Saturday, June 25, 2011

Yes, I am a prophet.

Below is something I posted to Facebook on October 30th, 2008. Those of you who were in that 1000+ series of messages that lasted over three years can scroll up (for about 20min) and find it in context of an election and financial crisis. I won't edit it or remove any of my rantier bits. Be patient with my grammatical errors and exuberance. Of particular importance is the exposure of American money market funds and other bank held assets to a European Banking collapse.

Please be patient and read all of what follows. It is my turn for a conspiracy theory, but I have evidence and nobody is making an effort to suppress it. They're just not advertising it either.

You want your mind blown, well its 10:30 and I'm a little drunk. Europe is f***ed. No, really they're royally screwed. Iceland has been completely bankrupted by this crisis and they're indicative of the rest of the European marketplace. Iceland's problem was that their banks were worth 14 times more than the GDP of Iceland itself. As opposed to America, where out banks are a relatively modest portion of our GDP, in Europe only the UK has a GDP larger than the market capitalization of their banks. Germany? Yeah their banks are worth twice their GDP. It is the same across the board. If these banks fail we have several problems. There is no equivalent to the FDIC in Europe. In the US the government takes over but in Europe there is no legal system set up to handle the collapse of a bank. To complicate things even farther, the banks operate multinationally. When a German bank fails they will have accounts from individuals all over Europe. Normally this wouldn't be a huge deal. some special rule would be written up, the various governments involved could negotiate a way to help those who lost their money. 

But what happens if banks start to fail across the board? And keep in mind that there aren't nearly as many banks in Europe as there are in the US. We have 8,500 banks. There are about 20, no joke 20 banks in the EU. Those of you who were in Oxford last year, think about it, did you see an Oxford regional? First Bank and Trust of Oxfordshire? Nope. The rules are different over there. So back to the crisis. But what happens if banks start to fail across the board? Not very likely you say? Touche! Extremely likely I say. Behold! 
http://www.nakedcapitalism.com/2008/10/currency-crisis-is-gathering-storm.html 
"The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.

They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe (Present James here, that also means Greece!), Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime (our housing bust) and Alt-A (the credit problem and what ultimately screwed AIG) debacles."

Europe is in a position where banks will be failing left and right. Who will bail them out? Not their home countries. They don't have the money. To understand the scope of just their exposure to emerging market risk, nevermind any other losses they may sustain as a result of the global recession, lets turn back to the article: 

"Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall."

So what happens when Europe cannot bail itself out as the US has and can continue to do? The implications are scary. This is how wars begin. This is how people establish hard line communist governments. This is how revolutions occur. Thank God for the Federal Reserve. You see, they've established unlimited, unlimited, UNLIMITED, lines of credit to numerous European nations. These lines were expanded yesterday (Wed. but you didn;t hear about it b/c the rate cuts dominated news coverage). Here's the original release:http://federalreserve.gov/newsevents/press/monetary/20081013a.htm

Thats right folks, the US is bankrolling the central banks of Europe and some Asian and South American countires. Talk about your redistributions of wealth. Here's something else, the Federal Reserve only had ballance sheets of $800bn before the bailout and then got $700bn in the bailout. So in total thats $1.5trillion. Yet they've guaranteed more than $3trillion, between the banks, the mutual funds, and all the othet things the Fed now stands behind.

One might ask, why take that step at all? We have big enough problems of our own, let the Europeans figure it out themselves. Well it seems the Fed is pretty well informed, as the ought to be. The Fed isn't interested in politics, they don;t care about propping up Governemnts. Their job is to maintian the stability of our Economy. So, the must be some way in which a massive bank collapse in Europe will drastically affect the US economy. It too some digging but I have figured out how. 

Here it is: http://personal.fidelity.com/misc/ekits/pdf/55-DFH.pdf (Present James again, wow, the link stays up to date - the data are from the current, 6/23, holdings of fidelity's moneymarket funds! Yes, those figures are in the hundreds of millions and tens of billions.)

When you buy into a money market account, the banks call it cash but that isn't quite what it is. It is in effect a highly dilluted pool of diverse holdings. The idea is that you spread the risk around. Sure you might not make a ton of money but the point isn't profit its security. You need to know when you go and get your money that it will be there. Take a look at the Holdings for the Fidelity Cash Reserves. Check page 4 under the heading "Repurchase Agreement" and then further down under "Yankee Comercial Paper" and "Yankee Dollar CD". More than 40% of this money market fund is European bank holdings. 

But James, thats just 1 fund. Well folks, it is the largest American Money Market fund, which means that it is probably a good model for the Money Market funds that other banks in the US have. Indeed, at the largest Money Market it is a good statistical model for all US Money Markets. And where do you think the US banks are putting all that money they are getting from the Bailout? Well we know from the TED spread that they aren't lending much of it so it goes to ....... Cash Reserves! Not to mention that an untold number of 401k's, pension plans, and other 'secure' kinds of investments are largely in Money Markets.

A viscious cycle. A damned vicious cycle. So we're stuck bailing out Europe, so that we don't have to bail ourselves out again. 

Last question, how do you think Congress is going to react when they find out how much money the Fed has been throwing around? 1. Congress is going to be pissed they aren't getting a piece of the action. 2. Congress is going to be pissed that they don't have authority over what the Fed does. 

The Federal Reserve Bank is not going to be an indepenent entity for very long. I know that the Fed is basically central planning at the highest level of buisness but at least it is planning by a limited set of very, very smart men. I mean Bernake did run the economics dpt at Princeton and was CEO of Goldman Sachs. Do we really want an act of congress every time the Fed has to act? Do we really want congress in control of our interest rates?

We're all screwed. Oh and I am a little worried after seeing how Phillies fans tore up the city after the World Series. What happens after the Election? Lastly, lets see what the guy who discovered Fractal Geometry, invented Chaos Theory, and his protoge have to say about how unknowably screwed we are: http://www.pbs.org/newshour/video/module.html?mod=0&pkg=21102008&seg=5

So, yeah. A little bit ranty and definitely apocalyptic. But I was right about our exposure to European bank debt. I was right about how weak Europe's banks were. And I was right that the Fed is providing quiet back-door bailouts to the ECB in order to keep German, French, and Swiss banks solvent. We're at that point again. The biggest banks in Europe are probably insolvent if Greece defaults. That's why they keep getting deals from the EU/ECB. No matter how much saber rattling goes on before hand, northern Europe has to cave or they are stuck having to bailout their own banks. And they simply don't have the money to do that.

Article from the present which makes the same point I made in 2008:

RETURN-FREE RISK.” That’s just one of the turns of phrase that Jim Grant has tossed off over the years as editor of the invaluable Grant’s Interest Observer and as Barron’s most illustrious alum.
The term could well apply to major money-market funds, which provide yields barely visible to the naked eye but could suffer collateral damage from any potential fallout from a possible default by Greece. Grant was way out ahead of the crowd by pointing out in his latest issue, dated June 17, that the five largest money funds, Fidelity Cash Reserves (FDRXX), Vanguard Reserve Prime (VMRXX), Fidelity Institutional Money Market Market Portfolio (FNSXX), Fidelity Institutional Prime Money Market Portfolio (FIPXX) and BlackRock Liquidity TempFund (TMPXX) held an average of 41% of their assets in European banks’ short-term debt. Fitch Ratings added in a report last week that the top 10 money funds, with assets of $755 billion, had about half their assets in European bank liabilities.
It’s doubtful that any money-fund holder has forgotten the aftermath of the Lehman Brothers bankruptcy in 2008, which caused The Reserve Fund, a pioneer in the field, to “break the buck” — have its net-asset value fall below $1 a share — owing to its holding of Lehman commercial paper. Since the crisis, the Securities and Exchange Commission has mandated money funds hold at least 10% of their assets in paper that can be converted into cash in one day and 30% in paper due in 60 days or less (or redeemable within seven days).
European Central Bank President Jean-Claude Trichet last week declared the financial risk situation was “code red.” That was his characterization of an assessment by Europe’s new risk monitor, the European Systemic Risk Board, that the highly interconnected financial system inside and outside the European Union means debt woes of several countries could spread rapidly if conditions worsen, the Associated Press reported.
Given that, money funds with European exposure and yielding about 0.01% would seem the very embodiment of return-free risk. But it seems the generals have prepared well for the last war, so 2008-style runs aren’t likely.

 http://online.barrons.com/article/SB50001424053111904548404576397770227805578.html

Thank goodness we've already established a system by which US money market funds are now insured by the Federal Government; otherwise, they'd have to hold assets that really were safe. Just remember, when Europe blows up, the resulting debt gets added to the government's deficit and therefore your future tax burden. But hey, some bankers got rich.

Wednesday, June 22, 2011

More than you'll ever want to know about Michelle Bachmann

The Money Quote:

"In modern American politics, being the right kind of ignorant and entertainingly crazy is like having a big right hand in boxing; you've always got a puncher's chance. And Bachmann is exactly the right kind of completely batshit crazy. Not medically crazy, not talking-to-herself-on-the-subway crazy, but grandiose crazy, late-stage Kim Jong-Il crazy — crazy in the sense that she's living completely inside her own mind, frenetically pacing the hallways of a vast sand castle she's built in there, unable to meaningfully communicate with the human beings on the other side of the moat, who are all presumed to be enemies."

http://www.rollingstone.com/politics/news/michele-bachmanns-holy-war-20110622#

Sunday, June 12, 2011

On the Proper Domain of Ethical Philosophy

(I drafted this initially on Facebook in response to a post by Laura's boyfriend David.)

I am at once deeply fascinated in and deeply aggravated by ethical philosophy. I spent a considerable amount of time reflecting on it as an undergraduate and would say that it comprises a great deal of the intellectual matter of my novel.

I simply think there's something to be said for the maddeningly simple process surrounding all ethical theories (or moral imperatives, or tablets of stone) which purport to give us some rubric by which to appraise the actions of man in the real world. The process is that these very "rubrics of ought" being proposed are then themselves culled for quality by a separate rubric, a "higher" rubric, which is more fundamental and more intuitive. Thus we find, for instance, that Peter Singer's brand of utilitarianism, though founded on agreeable premises, is impugned for those of its implications which appall the mainstream sensibility (from environmentalism to animal rights to infanticide).

This second rubric, of course, is the public consensus of which moral truths should be taken as vital, or self-evident, or incontrovertible. But what is informing this rubric? And why should we trust it? There is no compelling reason to consider it an objective standard, after all, but just the opposite, as one society's "second rubric" — its ethical givens — are often in conflict with another's. The Middle East comes to mind here, as do the Middle Ages in Europe. Woman's rights come to mind. Slavery, the "sanctity of Muhammad", freedom of expression, imperialism, and so on. Such sensibilities, in other words, are subjective — informed by the promptings and the revulsions of our physiologies; the traumas and the nostalgias of our diverse histories; the assumptions, superstitious and empirical, about the laws and forces governing our physical universe; and the challenges of inhabiting an ever-changing often-perilous planet. The rubric is informed also by the occasional groundswells of religious or political ideology, abstractions by comparison which tend to thrive in direct proportion to how well they address the previous, more fundamental concerns.

This is what irks me about ethical philosophy, which, in my view, belongs to this last category of what I called "abstractions". It often asserts itself as an objective standard, or as something "above" or "beyond" subjectivity, and yet morality begins and ends with the human, the subject, to whom the theory or the God must always answer at the end of the day. Human sensibility is not, therefore, a barometer by which to gauge the merit of moralists' rubrics, but the rubric itself — accountable to nothing higher than the incompatible mores of another, more powerful society. To put perhaps too fine a point on it, the final say in any dispute of fundamental values must be wrested by battle or ballot — by war, in other words, peaceful or calamitous — and not by any merit inherent in the values themselves, since the merit is determined by an individual, or a tribe, or a culture, or a nation subjectively (that is, experientially, biologically, philosophically).

Simply put: Don't remove the moral from the man, lest the man should remove himself from the moral.