AIG’s Connolly: "Crisis of Capitalism is Upon Us"

It’s one thing to read an apocalyptic alarm from, say, a blogger or a newsletter writer. It’s quite another to see it coming from an analyst at a large institution, in this case AIG.

Bernard Connolly is deeply critical of central banks, not just of their recent actions but also of their very existence, and thinks they have gone from bad to worse with their devotion to inflation targeting. Connolly believes the monetary authorities have gotten themselves in a fix where they lack good options, but he sees raising rates now as the worst move they could make.

An interesting aspect of this piece, particularly for US readers, is Connolly’s observations about the politics of ECB chief Trichet’s moves. He argues that Trichet has gone beyond his mandate, perhaps to force action from the G8.

While I am not certain I agree fully with Connolly’s analysis, I do think the Fed has cut too deeply, too fast. As much as it would be better for rates to be higher, I’m not certain if we can get from A to B right now. The financial system is a mess. For instance, banks for some time have been well behind on foreclosures; it appears this is by design, so as not to alarm the public and shareholders. Similarly, the Bank of England says banks are hoarding cash, another sign of fragility. The Fed somehow hoped that banks would recapitalize in this window of improved market conditions, but they haven’t to even remotely the degree necessary, and the losses in the pipeline are probably worse than the Fed has been willing to admit to itself.

As much as I don’t like coddling banks, my sense is things are far more precarious than they appear. I’d rather see the Fed sit tight for three or four months and see if demand destruction due to high oil prices and a cut in subsidies in developing countries (particularly China, which has said it will lower supports and may take action after the Olympics) puts some downward pressure on oil prices.

Regardless of whether you agree with Connolly’s views, I recommend him for his fresh perspective and trenchant writing style.

From Connolly:

We have lost count of how many notes we have, in the past few years, written with some reference to a crisis of capitalism. Tragically, that crisis is now upon us, and the pace of unravelling seems to be accelerating. The next highly foreseeable development is that there will be a worldwide crimping of central bank independence as the political process increasingly sees — rightly or wrongly, but in our view largely rightly — central banks as having fouled up.

The yob culture of Britain’s streets seems to have spread to several of the central banks. Those banks are behaving like gangs of brutish, feral fifteen-year-olds who egg each other on, claiming “respect”, by knocking down elderly passers-by and kicking the life out of them. So far, governments have reacted…by saying that we have to let these young people express themselves. But the tide may be turning…

The ultimate fons et origo of the present mess is, arguably, the very existence of central banks, for that existence is a token of a decision taken by society, in virtually all countries, that financial risk must be at least to some extent socialised and that central banks are necessary to prevent or alleviate financial crises. Moral hazard is thus inherent in all, or virtually all, our societies. But the proximate reason for the mess, ironically enough, is that central banks have reinterpreted their mission, largely perversely, and have fallen prey to the totemism of inflation targeting. That totemism is essentially imposing on the world a version of Bundesbank philosophy that is proving highly malignant in the moral-hazard-ridden but innovative and, in most circumstances, beneficial financial system we actually have…

One implication worth stressing from the very outset is that while Trichet told us all last week that he will, if he is allowed to get away with it, impose 1930s-like conditions in the euro-area cads, the Fed has, in its recent pronouncements, come close to saying that it is prepared to impose some aspects of 1930s conditions — and not least a stock market crash — on the US. And while Trichet can argue that he is only doing what the politicians have, through the treaty, told him to do, however stupid or destructive that may be, the Fed will have only itself to blame…. In our note of a month ago, “The Fed: Damned If It Does and Damned If It Doesn’t?”, we argued that while the vicious circle posited by Fisher might well exist, another, and more dangerous, vicious circle would be created if the Fed were to give the impression of being constrained by the dollar…

But who has won the argument in and about the ECB? Our understanding is that Trichet sprang his announcement on surprised ECB Council members at the real Council meeting — the dinner on the Wednesday evening preceding the formal meeting2. We further understand that even those who welcomed Trichet’s announcement — such as Weber — were taken aback by it (though not as taken aback as banks’ exotic rate structures desks, which were ripped up and torn into shreds by the sudden reversal of the shape of the euro curve; one presumes that Trichet did not anticipate the wild movements in the curve, for those movements were very unwelcome from the point view of a global financial system which in some ways looks even more vulnerable than before the Bear Stearns rescue). Many others were appalled by it. Significantly, it seems the Irish said (as we suggested last Friday) they could accept Trichet’s decision, but not this month — in other words, not until after today’s referendum.

Implicitly, what Trichet did at his press conference was something along the lines of, “Forget anything you thought you knew about the euro: it is from now on going to be a hard, Germanic currency. The ECB is the Bundesbank and the euro is the DEM. The value of the euro and the level of interest rates will be no more affected by the fact that countries such a Spain, Portugal, Greece, Ireland and Italy are members of the euro zone than were the dollar and US rates affected by the fact that at various
times countries such as Nicaragua were dollarised.” If Trichet were allowed to get away with that, the status of the euro would be radically transformed. Even more important, Trichet was in effect announcing a coup d’état in EMU. The question of whether the euro would be hard or soft, and whether the ECB would respond to conditions in the area as a whole, to conditions in weak countries or to conditions only in Germany – at bottom, the question of whether France or Germany would
predominate in EMU – was the subject of many years of detailed – and, it has to be said, inconclusive – political discussion and negotiation, though admittedly not politically accountable discussion and negotiation. Now Trichet, a jumped-up civil servant, though admittedly the high priest of the caste of civil servants, or at least of énarques, appears to be saying, “I don’t care about all that: This question is not being decided by my personal diktat, and my decision is in favour of Germany.”

Will Trichet be allowed to get away with it? Does he want to get away with it (recall our suggestion made last Friday that Trichet, who is known to have been worrying about divergence within the euro area for the past couple of years, may in effect have decided to force the politicians to make the decisions about the future of EMU before an uncontrollable economic and financial crisis develops, knowing as he must that the ECB cannot resolve the problems and contradictions now so clearly exposed within it). The stakes are now very high indeed. Lagarde’s implication that the G8 would force Trichet to change his mind represents a very considerable upping of the ante. If the ECB goes ahead and hikes, Lagarde (and Sarkozy) will look foolish. If that were to happen, the rumours that have been swirling for some months, to the effect that Sarkozy might threaten Merkel that France could withdraw from monetary union, might begin to have some substance. But if Trichet backs
down, he will have made a political — though entirely unaccountable — forum, the G8, the arbiter of ECB policy. ECB independence will be gone. Thus the G8 is shaping up to be potentially as climactic as the famous Bath Ecofin meeting of September 1992. Then, the pressures on Schlesinger, and his reaction to them, precipitated the ERM crisis.

What might the line-up at the G8 be? The belief in the market that the US government and the Fed were disconcerted and discommoded by Trichet’s announcement seems credible. For what that announcement did, coming immediately after Bernanke’s comments on the dollar (to which we shall return in Part 2 of this note), was potentially to re-create the conditions of the summer and early autumn of 1987. Then, the market perception that the Fed would be obliged by the Louvre Agreement to support the dollar, by following Bundesbank rate moves, was very definitely a factor ccontributing to
the Wall Street Crash of October of that year (true, the US stock market had gone parabolic in the months preceding the 1987 crash and was thus very vulnerable; but the factors of vulnerability now, though different from those of 1987, are very considerable; more obviously, the parabolic variable recently has been the oil price — a sharp fall in that price would reduce equity vulnerability, but, as noted earlier, we defer substantive discussion of the oil/inflation/dollar/rates/stocks nexus to Part 2).

We suspect that the US, or at least the US government side, will want to make it clear to Trichet (or perhaps in reality to Weber) that it will not look kindly on any attempt by the ECB,…. to push up not just euro rates but dollar rates. Equally clearly, the Italians will side with the French. So, too, will the British government, which has troubles of its own with the turbulent monetary priest of Threadneedle Street. The Canadian government, too, will not wish to endorse an ECB role as global rate-setter. The Japanese — including, we suspect, the BoJ – will have been aghast at what one can consider the collective loutishness of some of the other major central banks. So Trichet and the Germans may well be isolated.

That said, we cannot predict the G8 outcome with any confidence whatsoever. But Lagarde has ensured that its outcome — whichever way it goes – could be dramatic. The politicians will strike back against the central banks, whether at Osaka or later. The central banks (again with the exception of the BoJ, for reasons we hope to develop in a subsequent note) have, in putting the entire global economic and financial system at risk in pursuit of “respect”, over-reached themselves.

Note that this was published prior to the G8 meeting this weekend. The public pronouncements seemed very tame, so it does not appear that the backlash that Connolly hoped for took place.

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  1. Martin

    Inflation in the EMU is at record levels and this guy attacks the ECB for raising rates.
    Germany is one of the countries with lowest inflation inside the EMU, so it is absurd to accuse the ECB of not taking other countries into account, while pure inflation targeting would consistently over about the whole EMU time, including now, mean lower rates, if only Germany would count. That somehow Trichet, a French patriot, has ‘decided’ for Germany, is as well ridiculous.
    I take this accusation, that somehow the ECB follows mostly German interests, instead of focusing on the whole EMU economy, as an anti-German attack either based on envy or on racism.

  2. Stefan

    It is not a crisis of Capitalism. It is a crisis of Fractional Reserve Banking (which eventually will fail with certainty) and the Mixed Economy. Capitalism works if people (i.e. governments) let it work and keep their hands off the markets. Governments should only protect people’s rights, not violate them. Governments should focus on strenghtening individual rights instead of wasting immense amounts of money on regulation and bureaucrasy.

  3. a

    There is so much to dislike.

    “[CBs] have fallen prey to the totemism of inflation targeting.” Negative real rates in the US and zero real rates in the euro zone is “totemism of inflation targeting?” Methinks its more the case of yet another financial economist talking the book of his firm. Yes we are in a crisis, and yes there will be a lot of financial pain. The only questions are who suffers the pain and how much they suffer it. Methinks it should be financial firms who should suffer the most, so I vote with my feet whichever way is contrary to what they want.

    “though not as taken aback as banks’ exotic rate structures desks, which were ripped up and torn into shreds by the sudden reversal of the shape of the euro curve; one presumes that Trichet did not anticipate the wild movements in the curve, for those movements were very unwelcome from the point view of a global financial system which in some ways looks even more vulnerable than before the Bear Stearns rescue” Oh lordy me, the poor exotics desks. So I guess CBs are supposed to ensure that exotics desks do not lose money. And if exotics desks have taken a bet in one direction, then CBs are not allowed to go in the other. What the markets want, the markets get. Does Conolly realize how fatuous he sounds?

    “Implicitly, what Trichet did at his press conference was something along the lines of, “Forget anything you thought you knew about the euro.” Yet another anglo-Saxon economist who takes his inability to predict how the ECB will behave as a failure of the ECB. Most continentals (and I don’t mean economists at continental IB banks, who have drunk the anglo-saxon Kool-Aid long ago) reading the tea leaves knew pretty well that the mandate of the ECB is inflation control, and that inflation has been going up in the eurozone, so that the ECB had a very good chance of increasing rates. Anglo Saxons couldn’t get past the logic of, “Bad growth will lower inflation in the future, so of course the ECB will not increase rates.” Well the Anglo Saxons were wrong (or at least they look like they will be wrong), but instead of admitting their own shortcomings, they blame the ECB.

    “If the ECB goes ahead and hikes, Lagarde (and Sarkozy) will look foolish.” Well it won’t be the first time. Sarkozy has looked ridiculous for better over a year now, so what’s one more foolish feather in his cap?

    “We suspect that the US, or at least the US government side, will want to make it clear to Trichet (or perhaps in reality to Weber) that it will not look kindly on any attempt by the ECB,…. to push up not just euro rates but dollar rates.” Well that’s a bit too bad. The US has lived by the sword of “It’s our currency but your problem” for two generations; now it must fall on that sword as someone is capable of making independant decisions.

    “The public pronouncements seemed very tame, so it does not appear that the backlash that Connolly hoped for took place.” I’m sure his next article will be how the G8 are idiots because they didn’t do what he predicted they would do.

  4. fuguez

    A very good piece. I think that Connolly makes a good assessment of the game going on. However I do not believe his criticism of the ECB is incorrect. I believe that there can really only be 2 outcomes to our credit splurge: Hyper-Inflation or Deflation. Europe understands the first and the US understands the second.

  5. Anonymous

    “Connolly believes the monetary authorities have gotten themselves in a fix where they lack good options, but he sees raising rates now as the worst move they could make.”

    True: they’re in a fix without good options. In a stagflationary Ponzi economy, only one of the symptoms can be treated.

    Weak growth can be addressed with another dose of rate cuts, which will send inflation skying. Or, inflation can be treated with a judicious rate hike, which will kick growth down the stairs.

    Sadly, though, you can’t fix both inflation and low growth at the same time. Or rather, you can, but only with structural reforms (sound currency, prudential lending standards, restraints on government profligacy) which take a long time to implement, if they are feasible at all.

    “Crisis of capitalism” is a tart title, but it’s really a crisis of leveraged crony socialism. Managed democracy coupled with fiat currency offers powerful perverse incentives to continue borrowing, spending and blowing Bubbles. Stagflation, like gout, is a disease that develops after a lifetime of overindulgence (in credit, in the economy’s case).

    Bottom line, this bus is going to be driven over the cliff, whether the driver stomps the brakes, the accelerator, or both at the same time. Please join me in singing “Nearer My God To Thee” …

  6. S

    Trichet is the only grown up on the circuit. This guy’s pen/thoughts has (have) more in common with Germany, namely its totalitarian past, than ECB interest rate policy. Why not just one sentance and save us the read: play ball or else……

  7. Anonymous

    This guy needs to learn to get to the point and stop ranting about things he can’t understand — no wonder AIG is always being busted by SEC for fraud and earnings mang!

  8. albie

    Bernard Connolly sounds like a rat who got caught by the door slamming on his tail just as he was about to escape. Where was all his high mindedness two, three, four years ago….? He is part of the problem, not the solution. He’s sooooo morally outraged…. Awwww….

    Did Trichet hurt his tiny little feelings…..?

    Best regards,


  9. Adrem

    “It’s one thing to read an apocalyptic alarm from, say, a blogger or a newsletter writer. It’s quite another to see it coming from an analyst at a large institution, in this case AIG….” I am afraid I find this observation reeks of intellectual and establishment-minded snobbery. It is a pity because this site is one of the first I turn to, and from which I have garnered a mountain of useful insights and information. It is a pity because these so-called “apocalyptic” sources have proven to be far more prescient than your self-regarding academic, media and financial establishments. If there were many in these arenas who were fully aware of the crisis that was pending they certainly kept it a well-guarded secret. If there is one lesson to be learnt from blogging and websites is that noone has a monopoly of the truth or expertise, and fancy titles do not a prophet make.

  10. etc

    Goldman and Morgan commodities profits

    Bloomberg reports Goldman and Morgan have been making large profits off commodities. Viniar of Goldman said: “`A lot of very smart people have gotten into a lot of trouble or lost a lot of money by getting into the commodities business … [Goldman has a] long history of watching our competitors get into the commodities business at the top of the market.”

    Maybe this means that Goldman and Morgan are biding their time to go short and bet against the hedgies and speculators.

  11. Vijay

    “too deeply, too fast” for what? And why would it be unexpected? Everyone and their dog wants to kibitz on what the right rate should be for the Fed. Here’s a hint, no one knows, least of all a bunch of pseudo economists in white robes manipulating econometric models that have no resemblance to reality. As Ron Paul says, one day we may try something really radical and let the market set the rate of interest, rather than a bunch of politically influenced bureaucrats.

    And check this video out. Bernanke thinks a falling dollar doesn’t effect prices of goods in America. AND THIS GUY IS SETTING INTEREST RATES.

  12. Anonymous

    That totemism is essentially imposing on the world a version of Bundesbank philosophy that is proving highly malignant in the moral-hazard-ridden but innovative and, in most circumstances, beneficial financial system we actually have…

    That, I believe, discredits Connolly entirely. Anyone who thinks that the current workings of the financial systems are “beneficial”, that is, to anyone else but the bankers, is a kook.

    Finance must be dull and boring. It’s a job for accountants and bookkeepers. Finance must not be anything but mere plumping for the economy. Anything else is superfluous and toxic.

  13. Anonymous

    It is an issue of immoral and unethical people like connolly trying to spread blame for their kind’s theft. Central banks are bit players when the driver is poor ,orals and greed.

  14. Anonymous

    Dear Bloggers, I was fortunate enough to work with Bernard for a number of years and we remain close friends. So I felt compelled to leave a comment.

    Since 1998, nobody has provided a better intellectual macro framework, and nobody has both predicted and described this mess better than he. He has never wavered.

    It is disappointing that somebody would have chosen to paste Bernard’s latest work in a generally interesting forum like this one without any underdstanding whatsoever of Bernard’s role at AIG, and indeed, if one is not fortunate enough to be a reader of Bernard’s outstanding work then it is impossible to understand what has been pasted above, or at least put it its proper context. Regrettably, none of you have.

    The irony is that if AIGFP’s now departed management – i.e his bosses – had paid attention to what Bernard started saying repeatedly two years ago, they would not have ended up in such a colossal mess.

    I hate to tell you this but every successful macro hedge fund manager will tell you that Bernard is the best, bar none.

    So will most of the world’s more thoughtful central bankers, of which there are still one or two left.

  15. Yves Smith


    The reason for the comment on Connolly’s tone is that most commentary published by big firms is reviewed and edited and comes out being anodyne.


    The Goldman comment about competitors getting in at the top of the market is HUGELY counterfactual. Goldman bought J. Aron, a commodities broker, at the absolute peak of the market in the early 1980s. I worked on the deal in a very junior capacity, but I did see all the numbers. Even thought that deal in the very long run positioned Goldman well, on any calculation of it as an investment, it was a disaster. It hemorrhaged cash almost immediately, and quite a few staff members were fired.


    We have pointed to the work of Axel Leijonhufvud, Tim Duy, and Richard Alford, who have each offered separate but broadly similar critiques of how the Fed has gone wrong in how it views inflation. That has led to a bias towards an overly lax monetary policy. I suggest in particular you read

  • etc


    point taken regarding goldman knocking its competitors for getting into commodities at the top of the market when it’s done so itself. However, my question was whether the they and other prime brokers plan to wait until their hedgie and other customers get over-extended in commodities, and then short the hell out of the market. And make money like Morgan, Tudor Jones, and Nassim Taleb did with S&P puts in 1987 after institutional investors bought their fill of portfolio insurance, and like Goldman and Paulson did with subprime going short subprime.

    anon 4:12pm,

    The fact that Bernard provides operators excellent analysis on how to manipulate the system says nothing about his ability or desire to tell policy makers how to fix it. If anything it suggests he is talking his book, by promoting the interests of his various clients.

  • Yves Smith

    The element that has been missed in all the heated talk above is whether interest rate increases will produce the desired outcome. I am skeptical that they will. The way interest rate increases reduce inflation is by reducing demand, that is by inducing a slowdown or a recession. Readers will know that I am not opposed to recessions; in fact I think we have to have one because our savings rate is unsustainably low, and any increase in savings (which included reducing debt) means a big fall in consumption, which in turn means recession.

    However, I also think that process is inevitable. The Fed has tried to fight it, and is now so close to ZIRP land that (until the inflation worry) it was unlikely to cut further in the absence of another market panic (not that I approve of that response, I’m just commenting on their behavior).

    Conversely, raising rates works if you choke off excess demand. But the excess demand in the world these days is from overheated emerging markets that are getting excessive monetary stimulus from running dollar pegs and being unable to fully sterilize the dollar purchases they make. So how does increasing interest rates in the EU and the US solve that problem? Now the EU may well have robust enough growth and enough internally driven inflation to warrant a rate increase; I haven’t seen their figures decomposed. But that’s the key analysis: to what extend is inflation really endogenous?

    Nouriel Roubini has argued that the current situation departs from a true stagflationary shock and sees both the risk of deflation in some economies in parallel with inflation in others, which does not lend itself to obvious measures (I suggest you read his full argument if you are inclined to take issue with it; it’s detailed and nuanced).

    I’m perfectly happy to see the economy take pain to get us on a better path in the long run. And the US will probably see higher interest rates if the Fed does nothing simply due to the much higher volumes at Treasury auctions thanks to our every growing budget deficits.

    Further, per the comments in the post, I am not necessarily saying do nothing; I’d prefer the powers that be wait a bit to see if high prices (in this case oil) winds up being the cure to high prices. We won’t see the full effect of demand destruction in the advanced economies for another month or two, and some of the emerging markets (most notably India) only just reduced their fuel subsidies. China is expected to take tougher moves (particularly re oil) post the Olympics, although no one anticipates them to revalue their currency in a more serious way then, which is what really needs to happen.

  • Anonymous

    It’s hard not to see in Connolly a voice of the financial industry whining about the idea that the world might be weaned from the ultra loose financial conditions that dominated the past decade.

    Maybe he profited. But clearly high housing prices hurt people when they have to get in debt for the rest of their lives to buy a 2 bits shack. Yes, inflation hurts people.

    On the other side, there is no prospect of 30’s like conditions as long as the Fed keep the head of the industry out of water.

    And comments like “Sarkozy might threaten Merkel that France could withdraw from monetary union” are clearly wishful thinking.

  • S

    I would take exception with whether rising interest rates would have their desired effect. The question seems not to be one of whether to raise it is the magnitude and will to carry through. I think we could both agree that you take rates high enough and demand destruction will be a sidebar. You squeeze hard enough and eventually you start to choke. Sometimes you need to be poisened right up to the edge of life to kill the cancer.

  • Yves Smith


    You are viewing inflation as a strictly domestic phenomenon when it has a very large international component which is outside our control.

    The US is far smaller, in its share of global GDP than it was in 1980s. Our demand for oil is already in decline. The overheated economies are China, the Gulf, and the other countries running pegged currencies. For the US to act unilaterally, or even in concert with the EU, will have less impact than you imagine. The two drivers of China’s growth are exports and domestic investment. McKinsey estimates that exports account for only 2-3% of its 10+% GDP growth. They will grow at a robust pace even if we raise interest rates and induce a recession that cuts demand,

    Moreover, despite the low real short-term interest rates, credit is not all that available and M1 has not grown in three years (which says it isn’t the cause of the problem). Even MZM growth has fallen from rates that were just plain scary to an compound annual rate of 7.6% for the last four weeks. The rate of M2 growth has also been falling since last year and was at a compound annual rate of 1.0% for the last four weeks. The monetary base, which is what the Fed controls, grew only at a compound annual rate of 1.1% in the last four weeks. Now there is considerable debate as to which M is the best guide, or whether any of them are good guides, but they are all at considerably lower growth levels than a year ago (and note the Fed no longer uses money supply and instead focuses on the price of money).

    And per above, I see a recession as inevitable given the deleveraging that is in progress but far from complete. Deleveraging is a deflationary process. We don’t need to raise rates, all we need to do is quit impediing the deleveraging as much as we have. Again, this is a completely different fact set than the late 1970s.

    Mohammed El-Erian has a very good comment to day in the FT on how joint action is needed to combat global imbalances, and for any player to act alone will leave it worse off. No China watcher that I am aware of sees any will in China to do what is really needed, namely, seriously revalue its currency (given that the overall impact would be tolerable it may be due to who winds up being losers, that the officialdom is already finding it promise of a harmonious society under threat, and having those dependent on exports take a hit might produce more domestic strife than they care to engender).

  • Calvino

    Connolly praises the Bank of Japan? He must like the .5% loans that he can roll over into the CDO’s of the mortgage market. Bear Sterns liked those also. So does Lehman and every other house on Woe Street. Yes, bring back the glory days of the carry trade – more bubbles please.

    This man is an idiot, running AIG. Pathetic.

  • Anonymous

    Connolly is your typical American
    spoiled brat who believes that America can act as irrationally as it
    wants and that the rest of the world then has to pay for the mess. Just another Neocon jerk.

  • Anonymous

    For the most part, this is one of the most fact-free, histrionic threads I have seen on this blog. I hope most of you choose not to become regulars. One of the things I value here is the quality of the commentary, but what came prior was largely ideologically-driven name calling. Pathetic.

  • mmm

    9:51, I agree completely. These comments were idiotic. Connolly is a global strategist, He has nothing to do with how AIG manages its businesses. All those readers who tried to link him to AIG’s problems just showed how ignorant they are. And 9:40 couldn’t be more wrong. Connolly is a Brit based in London. He’s a known super-bear. I you believe we are going to have a depression, or close to it, then raising rates is a bad move. Defending the dollar in the 1930s is what turned what would have been a recession into a depression.

    If you disagree, fine, but simply calling him names doesn’t prove your point. In fact, it says all you have on your side is emotion, not data. If you have a basis for disagreeing, that would be enlightening, but too many of the comments were trash talk.

  • Yves Smith

    Normally readers do a good job of policing ad hominem attacks, but I see that didn’t happen until pretty late in the game.

    The deleted comment was a personal attack, not a discussion of the substance of the post. I welcome people taking issue with my ideas but slurs on the person who gives you a space in which to comment are not permitted. This one fell in the gratuitously ungrateful category, as opposed to the slobbering at the mouth sort.

    FYI, I’m more liberal on this matter than Barry Ritholtz: but think his policy should be viewed as the web standard:

    This may be a free country, but The Big Picture is my personal fiefdom. I rule over all as benevolent dictator/philospher king/utility infielder. Fear my wrath, mortals!

    I will ban anyone whom I choose from posting comments — usually, for a damned good reason, but on rare occasions, for the exact same reason God created the platypus: because I feel like it.

    I encourage a broad range of perspectives, philosophies, sexual orientations. Dissent is good. I want to see a debate of views, a battle in the market place of ideas. (Thomas Jefferson wasn’t so dumb after all). You can post on nearly anything, so long as it is at least tangentially related to the topic at hand.

    On occasion, I will “unpublish” a comment if I feel it is too impolite, harsh, ad hominem, inappropriate, or off-topic. Off-topic posts have been rising, and I have taken to unpublishing them en masse. Publish too many comments on a given post (3 or 4 relevant comments out of 30 are fine, 10 out of 30 is excessive). It takes me ~10 seconds to un-publish 10 comments.

    If you find yourself publishing way too many comments, consider this: This humble blog is my forum for expressing my ideas. Get your own damned blog.

    A few things that will get you permanently banned from commenting at The Big Picture. The fastest way to lose posting privileges is to misrepresent your host’s complex and nuanced views in some inane bumper sticker comment. Those who do this, be advised: I’ve read your prose and considered your thought process: Suffice it to say the literary world will suffer no harm for your deletion (Robert Frost’s legacy is safe).

    Other fast tracks to getting banned:

    – Knowingly posting false or malicious material;
    – multiple postings under different names;
    – generally engaging in troll-like behavior;
    – misquoting your host/overlord;
    – being impolite in the extreme;
    – ad hominem attacks;
    – being an asshole.

    Right now, someone is reading this and saying to themselves “What does he mean, being an asshole?” If you wondered that to yourself, well the odds strongly favor that you yourself have sphincter-like qualities. Thus, you should consider it likely that you will be banned as a rectoid from posting comments sometime in the near future.

    Note that I am gratified by the quality of the comments and (aside from removing the occasional spam) have only very rarely deleted comments (this is only the fourth non-spam incident in the year and a half this blog has been up).

  • jest


    i completely agree with you that a major component of the money expansion is externally induced, from asia and the gulf.

    but credit (bank credit, sovereign debt, etc) as well as money market & institutional funds are still growing at a healthy pace. MZM growing at over 7% is not good news considering the environment we are in.

    granted, raising rates won’t cure everything, as you’ve said. but a 2% FFR is still wildly negative. and right now it’s much worse than the 1% rate we had with greenspan, b/c inflation is so much higher today. it’s not going to solve the problem, but it may reduce the amount of medicine we need to take later on.

  • Anonymous


    The dependency culture of financial systems has been spreading for years throughout the system. Those banks are now seen aping their progeny, claiming “respect”, hands in the pocketbooks of elderly passers-by squeezing the life out of them. So far, governments have reacted…by saying that we have to let these young people express themselves. But the tide may be turning…

  • Yves Smith


    I agree in general that we are in a fix and interest rates are lower than they ought to be. However, oil at $140 a barrel is a huge kick in the head to the economy that has not cycled through yet. Gary Shilling is forecasting that retail sales will fall 2.5% next month and consumer retrenchment will continue. I advocated waiting a few months because I think the economy will start looking much weaker.

    I’m not sure MZM is as good an indicator as it would normally be because people run to cash when they get nervous. If you looked at the series, that number is way lower than the recent past.

    I’m very bothered by the internal inconsistency of our policies. We are doing everything to avoid a recession (tax rebates, the housing bill, all those facilities for banks and brokers) but merely raising interest rates won’t get rid of inflation. The increase has to be great enough to induce a recession.

    And I think we’d have one if the folks in DC quit intervening, and the Fed got a bit more stringent about what financial firms get rescued. For the Fed to raise rates when Congress is hell bent upon fiscal measures to prevent a recession makes zero sense.

    Volcker had Carter’s, and more important, broader social backing (at least initially) to jack up rates. But even Volcker got reined in. There is no support for Bernanke to tank the economy to kill inflation.

  • a

    “Conversely, raising rates works if you choke off excess demand.”

    Surely this is not the only reason to set interest rates? IMHO one criterion needed to set interest rates is that saving is a good in itself and should be encouraged. This is for cultural and moral reasons. Real interest rates should be above 0, indeed (again IMHO) around 1.5% to 2% above.

  • Richard Kline

    I’m completely in line with Mohammed El-Arian that COORDINATED ACTION IS NECESSARY. Unilateral actions by Central Banks or major sovereign actors are at this point most unwise because they will have more consequences globally than effects locally. Overall, I have been quite sympathetic to Trichet and those at the ECB staying high and firm. That said and even so, for the ECB to widen its spread against Fed funds will do little to control inflation but much to further tank the $ which by jumping up oil and the $ peggers will more than cancel out any intended impact of a rise.

    “Com’ on people now, smile on y’r brother; Ever’body get tuhgether, try ta—” sing it with me now, “Luuuuuuvvvvv one ‘nother raaaaight now . . . .” Or not—but act together.

  • trotsky

    it is definitely NOT a ‘crisis of capitalism’, but of its antithesis, the centrally planned, coercive fiat money system. it should be clear that unless money is left to the free market, you have no true market economy, and therefore no true capitalism. something that doesn’t even exist can not be said to be ‘in crisis’. one look at the new composition of the Fed’s balance sheet – the result of its unlimited liquidity backstop guarantee to the banking cartel – tells us exactly what is in crisis.

  • Anonymous

    The Fed gets to see all the stats and wave a magic wand over them days before they are released to the public. With that they only protect the big banks staving off irate consumers as a balance. Not following demanded markets rates the Fed is going to put us in a world of hurt, I don’t think they really care would be an understatement.

    While deflation just about this time would be a good thing we will get more inflation first. That mythical disappearing act of debt, we end up paying for long term.

    Euroland (probably go for one another throats soon) needs to raise rates, it will hurt but not as bad as it will hurt us if we raised. Germany produces and the Euro banks just print and will price their products out of the markets.

    You’d have to take the red out of Red China before they float their currency.

    Reading ahead, this all ends poorly. Funny how with all the undeclared debt lurking about that some bubble money found commodities.

  • S


    I am in agreement with you that coordinated action is needed. MAybe that is why Paulson is now beggin the Chinese to open the banking markets so we can leverage our comparitive advantage in financial services. Subprime he says is no reason to lock us out. The probklem with coordinated action is someone has to take a loss and the new US culture goes something like: we don’t do pain. The prozac nation.

    Rates and reserve ratios are rising across the world. Pakistan, Thailand, China, India, Brazil (maybe), etc.. The list goes on. Viewed from the outside it is the US who is not cooperating not the other way around. The rest of the world admittedly is enabling the US addiction as sester points out with most recent tic data, so maybe we should just prohibit them buying our debt and we will get the reset. Are not rates at the center of the whole dual mandate debate and ECB spitting match?Seems bit disengenous to suggest that interest rates arn;t the problem — they and the malignancies rampant in the globalization architecture are 100%responsible. And this has nothing to do with savings gluts or the fall of the Berlin wall.

    As for money supply not growing I don’t buy any of the Ms. I look around the world and see massive inflation – admitedly caused by in part by subsidies and secular changes. But Check out the most recent China money supply growth numbers. If I took CPI at face value I would think my wages are doing ok as well. Inflation around the world is indeed real, then it is being caused by something more than lower fuel subsidies, monetarist academic voo doo aside. Hasn’t viewing monetary base to the exclusion of credit the whole shadopw banking debate? If these were the barameters thatat the expetrts used on the wway up, why should I have any confidence that they are more meanigful on the way down.

    I would seriously suggest looking at the St louis fed adj monetary base and chart Y|Y. If you clip the current declining growth rate and pull it back and overlay agains the mid 20s, the comparison is scary. Look at what happened in the mid 30s? Explosion. That is the call being exercised.

    You either inflate it away or you face deflation all around. Binary. I am just unclear as to how the sequence plays out – hyperinflation first? Looks like history is repeating itself…

    Agree with previous poster that rates should reflect a real return of 1-2%. Interest rates are too low. I am suggesting Greenspan in reverse to borrow from fx overshootuing theory. Overshoot on the upside would do exactly that; encourage savings likely at the expense of the equity cult/farse the governement has tried to staple to every American.

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