Why Regulation Is Good For Growth

With tongue firmly in cheek, this author mocks Paul Krugman, the Nobel Laureate from Princeton who really believes his own bull$hit version of Keynesian economics.

http://www.zerohedge.com/news/why-regulation-good-growth

Commodity Bubbles Caused by Speculators Need Intervention, UN Agency Says

The UN is now trying to regulate human nature.  If they're going to target speculators, don't leave out our central and commercial bankers.  It's open season for market manipulation.

http://www.bloomberg.com/news/2011-06-05/commodity-bubbles-caused-by-speculators-need-intervention-un-agency-says.html

Volcker spares no one in broad critique

http://blogs.wsj.com/economics/2010/09/23/volcker-spares-no-one-in-broad-critique/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wsj%2Feconomics%2Ffeed+%28WSJ.com%3A+Real+Time+Economics+Blog%29

Former Federal Reserve Chairman Paul Volcker scrapped a prepared speech he had planned to deliver at the Federal Reserve Bank of Chicago on Thursday, and instead delivered a blistering, off-the-cuff critique leveled at nearly every corner of the financial system.

Standing at a lectern with his hands in his pockets, Volcker moved unsparingly from banks to regulators to business schools to the Fed to money-market funds during his luncheon speech.

He praised the new financial overhaul law, but said the system remained at risk because it is subject to future “judgments” of individual regulators, who he said would be relentlessly lobbied by banks and politicians to soften the rules.

“This is a plea for structural changes in markets and market regulation,” he said at one point.

Here are his views on a variety of topics.

1) Macroprudential regulation — “somehow those words grate on my ears.”

2) Banking — Investment banks became “trading machines instead of investment banks [leading to] encroachment on the territory of commercial banks, and commercial banks encroached on the territory of others in a way that couldn’t easily be managed by the old supervisory system.”

3) Financial system — “The financial system is broken. We can use that term in late 2008, and I think it’s fair to still use the term unfortunately. We know that parts of it are absolutely broken, like the mortgage market which only happens to be the most important part of our capital markets [and has] become a subsidiary of the U.S. government.”

4) Business schools — “We had all our best business schools in the United States pouring out financial engineers, every smart young mathematician and physicist said ‘I don’t want to be a civil engineer, a mechanical engineer. I’m a smart guy, I want to go to Wall Street.’ And then you know all the risks were going to be sliced and diced and [people thought] the market would be resilient and not face any crises. We took care of all that stuff, and I think that was the general philosophy that markets are efficient and self correcting and we don’t have to worry about them too much.

5) Central banks and the Fed — “Central banks became…maybe a little too infatuated with their own skills and authority because they found secrets to price stability…I think its fair to say there was a certain neglect of supervisory responsibilities, certainly not confined to the Federal Reserve, but including the Federal Reserve, I only say that because the Federal Reserve is the most important in my view.”

6) The recession — “It’s so difficult to get out of this recession because of the basic disequilibrium in the real economy.”

7) Council of regulators — “Potentially cumbersome.”

8) On judgment — “Let me suggest to you that relying on judgment all the time makes for a very heavy burden whether you are regulating an individual institution or whether you are regulating the whole market or whether you are deciding what might be disturbing or what might not be disturbing. It’s pretty tough and it’s subject to all kinds of political and institutional blockages as well.”

9) On procyclicality — “It’s the hardest thing as a regulator in my opinion…when things are really going well, the economy is going well, the market is not disturbed, but you see developments in an institution or in markets that is potentially destabilizing, doing something about it is extremely difficult. Because the answer of the people in the markets is, ‘what are you talking about? Things are going really well. We know more about banking and finance than you do, get out of my hair, if you don’t get out of my hair I’m going to write my congressman.’”

10) Risk management — “Markets that are prone to excesses in one direction or another are not simply managed under the assumption that we can assume that everybody follows a normal distribution curve. Normal distribution curves — if I would submit to you — do not exist in financial markets. Its not that they are fat tails, they don’t exist. I keep hearing about fat tails, and Jesus, it’s only supposed to occur every 100 years, and it appears every 10 years.”

11) Derivatives — “I’ve heard so many stories about how important” derivatives are but “there doesn’t seem to be much doubt that the creation of derivatives has far exceeded any pressing need for hedging.”

12) Money market funds — “Money market funds have encroached so much on the banking market. They are nothing, in my view, but a regulatory arbitrage. The purpose that they serve in handling payments and short term paper is a commercial banking function” but they don’t hold the capital or face the regulation of banks.

13) The Fed and Dodd-Frank — Volcker said it was a “miracle” that despite all the criticism aimed at the Fed the central bank “came out with enhanced regulatory authorities rather than reduced regulatory authorities.”

CFTC Commissioner Bart Chilton on financial regulation

http://www.washingtonpost.com/wp-dyn/content/video/2010/07/29/VI2010072902523.html

In this interview, he sounds serious in implementing regulation of the derivatives markets. What's also encouraging is his enthusiasm for eliminating fraud and manipulation in the commodities exchanges, including removal of exemptions from position limits for speculators. Hopefully, this will level the playing field and promote efficient markets and price discovery.

Expats renouncing US citizenship

Expatriates renouncing their US citizenship will be a growing trend.

http://www.nytimes.com/2010/04/26/us/26expat.html?hp

Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship.

Anecdotally, frustrations over tax and banking questions, not political considerations, appear to be the main drivers of the surge. Expat advocates say that as it becomes more difficult for Americans to live and work abroad, it will become harder for American companies to compete.

American expats have long complained that the United States is the only industrialized country to tax citizens on income earned abroad, even when they are taxed in their country of residence, though they are allowed to exclude their first $91,400 in foreign-earned income.

Gensler - CFTC Chairman of the people?

I've chronicled CFTC Chairman Gary Gensler's attempts to increase transparency in futures markets, specifically in derivatives. One proposal is to transfer over-the-counter trading of derivatives into an exchange, where price discovery is more transparent. He is targeting the energy complex, particularly crude oil. We'll see if he ratchets up regulation against price manipulation in the precious metals sector.

http://www.bloomberg.com/apps/news?pid=20601109&sid=a3OkrdITAZtA&pos=10

New York Federal Reserve Bank

The term secret banking cabal is appropriate in describing the New York Federal Reserve Bank in its role of bailing out insurer AIG.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aaIuE.W8RAuU

That the New York Fed, a quasi-governmental body, was able to push around the SEC, an executive-branch agency, deserves a congressional hearing all by itself.

Later, when it became clear information would be disclosed, New York Fed legal group staffer James Bergin e-mailed colleagues saying: “I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals -- too many counterparties, too many lawyers and advisors, too many people from AIG -- to keep a determined Congress from the information.”

Think of the enormity of that statement. A staffer at a body with little public accountability and that exists to serve bankers is lamenting the inability to keep Congress in the dark.

This belies the culture of secrecy obviously pervasive within the New York Fed. Committee Chairman Edolphus Towns noted during the hearing that the bank initially refused to disclose even the names of other banks that benefited from its actions, arguing this information would somehow harm AIG.

Now, I’m not saying Congress should be meddling in interest-rate decisions, or micro-managing bank regulation. Nor do I think we should all don tin-foil hats and start ranting about the Trilateral Commission.

Yet when unelected and unaccountable agencies pick banking winners while trying to end-run Congress, even as taxpayers are forced to lend, spend and guarantee about $8 trillion to prop up the financial system, our collective blood should boil.

Financial regulation

According to Jim Rogers, regulators caused the financial crisis, not lack of regulation.

Ben Bernanke on the housing bubble

http://www.businessweek.com/news/2010-01-04/bernanke-says-regulation-came-too-late-to-curb-housing-bubble.html

Federal Reserve Chairman Ben S. Bernanke said low central bank interest rates didn’t cause the housing bubble of the past decade and that better regulation would have been more effective in curbing the boom.

Stunning. This is the same guy who totally missed the bursting housing bubble. And now he's absolving himself of any blame.

IT infrastructure investments

Information technology (IT) infrastructure investments by Wall Street investment firms are approaching $3.6 billion annually. By contrast, the U.S. Commodities Future Trading Commission (CFTC) has an annual IT budget of $23 million--which makes it difficult for them to monitor and regulate derivatives trading. Their servers, bandwidth pipes, storage, and overall IT infrastructures are slow, old, inadequate, and obsolete.

It's analogous to highway patrol squad cars having a top speed of 160 mph, rendering them impotent to catch speeders averaging 1000 mph. The software algorithms and quantitative analysis investment firms perform are fast enough (and getting faster) to stay ahead of the watchdogs.

Financial derivatives are useful in hedging strategies and increasing potential returns on investment, but they can also be weapons of massive financial destruction when leverage is abused. And algorithms can spin out of control when asset bubbles burst. The race to be ahead of everyone else sometimes causes the mutual destruction of algorithms gone bad, as self-fulfilling negative outcomes beget other larger losses.

The regulatory path has become increasingly futile as Wall Street computing capabilities increase geometrically with Moore's Law.

Free market proponents epouse minimum regulation, with a mantra of caveat emptor, but cases of fraud and market manipulation should be regulated and prosecuted to the full extent of the law. Rigged markets and lack of transparency hurt markets long-term, as investor distrust of manipulated markets cause participants to stop trading. Without investors, markets disappear.

Porter Stansberry on the "role" of government

This rant needs no introduction.

I'd like to make you a business offer. Seriously. This is a real offer. In fact, you really can't turn me down, as you'll come to understand in a moment...

Here's the deal. You're going to start a business or expand the one you've got now. It doesn't really matter what you do or what you're going to do. I'll partner with you no matter what business you're in – as long as it's legal. But I can't give you any capital – you have to come up with that on your own. I won't give you any labor – that's definitely up to you. What I will do, however, is demand you follow all sorts of rules about what products and services you can offer, how much (and how often) you pay your employees, and where and when you're allowed to operate your business. That's my role in the affair: to tell you what to do.

Now in return for my rules, I'm going to take roughly half of whatever you make in the business, each year. Half seems fair, doesn't it? I think so. Of course, that's half of your profits. You're also going to have to pay me about 12% of whatever you decide to pay your employees because you've got to cover my expenses for promulgating all of the rules about who you can employ, when, where, and how. Come on, you're my partner. It's only "fair."

Now... after you've put your hard-earned savings at risk to start this business and after you've worked hard at it for a few decades (paying me my 50% or a bit more along the way each year), you might decide you'd like to cash out – to finally live the good life.

Whether or not this is "fair" – some people never can afford to retire – is a different argument. As your partner, I'm happy for you to sell whenever you'd like... because our agreement says, if you sell, you have to pay me an additional 20% of whatever the capitalized value of the business is at that time.

I know... I know... you put up all the original capital. You took all the risks. You put in all of the labor. That's all true. But I've done my part, too. I've collected 50% of the profits each year. And I've always come up with more rules for you to follow each year. Therefore, I deserve another, final 20% slice of the business. Oh... and one more thing...

Even after you've sold the business and paid all of my fees... I'd recommend buying lots of life insurance. You see, even after you've been retired for years, when you die, you'll have to pay me 50% of whatever your estate is worth. After all, I've got lots of partners and not all of them are as successful as you and your family. We don't think it's "fair" for your kids to have such a big advantage. But if you buy enough life insurance, you can finance this expense for your children. All in all, if you're a very successful entrepreneur... if you're one of the rare, lucky, and hard-working people who can create a new company, employ lots of people, and satisfy the public... you'll end up paying me more than 75% of your income over your life. Thanks so much.

I'm sure you'll think my offer is reasonable and happily partner with me... but it doesn't really matter how you feel about it because if you ever try to stiff me – or cheat me on any of my fees or rules – I'll break down your door in the middle of the night, threaten you and your family with heavy, automatic weapons, and throw you in jail. That's how civil society is supposed to work, right? This is Amerika, isn't it?

That's the offer Amerika gives its entrepreneurs. And the idiots in Washington wonder why there are no new jobs...

The Warning

In a new DVD, the origins of last year's financial crisis is exposed. Our nation's leaders demonized the top official of the commodity futures exchanges, Brooksley Born, former head of the Commodity Futures Trading Commission (CFTC). She attempted to regulate the over-the-counter (OTC) derivatives market, which ultimately caused the economic meltdown and financial crisis in 2008. In hindsight, she was eerily prescient, even against a backdrop of naysaying government officials who still rule the roost. Instead of preventing it, former Fed Chairman Alan Greenspan, former Treasury Secretary Robert Rubin and current National Economic Council Director Lawrence Summers caused the financial crisis by allowing derivatives traders to run amuck. Lauded as financial heroes, they actually enabled these weapons of financial mass destruction to fluorish, instead of reeling them in. Unfortunately, these same players and their financial progeny haven't fixed the structural problems, and another financial crisis is looming. The same perps who got us into this mess in the first place are back again in government and at leading banks trying to undo it. Good luck to us all.

http://www.pbs.org/wgbh/pages/frontline/warning/view/

In The Warning, veteran FRONTLINE producer Michael Kirk unearths the hidden history of the nation's worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008.

"I didn't know Brooksley Born," says former SEC Chairman Arthur Levitt, a member of President Clinton's powerful Working Group on Financial Markets. "I was told that she was irascible, difficult, stubborn, unreasonable." Levitt explains how the other principals of the Working Group -- former Fed Chairman Alan Greenspan and former Treasury Secretary Robert Rubin -- convinced him that Born's attempt to regulate the risky derivatives market could lead to financial turmoil, a conclusion he now believes was "clearly a mistake."

Born's battle behind closed doors was epic, Kirk finds. The members of the President's Working Group vehemently opposed regulation -- especially when proposed by a Washington outsider like Born.

"I walk into Brooksley's office one day; the blood has drained from her face," says Michael Greenberger, a former top official at the CFTC who worked closely with Born. "She's hanging up the telephone; she says to me: 'That was [former Assistant Treasury Secretary] Larry Summers. He says, "You're going to cause the worst financial crisis since the end of World War II."... [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.'"

Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives. "Born faced a formidable struggle pushing for regulation at a time when the stock market was booming," Kirk says. "Alan Greenspan was the maestro, and both parties in Washington were united in a belief that the markets would take care of themselves."

Now, with many of the same men who shut down Born in key positions in the Obama administration, The Warning reveals the complicated politics that led to this crisis and what it may say about current attempts to prevent the next one.

"It'll happen again if we don't take the appropriate steps," Born warns. "There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience."

Regulation--or lack thereof

Interesting excerpt from cnbc.

Madoff Whistleblower Markopolos at the Congressional Hearing on the 50 billion dollar ponzi scheme.

Congressman Alan Grayson: Are you familiar with the concept of capture when you are talking about regulation? What is that? Do you know that concept?

Harry Markopolos: Yes. It’s basically when the regulator is in bed with the industry they purport to regulate and do not regulate the industry. In fact, they consider the industry the client, not the public citizens.

Congressman Alan Grayson: And have you seen that in action.

Harry Markopolos: Yes. At the Food and Drug Administration and at the SEC.

More crooks

Stephen Obie, Director of Enforcement with the Commodity Futures Trading Commission (CFTC), which oversees the futures exchanges, is on Fox Business News preaching about transparency, oversight, regulation, and enforcement, and waving his hands on TV like a Dale Carnegie salesman. He's saying how the SEC and investors didn't oversee and perform due diligence on Bernie Madoff.

What's unbelievable is that the commodity pits are rife with manipulation and corruption beyond imagination. Big commercial traders and banks have artificially suppressed prices on the futures markets for years--yet, the CFTC never investigates the commercials--they know where their bread is buttered. Naked shorting makes it possible for the commercials to dampen prices on commodities like gold and silver, with no intention for physical delivery on settlement date. In other words, they'll sell short a futures contract with no inventory, and no intention to deliver at that date. These are phantom contracts, much like the toxic credit default swaps which were uncollaterized. These naked short-selling commercials are selling vaporware, and their massive short positions alone can drive prices lower due to no other reason than market manipulation.

Instead, the CFTC goes after the small-time speculators for minor non-compliance, but they will not reveal who takes large positions on either side of a trade--including the commercials who manipulate the markets. Transparency? What a crock--Fort Knox hasn't had an independent audit for its gold reserves since the early 1950's. Many conspiracy theorists are saying half of what is reported in vaults has either been sold off or leased, yet is still counted.

Eventually, this con game will be exposed when a seller will default, unable to meet physical delivery demands. That day is approaching, as buyers in the middle east are scrambling to buy gold and dealers are unable to meet that demand.