Tag Archives: financial crisis

commodities fraud

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The U.S. Senate Permanent Subcommittee on Investigations is investigating too-big-to-fail banks for fraud in manipulating commodities markets:

One focus for the subcommittee is the management of Detroit-area metal warehouses run by Metro Trade Services International, the largest U.S. warehouse company certified to store aluminum warranted by the London Metal Exchange for use in settling trades. Since Goldman bought Metro in 2010, Metro warehouses have accumulated up to 85 percent of the U.S. LME aluminum storage market.

Since Goldman took over the warehouses, the wait to withdraw LME-warranted metal has increased from about 40 days to more than 600 days, reducing aluminum availability and tripling the regional premium for storage and delivery costs.

The investigation revealed a number of previously unknown details about these deals: that Goldman’s warehouse company paid metal owners to engage in “merry-go-round” deals that shuttled metal from building to building without actually shipping aluminum out of Metro’s system; that the deals were approved by Metro’s board, which consisted entirely of Goldman employees; and that a Metro executive raised concerns internally about the appropriateness of such “queue management.”

Goldman didn’t just store aluminum; it was involved in massive trades of aluminum at the same time its warehouse operations were affecting aluminum availability, storage costs, and prices.

Even more fun than this, if you dig into the long report you can learn that Goldman Sachs is operating a “physical uranium business”, possibly without people qualified to do this:

Goldman’s involvement with physical uranium began with a 2008 proposal by GS Commodities to get into the business of trading physical and financial uranium products and processing rights.688 In 2009, Goldman purchased Nufcor, and expanded its business over the next five years, resulting in Goldman’s buying millions of pounds of uranium, controlling inventories of physical uranium at storage facilities in the United States and Europe, and becoming a long term supplier of physical uranium to nine utilities with nuclear power plants. Because no employees who conducted Nufcor’s business joined Goldman after the sale, Goldman employees ran the business.

This is great Bond villain material. Except Bond would probably be on the banks’ side, as long as they were just trying the rip the world off financially on behalf of the empire, rather than actually blow anything up.

World Economies

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According to NPR, the U.S. economy has picked up, which is nice.

In the most recent quarter, this country grew at 3.5 percent — a very robust pace for a mature economy.

In the United States, the stock market is booming, budget deficits are melting away, corporate profits are breaking records and the unemployment rate is falling, down to nearly half the level set five years ago.

U.S. success shows “the resilience and determination of the American people,” Lew said. “It also reflects the ease of starting businesses, our highly competitive product markets, and the ability to reap rewards from entrepreneurship.”

In fact, the U.S. is doing so well that we have resumed wagging our fingers at other countries.

Meanwhile, Japan’s economy is stuck, with its inflation-adjusted growth rate running at less than 1 percent over the past decade. Europe may be on the brink of its third recession in six years.

Lew says that to grow, countries need a “comprehensive policy approach” that involves not only better fiscal and monetary decisions, but “structural” changes. When he talks about “structure,” he’s referring to the policy frameworks that hold back growth.

This sounds pretty good. We should also remind ourselves to have a comprehensive policy approach to not crash the world financial system again.

world economic slowdown

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Here’s a laundry list of world economic problems from CBS News:

The focused has been on Germany over the past week, the weakly beating heart of the still-troubled eurozone, where industrial production, factory orders and export activity all posted the worst results since early 2009 amid chatter that the country is on the verge of falling back into a technical recession.

Separately, France is having budget woes. And the eurozone debt crisis threatens a comeback as credit rating agencies issue new warnings and the market starts to realize that the European Central Bank can no longer bluff its way out of trouble. It now must step up with a bona fide sovereign bond-buying stimulus program (which could be illegal according to its charter and is unpopular idea with the Germans) after playing at one for more than two years.

Japan is also at risk of falling back into technical recession (GDP growth already contracted last quarter) as a recent sales tax hike and the negative impact of a very weak yen (higher food, fuel and import costs) pinches consumers.

Japan has been held together by the idea that the Bank of Japan would issue more cheap money stimulus and further slam the yen if the economy faltered. But economists are realizing that a weak yen is hurting more than it’s helping at this point. And given Japan’s massive 227% national debt-to-GDP ratio (vs. around 100% for the U.S.) time is running out.

And in China, the People’s Bank of China is watching as electricity production contracts outright for the first time since early 2009, an anecdotal sign that China’s economy has hit a wall.

The second reason is that the U.S. Federal Reserve is watching as its efforts to merely return monetary policy to a more neutral footing — by bringing to an end the QE3 bond-buying program and looking ahead to the first interest rate hike since 2006 — has resulted in a volatile corporate bond market and a massive rally in the U.S. dollar.

This has crushed commodity prices, tightened credit to foreign economies (many of which have grown dependent on borrowing at low rates in cheap dollars) and threatens to slow U.S. GDP growth by pinching American exports.

It goes on after that…

No mention of root causes here. I keep repeating myself all the time redundantly but some potential root causes, which are not mutually exclusive are (1) the world is still feeling effects of the 2007-8 financial crisis, in a classic depression and loss of demand and confidence scenario, (2) rich people and corporations are driving government policy in their favor to the point that inequality has gotten so bad it has broken our economic system, with the middle class and working class not having enough incentive (i.e. income) to be productive, (3) technology and automation are putting strong downward pressure on middle class and working class wages, (4) climate change and natural capital depletion are starting to be felt in energy and food prices, putting a head wind on economic growth, with “green” technological progress not enough to lessen or reverse environmental impacts, or (5) innovation and technological progress in general have slowed down and are not driving economic growth like they have over the past century or so.

the shifts and the shocks

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The Shifts and the Shocks: What We’’ve Learned —and Have Still to Learn— from the Financial Crisis

Felix Salmon in the New York Times has this to say:

Martin Wolf is as grand and important as an economic journalist can ever become… His is the loudest and foremost voice saying that the global policy response to the crisis was far too timid; that it all but ensures we will have an even worse crisis down the road; and that unless we start implementing extreme measures today, we will be running headlong into catastrophe.

According to Salmon, his (Wolf’s) solution to the problem is the following:

  1. “central banks should target a much higher rate of inflation”
  2. “abolishing ­fractional-reserve banking, which would give governments the job of directly creating all the money in the economy”
  3. “attempts to prevent corporations from accumulating cash”
  4. “an end to the tax-deductibility of interest payments”
  5. “a scaling back of international banks”
  6. “a mass refinancing of European sovereign debt into eurobonds”
  7. “a radical change in debt contracts to make them much more equitylike”

Okay. I don’t know. I don’t really have the expertise to agree or disagree. All this seems aimed at giving the government and/or central bankers more direct control over the money supply. But do the experts really know exactly what the money supply should be? If we give the keys to the printing press over to the politicians, I think we know what will happen. If we give them to a handful of “experts”, I’m not sure we know what will happen, except that the world economy will be at the mercy of whatever theories they happen to believe in. That leaves the ebb and flow of individual banks setting interest rates based on supply, demand, and greed, with the government trying to nudge the system back toward balance if it starts to get out of balance.

It doesn’t seem like a great system, but if we experiment with something different and it causes the masses to lose our faith that money is a real thing (because it is only because we think it is), that would be hard to recover from. So I don’t know, maybe higher capital requirements but short of 100%, complete transparency in trading of derivatives and other weird forms of risk trading, and a constitutional amendment (in the U.S. anyway) to ban campaign contributions or political speech of any kind by financial corporations. The individual human persons who work for those corporations could still engage in political speech, of course, but only as private citizens using their own time and money.

Bill Gross on the new normal

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In this 2009 essay, after an incomprehensible and irrelevant introduction involving golf, Bill Gross from PIMCO gives us his reasons why we may be in a “new normal” of lower economic growth:

  1. American-style capitalism and the making of paper instead of things. Inherent in the “great moderation” of the past 25 years was the acceptance of a sort of reverse mercantilism. America would consume, then print paper assets and debt in order to pay for it. Developing (and many developed) countries would make things, and accept America’s securities in return. This game is over, and unless developing countries (China, Brazil) step up and generate a consumer ethic of their own, the world will grow at a slower pace.
  2. Private vs. public-driven growth. The invisible hand of free enterprise is being replaced by the visible fist of government, a temporarily necessary, but (if permanent) damnable condition itself in terms of future growth and profits. The once successful “shadow banking system” is being regulated and delevered. Perhaps a fabled “110-pound weakling” may be an exaggeration of where our financial system is headed, but rest assured it will not be looking like Charles Atlas anytime soon. Prepare to have sand kicked in your face, if you believe you are a “child of the bull market!”
  3. Global economic leadership. It’s premature to award the 21st century to the Chinese as opposed to the United States, but if the last six months have been any example, China is sort of lookin’ like Muhammad Ali standing over Sonny Liston in 1964 yelling, “Get up, you big ugly bear!” Not only has China spent three times the amount of money (relative to GDP) to revive its economy, but it has managed to grow at a “near normal” 8% pace vs. our “big R” recessionary numbers. Its equity market, while volatile and lightly regulated, has almost doubled in twelve months, making ours look like that ugly bear instead of a raging bull.
  4. United States housing and employment. Old normal housing models in the U.S. encouraged home ownership, eventually peaking at 69% of households as shown in Chart 1. Subsidized and tax-deductible mortgage interest rates as well as a “see no evil – speak no evil” regulatory response to government Agencies FNMA and FHLMC promoted a long-term housing boom and now a significant housing bust. Housing cannot lead us out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest. The model has been broken if only because homeownership is declining, not rising, sinking to perhaps a New Normal level of 65% as opposed to 69% of American households.

As usual, no acknowledgment that ecological limits could play a role. If they are playing a role, my thought is that the boom times leading up to 2007 could easily have masked a weaker, but more permanent, signal being sent to us by our planet. Then following the bust, that signal could make a recovery harder than it should have been if we were simply reverting to a long-term mean. So during each boom, we forget about the underlying signal, then after each bust it gets harder and harder to recover to the previous trend, and we scratch our heads as to why. If my hypothesis is correct, eventually there will come a bust that we don’t recover from. Maybe this is even it – there is essentially no growth in Europe or Japan, and we are celebrating a very low growth rate in the U.S. It will be difficult to discern the long-term signal from the noise in real time. In hindsight, it may be obvious.

Lords of Finance

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Lords of Finance: The Bankers Who Broke the World

This book was kind of a hard read, but I’m glad I read it. My favorite part of the book was the last five pages, particularly these quotes explaining just how bad the Depression really was.

Anyone who writes or thinks about the Great Depression cannot avoid the question: Could it happen again? First it is important to remember the scale of the economic meltdown that occurred in 1929 to 1933. During a three-year period, real GDP in the major economies fell by over 25 percent, a quarter of the adult male population was thrown out of work, commodity prices fell in half, consumer prices declined by 30 percent, wages were cut by a third. Bank credit in the United States shrank by 40 percent and in many countries the whole banking system collapsed. Almost every major sovereign debtor among developing countries and in Central and Eastern Europe defaulted, including Germany, the third largest economy in the world. The economic turmoil created hardships in every corner of the globe, from the prairies of Canada to the teeming cities of Asia, from the industrial heartland of America to the smallest village in India. No other period of peace time economic turmoil since has even come close to approaching the depth and breadth of that cataclysm…

[The Great Depression was] a crisis equivalent in scope to the combined effects and more of the 1994 Mexican peso crises, the 1997-98 Asian and Russian crises, the 2000 collapse in the stock market bubble, and the 2007/8 world financial crisis, all cascading upon one and other in a single concentrated two-year period. The world has been saved in part from anything approaching the Great Depression because the crises that have buffeted the world economy over the past decade [writing in 2009] have conveniently struck one by one, with decent intervals in between.