News about financial stability, central banking and theory of money
Zero hedge thinks yes, as the temptation to preserve the “reserve currency hegemony” will be too high.
If so, Ben Bernanke could end up like this – as the Reverend Ben’s Church of Ponzi.
Have a happy holiday.
Professor Shin discusses the Bernanke “savings glut hypotheses” in a post at Vox today. Drawing a parallel with Europe, he argues that to believe that the global financial crisis was due to a savings glut (in China) would imply that savers in Germany invested in Ireland and Spain because they couldn’t place their savings domestically. This argument strains credulity and shows that we need to look for a better explanation. He suggests that a more plausible narrative is a banking glut associated with the explosive growth of cross-border lending. According to Shin,
The banking glut in Europe was part of a global phenomenon, as documented in a recent paper delivered as this year’s Mundell-Fleming lecture at the IMF (Shin 2011). Effectively, European global banks sustained the “shadow banking system” in the US by drawing on dollar funding in the wholesale market to lend to US residents through the purchase of securitised claims on US borrowers, as depicted in Figure 4.
Figure 4. European banks in the US shadow banking system
Although European banks’ presence in the domestic US commercial banking sector is small, their impact on overall credit conditions looms much larger through the shadow banking system. The role of European global banks in determining US financial conditions highlights the importance of tracking gross capital flows in influencing credit conditions, as emphasised recently by Borio and Disyatat (2011). In Figure 4, the large gross flows driven by European banks net out, and are not reflected in the current account that tracks only the net flows.
Since European banks are so heavily intertwined with the US financial system, a successful resolution of the European banking crisis will mean a lot for the development of the US economy, according to Shin.
As the hearing goes on over here, another story has reemerged. Zero Hedge is again the source of this, when they back in October noted that a “secret” firm had upset Goldman Sachs as the biggest program trader on NYSE. Strange, you would think, that this could be the case.
What strategies they run, how much capital they actually need etc is almost impossible to gain knowledge of. One thing is sure though. The Trading space is rapidly changing, attracting many smart and creative people, but there remains many questions to ask with what these firms contribute with in terms of volume, liquidity, volatility and most importantly the “morality” of the strategies conducted.
Rough traders stealing program code from their banks, jumping over the Atlantic, and then setting up a backroom operation in high frequency trading that is overtaking GS. Serious? How can this be the case? A must read article courtesy of,Douglas Faneuil, Dis magazine.
And, interestingly enough, the story also ended up in this Swedish newspaper. They note that
I de efterföljande läsarkommentarerna spåras företagets domännamn till Tower Research Capital, i sin tur en del av Lime Group, grundat av amerikanen Mark Gorton. Koncernen ligger också bakom Spire Europe, som i år blivit en av Stockholmsbörsens största aktörer.
Spire Europe is probably also one of the big actors on the Oslo Bors as well, I would imagine. Perhaps a case for Finanstilsynet?
Today has been a new day of hearings about the MF Global bankruptcy. Corzine has again been questioned about where the client money is and again repeated his “I have no idea about where the money went”. Is this to be believed?
What we know is that the 200 year old company was “taken over” by Corzine and transformed from a quite broker-dealer into a highly speculative company with huge leverage. As Reuters reports, Corzine had all the characteristics of a rough trader, perhaps the biggest of them all (the open sovereign position of MF Global was 6,3 billion dollars!). Their bet failed and now they are all in the soup. But the backlash on the Hill is pretty severe, although it remains to be seen what consequences this will have for those responsible, both at MF Global and at the regulators.
While this soup is simmering in Washington DC, farmers are suffering around the country due to losses on their future accounts. This has been referred to at the hearings. But if you want to hear an angry voice from the West, listen to this one. She accuses the regulators for having screwed up completely and has folded her futures company and advised all her clients to go into physicals. The system will implode before Christmas!
And to add to her conspiracy theory, it has been noted in the news that Corzine held a fundraiser in his private NY apartment earlier this fall for President Obahma (tickets for the simple sum of $ 35,000) and that Bill Clinton received $ 50,000 from MF Global for “consultancy services” just weeks before the firm went under.
This is an interesting post as we are drawing closer to crunch time in Europe. I agree in principle, but think it will be hard to imagine an orderly closure of any of the TBTF banks.
Meanwhile, the EU is churning on with its new crisis management directive, which will be out soon – here. From reading the early draft it doesn’t look too bad, sort of FDIC resolution type directive. So perhaps, if the real crisis can simmer for another year or so, the tools will be available for an orderly TBTF wind down?
This is a useful clarification by Thomas Palley in FT:
The euro lacks a government banker, like the Federal Reserve or Bank of England, which helps finance budget deficits and keeps rates low on government debt. This explains why the US and UK can borrow at low rates and remain solvent, whereas Spain, which has a roughly similar deficit and debt profile, is under speculative attack.
The lack of a government banker reflects the euro’s neoliberal birthmark. Neoliberalism aims to diminish the role of the state and enhance the power of the market, and this goal is reflected in neoliberal monetary theory which guided the euro’s design. The theory argues central banks should control inflation, but there should be complete separation between the central bank and government finances.
According to Palley,
The solution is to create a European Public Finance Authority (EPFA) that issues collectively guaranteed debt on behalf of eurozone governments which the ECB is allowed to buy. That would enable the ECB to manage governments’ interest rates via open market operations, as does the Federal Reserve and Bank of England.
Currently, ECB is lending freely to banks so that they can buy sovereign paper instead of the ECB. The question is if this will work? It is probably not a wise strategy for banks to take, unless they are arm twisted into doing it. We will have to wait and see.
Australian economist Steve Keen has long warned against the current debt bubble. As the financial crisis has continued his is now touring the world with his message of debt cancellation. He has posted two recent interviews on his web site, one with INET, the NY based Soros sponsored institute, and another one with BBC – Hard Talk. The BBC interview is quite good, so have a watch (only 20 + min). At the end, he recognize his indebtedness to Hyman Minsky, who more than anyone else saw this coming and also provided a theory for understanding why it could happen.
Zero hedge and Reuter today has interesting posts on the greater implications of the Global MS bankruptcy. They point out that MS Global did exactly what Lehman and AIG did; leverage up in the repo market on bets that finally went bad. The fragility of the shadow banking system is exposed as banks now are scrambling for funds. This may just be the beginning of a total implosion of the London based practice of re-hypothecate client’s collateral.
As the hearing of Corzine proceeds today, it becomes all the more apparent, that this was a huge investment bet that failed (like LTCM), with counterparties pulling their funds, putting the firm in a liquidity squeeze, and eventually bankruptcy.[1] The unfortunate effect of MS Global’s collapse was that client funds were compromised in the final days of the collapse, but before it was put in bankruptcy.[2] How this happened and who is responsible for this calamity remain to be clarified. But as one of the congressmen noted today … this is yet another example of the financial industry leveraging ordinary people’s monies.
Before Corzine came in, MS Global was pretty dull primarily a broker firm, with relatively modest income from commissions only. Under Corzine’s leadership (which lasted only eighteen months) MS Global, which became more of a broker-dealer.[3] The exposures to European sovereigns (increasing from 1 to 6 billion dollars during 2011) were intended to boost the income of MS Global.[4] Unfortunately this huge bet went wrong and led to the annihilation of a 230 year old company and huge losses for a large numbers of farmers which trusted their money were safe in the client accounts.
[1] As one congressman noted, can we regulate away “greed, incompetence and fraud” or could something like this happen even with better regulation? Corzine noted that the failure was rather the result of bad judgments and a complex business model.
[2] This was different from the Lehman case, where client funds were made whole.
[3] MS Global also became a primary dealer with the NY Fed earlier this year.
[4] According to an earlier WSJ report … “Europe wouldn’t let these countries go down,” Mr. Corzine, who is also chairman of MF Global, told another executive at the New York City company early this year. When the lower-ranking official suggested that the trade was too big, Mr. Corzine brushed the concerns aside, responding that his career on Wall Street and in politics made him confident about the bets.
This is the show everybody has been waited for all week. The previous democratic senator, governor, and CEO of Goldman Sachs is appearing before the Agricultural Committee to respond to question related to the 8th largest bankruptcy in US history, of Global MS. Corzine’s written testimony is posted here.
For more coverage, see: Rolling Stone Magazine New York Times Deal maker Reuter
Financial Stability News 