's the job of Adam's Smith's "invisible hand". In 1930 Ludwig von Mises and Oskar Lange debated the possibility of economic calculation in a socialist world. Mises point: without the capitalist West, socialist states could not exist as they needed to ape the West for the parameters in the equations they would use to allocate resources. This is why I believe Wassily Leontief's (WL) 1973 Economics Nobel Prize was the worst ever awarded. WL was, drumroll please, AN ACCOUNTANT! He could not distinguish historical from opportunity cost among his other failings! "To the maximum degree possible, the financial system ought not introduce risks that are not inherent to the real projects it is underwriting. ... Complexity is much more often a marker of snake-oil than of quality in a financial instrument", writes SW. Exactly. Here's a link:

My financial reform plan is:
1. Repeal the Federal Reserve Act.
2. Criminalize fractional reserve banking.
3. Make the sale of CDOs, CDOs squared, CDSs criminal.
4. Ban anyone associated with Goldman Sachs, Morgan Stanley, Merrill Lynch, etc., in the last ten years from holding any position in the Federal government for the next 25 years.

Book Review: Walter Wriston's Bits, Bytes, and

"The Internet has changed everything", xv. "To get 'it' means more than just having a personal computer on your desk or going to conferences with PowerPoint presentations. It is a mind-set", xvi. "Just as the landed gentry gave way to the industrialists as the Industrial Revolution gained momentum, so today the industrialists have been replaced by the master of intellectual capital", xvii. "The law of unintended consequences was at work with the the passage of the Sarbanes-Oxley bill in 2002. ... The overregulation that surely will result is partly the fault of business itself because practices that are often overlooked in boom times may, in lean times, appear to be egregious excesses that should never have been allowed to happen", 1. " "With the passage of time, the regulators produce a plethora of regulations that have the force of law, and an administrative judge--often from the same regulatory body--becomes prosecutor, judge and jury. Inevitably, the regulator substitutes his or her judgment for that of the market, and the system becomes backward-looking at a time when worldwide competition requires forward-looking innovation to survive. In the banking sector, for years the regulators held below market the interest rate that banks could pay to consumers", 2. "[I]f regulations continue to point in that direction [greater liability], it will become difficult, if not impossible, to get anyone of substance to serve on a board of directors", 3. "In the United States, thousands of manufacturing jobs that were once a mainstay of our society are never going to come back, nor will we ever see the American farms employing the approximately 20 million people who worked on them as the beginning of the twentieth century", 8.
"Over the years, wealth--and the perception of what constitutes it--has changed dramatically", 14. "What is wealth? How is it generated, used and saved?", 15. "Since only about 2 percent of a microchip is material cost, material resources are no longer very important as sources of wealth. ... The new economic powerhouses are masters not of huge material resources but of ideas and technology", 17. "The shift to the new economy has given new prominence to what John Maynard Keynes called the 'symbol' economy as opposed to the 'real' economy", 21. "Wealth is being created not by making and selling things, although this is still a large part of the economy, but by taking, trading, and managing risk in the financial sector. ... The idea of breaking down every risk into smaller and smaller parts was given the name 'particle finance,' and modern technology is giving us the means to do so", my emphasis, 23.
"It is almost a truism that although history is made up of facts, facts do not make history. Facts, no matter how prolix, do not arrange themselves into useful knowledge", 28. "For example, when natural resources were the dominant factor of production, the conquest and control of territory seemed a reliable way to enhance national power", 37. Today, infomation technology permit just-in-time inventory with direct shipments from supplier to store in response to signals created by the cash registers at the store's checkout counter", 38. "The economy ... has created what I call the Information Standard, which is far more draconian that the old gold standard and operates more swiftly", 40. "There is still no substitute for courage and leadership", 55.
"It is fair to say that no economy has ever behaved in a totally predictable manner; otherwise, the pundits would not be wrong so often", 57. "Until very recently, governments retained substantial power to manipulate the value of their currencies", 58. "Today, the value of any currency is determined by the price that the market will pay for it in exchange for some other currency", 59.
"People all over the globe see and hear how others live and work, and no one has to tell them that command and control economics do not work", 69. "There are large public-policy issues raised by the new technology that touch upon a sovereign nation's monopoly on the issuance and control of money", 80-81. The gold-silver standard and ratio between them, was an "inflexible system [that] led to panics and instability", 81. "There is very little, if any evidence that government has managed our currency values as well as did the commercial banks in the pre-Federal Reserve days", 81-82. "How can we control counterfeiting in cyberspace? What will happen if the issuer of the [debit] card goes broke?", 82. "Banks have always been good at assessing risk because the management of risk is what the banking business is all about", my emphasis, 88.
"American Enterprise Institute scholar Nicholas Eberstadt writes: 'Where unshakable traditional beliefs or passing superstitions played official roles in the past, we now witness overconfidence based on a false precision. ... Where antique despots surrendered to the temptations of numerology, the modern statesman proudly succumbs to the allure of "quantophrenia"--an idolatry of numbers no less unreasoning, and no less poorly suited for promoting the commonweal, than its precursor'," 92-93. "On another front, everyone from Main Street to Wall Street watched the inflation numbers. ... [The Boskin Commission] reported that the CPI overstated the change in the cost of living by about 1.1 percentage points per year. ... For example, instead of falling by 13 percent, real hourly wages actually rose by 13 percent from 1973 to 1995", 96. "Banks, which like to have collateral for their loans, are increasingly faced with the dilemma of what constitutes good collateral", 102.
"There is clearly a massive disconnect between corporate accounting and the value the market puts on a corporation's stock", 109. "To survive and prosper in the new economy, companies must now compete for the men and women with brains", 111.
"The Black-Scholes model, such as it is, is designed for short-term, tradable options and rests on a series of assumptions, some about the unknowable future, which must be imputed into the model", 114.
"With the plaintiffs' bar pouring money into the coffers of Congress and with the pressure to pass laws, the concept of a limited liability corporation, which has fueled the expansion of our economy, is in jeopardy", 119.
"The hunt for scapegoats heats up at the end of every financial cycle when markets start to decline and paper profits disappear", 121. "The basic problem is simple: Do the men and women who manage companies around the world have the necessary integrity?", 122. "The first lines of defense are honest law enforcement officers and effective auditors", 123.

The numbers above are page references. Walter Wriston (WW), 1919-2005, wrote Bits, Bytes, And Balance Sheets, 2007, piecemeal. It is a collection of his speeches and articles by Kathryn Wriston, his widow, after WW's death. As for regulators suppressing interest rates to consumers, that was done to aid banks. I don't recollect banks complaining about it until money market funds were created. Do we see Vikram Pandit, current Citigroup CEO, screaming interest rates are too low and that bank account holders are being "euthanized" after taxes and inflation? I have heard many times, how difficult it is to get competant people to serve on BODs. Really? I'll chair Citigroup's current audit committee. I'm sure Citigroup's senior management, accountants and KPMG will dislike the questions I'll ask, but I'm ready. I disagree, manufacturing, mining and agriculture are where it's at as American living standards decline. I agree, we will never see 20 milllion people back on US farms.
I agree, if in 1910 you would have told people fiat dollars were wealth as well as Euros, krona, etc., people would have laughed. Excellent question: what is wealth? That 2% of a microchip's value is material cost strikes me as no more relevant than what percent is the material "cost" of a barrel of oil. Oil's cost of material means what? The cost of: drilling mud, dry holes, tool pusher labor, what? I agree, the "symbol" economy will collapse under higher US inflation rates, when the world's central banks stop supporting the dollar. This get a "res ipsa loquitur". Imagine, WW was Citigroup's chairman. I'm surprised he never nominated any of his financial engineers for a Nobel Prize. In Physics!
So? Aren't natural resources a "dominant factor of production" today? As long as you have no transportation bottlenecks. More "draconian"? More "swiftly", to do what? "No substitute"? How about cunning, guile and obfuscation?
I agree, it's tough to predict the future. So? Until? Then why does China have $1.9 trillion in foreign exchange reserves? Yes, the Fed has done worse than the the market.
I agree, they don't work. Does anyone recollect WW advocating repeal of the Federal Reserve Act? Maybe the world is overdue to accept von Hayek's 1976 suggestion: we need free choice in currencies. Maybe we don't need any government to "control money". Is WW serious? It was unsound fractional-reserve banking practices that led to "panics and instability". Not gold and silver. Why punish counterfeiting, is the Fed afraid of competiton? Seriously, I have long believed that such counterfeiting would be concealed lest people lose faith in the "system". "Stuff and nonsense", said Alice. The business of banking is having bank depositors absorb risk and not get compensated for it. Banking under fiat money is a scam. Banks "good at assessing risk"? As The Mogambo Guru would say, "Hahahahaha"! If politicians did not protect them, most banks would collapse.
Amen, see my 12 December 2007 post mentioning Oskar Morgenstern. I agree with John Williams of shadowstats, about the Boskin Commission. It was another scam. I didn't know banks like to hold collateral. That's so 19th century.
I agree. So? I would never have guessed brains are useful.
I agree with WW, Black-Scholes (BS) is not that useful. Further, the 1973 Nobel Prize to Wassily Leontief and 1997 to Merton and Scholes as the two worst awards of its type. That said, I think options have a cost, which should be reflected in earnings per share. If BS is the best we have, use it.
The reestablishment of personal liability for bankers managing institutions which hold federally insured deposits is long overdue. I agree with Jefferson, corporations are dangerous. They can be used to redistribute wealth. And are. That's a fair slice of private-equity and LBO shops returns, i.e., "cutting off the left tail" and leaving it to other creditors. WW advocates adopting International Accounting Standards, 120. I don't and just see than as tools for manipulation. I wonder if WW, wherever he is, feels the plaintiffs' bar has done as much damage to the US taxpayer as say the managements of: Goldman Sachs, Freddie, Fannie, Bear, etc., etc.?
So? Integrity is a problem, but I see the integrity of the regulators as a bigger problem. Does Citigroup really want an "honest", KPMG, SEC and SDNY US Attorney's office?

Save your time and $25. Read something else. Whenever I think of WW, I think of something he said, "Countries don't go bust". They sure do. Imagine, WW was the chairman of Citigroup. Think about that!

Wednesday, October 29, 2008

Pay Up, Or Else!

"While America buckles in for years of sacrifice, the five chiefs [Blankfein, Dimon, Stephen Schwartzman, Larry Fink and Glenn Hutchins] took a different approach. The group pulled straight from the what-government-can-do-for-you school of 2006, lobbying for Wall Street tax breaks, the repeal of Sarbanes-Oxley and against the distraction of class-action lawsuits. ... Blankfein, meanwhile shrugged off the idea that Wall Street could do much. The political system has gotten so tainted that 'people like us may not lift their heads above the parapet to give ideas for fear that their heads may be shot off,' the Goldman CEO said", Dennis Berman at the WSJ, 14 October 2008.

"It is now clear that much of the bonus pay awarded to executives on Wall Street in the past two years was richly undeserved. ... And with a Main Street mob howling about Wall Street parachutes, the motive [to get it back] is there. The Feds could try out a rarely applied provision of Sarbanes-Oxley, the Enron-inspired legislation intended to criminalize accounting chicanery. A public company can recoup bonuses paid to its chief executive and financial officers if 'any misconduct' causes the firm to restate its financials. ... But applying the Sarbox strategy to failed banks is a long shot, says Nader Salehi, a partner in the securities practice at law firm Bingham McCutchen in New York. ... Another tricky legal weapon can be found in bankruptcy code and federal bank insolvency laws. The feds could argue that a payment to an executive constituted a 'fraudulent conveyance.' ... There's nothing like the threat of jail time to get an executive to write a big check to the government", Evan Hessel and Scott Woolley at Forbes, 27 October 2008.

"Shot off"? See, how smart Lloyd Blankfein (LB) is. He knows enough to duck! Let's see: Goldman Sachs, JPMorgan, Blackstone, BlackRock and SilverLake. Possibly excepting Dimon, a rogues gallery. Hey Mike Garcia (MG), do you have the NY FBI keep tabs on these guys? When are you going to bring them in for questioning? You can figure out what for later.

If the Feds want to nail someone, they can. If they could convict Martha Stewart for nothing, they can nail say, LB and John Mack (JM). Imagine Wall Street's reaction to LB and JM each getting a 20-year sentence for securities fraud. MG would have a block-long line in front of his office of white-collar criminal defense attorneys waving eight-figure certified checks and begging not to have their clients indicted as they had already made restitution for their wrongs. This is a standard criminal defense tactic to avoid prosecution, "Parallel Civil And Criminal Litigation", LA Lawyer, Vol. 38, No. 9, 36-42 (December, 1990), Nessim, Ronald. The Feds don't need Sarbox for anything. Wire, mail, bank and securities fraud and continuing financial crimes enterprise will do fine.

Wall Street Dreams

"Government investments in financial institutions could crimp executive pay on Wall Street, at least for a while, and hinder firms' ability to attract and retain top talent. ... The rules cover the chief executive officer, chief financial officer and the three other highest paid officials at participating institutions. But they could affect others on Wall Street, and beyond. ... In weighing that decision, bank and Wall Street executives will have to consider whether they may drive some top performers to employers not covered by the rules. 'The hedge funds and the private-equity firms will go after some of the other talent that doesn't fall under these restrictions,' says Irving S. Becker, head of the executive compensation practice at Hay Group, a management consultancy", WSJ, 15 October 2008.

"Let's see if I get this right. In exchange for their expertise and leadership skills, Wall Street CEOs and managers are paid millions, tens of millions, and in several cases, hundreds of millions in compensation. ... What leadership? What expertise? How could lower-priced leadership be any worse for Wall Street?," Vern Mastel letter to the WSJ, 21 October 2008.

"Retain top talent? What are you talking about?", John Krustins letter to the WSJ, 21 October 2008.

This is laughable. Where will Wall Streeters go? To hedge funds, half of which may fold in the next 24 months? Threats by this "talent" to leave should be greeted with, "Thank God. Now you get no severance pay". Wall Street's average compensation per employee is over six times the rest of New York's private sector, my 18 October 2008 post. Why doesn't competition on Wall Street reduce its compensation to that of the rest of industry? Where is "our" DOJ to prosecute what I conclude is a Wall Street cartel that facilitates this? Hey Mike Garcia, are you looking into this, or are you too busy prosecuting nickel and dime (ugh) crack dealers?

Mastel and Krustins have this right. Some talent.

Oil's Slide

"Signs that an enfeebled U.S. economy is using less and less oil sent world crude prices below $70 a barrel for the first time in 14 months, a dramatic turnaround for a market that not long ago had some analysts predicting $200-a-barrel oil as early as next year. ... U.S. benchmark crude on Thursday fell to less than half of its record high, set just three months ago, of $147 a barrel. ... Events over the past three months have stunned oil analysts as much as bankers and stockbrokers. ... The U.S. over the four weeks before Oct. 10 consumed about 18.6 million barrels of oil a day, a drop of 1.8 million barrels, or nearly 9%, over the year-earlier period", Neil King at the WSJ, 17 October 2008.

I'm surprised too. Along with the dollar bull market.

Tuesday, October 28, 2008

Zimbabwe Ben At Work

The monetary base (MB) was $1,143,873 (million) on 22 October 2008 and $843,841 on 10 September a 35.56% increase in six weeks. See how hard Zimbabwe Ben is working to protect the US dollar's value. At this rate the MB will increase 1,040% in 48 weeks! Check my arithmetic. Got gold? Get more. Got bonds? Hahahahaha.

Bernanke's Bubbles

"The [Fed] and academics who give it advice are rethinking the proposition that the Fed cannot and should not try to prick financial bubbles. ... The bursting of this decade's housing bubble, which was accompanied by a bubble of cheap credit, has wrought inestimable economic damage. ... While it is too soon to pronounce an about-face in Fed thinking, policy makers' views clearly are evolving. ... Even if the central bank could identify a bubble, policy makers said, trying to lance it would be far worse for the economy than letting the bubble run its course and dealing with the consequences. ... By giving market participants an incentive to assume greater risk than they would have otherwise, the Fed's laissez-faire position on bubbles may have contributed to the surge in credit that helped puch housing prices skyward in the first half of this decade. ... Policy makers need to be more careful of valuing their judgment over the collective judgment of the market, because efforts to quash prices could interfere with the crucial role markets play in relaying information and allocating capital", my emphasis, Justin Lahart (JL) at the WSJ, 17 October 2008.

Next JL will quote Frederich von Hayek and Adam's Smith's "invisible hand". One purpose of the Fed is to direct credit to projects the market doesn't want. Like big banks. Repeal the Federal Reserve Act!

Posse Comitatus, RIP?

"According to the Army Times (dated Tuesday, September 30, 2008), 'Beginning Oct. 1 for 12 months, the 1st BCT [Brigade Combat Team] will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks.' ... The Times column also reported that the Army brigade 'may be called upon to help with civil unrest and crowd control ..." It seems that the Army's new domestic duties also include 'traffic control' as well as subduing 'unruly or dangerous individuals.' ... I am assuming that the planners and promoters of this newfound function for the Army brigade envision the Army assisting local first responders in dealing with natural emergencies such as hurricanes, earthquakes, and the like. Good intentions notwithstanding, to assisting domestic police duties to the U.S. military is extremely disturbing. ... One of America's most sacred principles has always been that the U.S. military was never to be used for domestic law enforcement. The fear of standing armies ran very deep in the hearts and minds of America's founders. ... But in 2006, President George W. Bush pushed a Republican-controlled Congress to pass the John Warner National Defense Authorization Act for Fiscal Year 2007, which included a section titled 'Use of the Armed Forces in major public emergencies.' ... This evokes serious questions. Who will give the order to send U.S. troops against American civilians, and under what circumstances? What will the rules of engagement be? ... It seems to me that to now ascribe law enforcement duties to the U.S. Army only serves to augument the argument that America is fast approaching police state status. ... I think there is an even bigger question, What exactly will members of our armed forces do if and when they are commanded to seize Americans' firearms, arrest them at gun point, or even fire on them? How many soldiers and Marines love liberty and constitutional government enough to resist such orders, should they be given? And how many officers would resist issuing such orders?", my emphasis, Chuck Baldwin (CB), 1 October 2008 at

CB, a Baptist pastor in Pensacola, Florida is the Constitution Party candidate for US President. CB raises a good point. Would our troops refuse to engage in a new "Boston Massacre" or fire on civilians as happened to 1931's "Bonus Army"? Would Bush, who seems to have contempt for law, get a legal rationalization from "his" lawyer, John Yoo? Would scenes like that at Tiananmen Square in 1989 subject the US to international ridicule? Or set off a civil war? Bush does not know what he is playing with. It's almost enough to make you want the Iraq War to continue. At least our troops are on the other side of the ocean.

Monday, October 27, 2008

Bankrupt Central Banks

I recently stumbled across a 17 May 2008 paper titled, "Can Central Banks Go Broke?", by William Buiter (WB), a London School of Economics professor. WB writes of a topic on which I have long speculated. "The Central Bank of Iceland's balance sheet, shown in Table 7, is unique in two respects. First, it appears to hold effectively no securities issued by the government of Iceland. ... Second, the country's foreign exchange reserves (which are held by the central bank) while large by international standards in relation to GDP (14 percent at the end of 2007), are tiny (at around $2.8 billlion on 31/03/08) in comparison to the foreign currency exposure of the private sector. ... The country as a whole is a net external debtor, with a net international investment position of minus 119 percent of annual GDP at the end of Q3/2007, if FDI is measured at book value. When marked-to market, Iceland's net international investment position is minus 27 percent of annual GDP. ... This massive mismatch between the currency of the lender of last resort/market maker of last resort and the foreign currency exposure of the banking sector ... is unique among developed countries, as far as I know". Here's a link:
After reading this, I wonder if WB was short krona. I'm sure if he was, he's too discrete to tell us. I wish I had read this paper when it came out.

Dr. Duru on Zimbabwe Ben

Dr. Duru on 12 October 2008 warns us that Zimbabwe Ben can "Print As Much As It Takes". Here's a link:

KPMG Tax Case Resumes

"Three former KPMG LLP executives and a lawyer engaged in a scheme to help some of nation's wealthiest individuals avoid paying hundreds of million of dollars in taxes through tax shelters that were 'out and out frauds,' prosecutors said Wednesday. ... On Wednesday, Thomas A. Hagemann, a lawyer for [John] Larson, said in his opening statement that Mr. Larson relied on the 'good faith' judgment of more-senior executives at KPMG who signed off on the design of at least two of the transactions and that the transactions were viewed as legitimate when they were enacted. ... The government, which decided not to prosecute Sidley & Austin criminally, said the firm didn't write opinion letters for mass-marketed tax shelters prior to the merger [with Brown & Wood]", Chad Bray at the WSJ, 16 October 2008.

Another DOJ stinker. I find it inconceivable that senior KPMG persons were unaware of these transactions. Why wasn't at least Brown & Wood indicted? As it no longer exists, Sidley as sucessor in interest should have been. The four persons on trial here look like designated scapegoats. I hope Mike Garcia has the misfortune to draw a really smart jury and these four nobodys are acquitted when the jurors wonder why weren't their superiors charged too? If their superiors weren't even charged, what can these nobodys be guilty of?

Sunday, October 26, 2008

Are Insurers Next?

"Variable annuities, whose sales fueled profits at life-insurance companies in recent years, are starting to drag profits as the stock market declines. ... They also, for accounting reasons, face charges against earnings related to the cost of acquiring the business. The Dow Jones Life Insurance Index has dropped 47% in the past four weeks, outstripping the 26% drop in the DJIA over the same period. ... A popular innovation in variable annuities is also increasing the cost to insurers as the equity market drops. Insurers developed hedging programs to manage the risk of market volatility associated with minimum-income guarantees that many annuities carry", Lavonne Kuykendall (LK) at the WSJ, 13 October 2008.

LK does not make it explicit, but I suspect "equity-indexed" annuities are the annuities she is referring to with "minimum-income guarantees". I mentioned these annuities at my 25 August 2008 post. Depending upon how the insurers hedged their portfolios, they could face billions in losses here. As of 31 December 2007, there were supposedly $123 billion in these products outstanding. If the insurers even lose 5% of this, they'll be on the hook for $6 billion

Lehman's Kiting Scheme

"It turns out that Lehman, like other big dealers, was running a perfectly legal but highly risky game moving money from firm to firm. ... But when the [derivatives] contracts terminate as the result of bankruptcy, the extra collateral is supposed to be returned. ... The contracts were a big business for Lehman: When the firm went under in September, roughly 1 million derivative deals had its name on them. ... Both the BofA and the Dubai fund have filed suit against Lehman. They're not alone. Some two dozen Goldman Sachs hedge funds say in a suit that Lehman owes them 'hundreds of millions of dollars.' ... After Lehman used the collateral for its own deals with other firms, they could have used the money for their own purposes. ... By using their customers' collateral as their own collateral, Lehman and other firms could borrow more money, using the proceeds to buy the kind of high-risk securities that are now imploding", my emphasis, Matthew Goldstein and David Henry at Businessweek, 20 October 2008.

Amazing. Lehman used customer assets, which appear to be a "bailment" for its own purposes. Will anyone go to prison for this? If Joe Schmoe (JS) did something like this with his checking account, an affected bank would scream and JS would be indicted for bank fraud for "check kiting". Where were Lehman's CPAs, Ernst & Young when this went on? Doesn't the PCAOB have CPAs look at a client's "risk controls"? Well Mark Olson, what will you do about this? Call "NY Big Law" to tell you all was legal? Where was Chris Cox's SEC when this went on? I remember when WPPSS went under in 1983, some disgusted trustee said something to effect, "Well if we want justice [for the bondholders], there's only one way to get it. Strap on our sixguns, mount our horses and ride after it". The person quoted in Fortune, as having said that was a trust officer with a major NY bank, to the best of my recollection.

Ben Stein's Surprise

"A few days ago, I spoke to a gathering of investors in the San Diego suburb of La Jolla, and was startled by the audience's furious anger at the powers that be. The Wall Street-Treasury-Federal Reserve axis is hated, loathed and feared by these people, who were, as far as I could tell, largely Republicans, almost all well to do--or formerly well to do. They are in a state of extreme agitation about how the current mismangement of our financial system has played havoc with their own personal financial situation. In fact, they are among the angriest upper- and middle-class people I have ever seen. And the most frightened and worried. ... I wonder if Mr. Paulson with his hundreds of millions in the bank really understands the terror of those people in the room in La Jolla and the tens of millions like them. ... I just know that for a long time, we have paid Wall Street 'experts' unimaginable sums for preparing for our retirement. They still have our money, and we have ashes. And I wonder whose side government is on, which is a bad thought to have, and I wish I didn't have it. As the song goes, there is revolution in the air", my emphasis, Ben Stein (BS) at, 12 October 2008.

"In one frenzied month Treasury Secretary Henry Paulson and [Fed] chairman Ben Bernanke remade Wall Street. Along the way they may also have recast American politics. A month of historic government interventions shows signs of triggering a political version of climate change--unleashing a new era of class fury that could hurt U.S. companies, business leaders, and wealthy investors for years. 'A potential calamity,' predicts Democratic pollster Doug Schoen. 'If the reactions we're seeing hold, we could have real spasmodic anger directed at businesses and corporations.' ... By contrast, the implosion of Wall Street, followed by Paulson's escalating series of multibillion-dollar rescues, has fired up populist sentiments that were already building in American politics. ... White House spokesman Tony Fratto tried valiantly to get his message out to reporters: 'This is a rescue plan for the American economy,' he insisted. Despite the dire warnings of financial calamity from the White House and a few high-profile business leaders, much of Middle America wasn't buying the story that their own livelihoods were linked to the fate of the rescue package. Instead, average workers read the plan as the 'big guys bailing out their friends,' says former House Speaker Newt Gingrich. ... Morning talk-show hosts like Regis and Kelly shook their heads in disgust. Constituents in rural southern Illinois--a Republican district--phoned in their opposition to Congressman John Shimkus in a ratio of 200 to 1. ... Paulson ... banked on public fear of a financial crash; instead they ran into a fear from lawmakers who had to face down the folks back home angry at having to bail out Wall Street's masters of the universe. ... 'When an economy is overleveraged, it strikes me that investors are eventually going to be seeking a much higher return [from bonds and loans],' says Jared Bernstein, an Obama adivsor and senior economist with the left-leaning Economics Policy Institute. ... Even before this populist eruption over the Wall Street rescue, Middle America was souring on the privileged class. There has been a growing sense in the U.S. that a stagnant tide has kept the 80-foot yachts afloat while beaching the family outboard. ... Obama advisor Jacon Furman has calculated that the rise in the income of the top 1% of earners, set against the drop in income by the bottom 80%, is the equivalent of a shift of $885 billion a year. ... Former Arkansas Governor Mike Huckabee ... [said] 'I'm disappointed and disgusted with my own Republican Party as I watch them attempt to strong-arm a bailout of some of America's biggest corporations by asking taxpayers to suck up the staggering results of the hubris, greed, and arrogance of those who sought to make a quick buck by throwing the dice.' ... Gingrich argues that the rise in American populism is not a revolt against business alone but a revolt against all elites, including government and media elites. In his mind this is the age of the populist Andrew Jackson, not the socialist Eugene Debs. ... By this thinking, Wall Street veteran Paulson tocuhed off a populist revolt not only in the substance of what he proposed but also in the style in which he proposed it", Nina Easton at Fortune, 13 October 2008.

Unlike BS, I am not surprised at all. Read my 2 October 2008 post citing Vox Day. Unlike BS, I don't wonder "whose side government is on". It's been obvious for years. BS refers to an "axis"; is it the US answer to the "axis of evil"? Yes, "there is revolution in the air". One can almost smell the cordite. "Nero" Bush fiddles while his Republican constituency is sacrificed "on a cross of paper" to bail out the banks. Henry Paulson (HP), "formerly" of Goldman Sachs (GSG) will "understand the terror" if an American Robespierre appears on Wall Street with a few dozen stout ropes and horses, and HP sees peoples' Justice dispensed. The peasants contempt for the HP regime may soon equal HP's contempt for the peasants.

Does HP think he is talking to a new GSG MBA, one day out say Wharton? The arrogance of this clown, who I conclude is "just a salesman" is amazing. HP is a guy who knows nothing of the capital markets or foreign exchange. On about 21 October 2008 I saw HP interviewed on the Charlie Rose show. My conclusion: he hasn't a clue what capital markets do or how to fix the current mess. The only thing HP can do is bluster. People are fed up with GSG down here. That HP and Robert Rubin before him, could rise to the top at GSG makes one wonder how much talent GSG really has.

Saturday, October 25, 2008

Deflation, Bah Humbug!

"As U.S. credit markets continue to be rolled in chaos, some are bandying about the notion that American's problems resemble those of Japan in its deflationary 'lost decade' of the 1990s. 'Deflation looms. It certainly does loom,' said one functionary for a major international bank. 'The cycle in which debt destruction and asset price destruction reinforce each other clearly has a very, very, strong negative effect on the economy.' This analysis expresses a common fallacy that asset-price declines give rise to economic weakness, and the effect is therefore deflationary. But 'deflation' is not a synomym for economic contraction. ... Like inflation, deflation is a monetary phenomenon. There is no evidence that deflationary influences are now at work in the U.S. economy. ...In fact, the comparison should provide some comfort to Americans. U.S. monetary conditions are nearly the exact opposite of the devastating deflation that characterized the Japanese experience. ... Our bubble had it roots in the Fed's exceptionally accommodative monetary policy. .. But unlike the Fed, the BoJ turned toward tightness with a vengance, apparently with the objective--at least initally--of pricking the bubble", David Gitliz at the WSJ, 8 October 2008.

"The [Fed] threw open its coffers to strained overseas credit markets, taking further steps to stem the global financial crisis. The U.S. central bank said Monday it would provide unlimited dollars to the European Central Bank, Bank of England and Swiss National Bank, allowing them to relieve pressure on commercial banks across their regions. Dollars have become elusive in recent weeks as short-term money markets around the world deteriorate. ... The U.S. previously had extended $620 billion in currency swaps with foreign central banks, which provide the funds in exchange for collateral from commercial banks", WSJ, 14 October 2008.

"In a financial world gone haywire, market indicators often send mixed signals. ... One gauge of market inflation expectations reflects this new paradigm: The spread between yields on 10-year Treasury inflation-protected securities and the 10-year Treasury note has shrunk to less than one percentage point, the lowest since 1998", Mark Gongloff at the WSJ, 16 October 2008.

I agree with Gitliz who is chief economist of Trend Macrolytics.

Deflation, I just can't see it.

Haywire indeed. Is there anyone who believes inflation will average 1% for the next ten years?

US, Banana Republic?

"The ongoing financial meldown is just the latest example of a disturbing trend that, to this adoptive American, threatens to put the Land of the Free and Home of the Brave on a par with Zimbabwe, Venezeula, and Equatorial Guinea. ... What are the main principles of a banana republic? A very salient one might be that it has a paper currency which is an international laughingstock: a definition that would immediately qualify today's [US]. ... In a banana republic, the members of the national legislature will be (a) largely for sale and (b) consulted only for ceremonial and rubber-stamp purposes some time after all truly important decisions have already been made elsewhere", Christopher Hitchens at Vanity Fair, 10 October 2008, the link:

"Talk about your role reversals. In the past few weeks, officials at the [Fed] have discussed the unfolding crisis with at least one central banker from a developing nation who witnessed his own country's financial system implode: Mexico's Guillermo Ortiz. ... The so-called Tequila Crisis, named after Mexico's national drink, is today seen as the first financial crisis of the globalized economy. The U.S. put together a massive credit line that helped Mexico emerge from the crisis and grow prosperous in its wake. ... Nonetheless, many of the lessons of the Tequila Crisis and others like it apply to the U.S. ... 'Do whatever it takes to restore confidence,' Mr. Ortiz said in an interview. 'Once you lose it, it's very difficult to get it back.' ... In nearly all financial crises, the government usually reacts too slowly at first. ... What lasted longer was political bitterness linked to the bailout, which was seen as having helped rich bankers at taxpayers' expense. ... Much like Washington, the Mexican government expected to break even and possibly make some money on the bad loans that it purchased. The reality: The government lost money--lots of it. The bailout's final price tag of about $75 billion was three times what the Mexican government expected", my emphasis, David Luhnow at the WSJ, 13 October 2008.

It's fun to relive your youth. All the US needs to achieve banana republic status is 20-35% annual inflation rates. Be patient. I refer back to my 15 December 2007 post:

Do"whatever it takes". There is no rule of law in such a country. The US really is becoming Mexico.

Friday, October 24, 2008

WC Varones on Paulson 2.0

WC Varones has a 14 October 2008 post at WC Varones Blog attacking Paulson 2.0 for stupidity which is worth reading. Here's a link:

DiLorenzo Skewers Gordon

Thomas DiLorenzo (TD) skewers John Steele Gordon (JSG) for writing what TD calls, "A Fake Banking History of the United States". JSG's article, "A Short Banking History of the United States", was published by the WSJ, 10 October 2008. I read the article and thought of skewering it myself. No need. TD is an Economics professor at Loyola College in Maryland. Here's a link to TD's post:

Cold War II?

"Are we in another cold war with Russia? I don't think so. It's more a case, perhaps, of history appearing to repeat itself--the first time as tragedy, the second as farce. ... In Germany in 1945 the victorious allies were in a position to impose, very thoroughly, their policy of denazification. Members of the Nazi elite were hanged or suffered long periods of imprisonment and were banned from ever holding political office. The eradication of Nazi ideas was enforced with success, and the new Germany emerged as a democracy down to the grass roots. ... Russia, in contrast, was never occupied and reeducated. No one was punished for Stalin's or his successors' crimes. ... Russia has no ideology, other than the ruthless retention and exploitation of power. It is not burdened by the rule of law, which does not exist there. It has no moral principles of any kind. It is, however, nationalisitic and can and does exploit popular xenophobia to win support for its adventures beyond its borders", my emphasis, Paul Johnson (PJ) at Forbes, 13 October 2008.

I am in large agreement with PJ, except with respect to Russian xenophobia. I am intrigued by using denazification techniques on Wall Street. With many street lights, all we need are a few dozen stout ropes. What are say Goldman Sachs (GSG): ideology, respect for the rule of law, or moral principles? GSG lists 14 "Business Principles" at its website. I select these: "2. Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying with the letter and the spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard. ... 9. The dedication of our people to the firm and the intense effort they give their jobs are greater than one finds in most other organizations. We think that this is an important part of our success. ... 14. Integrity and honesty are the heart of our business. We expect our people to maintain high ethical standards in everything they do, both in their work for the firm and in their personal lives", my emphasis. There is some truth here. I do not doubt GSG's people are dedicated to GSG, even after they "leave". I suspect part of the GSG "initiation rite" is memorizing Rothschild's maxim, see my 30 March 2008 post,

Thursday, October 23, 2008

California's Begging Bowl

"California hoped passage of the $700 billion rescue plan Friday would avert financial disaster for the most populous U.S. state, which a day earlier had called for a possible emergency federal loan. Its precarious financial position is an example of how the credit crunch has spread to states and municipalities. ... State Treasurer Bill Lockyer will go ahead with a planned $7 billion bond offering, but market conditions remain dire. ... Schwarzenegger said that if the state couldn't borrow on its own, it would again 'go to the federal government and ask for help.' ... Tom ... Dresslar ... added that the U.S. Treasury has the authority to grant an emergency loan to the state and that the rescue bill reinforces those powers. ... At the local level, 'there are examples every single day of counties hitting the wall,' said Jacqueline Byers, research director for the National Association of Counties, an organization that represents 3,066 counties in the U.S. ... In California, property tax revenue is falling becaue plummeting home prices have resulted in lower assessments, even as cities are tied up by long-term labor contracts, said Mark Moses, chief financial officer for Stockton, Calif. That makes many California cities vulnerable to involvency, he said", my emphasis, WSJ, 4 October 2008.

"California State Controller John Chiang warned Tuesday that the state's revenues and cash flows are deteriorating quickly, in another sign of how the financial downturn has spread beyond Wall Street to state and local governments. In a statement, Mr. Chiang, ... said California is already short $1.1 billion after the first three months of its fiscal year", WSJ, 8 October 2008.

"With credit markets in New York in crisis last week, California Gov. Arnold Schwarzenegger sent an extraordinary letter to Treasury Secretary Henry Paulson asking for $7 billion. Although the governor has since withdrawn that request, it testifies to the dire state of his budget. ... Actually, the state's budget woes should give voters pause--especially since high-speed rail is a fantasy that has as much chance of delivering on its promises of creating 450,000 jobs, vanquishing road congestion and lowering greenhouse gases as 'Conan the Barbarian' had of winning the Oscar. The Golden State's finances are a mess. California's general obligation debt has tripled in the past six years and is now almost equal to the state's $145 billion annual budget. ... But there is little reason to believe [high-speed rail] cost or revenue projections. ... To attract riders, California's rail will have to out-compete cars and airplanes by keeping a lid on commute times and fares. ... It seems California is promising to build a train that is faster, cheaper, more efficient and serves more riders than any high-speed train in the world. And all it has to do to pull off this miracle is defy the laws of economics and physics. This is the kind of creative thinking possible only in the land of Hollywood, but odds are that eventually reality will sink in and California will have to abandon its rail just like Texas, Florida and Southern California were previously forced to do with their far less ambitious proposals", Shikha Dalm, at the WSJ, 11 October 2008.

The credit crunch? Or California government wild spending? These idiots want to give 5 million illegal aliens government services, let 'em. The rest of the US should not pay for it. The idiots thought real estate would increase 20% in value yearly forever and found it won't. Tough. Go bankrupt.

"Credit crisis" or no, California would be insolvent.

The California high-speed rail project looks like another boondoggle. Now wouldn't it be nice if the WSJ applied this kind of thinking to the Paulson Plan and wrote an editorial, "Just Say No" as Nancy Reagan used to say.

Who is Stephen Cutler?-2

"A federal inquiry has concluded that the [SEC] should consider disciplining its director of enforcement and two supervisors for their role in handling an insider trading investogation that led to the firing of an S.E.C. lawyer for trying to interview an influential Wall Street executive. The commission's inspector general, H. David Kotz, said in a 191-page report obtained by the New York Times that he had found evidence that 'raised serious questions about the impartiality and fairness' of the S.E.C.'s investigation of possible insider trading at Pequot Capital Management, a giant hedge fund. Mr. Kotz, also condemned what he called the 'common practice' of giving outside lawyers' clients access to high-level S.E.C. officials when they had complaints about front-line investigators. ... Aguirre complained that he was fired in September 2005, shortly after receiving a merit raise, because he wanted to take testimony from John J. Mack, currently the chief executive of Morgan Stanley [MS] and a close friend of Pequot's founder, Arthur J. Samburg. ... The inspector general primarily sided with Mr. Aguirre's version of events, accusing enforcement officials of failing 'in numerous respects' to properly manage him and for allowing 'inappropriate reasons to factor into its decision to terminate him.' As a result, Mr. Kotz recommended possible disciplinary action against the director of enforcement, Linda Thomsen, Mr. Aguirre's direct supervisor, Robert Hanson; and the assistant director of enforcement, Mark Kreitman. Ms. Thomsen was criticized for providing 'relevant information' about the commission's evidence aginst Mr. Mack to [MS's] counsel, Mary Jo White, a former [US] attorney. At the time, [MS] was vetting Mr. Mack to be its new chief executive. ... Kotz said it was 'fairly routine' for outside lawyers to bypass front-line investigators and speak to S.E.C. supervisors when they had complaints about how their clients were being treated. This practice, Mr. Kotz said, would allow prominent lawyers to have better access to S.E.C. officials than less prominent ones. ... John J. Nester, an S.E.C. spokesman, said Mr. Kotz's report had concluded that the Pequot matter had been 'aggressively pursued' and that 'the investigation did not find that enforcement cases are generally affected by political decisions or the prominence of defendants'," my emphasis, Walt Bogdanich at the NYT, 7 October 2008.

"A rare inside look at an enforcement case against Bear Stearns Cos. [BS] that was ultimately dropped highlights the sensitivity of the 'revolving door' between government and industry. In one of several scathing reports released in recent weeks, the [SEC's] inspector general said that a senior SEC official closed a long-running case against [BS] amid an 'ongoing personal relationship' with the lawyer representing Bear in the matter. ... While the inspector general 'did not find evidence of a direct connection' between the relationship and the decision to close the investigation, 'even the appearance of a conflict is disturbing and could potentially damage the reputation of the Commission.' The report recommends disciplinary action against [David] Nelson. ... In a statement, the SEC said 'the report does not cite a single instance of improper communication or undue influence.' ... The allegations illustrate the delicate dealings in industries where lawyers and others cycle between roles in government regulation and private practice. Many enforcement lawyers have left the agency for jobs representing clients in SEC cases. ... Still some SEC executives in Miami were 'stunned' at the decision, the report says. Jon Jordan, a Miami branch chief ... said he didn't complain because that 'would do nothing' for him but make his 'life miserable' and 'definitely would not help' his career at the SEC", my emphasis, Michael Siconolfi at the WSJ, 18 October 2008.

"[BS] improperly valued certain assets to avoid taking write-offs in 2007 as the credit crunch was beginning to unfold, according to the [SEC's] inspector general. ... Albert Kyle, a finance professor at the University of Maryland who conducted the review for the inspector general, said it was improper for risk managers to allow [BS] in effect to adopt two valuations for the same asset. ... The SEC's regulatory staff, which was responsible at the time for overseeing the firm's risk management, rejected the report's contentions. ... Charles Mulford, an accounting professor at the Georgia Institute of Technology, reviewed the report and said it 'raises a lot of questions.' Using different valuations for the same asset is 'improper accounting,' he said. 'Whether it rises to the level of fraud is for somebody with jurisdiction to decide'," Kara Scannell at the WSJ, 18 October 2008.

"The FBI is struggling to find enough agents and resources to investigate criminal wrongdoing tied to the country's economic crisis, according to current and former officials. ... According to previously undisclosed internal FBI data, the cutbacks have been particularly severe in staffing for white-collar crimes like mortgage fraud, with a loss of 625 agents, or 36 percent of its 2001 levels", Houston Chronicle, 19 October 2008.

"Serious questions"? Hahahaha! The SEC is a joke. Do lawyers other than NY Biglaw get regular access to senior SEC personnel? The SEC should give Linda Thomsen a new title, director of questionable practices concealment. Mary Jo White, again. She's everywhere. The SEC should adopt a new policy: log every contact made by NY Biglaw and have someone not associated with the SEC, like a prominent member of the plaintiff's bar investigate them. This looks like a job for, no not Superman, but Melvyn Weiss as soon as he's released from prison. Now that would please the Mikado's Lord High Executioner. I conclude SEC enforcement cases are almost invariably subject to political influence. Some relevant prior posts:

Potentially damage? Rigorous enforcement might end one's SEC career. Sounds like the major CPA firms.

Which other firms use Bear's valuation techniques today?

Perhaps the FBI should give up its "Palmer" raids and focus on serious crime.

Wednesday, October 22, 2008

Of Planks and Specks-2

"The [SEC] said it has charged a Beverly Hills firm and its principal with illegal short-selling in 14 publicly traded companies. ... The SEC alleges that [Kenneth] Rickel made at least $207,291 in profits from illegal trades in 2005 and 2006", WSJ, 8 October 2008.

"Duane Reade Inc.'s [DRI] former chief executive and chief financial officer were indicted Thursday on charges of exaggerating the income of the New York drugstore chain by millions of dollars. The SEC filed a separate complaint in federal court in Manhattan, saying the men schemed to overstate the chain's pretax income by a total of $17.5 million between 2000 and 2004. The exectives entered into fraudulent transactions to boost reported income and enable the company to meet earnings guidance, the commission said", WSJ, 10 October 2008.

It's good the SEC has time to pursue this charge of illegal profits of .0031 of Lloyd Blankfein's 2007 bonus.

Normally, I wouldn't object to the SEC and DOJ pursuing a case like DRI. But under the circumstances, with "fish to fry" at least 1,000 as large, I think the DRI case should be shelved. Again we wonder, where were the CPAs, PriceWaterhouseCoopers this case, as the fraud went on?

Buffett's Motives?

"Bloggers chimed in with foreboding, if accurate, reminders that Mr. J.P. Morgan, the Buffettesque figure of his day, bought big stocks including GE in the panic of 1929--before the crash. ... But the deep suspicion of [Buffett's] motives and acumen are another ingredient in the required concotion of fear and ill-feeling that will eventually mark at least a trading low in the market", Michael Santoli at Barron's, 6 October 2008.

"In exchange for his $5 billion investment in Wall Street firm Goldman Sachs Group Inc., [GSG] Warren Buffett is due a hefty dividend and an equity kicker, but he also got something else: a commitment from top company insiders that they will continue to hold a substantial stake in the firm. ... Thursday, [GSG] disclosed that Mr. Blankfein, Chief Financial Officer David A. Viniar and Chief Operating Officer Gary D. Cohn and John Winkelied had agreed to hang onto at least 90% of their current stock holdings for the term of the agreement. Their spouses and estate-planning vehicles are similarly restricted under the deal", Yogiat Patel at the WSJ, 8 October 2008.

Was there this suspicion of Buffett say five years ago? What's happened in the meantime?

This makes sense. Ensuring the GSG executives are at risk for mismanagement.

Gold and the Crisis

"A gold 'rally' doesn't quite describe it. The flight-to-quality stampede by investors left gold traders craning their necks to see just how high and how fast the metal could climb--as financial markets undergo their biggest upheavel in 80 years. ... Short-term, volatility in gold pricing--while it may not remain at September's levels--is likely to persist, as participants mull details of the plan to backstop markets. But the medium- and long-term implications of Washington's market-rescue plan for the metal will also hinge on the reactions of the U.S dollar and inflation. Indeed, if the rescue works longer-term, it will likely prove supportive of the U.S. economy and the U.S. dollar, says Carlos Sanchez, precious-metals analyst with CPM Group. ... Even if the U.S. monetizes only some of that debt, especially keeping in mind Uncle Sam's recent bailout of [Freddie and Fannie], that will add to rising inflationary pressure down the road, factors that are likely to remain bullish for gold as a hedge against rising prices. A Merrill Lynch research note observes, that 'once the immediate liquidity crisis subsides, the market should focus on the fiscal implications of the recent measures, putting heavy downward pressure on the U.S. dollar. A weaker U.S. dollar should help support gold prices, as the two markets have been closely linked in the past year',' my emphasis, Matt Whittaker at Barron's, 6 October 2008.

Only some? Got gold? Get more.

Tuesday, October 21, 2008

The Impending US Bankruptcy

"There are other obligations, too, that aren't calculated into the national debt, or even the $70 trillion, but for which the government remains at risk. ... If the price pendulum swings back to 2000, we'll see the mortgage default rate, currently at a record 9%, soar. We'll also see more Americans file for personal bankruptcies and default on their credit cards. ... Large-scale bank failures could leave the FDIC short hundreds of billions of dollars. The total of insured deposits in this country is $4.5 trillion. ... The earthquake will come via a collapse in the market for U.S. government bonds as domestic and foreign investors realize that the only way Uncle Sam can meet his future spending obligations is to print massive quantities of money. The result will be sky-high inflation and interest rates and, most surely, a prolonged reduction in output and employment, This could happen today. It could happen tomorrow. But it will happen here just as it has happened in every other country that has tried to spend far beyond its ability to pay", Lawrence Kotlikoff (LK) at Forbes, 29 September 2008.

"The Treasury in going to devalue the US dollar by 30 to 40 percent, or more, from here. Why? Because they have no choice. ... The devaluation will be coated with a minty flavor shell of verbage and G7 misdirection and government programs with lots of letters in the names. ... Remember, its a secret. Don't tell the Chinese, foreign holders of US debt, and especially the US middle class whose life savings are going to be wiped out", Jesse, 8 October 2008, the link:

"Various level-headed economic pundits have opined that the $700 billion Bailout cannot possibly succeed. ... And the Bailout approaches $2 trillion now. Except for dedicated pros, it's impossible to keep tabs on its total size anymore. ... The '08 elections are being contested by a man who is so tainted by anti-American poison that, if elected President, he would not pass a Secret Service background check to be his own bodyguard. ... And the economic crisis is a mark-to-market not only of our financial assets, but also of our fictitious weltanschauung. To begin with, an economy based on consumption, borrowing and speculation rather that on production, saving and investment is a greater fool game bound to self-destruct. ... When a man who holds an MBA from Harvard advises his nation to go out and shop on 9/12, something is wrong with Harvard. When the American Dream has morphed from having personal freedom, to owning real estate with no money down, something has gone wrong with American dreaming. ... An overlord of cultural and economic saboteurs is in control. Their Bolshevik predecessors wreaked havoc by exploiting differences between the classes, but the new breed has accomplished the same by exploiting differences between the races. ... An economy cannot be bailed out that allows millions of terminal savages to wreck and terrorize its cities under the banner of "F**k Whitey'. An America that sends its National Guard to bring peace and order to Baghdad and Kosovo rather than Philadelphia and Cleveland cannot be saved from the mark-to-market of history. ... Starting with demographics. Because of all the answers to any question at all that concerns the future of the [US], the most important is Demography is Destiny. In 1965, America's ruling class decided that the problems with the black minority were not enough. This almost-vanilla ice cream needed more Tabasco. A country that was the envy of the world in every material and political area and many cultural ones as well, began the wholesale importation of the Third World onto its shores at the rate of over 1 million per year, not counting illegals, refegees and asylees. So now the ice cream is 1/3 Tabasco, and in two decades it will be 50%. ... One wonders whether the inspiration for this came from the great success stories of the multicultural late-Roman, Russian or Austro-Hungarian Empires. The enthusiams did not abate despite the fate of Yugoslavia and Czechoslovakia, Rwanda, Kashmir and Iraq. ... Wasn't there something in Federalist #9 and #10 aabout the destructive tendency of factions? But to understand that doesn't require the genius of Hamilton or Madison. It takes common sense at the level of a 14-year-old who has not attended an American school in the last 40 years. ... America already spends twice to three times as much on education per student as dozens of countries thaty outrank it in scholastic achievement. American schools are failing because they are full of sub-85-IQ imported children from unassimilable minorities. ... Unless he has been stung by a liberal encephalitis mosquito, anyone who had spent time among the nonwhites in the US or abroad knows that, in its obsession with white racism, the American society of 300 million is enagaged in a collective act of moral masturbation the like of which may have no precedent in history, excepting China's pre-1976 cult of Mao and the EU's cult of Islam. ... The Russians have a despotic leader who does what's best for her, her being Russia. He will be remembered by a grateful people as one of the five greatest sons that nation has ever produced. America has leaders who do what's best for Iraq, Albania and South Korea. Who work for Pakistani democrats, Chinese arms manufacturers, Chechen warlords, Bosnian mullahs or American mullahs. ... A bonfire of a trillion dollars can do nothing for a slumbering slob. But history's mark-to-market to Third World status may, if we are lucky, awaken a sleeping giant", Takuan Seiyo at Gates of Vienna, 14 Ocotober 2008. The link:

LK, a Boston University professor sings my song.

Jesse, I'll give you the benefit of the doubt. I assume you mean 30-40% in the next say 3-5 years. I expect much more over the long term, see my 4 July 2008 post.

Can you believe Seiyo is an Ivy Leaguer too? A Wharton MBA at that.

Mackerel Beat Dollars?

"When Larry Levine helped prepare divorce papers for a client a few years ago, he got paid in mackerel. Once the case ended, he says, 'I had a stack of macks.' ... 'It's the coin of the realm,' says Mark Bailey, who paid Mr. Levine in fish. ... There's been a mackerel economy in federal prisons since 2004, former inmates and some prison consultants say. That's when federal prisons prohibited smoking and, by default, the cigarette pack, which was the earlier gold standard. ... Elsewhere in the West, prisoners use Power Bars or cans of tuna, says Ed Bales, a consultant who advises people who are headed to prison. But in much of the federal prison system, he says, mackerel has become the currency of choice. ... The Bureau of Prisons [BOP] views any bartering among prisoners as fishy. ... Another problem with mackerel is that once a prisoner's sentence is up, there's little he can do with it--the fish can't be redeemed for cash, and has little value on the outside. As a result, says Mr. Levine, prisoners approaching their release must either barter or give away their stockpiles", Justin Scheck (JS) at the WSJ, 2 October 2008.

This article is rich. It teaches much. Do you remember Economics 103, "Introduction to Micro"? You should have encountered a "Robinson Crusoe" economy. That's like what we have here. Note the prisoners need no "Fed" to regulate mackerel's exchange value for other things. The BOP shows its political correctness by banning smoking. Having banned cigarettes, the prisoners adopted something else as currency. Why not mackerel? Tobacco was used as currency in Colonial Virginia. I bet the "mackerel inflation rate" is lower than the US core rate. Why does the BOP oppose prisoner bartering anyway? Would it prefer prisoners steal from each other? I think prisoners operating in an exchange economy might learn something. This is very important: mackerel can serve as currency precisely because they are not consumed. JS used the term "gold standard". How interesting. What do you think will happen if Uncle Sam issues a new currency one day and only lets you exchange say $10,000 maximum per person, cancelling the rest? Countries have cancelled currencies many times.

Monday, October 20, 2008

California's Gestapo

"California's Franchise Tax Board was after [Thomas] Kaschak for $138,000 in income taxes he allegedly owed between 2000 and 2004. ... If he was expecting accountants and tax lawyers, he says he got instead 20 FTB agents who raided the house, rousted him out of bed and refused to let him contact his attorney during a two-hour interrogation. ... Mad as hell, Kaschak, now 49, filed a federal civil rights suit in Fresno in June. More satisfying: in August a different taxpayer won a tort suit against the [FTB]. ... The jury decision is likely to give pause to tax collectors--from California especially--who make a habit of going after wealthy ex-residents who set up house in another state. ... They can almost make the [IRS], which is boxed in by taxpayer rights laws, seem like a softie. ... In 1995, following intense efforts by Nevada's delegation, Congress passed a law prohibiting state income taxation of nonresidents' pension income, including that from a 401(k). ... Still, Kaschak's attorney, James Rowe says that when it comes to playing bad cop, California's FTB is in a precinct all its own. "They've almost become, in some respects, a gestapo of sorts,' he says", Asher Hawkins at Forbes, 29 September 2008.

I agree, having lived in California and been exposed to the FTB. The IRS is a bunch of pussycats next to this mob. The FTB will take, in my experience, absurd positions to try to collect taxes. It particularly harasses retiree ex-residents, apparently figuring it can terrify them into paying taxes it is not due. On some occasions I have told clients to close their California bank accounts and sell their California property so the FTB will lose track of them when leaving the state.

Agents of Influence

"If conservative Republicans are right and the $700 billion financial-sector rescue plan signals America's slide into socialism, you'd think Seth Dellinger would be celebrating. ... To Mr. Dellinger, 32, capitalism's crisis may be socialism's opportunity. He's making the case to anyone who will listen that the U.S. should adopt a Cuban-style government before the Bush administration and Congress empty the treasury in order to keep workers from storming the barricades. 'What they're trying to do, above all, is prevent millions of workers from lining up outside banks all over the country, because they know they'll have to send troops and cops,' says Mr. Dellinger. 'That kind of scenario could unfold quicker than people think.' ... The topsy-turvy Wall Street rescue, which failed in the House on Monday then passed the Senate on Wednesday, and finally won House approval on Friday has done what neither Presidential candidate has yet been able to do: bring left and right together, albeit in opposition to the plan and from very different positions. ... 'Today you are being asked to choose between bread and freedom,' Rep. McCotter scolded his fellow lawmakers. 'I suggest that the people on Main Street have said they prefer their feedeom, and I am with them.' ... 'This is not socialism,' says Sam Webb, national chairman of the Communist Party USA. 'Bailing out the biggest financial corporations in the country is a far cry from what we have in mind when we think about socialism.' ... The left wing faces fissures of its own. The Socialist Workers [SW], Mr. Dellinger's Party, considers itself the true heir of Marx and Lenin and seeks to emulate the Cuban model of Fidel Castro. It argues that the Socialist Party is laboring under the false impression that capitalism can be reformed, and the [SW] members scorn the American Communist Party as a cross between closet Stalinists and closet Democrats. The Way Far Left agrees on one thing: The Wall Street rescue plan won't help the working class. 'It poses the urgent need for a revolution in this country, a socialist revolution that will throw the billionaire ruling families out of power and replace them with a workers and farmers government,' [SW] Party presidential candidate Roger Calero said in a statement distributed this week. ... Dellinger explained that in recent decades the capitalists have found their profits from the exploitation of workers shrinking. 'So they've turned to gambling on Wall Street to make a faster buck", Michael Phillips at the WSJ, 4 October 2008.
"Amongst the worst tragedies of the Soviet collectivization was the Ukraine famine of 1932-33, which took six million lives as Joseph Stalin practised forced appropriation of crops and imposed very low prices for agricultural products in favor of industrialization. Interference with the pricing mechanism and Stalinism in the form of very low prices for agricultural products also caused famines in India in 1965 and China in 1969, with a human death toll well into the millions. Monetary policy as practised by the US [Fed] for the past decade is but a form of financial Stalinism, forcing ridiculously low or negative interest rates, with catastrophic results that are now plaguing the world. Fed policy had disabled the price mechanism in capital markets and set off uncontrolled credit expansion at the expense of capital productivity and creditworthiness, pushing housing, food, and energy prices to prohibitive levels, and triggering food and energy riots in vulnerable countries. ... Last, but not least, the long-term inflationary consequences may turn out to be even more dramatic. All these consequences are real and were in part predictable. ... It would appear that Bernanke has read a great deal about the Great Depression of 1929-1933 and perhaps very little, or nothing, about the German hyperinflation of 1920-1923. ... Therefore, Bernanke is determined not to let that mistake happen again. Consequently, his response to the financial crisis has been a blind and aggressive monetary policy in form of negative interest rates, massive liquidity injection, and massive bailouts. ... The Fed has arguably created the most uncertain and unstable economic environment in US history. ... Interest rate setting by central banks has long been repudiated by monetary economists; it creates distortion between the market and natural interest rates, and triggers a self-cumulative inflationary process", my emphasis, Hossein Askari and Noureddine Krichene (A&K) at, 10 October 2008.

"Demonstrators clashed with police while trying to force their way into the Royal Exchange building during a demonstration Friday against the British government's bank bailout. ... About several hundred people, mostly students and Socialist Worker Party activisits, turned out for the late-afternoon protest against the government's $86 billion plan to partly nationalize major banks, while guaranteeing an additional $431 billion of bank loans. 'Whose money" Our money!" chanted the protesters, some of whom carried placards reading 'Why should we pay for their crisis?", Houston Chronicle, 11 October 2008.

Yes, as Lenin said, "War is the cradle of revolution". Lenin also said, "The way to crush the bourgeoise is to grind them between the millstones of taxation and inflation" and "The best way to destroy the capitalist system is to debauch the currency". Comrade Dellinger (CD) sounds like Pat Buchanan. CD has much to learn. He should heed Alexander Kerensky who said, "no enemies to the left". CD, do you not realize Comrades: Paulson, Bernanke and Buffett are amongst our most effective agents of influence? You worry about the working class's temporary discomfort. I say, it's a small price to pay to hasten the revolution. Again CD we look to Lenin's wisdom, "You can't make an omelet without breaking a few eggs", my 10 January 2008 post,

Yes, we need a WSA, worker-student alliance. Anyone remember the 1970s? Has Mark Rudd an opportunity here? Leon Trotsky said, "The old principle he who does not work shall not eat, has been replaced with a new one: who does not obey shall not eat". Let's go to New York's Union Square and see if we can find Troskyites debating Stalinists, Leninsts or Maoists about the bailout. Great fun! What does Webb know about socialism anyway? Let's see if we can have Castro weigh in on this. I'm on the SW side in this left-wing intramural spat. CD, while I applaud your enthusiam, I remind you as a true heir of Lenin, that the bailout will bring Communism closer. Do you think our leading socialists like Warren Buffet are unaware of this? They follow Stalin's injunction, "Break eggs? I can help break eggs". Stalin did. about 20 million of them!

I agree with A&K.

Why indeed. I conclude the British Labor Party sold out the revolution and aligned itself with the capitalist oppressors. Hence it is not a fit heir to carry the torch of Marxism-Leninism. Go Socialist Workers!

Sunday, October 19, 2008

Dollar Si, Krona No?

"In the U.S., markets worry that the government may not do enough to bail out it banks. In Iceland, they worry it can't. On Friday, the cost of insuring Icelandic government debt soared to punitive levels, while the country's currency--already worth less than half of what it was at the start of the year--dropped 8% against the euro since Monday. The trigger for the panic over Iceland's solvency came Monday when the government pumped Euro 600 million ($827 million) into Glitnir Bank hf, the country's third-biggest bank by market capitalization, taking a 75% stake. Meant to reassure financial markets, the bailout instead heightened concerns that Iceland might have to prop up its other banks, too, but that it lacks the resources to do so. ... On Friday, traders said it cost $1.5 million up front plus $500,000 a year to insure $10 million of Icelandic debt against default. That is up from $271,000 a year with no up-front fee a month ago according to Markit Group, a credit-information firm. ... The krona's latest tailspin could worsen the country's already sharp downtunrn. 'No one wants to he holding the Icleandic krona,' said Jon Harrison, a currency strategist at Dresdner Klienwortin London. 'No one wants to deal with the local banks'," WSJ, 4 October 2008.

"Saying Iceland was at risk of 'national bankruptcy,' Prime Minister Geir Haarde prepared to give regulators authority to take over the nation's failing banks as a worsening financial crisis all but cut off the island from the global financial system. ... Late Monday, Iceland's parliament was voting on an emergency law that could put the entire banking system under government control. It was expected to pass. 'There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy,' Mr. Haardie said. After the speech, Standard & Poors cut Iceland's foreign-currency sovereign debt rating for a second time in a week. ... Under the bill in Parliament, the government has wide-ranging authority to take over banks, seize control of management and direct asset sales. Mr. Haarde wouldn't say whether the government would use the full powers but said 'it is conceivable that some [banks] will not be able to function without the authorities intervening'," Charles Forelle at the WSJ, 7 October 2008.

"An article at, a Russian site asks, 'Time for a gold rouble?", which made me laugh in a Disrespectful, Xenophobic Mogambo Way (DXMW), as it looks like the damned Russians are so stupid they can't even spell 'ruble'! Hahaha! My levity was soon abandoned, however as the paper reports 'the decision by the US government to inject $700 billion into the financial system means that the already gigantic annual budget deficit of the American state (previously some $450 billion a year) will now rise by a factor of three. The total state debt of the USA will rise to well over $11 trillion. It is obvious that such a colossal debt can never be repaid. Instead, it will be serviced by more debt in the future', which they attribute to the collapse of the financial system, such as 'the collapse of those markets is only a symptom of a much deeper problem, the basic insolvency of the American state itself.' ... Since I never think of Russians except as humorless bad guys who speak English with terrible accents and who are always out to kill James Bond, it is novel to me that the paper concludes that 'as a major exporter of hydrocarbons, her role in the world economy is actually very important. As the age of the dollar draws to a close, Russia will have to consider selling her oil and gas not in the devalued American currency, but instead in the euro used by most of her customers.' ... SoI thought that was a little strange: but it got spooky when they wrote the line, 'the age of the dollar draws to a close', as my heart withered in fear and I suddenly mistrusted everyone around me, but before I could ask them to explain such a remark, it suddenly made sense when they went on, 'It is surely unnatural for two geographic neighbiors to do such large volumes of business using the currency of a distant and now ailing nation.' Ooops! They're right! we're freaking doomed! ... Somewhat mollified and again ready to give them the benefit of the doubt, they now finally win me over when they conclude, 'The contempt of the Keynesians notwithstanding, it is an undisputable fact that gold does remain the ultimate store of value, which is precisely why the states own so much of it'," my emphasis, Mogambo Guru at, 8 October 2008.

"Iceland sought to avert the collapse of its financial system Tuesday by reaching out to Russia for an emergency loan, trying to peg its plummeting currency and seizing a second big bank. ... Early Tuesday, the Icelandic central bank announced Russia would lend it Euro 4 billion ($5.4 billion), citing a seemingly unimpeachable source: Russian Prime Minister Vladimir Putin. Hours later, the central bank backpedaled, saying Russia and Iceland were planning to start negotiations on a loan Wednesday or Thursday. ... This week, krona trading had effecively disintegrated", Charles Forelle at the WSJ, 8 October 2008.

"Iceland plunged further into financial turmoil--and muddled into a diplomatic spat with Britain over its handling of the crisis--on Wednesday as the country's third-largest bank went into receivership and the government abandoned attempts to put a floor under its free-falling currency. ... Prime Minster Geir H. Haarde ... added that talks with Russia over the potential of a 4 million [I believe the author means billion] euro ($5.47 billion) loan were scheduled to take place in Moscow on Tueday", Jane Wardell at the Houston Chronicle, 9 October 2008.

"As Iceland nationalized a second big bank and abandoned a brief attempt at pegging its tumbling currency, Britain and the Netherlands sought to protect hundreds of thousands of their savers who have money in frozen Icelandic bank accounts. ... The fallout from the financial meltdown in tiny Iceland underscores the often unpredictable connections the global economy has woven among far-flung people, banks and nations and the damage they can cause. ... Iceland's government has vowed not to default on its soverign debt, but some economists fear it could", Jeanne Whalen and Charles Forelle at the WSJ, 9 October 2008.

"Kristjan Davidsson went to sea as a deckhand at 16. At fisheries college he aspired to be a boat captain. For two decades, he sold fish and fish-processing equipment. Like his father, and pracitcally everyone else in this remote village, he owed his living to the fish his country pulled from the ocean. ... But just a half-dozen years ago, Icelanders discovered that cast fortunes could be made in high finance. ... The banks quickly swelled to a size that dwarfed the economy of some 300,000 Icelanders back home. ... The banks' assets reached Euro 100 billion, about 10 times the country's gross domestic product last year, and their foreign depositors have come to far outnumber the island's poipulation. ... Today, Iceland's swollen banks are ruined. In the space of a few days, practically the entire banking system has been seized by the government. ... The krona has ceased functioning as a currency outside Iceland. ... The U.K. and Netherlands are suing over frozen deposits held by their citizens, while the government is trying to arrange more foreign loans to help stave off national bankruptcy. ... Up until a few days ago, Icelanders thought they could live on banks. ... The krona was strong. That damped exports--fish is the island's biggest--and the trade deficit ballooned, a worrying sign. ... To their surprise, they became some of the wealthiest people on the planet. Many became millionaires, a few billionaires. The standard of living was high and foreign luxuries could be imported cheaply. They bought expensive cars with loans in yen and Swiss Francs with attractively low interest rates, racking up high debts exposed to the vagaries of currency exchange. ... For the banks, growing was easy. They could borrow at low cost from around the globe, then turn around with little oversight lend that money to businesses and entrepreneurs where they wanted--in the U.K., Denmark and the U.S. Over time, the banks assets--largely these loans they made--grew and grew. ... Just printing more money--something the U.S. can do--wouldn't help the banks much, since their foreign debts were largely in foreign currencies. The creation of more Icelandic krona would just puch down the exchange rate. Fearing this, investors began shunning the krona. It tumbled more than 40% against the euro this year. ... 'Overnight, the change of emphasis from banking over solid products, and that is fish and aluminum,' [Gisli Gislason, the director of the Reykjavik port] said. ... A real economy needs products to sell, Mr. [Halldor] Leifson [fisherman] says. Banking is 'paper money. You can't do anything with paper money'," my emphasis, Charles Forelle at the WSJ, 10 October 2008.

"Britain sent a team of negotiators to Iceland to resolve an increasingly bitter dispute over British savers and local governments whose deposits are frozen in failed Icelandic banks. ... 'We will take further action against the Icelandic authorities wherever that is necessary to recover the money,' U.K. Prime Minister Gordon Brown said at a meeting with voters in southern England on Friday. 'This is the responsibility of the Icelandic government. They've got to take responsibility'," WSJ, 11 October 2008.

"When Iceland's banking system collapsed last week, stunned bankers and government officials pointed blame at the freeze in short-term funding markets that has inflicted pain the world over. But Iceland's leaders had long been warned of the potential damage of a liquidity squeeze. And when it struck, authorities who had expressed optimism about the system didn't have the tools to keep it afloat. ... The central bank held low foreign-exchange reserves, leaving it with scant ammunition in a crisis. ... But there were other regulatory failures by the central bank and other authorities in recent years, [Gylfi] Magnusson [an economist at the University of Iceland] says. Among them, he says, reducing reserve requirements for banks and letting them accept giant deposits overseas. 'They gre well beyond what the government could reasonably hope to provide in deposit insurance.' ... [David] Oddison [central bank head] said foreign-exchange reserves weren't the issue. 'People started yelling that we must enlarge the foreign-currency reserves in step with the banks' growth. A totally wrong theory,' he said. 'We should have cut the banking system down'," my emphasis, Charles Forelle at the WSJ, 17 October 2008.

Venezeula's Hugo Chavez (HC) must be smiling at the "emergency" laws. HC is now the world's leader in monetary theory. I propose him for a Nobel Economics Prize. How far behind Iceland is the US?

Right on Mogambo. IA war story time, here's how IA became a "gold bug". If any reader wishes to deride IA as a crank for that reason, go ahead. See if IA cares. In January 1980, gold reached $875. Until then, I was a "good" Milton Friedman monetarist. Based on "inflation" from 1933, when gold was $20.67, I estimated gold's "fair value" was about $350. I saw something. With gold over twice its "fair value", the world's biggest gold holder, the "Treasury-Fed" with 261.5 million ounces didn't sell! Now, almost as a lark, IA rechecked all his assumptions about money, everything I ever learned, with a new assumption, i.e., gold is money and the dollar is a commodity. Many things fit which made no sense before. Even monetarism could be explained by the gold standard. I felt I made a breakthrough like that of relativistic mechanics. Huh? Newtonian mechanics fits within relativistic mechanics as long as you aren't moving near lightspeed. Similarly, monetarism can be explained by the gold standard. IA then remembered his first economics class, 101, the "Samuelson" class. My professor used McConnell's text. I remember reading a section on multipliers. There were balanced budget multipliers (BBM) and tax cut multipliers. The BBM left me stymied. I asked my professor "How did a dollar know if it was a tax increase dollar or a spending increase dollar? It seems a dollar is a dollar?" He had no answer. When I came to the marginal propensity to consume (MPC) I asked, "What if the MPC approached 1 in the limit? Does that mean if I throw a penny into the system we all become infinitely rich"? My professor said the MPC effect only works within the "relevant range". I said, "it sounds like you have no theory. Only ad hocery". If you want Keynes dissected, read almost anything by Henry Hazlitt, 1894-1993.

When times get bad enough, central banks will go anywhere for support. As they say, "Even the devil dances for gold".

I wonder how much political influence Czar Putin can buy for $5.47 billion?

Iceland's current predicament reminds me of Mexico in 1982. President Jose Lopez Portillio (JLP) promised to defend the peso "like a dog" before it collapsed. Hence, JLP's mansion is known to this day as "dog hill". It is rumored JLP salted away billions before the peso's collapse. The significance of Mexico's 1982 situation is: nothing a government official says should be believed.

Iceland's banks remind me of American "wildcat" banks in the 1830s. That's what America's SIVs are, today's wildcat banks. Or the Texas oil boom around Midland-Odessa of 1980-83. Or California's "genius" mortgage brokers who made $700,000 a year in 2004-2006 and now are unemployed. Iceland makes an excellent case study for the Austrian theory of the credit cycle. Connie Yu, are you listening yet? If you wish stay in California. Go to work for Chevron! Repent, there's still time.

What will Gordon Brown (GB) do to make Iceland pay? Will he have England declare war on Iceland? Assuming England wins the war, will GB institute slavery in Iceland to make Iceland's working class pay England's rentiers? All power to Iceland's working class! Britain will have as much luck recovering the monies in question as Mexico's creditors did in 1982, not much.

Oddsson can redeem himself. Call a press conference in New York to tell Zimbabwe Ben, "cut the banking system down".