naked capitalism

doc holiday says:

A fine metaphorical example of illiquidity.

Anonymous says:

^^^^ skippy

Independent Accountant says:

In 1987 Citigroup added $3 billion to its loan loss reserve for third world debt. I remember looking at Citi’s financials then and concluding Citigroup had been insolvent for years. It took a few years but the Fed was able to “reliquify” the system and keep the big banks afloat. Is Citigroup insolvent today? Almost certainly. That’s part of the Fed’s motivation for suppressing short-term interest rates, to let big banks “ride the yield curve” to solvency. We’ve seen this act before. Only a collapse of the dollar might get in Zimbabwe Ben’s way.

Matt Dubuque says:

Amazing “Letter from Iceland”, wasn’t it?

This article gives some hint of what a hyperdeflationary context would look like, with a few key differences.

An environment where NOBODY, but nobody, has any money.

Zero liquidity. Zero credit.

This article gives an idea of that risk we need to manage.

Fortunately Paul Volcker, who had the courage in 1982 to stand up to Milton Friedman based on the research of the Kansas City Fed and the advice of Wayne Angell, has both the courage and the credibility to help us in the big transition.

The markets correctly trust that Volcker would NEVER countenance a return to inflation and this gives him the credibility to fight deflationary bursts as they are likely to occur.

Matt Dubuque

River says:

Off Topic: 'Iran Switches Reserves To Gold'

'"With the plans of the presidency…the country's money reserves were changed into gold so that we wouldn't be faced with many problems in the future," presidential adviser Mojtaba Samareh-Hashemi was quoted as saying by business daily Poul.'

I noticed that gold trades yesterday were tending to move away from the strong relationship to the dollar that has prevailed for a some time;ie, while the dollar strengthened, gold was doing likewise. That said, one day does not a trend make.

http://in.reuters.com/article/businessNews/idINIndia-36518320081115?rpc=401&

Don says:

"If you hear lawmakers and pundits repeating these like mantras, you can be sure that the financial regulation facelift is off to a bad start. "

A hugely important post on Bloomberg by Susan Antilla if you believe, as I do, that fraud, negligence, and fiduciary mismanagement are more important issues than CDS's, CDO's, complexity, ignorance of risk, etc.:

http://www.bloomberg.com/apps/news?pid=20601039&sid=aroo8dC2qwt8&refer=home

"Listen carefully for these words and phrases as politicians get to work on an overhaul of U.S. financial regulation in the months ahead: “duplicative,'' “balkanized,'' and the twin “quilts'' — “patchwork quilt'' and “crazy quilt.''

If you hear lawmakers and pundits repeating these like mantras, you can be sure that the financial regulation facelift is off to a bad start.

Those are the adjectives often used to describe the role of state securities regulators, the 50 local cops on the securities beat whose presence has long been a thorn in the deregulatory side of the financial industry.

Although the role of state regulators has been derided as wasteful (they regulate something that's supposedly already being regulated), expensive (it costs big bucks to pay lawyers to comply, and even bigger bucks to pay lawyers if you don't comply and get caught) and petty (they're just trying to steal the thunder from the real regulators in Washington), those who support the states see it differently.

“If you take away the states' power, there is only one game in town — the Securities and Exchange Commission,'' says Renee Jones, associate professor of law at Boston College. “That's a risk to investors.''

Yet there's a significant prospect that, amid plans to streamline financial regulation in ways that address the current financial crisis, state regulators might lose some of their power."

Understand this, they look into the treatment of average investors, and please remember the recent performance of the SEC.

“Given this opportunity to change the law, I think they will pounce on this,'' Jones says, referring to members of our sterling financial industry, their lobbyists and various politicians who are always keen to get government at any level to stop badgering business with rules.

It's far more desirable to be regulated by the SEC — four recent reports by the agency's inspector general will help you understand why — than by, say, Texas, where Securities Commissioner Denise Crawford says her underpaid and overworked civil servants find it rewarding “to see the results when bad guys get put in jail.''

“The folks in my office are not looking to go to work for Wall Street,'' says Crawford, drawing a comparison to the well- worn career path that propels smart but underpaid SEC staffers into lucrative jobs defending financial firms.

To get an idea of what she's talking about, go to your favorite Web search engine and plug in “former Securities and Exchange Commission.'' The results are thick with gushing press releases that announce the hiring of regulators by industry."

Good Lord, actual sense. The power of the financial lobby is immense. Exhibit A: TARP.

"The North American Securities Administrators Association, an investor-protection organization made up of 67 state, provincial, and territorial administrators in the U.S., Canada, and Mexico, tallied 2,276 enforcement actions and returned $616 million to investors in 2007, racking up 1,062 years of jail time for offenders who ended up being prosecuted. And that's only a partial tally that excludes 32 members that haven't gotten around to sending NASAA their data.

By comparison, the SEC in its most recent annual reporting period brought 671 enforcement cases and returned more than $1 billion to investors.

It was Kansas that started all this trouble back in 1911, adopting laws to address crooked promoters who fleeced investors in the state. Jones says that every state except for Nevada had enacted similar law — known as “blue sky'' — by the early 1930S.

State regulators in their earliest days didn't have what it took to ward off the Great Depression, though, and Congress passed the Securities Act of 1933, which a year later led to the creation of the SEC as a federal regulator. Thus, there would be two layers of supervision to handle problems in the financial markets, Jones says."

We need a blue sky right now to deal with all these dreadful weather words we've been hearing.

"Business interests have successfully slashed the authority of the states during several rounds of political fighting over the years. Most notably, in 1996 the National Securities Markets Improvement Act, or NSMIA, took away the states' authority to oversee registration and review of public companies whose securities were sold to investors in their jurisdictions.

Even though their powers were reduced, the states roared back. Former New York State Attorney General Eliot Spitzer exposed and punished Wall Street firms for conflicts of interest between investment-banking departments, which underwrote securities sales by public companies, and research departments, which touted the stocks of those clients.

This year, regulators from Massachusetts and 11 other states brought cases against major banks and securities firms that had marketed auction-rate securities to investors as “safe,'' only to see that market collapse. The states negotiated agreements that got customers' money back."

Can't have financial advisers taken to task for lying, exaggerating, etc. It's the system, the complexity, the models, etc. We can't blame human beings for these problems. It gums the system up, and our models include gullible clients.

"The SEC hopped on those auction-rate cases after the tough work already had been done by those crazy-quilt regulation duplicators in the states. Massachusetts, for example, sued UBS AG on June 26 and settled with the firm jointly with other NASAA members and the SEC on Aug. 8.

You would hardly know that, though, to read an Oct. 6 statement by the President's Working Group on Financial Markets at the U.S. Treasury Department, whose research is often cited as a starting point for regulatory overhaul.

“In the past few months, the SEC, with others in law enforcement, have restored liquidity to Auction-Rate Security investors in the largest securities buyback in the nation's history with tens of billions of dollars of liquidity being restored to tens of thousands of investors,'' the group gushed.

It isn't a far stretch to divine that Treasury is looking to downplay the role of the unnamed “others in law enforcement'' who actually did the work.

SEC spokesman John Nester said the agency was involved with the auction-rate case “from the get-go.'' William Galvin, secretary of state of Massachusetts, remembers it differently. “We certainly consulted with the SEC,'' he said. “But the idea that they were leading the charge is absurd.''

And so is the idea of cutting back on what the states are allowed to do in the financial arena. Memo to Congress: if you're looking for talent to run the new regulatory world, skip the SEC. The phone numbers you need are a click away in the records of your state payroll back home."

Looks to me like these state fellows get it, and are doing the heavy lifting. Please understand this: Regulations are one thing, fraud, negligence, and fiduciary mismanagement are another.

Don the libertarian Democrat

lineup32 says:

re-Trade: far too much hand wringing over this issue given the multi-national corp driven economic life we live. Rather more real life problems may at sometime really kill this issue and that is high energy cost causing the cost of moving goods so high that local production is a better alternative. We saw a snip of this during the recent energy run up which will come about again as production falls due to lower prices and higher production costs and of course oil is a finite resource.

Anonymous says:

Doug,

Repeat after me: Gold does not do well in garden variety inflation. Look at the record of the last 25 years. Gold does well in deflation and hyperinflation, in times when people do not want to hold financial assets.

I do not know why that is so hard to understand. Gold and cash substitutes do well in deflation.