Last week, on 21 May, the Financial Times ran a short piece which opened thus: "There has been no official announcement. No terms or conditions have been disclosed. But Greece's banking system is being propped up by an estimated €100 billion or so of emergency liquidity provided by the country's central bank -- approved secretly by the European Central Bank (ECB) in Frankfurt." The news barely made it into the U.S. press.
But wait up. A hundred billion Euros? Lent secretly? On unknown terms and conditions? And the entire operation conducted by a bunch of unelected officials and scarcely reported in the media?
Please don't think that these things happen in Europe but could never happen in the United States. They happen here all the time and on a colossal scale. Remember that Bloomberg fought the Federal Reserve all the way to the Supreme Court in order to establish that the Fed lent over $1.2 trillion to the U.S. banking system and that those loans went ahead unbeknownst to and unauthorized by Congress. Oh, and although I say 'the U.S. banking system' what I really mean is 'any bank that puts its hand out for some cash.' So the Federal Reserve considered it appropriate to hand over some of your dollars to such not-very-American institutions as the Royal Bank of Scotland, the Belgian bank Dexia, Credit Suisse, Deutsche Bank, the Italian Unicredit, and too many others to name.
Yet nothing happens. When Bloomberg broke its story about the Fed's secret lending program, a few other news outlets picked it up, but nothing changed. The same people are in charge of the Federal Reserve. They don't think they did anything wrong. No central banker thinks that the ECB did anything wrong by handing a hundred billion euros to the collapsing banks of a failing country. It's just the way these guys do business.
Just to be clear, though, there are alternative ways to do business. You might, for example, think that we should follow the following elementary rules: the central bank should avoid printing money and generating inflationary pressures which affect us all; bankers should lend money prudently and with proper due diligence; if those loans go bad, the banks should lose their money; and, over time, those banks are either left to go out of business (if they're dumb) or encouraged to shape up and improve (if they're not.) That system even has a name. It's called capitalism. We had it in America once.
But not any more. We live in a world where moral hazard reigns supreme, where acts of gross stupidity seem to lack consequence. Where central bankers print money and no one cares. Where banks make dumb loans and get bailed out. Where politicians just want to get reelected and know that the media is going to analyze the spin down to the very last molecule and leave the substance well alone.
Take some other recent news items. Facebook's IPO saw its shares trade up to $45 before falling back to as little as $31, a fall of some 31 percent. It is alleged that Morgan Stanley, one of the banks running the stock offering, revealed data to its institutional clients that it did not share with its retail clients -- data that, in effect, called into question whether Facebook's high valuation could be justified. Morgan Stanley insists it followed every dot and comma of the relevant regulations, and perhaps it did. But retail investors have still lost a shedload of money. And Morgan Stanley and its peers have still made a huge amount in fees. If Morgan Stanley truly did follow procedures, those procedures are plainly inadequate.
Or take JP Morgan's recent $2+ billion trading loss. That arose in a bank which prides itself on its careful risk management. Which has lobbied vociferously against regulations which would prohibit the kind of activities which led to that loss. A bank which is surely 'too big too fail' -- and in my eyes, therefore, also too big to exist.
Yet nothing changes. Just ask yourself these questions. Will the Fed never again extend secret loans to dodgy banks? Will Wall Street firms never again run an IPO that destroys billions of dollars in value for retail investors? Will Wall Street so clean up its act that it never again reports billion dollar losses because of dumb-but-greedy trades?
You know the answers. Nothing changes. In Europe at the moment, a calamity is unfolding. The Spanish bank, Bankia, has had its shares suspended as it seeks to apply for yet more state aid. The Spanish government, terrified by the way the ground is moving under its feet, is beseeching the Germans to help them borrow more money, so they can pass that money on to the same unreconstructed banks that lost it all in the first place. And meantime government deficits go on adding to the ever-less-supportable mountain of debt.
The United States is not yet in that position, but the preconditions are all here. An uncontrolled deficit. An out-of-control banking system. And politicians who would rather defer any problem than tell the truth about the mess we're in.
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If memory serves me right, it was last January or February that the Federal Reserve made a currency swap deal with the ECB to the tune of $100 million. This money went straight to the Greeks. This isn’t an act of gross stupidity so much as it is gross desperation. What do you think are chances are that we’ll be paid back?
1. plant, grow and/or harvest something of commercial value from the earth;
2. extract something of commercial value from the earth;
3. manufacture something of commercial value that is consumable
4. construct a building that is permanently useful for rental income;
5. provide professional services (medical, legal, dental, engineering, architecture, land surveying, technology, accounting, etc.);
6. collect payment for patent and copyright uses;
and if they then trade, sell, lease or rent these items and/or services to parties outside of their family, in return for a net transfer of gold, currency or commodities from other parties outside of their family into their own family, then that family is enriched.
The members of that family (tribe, city, state, nation) can then reflect the amount of their real NATIONAL WEALTH and financial security with their net positive accumulation of privately owned grain, gold, cattle, jewels, land, buildings, hotels, casinos, factories, commodities and/or other marketable products that are then available to be used for economic security for reserve use in times of emergency and also be available as collateral to redeem any printed currency that they might care to issue, and/or Treasury Bonds that they might print and sell.
The USA and most of the European nations are living on money borrowed from individuals in the industrialized nations in order to have sufficient government funds to pay their government employees and pensions for their retirees, instead of re-industrializing to create new national wealth through manufacturing and exporting products to foreign nations in return or exchange for foreign gold, or the equivalent in currencies that still have value.
1. Provide for the common military defense.
2. Pay for the construction of the common infrastructure elements that we all enjoy.
3. Pay for police, fire fighters, and a judicial system.
4. Take care of those citizens that cannot take care of themselves.
5. Provide various other non-essential government expenses such as libraries, museums, zoos, parks, hospitals, NASA and other unnecessary similar services that serve the total population.
Bureaucratic government employees at every level of government therefore are NET CONSUMERS of the nation’s financial resources, and DO NOT CONTRIBUTE to the creating any new financial resources or NATIONAL WEALTH that might be available to be taxed to pay for various government activities.
This country is Greece and it must be punished! But is it really the witch hunt that has started in 2009 the most stupid move ever made in the entire European history? Is it worth to blame Greeks for the lonely dark winters up in the North and for the depression syndrome that cripples the lives of dozens of millions northern Europeans, as if Greece makes the weather?
How Northern Europe shoot its leg, in order to satisfy the populist sentiments of an electorate being used to the fairy tales of "bad witches and pious farmers".
Panagiotis Traianou answers to many of the aforementioned questions and gives a proper solution on his article entitled “GREECE RANKS AMONG THE WITCHES OF SALEM”
http://eamb-ydrohoos.blogspot.com/2012/05/greece-among-salem-witches.html.
Moral of the story: get rich, and buy yourself a couple of politicians if you want a safety net. Otherwise, you're just the little guy whom no one cares about.
In addition, Japan, USA and UK have been printing money for years, China has kept its exchange rate low, which is in effect printing money... and despite all that inflation is very limited... it shows that we need to do more to erase debt and reboot the machine.
So yes, even if my long term view is that inflation is bad, this is what we need now.
And as you say... the fact that there is no inflation now despite having printed a lot of money means that we need to print much more....
And by the way, we need to be ready to pull the plug on money printing when things become better....
If inflation is imminent, then credit becomes cheap and keeps getting cheaper. Especially at current rates. That would mean if you are right about inflation, you would be insane not to get as much debt as is humanly possible. You can only benefit from more and more debt when inflation is in play. And yet, I assume you are still being cautious about increasing your debt. Thus, you are making my point for me.. inflation is not running away, nor is it threatening to. One reason is that the bulk of the stimulus went to large banks and corporations. They store the money rather than circulate it. More than 12 trillion is now in storage in corporate accounts, and growing. Not likely to hit the streets under any scenario.
You need to be correct more often because thus far, you are developing a bad pattern.
Also, with stilling around 2% of inflation and beside both printing and a little decrease of the euro mean we can print a bit more.
I think we can reach almost 3% for a year or to. In such conditions, bank will start to decide it will be more efficient to finance private sector than to save loses in ECB and German Dept.
The risk are lower euro and maybe more expensive oil. But the advantage will be cheaper good stuff to sell worldwide. And in dream, somebody could lower Oil taxes (witch will distress people budget and enterprises cost: I see that as a better measure than making up SMIC)
Japan, USA, UK .... France and Germany were the first one to break the euro rule while Spain and Ireland didn't. Look at who is broke by the crisis? Only countries that respect "Capitalism well to do" rule. So let's do something that everybody do, I bet it will be better than just following a rule without minding the rule.
I am asking as i had not heard of the Bloomberg case.
Foreign Banks Tapped Fed's Secret Lifeline Most at Crisis Peak- Bloomberg
"U.S. Federal Reserve Chairman Ben S. Bernanke’s two-year fight to shield crisis-squeezed banks from the stigma of revealing their public loans protected a lender to local governments in Belgium, a Japanese fishing-cooperative financier and a company part-owned by the Central Bank of Libya.
Dexia SA (DEXB), based in Brussels and Paris, borrowed as much as $33.5 billion through its New York branch from the Fed’s “discount window” lending program, according to Fed documents released yesterday in response to a Freedom of Information Act request. Dublin-based Depfa Bank Plc, taken over in 2007 by a German real-estate lender later seized by the German government, drew $24.5 billion.
The biggest borrowers from the 97-year-old discount window as the program reached its crisis-era peak were foreign banks, accounting for at least 70 percent of the $110.7 billion borrowed during the week in October 2008 when use of the program surged to a record. The disclosures may stoke a reexamination of the risks posed to U.S. taxpayers by the central bank’s role in global financial markets..."