Interest Rates on The Huffington Post

Questions For Ben Bernanke's Senate Hearing

2009-12-02T22:40:43Z

The Senate Banking Committee will be chatting with Ben Bernanke this Thursday to vote on his reappointment.

Demand that the Committee ask the following questions for our esteemed Esteemed Chairman (and contact your own Senators also and demand that they find out the answers to the following questions). If you are a Senate aide, please get these questions to your Senator.

Edward Harrison: On the Sovereign Debt Crisis

2009-12-02T09:10:35Z

This post first appeared at my site Credit Writedowns

Given the spate of articles in the business press about this country or that country facing a potential debt crisis, I wanted to write a bit about sovereign debt crises.

In my view, economic stimulus has been warranted in order stabilize the financial system and prevent economic collapse. However, the price of that stimulus is unsustainably high increases in government debt -- in a world in which private sector debt is already critically high. I see the sovereign debt problem as critical, especially in Europe. The sooner we abandon a debt servicing cost mentality, the more likely we are to face up to this challenge.

The debt service mentality

During the boom and bubble which led up to the financial crisis, many in the financial community looked to debt service costs in the private sector as the only relevant metric to gauge whether debt levels were sustainable - both for individuals and in the aggregate. This was bubble mentality which I must take to task now now that we are seeing it crop up in discussions about public sector debts as well. If not, we will likely see some major sovereign bankruptcies in the not too distant future.

The debt service mentality goes a bit like this: Bob and Shirley are looking for a new house. They make $6,000 per month. So they can legitimately afford to pay $2,000 per month for their mortgage. With a 7% interest rate on a 30-year fixed mortgage, that means they can afford to borrow $300,000 - or just over four times income. So, if Bob and Shirley put 10% down on the purchase of a home, they can afford one that costs $330,000.

The problem is when this is the only constraint on borrowing. What happens to house affordability when Bob and Shirley's 30-year rate drops to 5%? Suddenly, they can 'afford' a $375,000 loan. What if they get a 4% rate? Now, they can afford $425,000 in debt - a loan more than 40% larger than at 7% and a massive 5.9 times income. Anyone who has a mortgage recognizes this math as integral to the home buying process.

The lower interest rates go, the more affordable any debt load becomes when debt servicing costs are the only constraint. As rates drop toward zero percent, theoretically Bob and Shirley could afford to buy any house no matter how expensive. But, of course, interest rates don't move in one direction. If rates were to move up significantly when Bob and Shirley wanted to move house, they would face a serious problem. In this sense, artificially low interest rates are toxic. And therefore pointing to debt servicing costs as the only metric of affordability and debt constraints is bubble finance plain and simple.

Here I am talking about bubble finance, not Ponzi finance. In the Ponzi finance schemes in the U.S., we saw fixed rates substituted with lower but unsustainable adjustable rates. Eventually affordability became passé as no-doc, zero-percent down, ninja loans became the norm. In the end, the Ponzi debt scheme collapsed in a heap - as it always must. That's what we saw in the blow-off stage of the bubble after Greenspan lowered rates early this decade. But, the debt servicing mentality is what preceded it.

Relative debt constraints

What is needed is a relative debt constraint like debt to income - or in the case of aggregate figures or sovereign debt figures, debt to GDP. For example, before the bubble in the U.K., one might have seen relative debt constraints like three times income. That meant one could borrow up to three times one's annual income - no ifs ands or buts. If you worked in the City and received a bonus, you might have convinced the bank to count half of it toward your income for loan purposes.

As prudence was thrown out, these constraints were relaxed. The Bradford and Bingleys of the world used lower interest rates to justify jacking these constraints up to 3.5 times or four times income. Eventually these constraints hit six times in the UK.

How do you compete against that as a bank? All of the business is going to Bradford and Bingley and you are getting stuffed. I guarantee you shareholders won't like that. As an executive, you better find the holy grail of prudent but profitable lending or follow Bradford and Bingley on the road to easy money. Otherwise, you will be out of a job.

Eventually, even the prudent relax their standards too - that's how risky behaviour drives out good when risk is rewarded. See my comments in "James Galbraith: How financial stability creates instability."

Operational and effective constraints

So all of the preceding caused Americans and Britons to run up massive amounts of debt. The same was true in places like Latvia, Spain and Ireland - and to a lesser extent in places like Australia. But I am referring here to the private sector. What about the public sector?

Here too there are limitations. For sovereigns with debt in their own fiat currency, there is not the operational constraint that you and I face. After all, they can go to the backyard and just pick some bills off their money tree - something we can't do unless we want to go to jail.

Remember, many countries like the U.S. or the U.K. can just print money to meet creditor demands. After all, the only financial obligation of government in a fiat currency system is the payment of more fiat money. This is a confidence game then. Creditors will only accept more fiat money from the debtor if they believe that the money represents good relative future value (i.e. when debt repayment occurs and where value is relative to other currencies or real assets at that time).

So while there is no operational constraint on government because of the electronic printing presses, there is an effective constraint in the form of debt and currency revulsion and price instability (large measures of deflation or inflation). On countries like Greece or Portugal in the Eurozone, the operational constraint is a lot more real than it is on the U.K. because of currency union. The same is true for countries with a currency peg or large foreign currency debts like Latvia, Hungary or Dubai.

Taxes

What is a sovereign government's income? It is the taxes we pay now and in the future. So this makes tax revenue central to the sustainability of sovereign debt.

How does the Beatles song go:

Let me tell you how it will be

There's one for you, nineteen for me

'Cause I'm the taxman, yeah, I'm the taxman

Should five per cent appear too small

Be thankful I don't take it all

'Cause I'm the taxman, yeah I'm the taxman

Basically, if the net present value of all of the future taxes fall short of the net present value of expected government expenditures, you have a problem. Again, this problem need not be a hard constraint since the government can issue debt in its own currency. Nevertheless, there is a limit to how much paper money people are willing to take if they worry about the future value of that paper.

That's what the worries of a sovereign debt crisis are all about. At some point, the central government's debt become so high that everyone knows they cannot possibly tax the population enough to cover their expenses and service the debt. There are few way outs then - even for sovereigns using their own currency. One can print money, jack up taxes or cut spending drastically. Printing money is inflationary and causes currency and debt revulsion (The inflationary impact depends on the marginal propensity to save in the private sector i.e. the demand for credit). Raising taxes is deflationary as it curbs aggregate demand. And jacking them up far too high invites tax evasion, eventually making money printing the only fallback. And cutting spending reduces aggregate demand, can reduce the future tax base, and risks a nasty debt deflationary spiral. Pick your medicine.

And when I say printing money, I mean 'monetizing the debt' by buying up debt with money printed out of thin air or simply printing money to pay creditors. The two are functionally equivalent in a zero interest rate environment (see my post "On debt monetization").

So, in the short run, we can talk about supply and demand of government debt thinking only about the near-term deficit, budget gaps, and demand for government bonds. We can ignore health care liabilities in the same way we can ignore them for a family's immediate debt problems because this is not actual debt we have to service. Longer-term, there are constraints like huge unfunded liabilities, making the situation that much more difficult.

Enter the debt service mentality

That's where the debt servicing mentality enters this picture again. The public sector can get away with deficit spending for much longer than you or I. But, eventually they too must yield.

Japan is the textbook case. With sovereign debt to GDP well over 150% and rising to well over 200% soon, it will need to cut spending, increase taxes or print money (or all three) to avoid default. The only reason it has avoided problems is the bid for Japanese Government Bonds (JGBs) and Yen due to a huge current account surplus. What happens when that surplus disappears? What happens if interest rates are normalized?

This is the exact same issue Bob and Dorothy faced. When interest rates are low, debt servicing costs are low as well. But, as soon as rates move higher, you have a big problem. Theoretically, of course, if one takes on debt and 'invests' it, receiving a higher rate of return, then one could pile up more and more debt. This is what is commonly known as a "Carry Trade' - and it is a hallmark of bubble finance underpinned by the debt servicing mentality.

What if the investments don't succeed? What if they end up as malinvestments? Then you have wasted money and are now in a deeper hole than you were before. I think there is room to maneuver for the U.S. in terms of deficits to prevent a nasty double-dip recession, especially in regards to job creation. But a lot of what we have seen in terms of stimulus has been more dubious in nature; some will be malinvestment. Going forward, we should expect the same. And there has been absolutely no effort to reduce overcapacity in autos, banking, housing or elsewhere in the bailout nation. This is why relative debt metrics like debt to GDP are actually a good thing. They act as a hard constraint on deficit spending that otherwise does not exist.

Keeping this issue in mind, the following on Bruce Krasting's blog is interesting:

On ABC's "This Week" show there were some interesting thoughts from Paul Krugman.

He remarked:

"The cost of the deficit is only 1.2% real rate of interest at the Federal level."

This is economic speak. What Mr. Krugman was saying is that the Government can borrow long term at 3.2% and inflation is 2% so the real cost of debt is only 1.2%.

In response, George Will made the point:

"In ten years the interest cost of servicing the debt will go to $700 billion per year!"

Mr. Krugman responded:

In ten years GDP will be $20 trillion, debt service would still be 3.5%. "That doesn't sound too bad".

Mr. Krugman believes in the ultimate carry trade. His view is that growth will come from affordable (cheap) debt capital. He thinks that the US can go to 100% Debt/GDP without upsetting the applecart. I think he is dead wrong.

We are at the point where the laws of big numbers start to come into play. For Mr. Krugman' view to work out we would have to successfully sell an additional $900 billion of debt each year for the next decade. I think that is an impossible task. But what is truly impossible is that that amount of debt can be sold without an increase in the 1.2% after inflation cost of the debt that Mr. Krugman is relying upon. You can just fool so many bondholders for so long before they look elsewhere.

The cost of servicing our debt will likely double. The increase will be a combination of a general rise in interest rates and in increase in the "spread" that the US will have to pay. If debt expense was a modest 6% it would put the cost at $1.2 trillion. I don't think we will get to that level. We will blow up first.

The Carry Trade is fraught with risk.

National Debt To Increase By $9 Trillion Over Next Decade, $4.8 Trillion Just In Interest Alone

2009-11-20T09:07:57Z

NEW YORK (CNNMoney.com) -- Here's a new way to think about the U.S. government's epic borrowing: More than half of the $9 trillion in debt that Uncle Sam is expected to build up over the next decade will be interest.

More than half. In fact, $4.8 trillion.

The Debt Economy - How The Tax Code Encourages Debt : The New Yorker

2009-11-17T10:29:12Z

. Debt didn't get dangerously out of scale because the system was broken. It got out of scale, in part, because the system worked.

The government doesn't make people go into debt, of course. It just nudges them in that direction.

Jeffrey Sachs: Why Obama's Failing On The Economy

2009-11-11T09:26:29Z

The past week brought news of US double-digit unemployment and the Federal Reserve's decision to maintain near-zero interest rates. Both pieces of news expose the inadequacy of US economic policymaking. The Obama administration's stimulus policies are not well-targeted. The Republican alternatives are even worse. Both sides are missing the key fact: the US economy needs structural change that requires a new set of economic tools.

Ally Bank: Is GMAC's Rebranded Bank Using Bailout To Offer High-Interest CDs?

2009-11-09T08:16:24Z

NEW YORK — Its TV and print ads poke fun at the bait-and-switch tactics of other banks. Its interest rates on CDs have been the most generous in the industry.

Ally Bank's tactics have drawn in customers, but they've also irked rivals and gotten the attention of regulators. As the rebranded banking unit of GMAC Financial Services, Ally Bank has the backing of billions of dollars loaned to GMAC by the federal government.

Goldman Sachs Profiting From Low Interest Rates, But Earnings Are "Unsustainable": Felix Salmon

2009-11-06T09:23:33Z

To put these numbers into perspective, a savings of 2.43 percentage points in one quarter amounts to $1.2 billion in saved interest costs on $203 billion. That's over 40% of its third-quarter earnings.

Nelson Montana: Giving Credit Where Credit Will Do: How the Banks Have Changed the Rules Halfway Through the Game

2009-10-28T18:19:45Z

Who knows this one?

Here's my story, it's sad but true. It's about the banks that we all knew. They took our money and then skipped town. Now, when we need help, there's none to be found.

That just about sums up how the credit card companies are working these days. The way it stands, you might be better off dealing with loan sharks. At least they'll warn you before breaking your legs. The banks sneak up behind you and do it.

I used to believe in using credit - not to buy stuff I didn't need, but to get the things I needed to survive. I'd go as far to say that I have no sympathy for anyone who runs up too much debt by being frivolous. But it is no longer the reckless and the irresponsible who are paying the price of using a credit card. It's the average Joe and Jane who use credit in a prudent manner. It's the ones who run up more debt than they can afford to pay who seem to get the free pass.

In its original intent, credit was actually a pretty good system. Aside from the convenience of not carrying cash and ordering purchases via mail and online, people can borrow money they need in the short run for things that will make money in the long run, after which, a fee is paid for the advance. That's fair. Everyone wins. But it no longer works like that.

For years I used credit cards to stay ahead of the game. As an artist, I've never been a high finance guy. I live pretty much hand to mouth, I always hustled for work (being self-employed I can't even collect unemployment insurance), I don't play the stock market (with what?) and to be honest, I never concerned myself much with elaborate fiscal manipulations other than to transfer the credit card accounts to the lowest interest rates. Over time, I always paid them off. My credit rating was excellent. They made just enough money off of me to give me a high limit and my payments were always on time, making me a good risk. But as of last year, it got a little out of control. I still paid on time but the payments were often the minimum. I just couldn't get ahead. Then, one day I realized why. Overnight, my interest rate went from 4% to 27%! They knew I was having a hard time so instead of cutting some slack, they lowered the boom. I was falling behind and it looked like there was no hope in sight. Sound familiar?

With a few strategic moves and a bit of luck, I eventually managed to generate enough money to pay it all off. I kept just a Visa and one MasterCard and have paid in full every month. So what did I get for my efforts? They kept the 27% interest and lowered my credit limit from $10,000 to $1,000! And, just to add insult to more insult, they pulled a few more underhanded tricks. Like enrolling me in programs (that had an annual fee) without my consent. And double charging me on purchases - to which they gave a very sincere apology but asked me to contact all the vendors in order to straighten it out. (This was after hours of being shuffled from one representative to another.) They justify arbitrary alterations by saying the entire process was explained in that nine-page document with six-point font they sent last month. (Am I supposed to read that myself or is that when I'm required to hire a lawyer, investment analyst and a team of accountants? Because I have no idea what they're talking about.)

You can never get anyone on the phone who can actually do anything. You can't pay over the phone either. That costs extra. Computers are always down. Administrators are always away from their desks. Apparently, money can be extracted from one's bank account based on what seems like little more than a reluctance to check their own records. I could have gotten a comparable deal if I just declared bankruptcy and paid only a portion of the fees. Thanks, guys. Anything else you need?

What is probably most egregious in this entire debacle is the fact that credit card companies lose billions of dollars each year in fraud. When a card is lost or stolen, anyone can run up charges and they have to eat the loss. Wouldn't it make sense to have to use a pin number when charging, just as we do with debit accounts? That would make sense. But why should they bother when they can just keep slamming the people who play by the rules?

The latest word is that in just the past few weeks, rates across the boards have been jacked up as high as 30% in anticipation of the impending crackdown by Congress that will restrict how much the creditors will be able to extort, um, I mean charge.

It looks as if they may try to bilk their "valued customers" for every cent they can while they can get away with it. Congress needs to move a little quicker on this, though expecting them to act with urgency is like expecting a three legged mule to win the Kentucky Derby.

I've gotten to the point where my grandfather was. He didn't trust banks and kept all his money in a small safe in his bedroom closet. I used to laugh at his lack of sophistication. Now I realize he was pretty damn brilliant. He always knew how much he had and even though he was the sole earner in a family of four, he always had enough.

I'm thinking of doing the same thing with my liquid assets. The only difference is, instead of a safe in the closet, I'm pretty sure it'll all fit in an envelope in the dresser drawer.

79.9 Percent Interest Rate: RIDICULOUS Credit Card Offer Sent To San Diego Man

2009-10-15T13:58:10Z

Gordon Hageman couldn't believe the credit card offer he got in the mail.

"My first thought, it was a mistake," Hageman said.

The wine distributor called the number on the offer, gave them the offer code and verified his information. Sure enough, it was right: the pre-approved credit card came with a 79.9 percent APR.

Debtors' Revolt: Bank Of America Cuts Deal With Another YouTuber

2009-10-09T12:51:46Z

Got a gripe with Bank of America? Put it on YouTube.

Ben Frasier of Douglas, Ore. said in a YouTube video that he wouldn't make any more payments on a $30,000 personal line of credit unless Bank of America would let him settle up with a lump sum.

Bank of America wasn't interested in the offer when Frasier made it over the phone. But after he made his demand publicly, and it received some media attention, Bank of America made an offer that Frasier is happy with.

The video-sharing website has become an effective complaint department for angry customers willing to put their faces to a declaration of "debtors revolt!" Ann Minch of Red Bluff, Calif., did it first in September, when she refused to pay a credit card debt unless Bank of America lowered her rate. After her story went viral, Bank of America agreed to her demand. And Darren Bryant of Pensacola, Fla., won attention from the bank within four hours of "going YouTube" after he wasted 20 hours calling the bank to no avail.

Another person uploads a "debtors revolt" rant against Bank of America and other big banks almost every day.

Frasier said that because of an unexpectedly high interest rate, he paid $8,000 but dented the $30,000 loan's principal by only $1,500. He said in his video that he wanted to pay Bank of America $23,000 and call it even. After some negotiation over email, a Bank of America agent made the following offer on Thursday:

Based on the new payment amount from you of 15,134.78 and the credits to that account that I stated below, it would leave a remaining balance on the account of roughly $12,215.00. I would then be able to set that amount to a 60 month payoff term and an interest rate of 8.99%. The new payment on that amount for the 60 months would be roughly $260.00.

Frasier replied that he would accept the offer as soon as he saw it on paper. He told the Huffington Post he's happy with the deal, though he thought the way he got it was ridiculous.

"In terms of YouTube, it was a very effective mode of communicating with them," Frasier told the Huffington Post on Friday. "You have to go someplace unsecure to tell your story where everybody knows pretty much who you are, everybody knows the details. You'd think you could do that on Bank of America's website. It's an incredible website. Unfortunately, you just don't command the attention you do on YouTube."

Bank of America did not immediately respond to a request for comment from the Huffington Post, but a spokeswoman previously said, "Our associates talk to millions of customers every day and we work very hard to help them. It is more likely that we can work with them when they call us directly to resolve their issues."

Bernanke In No Rush To Raise Interest Rates

2009-10-08T23:13:24Z

WASHINGTON — Federal Reserve Chairman Ben Bernanke sent a fresh signal Thursday that he's in no rush to reverse course and start boosting interest rates.

The Fed's key bank lending rate is now at a record low near zero and will probably stay there for an "extended period," Bernanke said in a speech to a Fed conference here.

Bank Of America Won't Hike Card Rates

2009-10-07T02:28:13Z

Bank of America said it will not raise credit card interest rates before February, when a law restricting industry practices takes effect, unless a cardholder is in default.

Alan Schram: Where Do We Go From Here?

2009-10-05T00:45:28Z

The economy is most likely not out of the woods yet. Credit remains tight, unemployment is rising, retailers are struggling and both commercial and residential real estate are still reeling. Yet, the country is much better off now than it was a year ago, during the crisis in the fall of 2008. Many of our fundamental problems have been fixed, leverage has been removed from the system, foolish exposures to risk have been expunged, and most of the weak companies have been washed out. Blood is no longer gushing on Wall Street.

As always early on in a recovery, people fear the fiscal and monetary stimuli are not sufficient. Then when the markets start going higher, people fear that the economy may stall. Once the economy begins to improve in earnest, they fear profits will not recover enough to justify stock prices. When profits recover, they fear a jobless recovery, and when the employment situation improves they say it will not be sustained for long.

That pattern holds true this time around. Other patterns emerge as well. Some investors have compared the market behavior in the last decade to that of the 1930's. I believe the peak of the tech bubble in March 2000 could be compared to the 1929 market top. Both "easy money" bubbles ended suddenly, and brought on a long period of decline. Back then, from the bottom of 1932, the market had a 300% "hope" rally, which peaked in 1937 and went into a five-year, 50% decline, until finally making a generational bottom in 1942.

March 2003 may have been the temporary-bottom corresponding to that of 1932. Buoyed by an unprecedented credit bubble, the indices commenced a hope rally that actually exceeded the previous top. In the summer of 2007, the chickens came home to roost, and the S&P 500 began a sickening 57% slide that lasted 18 months. We made our generational low in March 2009, and that will not be breached even if the economy "double dips."

It may be years before we see Dow 14,000 again, but we are on our way higher from that generational bottom last March. The major stock indices may well spend the next few years flat, but it will be a good environment for stock pickers, who can outperform. Large cap companies have lagged in the recent rally, and many of them are still down for the year. They present an opportunity, especially those that are high quality businesses with little net debt and strong cash flows.

And historical precedent happens to be on our side. If you examine the table below, you will see that in the past, recessions have been a good time for long term investors to buy stocks. I believe this time will be no different.

S&P 500 returns during and after recessions:
Recessions # of months During R 1 year 3 year 10 year
Jul 1953 - May 1954 10 17.94% 25% 100% 179%
Aug 1957 - Apr1958 8 -3.94% 6% 26% 107%
Apri1960 - Feb 1961 10 16.68% 20% 28% 50%
Dec 1969 - Nov 1970 12 -5.28% 0% 28% 17%
Nov 1973 - Mar 1975 16 -13.13% -27% 6% 73%
Jan 1980 - Jul 1980 6 6.58% 13% 27% 188%
Jul 1981 - Nov 1982 16 5.81% -18% 15% 196%
Jul 1990 - Mar 1991 8 5.35% 9% 26% 302%
Mar 2001 - Nov 2001 8 -1.80% -1% -3% N/A
Average 10 3.14% 2.95% 28.20% 139.16%
*from Michael Zhuang's internet blog, "The Investment Fiduciary" 20, August 8th, 2009.

Nevertheless, in light of the large amount of fiscal stimulus, monetary easing and credit creation in the form of new dollars that have all taken place recently, you have every reason to be concerned about the buying power of the dollar and the inevitable spike in interest rates that will be necessary to entice people to buy Treasury bonds in the future.

You will hear people advise you to hedge these risks by buying gold. Gold does not generate cash flow and does not have any intrinsic value, and therefore I do not like it as a long term investment. I believe currency and interest rate risks are best hedged by owning shares of high quality businesses that have a durable competitive advantage and pricing power, and will be able to weather a bout of inflation.

While ignoring the macro economy is naïve, predicting it is arrogant. Few people can successfully predict macro trends over time. It is much preferable to focus on bottoms-up analysis of individual companies. The only sensible approach to investing is to buy into well-understood businesses when they are offered substantially below what they are worth, and to sell them as they approach intrinsic value.

Ellen Brown: The IMF Catapults From Shunned Agency to Global Central Bank

2009-10-01T19:20:21Z

"A year ago," said law professor Ross Buckley on Australia's ABC News last week, "nobody wanted to know the International Monetary Fund. Now it's the organiser for the international stimulus package which has been sold as a stimulus package for poor countries."

The IMF may have catapulted to a more exalted status than that. According to Jim Rickards, director of market intelligence for scientific consulting firm Omnis, the unannounced purpose of last week's G20 Summit in Pittsburgh was that "the IMF is being anointed as the global central bank." Rickards said in a CNBC interview on September 25 that the plan is for the IMF to issue a global reserve currency that can replace the dollar.

"They've issued debt for the first time in history," said Rickards. "They're issuing SDRs. The last SDRs came out around 1980 or '81, $30 billion. Now they're issuing $300 billion. When I say issuing, it's printing money; there's nothing behind these SDRs."

SDRs, or Special Drawing Rights, are a synthetic currency originally created by the IMF to replace gold and silver in large international transactions. But they have been little used until now. Why does the world suddenly need a new global fiat currency and global central bank? Rickards says it because of "Triffin's Dilemma," a problem first noted by economist Robert Triffin in the 1960s. When the world went off the gold standard, a reserve currency had to be provided by some large-currency country to service global trade. But leaving its currency out there for international purposes meant that the country would have to continually buy more than it sold, running large deficits; and that meant it would eventually go broke. The U.S. has fueled the world economy for the last 50 years, but now it is going broke. The U.S. can settle its debts and get its own house in order, but that would cause world trade to contract. A substitute global reserve currency is needed to fuel the global economy while the U.S. solves its debt problems, and that new currency is to be the IMF's SDRs.

That's the solution to Triffin's dilemma, says Rickards, but it leaves the U.S. in a vulnerable position. If we face a war or other global catastrophe, we no longer have the privilege of printing money. We will have to borrow the global reserve currency like everyone else, putting us at the mercy of the global lenders.

To avoid that, the Federal Reserve has hinted that it is prepared to raise interest rates, even though that would mean further squeezing the real estate market and the real economy. Rickards pointed to an oped piece by Fed governor Kevin Warsh, published in The Wall Street Journal on the same day the G20 met. Warsh said that the Fed would need to raise interest rates if asset prices rose - which Rickards interpreted to mean gold, the traditional go-to investment of investors fleeing the dollar. "Central banks hate gold because it limits their ability to print money," said Rickards. If gold were to suddenly go to $1,500 an ounce, it would mean the dollar was collapsing. Warsh was giving the market a heads up that the Fed wasn't going to let that happen. The Fed would raise interest rates to attract dollars back into the country. As Rickards put it, "Warsh is saying, 'We sort of have to trash the dollar, but we're going to do it gradually.' . . . Warsh is trying to preempt an unstable decline in the dollar. What they want, of course, is a stable, steady decline."

What about the Fed's traditional role of maintaining price stability? It's nonsense, said Rickards. "What they do is inflate the dollar to prop up the banks." The dollar has to be inflated because there is more debt outstanding than money to pay it with. The government currently has contingent liabilities of $60 trillion. "There's no feasible combination of growth and taxes that can fund that liability," Rickards said. The government could fund about half that in the next 14 years, which means the dollar needs to be devalued by half in that time.

The Dollar Needs to be Devalued by Half?

Reducing the value of the dollar by half means that our hard-earned dollars are going to go only half as far, something that does not sound like a good thing for Main Street. Indeed, when we look more closely, we see that the move is not designed to serve us but to serve the banks. Why does the dollar need to be devalued? It is to compensate for a dilemma in the current monetary scheme that is even more intractable than Triffin's, one that might be called a fraud. There is never enough money to cover the outstanding debt, because all money today except coins is created by banks in the form of loans, and more money is always owed back to the banks than they advance when they create their loans. Banks create the principal but not the interest necessary to pay their loans back.

The Fed, which is owned by a consortium of banks and was set up to serve their interests, is tasked with seeing that the banks are paid back; and the only way to do that is to inflate the money supply to create the dollars to cover the missing interest. But that means diluting the value of the dollar, which imposes a stealth tax on the citizenry; and the money supply is inflated by making more loans, which adds to the debt and interest burden that the inflated money supply was supposed to relieve. The banking system is basically a pyramid scheme, which can be kept going only by continually creating more debt.

The IMF's $500 Billion Stimulus Package:
Designed to Help Developing Countries or the Banks?

And that brings us back to the IMF's stimulus package discussed last week by Professor Buckley. The package was billed as helping emerging nations hard hit by the global credit crisis, but Buckley doubts that that is what is really going on. Rather, he says, the $500 billion pledged by the G20 nations is "a stimulus package for the rich countries' banks."

Why does he think that? Because stimulus packages are usually grants. The money coming from the IMF will be extended in the form of loans.

These are loans that are made by the G20 countries through the IMF to poor countries. They have to be repaid and what they're going to be used for is to repay the international banks now. . . . [T]he money won't really touch down in the poor countries. It will go straight through them to repay their creditors. . . . But the poor countries will spend the next 30 years repaying the IMF.

Basically, said Professor Buckley, the loans extended by the IMF represent an increase in seniority of the debt. That means developing nations will be even more firmly locked in debt than they are now.

At the moment the debt is owed by poor countries to banks, and if the poor countries had to, they could default on that. The bank debt is going to be replaced by debt that's owed to the IMF, which for very good strategic reasons the poor countries will always service. . . . The rich countries have made this $500 billion available to stimulate their own banks, and the IMF is a wonderful party to put in between the countries and the debtors and the banks.

Not long ago, the IMF was being called obsolete. Now it is back in business with a vengeance; but it's the old unseemly business of serving as the collection agency for the international banking industry. As long as third world debtors can service their loans by paying the interest on them, the banks can count the loans as "assets" on their books, allowing them to keep their pyramid scheme going by inflating the global money supply with yet more loans. It is all for the greater good of the banks and their affiliated multinational corporations; but the $500 billion in funding is coming from the taxpayers of the G20 nations, and the foreseeable outcome will be that the United States will join the ranks of debtor nations subservient to a global empire of central bankers.

Diane Francis: Dollar, Inflation, Recession Optimism

2009-09-24T13:44:55Z

A world expert on economics delivered a cogent and optimistic analysis of the meltdown, its causes, its cure and its effect on the future at the recent Global Business Forum in Banff, Alberta.

Dr. Nariman Behravesh, chief economist with IHS Global Insight, blamed twin "addictions" for 2008's financial catastrophe: dependency on easy credit on the part of nations with trade deficits and excessive reliance on exports by those with trade surpluses.

"Germany and Japan have been hit harder than the U.S. because trade surplus countries have been hit harder than trade deficit countries," said Dr. Behravesh.

This vicious circle fueled global growth until the credit markets sank in August 2007. Then the final straw was a year later when Washington let gigantic Lehman Brothers go bust.

"[Lehman's bankruptcy] was the one of the biggest policy blunders since the Great Depression. Credit markets completely froze and a mild recession turned out to be the worst in decades. It was totally avoidable," he said. "Fortunately, government actions after that avoided the Great Depression 2.0."

Questions
His keynote speech addressed a number of key questions: Is the recession over? What will drive the recovery? What will be the shape of the recovery? Will there be inflation problems? And how will U.S. debt affect the value of the US dollar?

"The U.S. third quarter will show a 4% [annualized] growth; Canada 2 to 3% but unemployment will climb and peak six months from now," he said. "Indicators always lag so the recession's over but not all the pain."

The recovery will be aided by bank rescues, monetary policies with low interest rates, central bank involvement and fiscal policies such as stimulus and reduced taxation.

"There is pent-up demand in the U.S. Nine out of ten households are able to afford a new house or car, corporations are cash-rich but people are scared," he said. "Consumer spending should increase in three to six months."

The recovery's shape will be a "mild W" (or up and down and up) not a "V".

"U.S. consumers represented 15 to 20% of the global economy and their spending grew by 3% a year," he said. "Our forecast is that spending growth will increase by 2% going forward."

No inflation worries

Slower growth will help abate inflation and the U.S. deficits and debts will be manageable in the future, he said.

"Wages are two-thirds of costs and with 10% unemployment there won't be wage inflation.

China is adding to excess capacity which will mean lower prices there and in terms of commodities there will be no big price rises in the foreseeable future," he said.

America's indebtedness won't trigger inflation rates any more than did Finland's or Japan's debts, considerably higher than U.S. forecasted debt. Those two countries suffered financial crises in the early 1990s but zero interest rates and no tax hikes helped them keep inflation at bay then and the same policies will do so now, he said.

"Some say U.S, debts are not sustainable but I'm not worried about a collapse of the U.S. dollar," he said. The biggest looming costs are health care because American health care costs are rising too rapidly.

"The other currencies are no alternatives," he said. "The U.S. dollar is the best looking horse in the glue factory."

Diane Francis blogs at the Financial Post

Jill Schlesinger: Fed Meeting: What's on Bernanke's Mind?

2009-09-23T10:09:15Z

When the interest rate decision is announced today, the Federal Open Market Committee will most likely leave its current monetary policy unchanged and say that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

In other words, just because Chairman Bernanke said that the recession is "technically over," that doesn't mean that consumers are feeling too swell or that Fed policy will shift. Fed governors have told us as much in their public statements and appearances. Just because we have backed away from the edge of disaster doesn't mean that a sustained recovery is baked in the cake.

Here's what I think is on Bernanke's mind right now:

Sure the worst is over, but if I don't get this next part right, I'm finished.

When should we stop buying all of those mortgage-backed securities? It's helped stabilize the housing market, but we can't do it forever.

Econ data is moving in the right direction, but with employment still declining and real incomes stagnate, when will consumers join the recovery?

I wish the inflation hawks would shut up already. I know that real rates will rise eventually as recovery takes firmer hold, but right now, I'm still worried about deflation--did anyone notice that prices are down 1.5% from a year ago?

This stock market rally is freaking me out--glad that all my money is in a blind trust so I don't have to think about it too much.

Love that blogger Mark Thoma--wants the Fed to oversee the entire financial system.

I'm so psyched that the boss gave me another term!

Image by Flickr User Cliff1066, CC 2.0

Ann Minch Triumphs In Credit Card Fight (VIDEO)

2009-09-21T13:38:33Z

Two weeks ago, Ann Minch of Red Bluff, Calif. announced in a YouTube video that she'd launched a one-woman "Debtors' Revolt" and would refuse to pay off her credit card balance after an unfair interest-rate hike. Now, after her video made a huge splash, Bank of America has agreed to reduce her rate.

Minch said in a video posted Saturday that a Bank of America executive contacted her on Friday.

"He asked me to talk a little about my personal financial situation so we can negotiate some kind of agreement in regard to my existing credit card account," she said. The executive "tried to get me to agree to 16.99 percent and I said, 'No, nope, I believe because you guys are getting your money from the Fed at zero percent interest... that 12.99 percent is a more than generous profit margin for you guys.' So he did finally agree to that and he also agreed to send me that in writing."

A Bank of America spokeswoman confirmed to the Huffington Post that Bank of America got in touch with Minch, and, "based on additional information we received about her situation, we reached a mutually agreeable resolution." Citing customer privacy, the spokeswoman declined to provide details. Minch said she'd send the Huffington Post the confirmation letter as soon as she gets it. (Her rate had been 12.99 percent for a long time before it shot up this year.)

Minch's first video has been viewed over 240,000 times. After the Huffington Post featured the 46-year-old stepmother of two in a story, she found herself inundated with media requests from the likes of NBC, CBS, Fox News and also a local reporter.

Minch said the Bank of America executive was very polite and didn't bring up her video, in which she called Bank of America executives "evil, thieving bastards."

It's a sentiment that resonated with HuffPost readers, who flooded this reporter's email account with over 200 letters of praise for Minch and stories of credit card malfeasance. (To all who wrote in -- I'm reading through every letter and will have a follow-up soon!)

Assuming the rate is reduced -- Minch said her online statement from over the weekend didn't reflect the deal -- she will now pay off her credit card balance, which stood at $5,943.34 last week. In her latest video, she encourages others to keep the faith.

"Just because my personal account situation has apparently been resolved, which is a small victory for this debtors' revolt movement, we still have a war to fight," she said.

Here's Minch's victory lap vid:

Sen. Bernie Sanders: Economic Crisis: One Year Later

2009-09-11T17:32:49Z

I hope you'll watch and participate in my new show, Senator Sanders Unfiltered, produced by Brave New Films. Follow my show on Twitter at SandersShow, join my Facebook page, or subscribe to my YouTube page.

Americans have suffered for a year through the worst economic decline since the Great Depression. Millions of people have lost their jobs. We're seeing people with very long-term unemployment. We are seeing older people who have lost their life's savings and are now worried about how they are going to retire with dignity. We have seen people lose their homes, and we've seen people lose their pensions. We've seen, in many ways, the collapse of the American middle class.

What's going on in Congress? I and some others have fought for an investigation to ask some simple questions: How did a handful of CEOs of major corporations precipitate this economic crisis? Who is accountable? Who should be going to jail? How do we make sure what happened in terms of the recklessness and irresponsibility on Wall Street doesn't happen again? I wish that I could tell you that Congress is now doing that investigation. It is not.

We have got to understand what caused the problem in order to make the necessary reforms.

Here are three ideas I'm working on:

Cap Interest Rates First, if there is anything we learned from the credit card disaster, where millions of Americans were paying 25 percent or 30 percent interest rates on their credit cards, it is that we have got to have a cap on interest rates in this country. We've got legislation to enact a national usury law. The maximum amount that credit card companies could charge would be 15 percent.

Return of the Trust Busters Second, we need to deal with this phenomenon of business that are considered "too big to fail" so we don't have to ever again spend millions of dollars bailing out financial institutions. Teddy Roosevelt had a good idea a century ago. Let's start breaking them up again today. We should require the Treasury Department to provide a public list of every institution in this country that is "too big to fail" and make recommendations to Congress on how we should break up those companies one by one so that they no longer impose a systemic risk to the entire economy.

Federal Reserve Secrecy We also need to also take a very hard look at the Federal Reserve. I've teamed up with Congressman Ron Paul, a guy whose politics are very different then mine, and I think we're going to succeed in getting an audit of the Federal Reserve. Among other things we're going to demand an accounting for trillions of dollars at zero interest loans. Who received that money, which financial institutions benefited from that and what were the terms of agreements. The Senate voted 59 to 39 in favor of an amendment I offered to the Budget Resolution calling on the Fed to tell the American people who they loaned $2.2 trillion to and how much each bank received. It still hasn't happened

There is a lot more to be done, but the bottom line is that a handful of people plunged this country into a huge economic disaster. We need to know who they are and we need to make sure this never happens again.

Stay up to date with the goings on in the Senate by signing up for my Bernie Buzz newsletter and joining my Facebook page today.

Central Bankers Content To Keep Interest Rates Low

2009-08-23T13:24:06Z

The world's central bankers were in no hurry to start raising interest rates as they headed home on Sunday from the US Federal Reserve's annual retreat in Jackson Hole, Wyoming.

Michael Pento: A Recovery Foundation Built on Sand

2009-08-18T10:03:08Z

A Brief Review

Instead of allowing a cathartic and reconciling recession to run its course, the Fed decided last year to again bail out the economy by greatly expanding the money supply. In this latest case of artificial intervention, the expansion in the monetary base was a record-breaking trillion dollars, but that intervention has abated in the last few months. What should become clear fairly soon is that the apparent recovery in the markets and the economy has been built primarily on the devaluation of the U.S. dollar, not from a healing of the economy's fundamentals. That clarity will become evident once the dollar begins to make a brief rebound.

Temporary Sanity

For the last few months, the Fed has temporarily halted its assault on the greenback in the mistaken belief that the economic crisis has ended. Therefore, the most likely result will be a major correction in the market and a resumption of economic deterioration. Unfortunately, that should eventually cause the Fed to resume its misguided efforts to bolster growth by wrecking the currency. The Fed's conundrum is this: whether he is aware of it or not, Ben Bernanke needs to defend the dollar and raise interest rates to provide for a viable and long-lasting recovery. But the short-term effect would be a devastating recession which is, of course, politically untenable.

Negative Correlation between Dollar and Markets

The basis for the perceived healing has been a Fed-induced 12% drop in the U.S. dollar since March alone, which has caused the S&P 500 to rally 50% and copper to increase 80% in the same time period. It's just not a coincidence when the dollar goes down; stocks and especially commodities go up. But remember monetary policy works with a lag. The Fed has since halted the increase in the monetary base which reached $1.77 trillion in May of this year, and has now reduced it to $1.64 trillion today.

The result has been a sharp decrease in the rate of increase for all monetary aggregates. The monetary base is up 93% YOY but is down 4.2% since the beginning of the year. M2 is still up 8% from last year but up just 3.5% from January. And perhaps most importantly, the four week compounded annual rate of change in the monetary base is actually negative 26.3%!

What this means is that at least on a short term basis the dollar may be oversold and commodities and stocks overbought. We can hope that Ben Bernanke will not acquiesce to the desire to be reappointed and maintain this brief period of monetary sanity. If he behaves like Paul Volker and doesn't care about being liked, he will drain the excess liquidity and allow the severe economic contraction to run its course.

However as mentioned earlier, the most likely outcome will be for the Fed to rebuild the base in an effort to stem the coming slide in markets and the economy.

That's because we just haven't yet acknowledged the reality of our addiction to debt and inflation as the basis for economic activity. What I find most amazing about all this is how most in Washington and Wall Street fail to recognize what caused the crisis in the first place. The problem never was that there wasn't enough borrowing, consuming and cheap money around. The problem was that the level of debt in the country had become unsustainable. In fact, as a country we are still actually increasing our level of debt. Therefore, all our perceived healing was predicated on the devaluing of the dollar, not from the paying down of our obligations or a repudiation of our past behavior.

We just can't escape the day of reckoning. The country will most likely go through a devastating bought of inflation to avoid a strengthening dollar and further erosion in asset prices. However, a protracted period of deleveraging is still needed as a nation. What we need is to return to real economy based on a sound currency and reduced debt. That will certainly be painful in the short term, but the only way to provide a long lasting and healthy economy.

Michael Pento is the Chief Economist for Delta Global Advisors and a contributor to greenfaucet.com

Sheldon Filger: Latest Consumer Spending Data Much Worse Than Expected

2009-08-17T13:27:00Z

At its peak level of GDP, the U.S. economy depended on the American consumer for more than 70% of its output of goods and services. It has been the deleveraging of the American consumer, and to a growing extent, his/her unemployment, that has been the catalyst of the U.S. recession. And not only America; the centrality of the U.S. consumer to the overall global economy has meant his pulling back on a debt induced shopping spree, which has sparked a worldwide synchronized recession.

The vast amount of money that Uncle Sam has borrowed to fund a nearly $800 billion economic stimulus program is supposed to substitute for the falloff in consumer demand, stop the avalanche of job losses and in the process regenerate consumer spending. The perception that this policy response was beginning to bear fruit has been the foundation of a recent flurry of statements emanating from the Federal Reserve, intimating that the recession was winding down, with recovery just around the corner. Both the Fed, Obama administration and Wall Street fully expected that the July retail sales figures would reflect a return to growth in consumer spending, juiced up by a taxpayer funding "cash for clunkers" gimmick aimed at kick-starting auto sales.

When the official sales figures were released by the Commerce Department, jaws dropped right through the floor. Instead of the .7% rise that was expected, July's retail sales figures revealed a decline of .1%. However, the reality was much worse than even the posted decline, for the July figures were artificially inflated by a large increase in automobile related products due to "cash for clunkers." Without the engineered car driven increase in consumer purchases, the actual retail sales contraction was .6%.

The ugly truth is that no matter how manipulated official economic statistics are, including the U3 unemployment number, the reality is that total consumer purchasing power, reflecting the number of hours worked multiplied by average wage, has declined to a level that makes it virtually impossible to recreate vigorous economic growth. Despite the happy talk from Washington, I think it would be surprising if the Obama administration does not ask Congress for a second massive stimulus package before the end of the year.

Should a second stimulus package be proposed by President Obama, he may encounter stiff resistance from Republicans and fiscally conservative Democrats over concerns about the exploding national debt. However, it is likely that the Obama administration will place a higher priority on going into the 2010 mid-term elections with the ability to claim they have reduced unemployment rather than positioning themselves as fiscally responsible.

Higher deficits, however, create the danger of inflation and much higher interest rates. Escalating interest rates will serve as a brake on economic expansion, defeating the purpose of deficit funded stimulus programs. Now, in that situation, one can always resort to monetary policy, with the Federal Reserve reducing interest rates. However, in this unique economic disaster our planet is currently navigating its way through, the Fed, as with many central banks throughout the world, has already reduced its funds rate to close to zero.

Could the Obama administration be running out of options? If fall retail sales continue to plummet and unemployment rises, things could get even more ugly for the problematic American economy.

Jill Schlesinger: Is Housing a Barometer for Economic Recovery?

2009-07-29T09:43:11Z

It's amazing what qualifies for good news during the nation's longest post-War recession on record. Yesterday, the S&P/Case-Shiller Home Price Index for May indicated that after almost three long years, we're finally seeing the early signs of price stabilization in housing.

The report showed the first month-to-month gain in 34 months, with three-quarters of the areas surveyed showing improvement or steady prices. That said, it's important to have context. Housing prices are down 17% from a year ago and we're now at levels consistent with those of 2003--who said that home prices never go down?

Still, the improvement in prices follows three other pieces of housing news reported recently: June Housing Starts were up 3.6%, June Existing Home Sales rose 3.6% and June New Home Sales increased by 11%. Same deal with all of these reports--the general year over year looks ugly, but the month over month shows signs of life. One more thing: the margin for error on housing stats is huge.

Considering that housing and credit led us into this crisis, is it safe to assume that the recession is over and we're on the precipice of economic recovery? We won't know until the folks at the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) tell us so. The NBER is the official arbiter of the beginning and end of recessions. Last week, even econo-bear Paul Krugman said that the Dating Committee may find that July marked the end of the recession, which started in December, 2007.

Assuming that the recession ends, what does that mean for you? That's what Harry Smith of the CBS News Early Show wanted to know this morning.

Even if the recession is "officially over," there will be some clear hurdles ahead:

EMPLOYMENT: Job loss is tapering off, but new jobs will be hard to come by for some time, so don't get too cocky with your boss. Also, get used to your current salary, because wages will continue to stagnate until there is more significant growth in the economy.

INTEREST RATES: Don't freak out when rates rise--the Fed will have to raise them in order to contain inflation. That said, lock-in fixed rates now and pay down credit cards as soon as possible.

HOUSING: Although prices are turning, don't expect a return to the bubble years. If you need to sell, it may be better to do so while interest rates are low and the first time home buyer credit exists. For the same reasons, if you can afford to pull the trigger and buy, get busy!

Continue on moneywatch.com

Jim Randel: How About the Consumer Financial Education Agency

2009-07-26T13:13:10Z

One of the big topics in Washington right now is whether the United States needs a Consumer Financial Protection Agency. The Administration says "yes" -- the logic being that consumers have been taken advantage of by mortgage and credit card lenders and therefore need an agency that fights just for them.

Whereas I do feel that consumers have been mistreated, I also feel our country has done a poor job educating its citizens on the most basic of financial principles. So instead of spending enormous energy and dollars creating a new federal agency (the CFPA), how about we spend 1/100 that amount providing inexpensive resources for people who are willing to invest a few hours to learn to protect themselves?

The two big areas that the new Finance Protection Agency wants to regulate are mortgages and credit cards. This stuff is not rocket science. It would not be hard to create simple resources for people to learn about mortgages and credit cards.

Instead of just shooting off my mouth, here my stab at a start.

Don't Get A Mortgage Unless You Can Answer These Questions:

1. What is the interest rate?
2. What is the monthly payment?
3. For what period of time will the interest rate remain fixed?
4. For what period of time will the monthly payment remain fixed?
5. Are there any penalties or other reasons I cannot pay off this loan whenever I want?
6. How much is my mortgage principal being reduced on a monthly basis?
7. When my monthly payment can change, how does it change?
8. What is my worst case scenario on the change in my monthly payment?
9. What happens if I am late with a monthly payment?
10. What exactly are the fees for closing this loan?

Our high schools and universities have done a poor job preparing our young adults for the real world. If the Administration and Congress feel the need to do something, how about pass some laws requiring basic financial education in our school systems.

Let's not jump to create a new federal agency that will start changing all the rules of the game -- e.g., the CFPA is mandated to create "vanilla" loan products that all lenders must use unless waivers are obtained. We do not need more federally-mandated documents and protocols adding time and cost to the lending world (already a bit anemic). We need to presume the intelligence of our electorate and give them the tools to protect themselves.

Jim Randel is the founder of The Skinny On book series. His first book, The Skinny on the Housing Crisis, was just awarded first prize in a book competition sponsored by an organization of 600 business journalists.

Deepak Bhargava: 10 Percent Is Enough

2009-07-22T13:39:20Z

Debt. It is crushing America's soul, and slowly robbing it of its leadership position in the world.

And what are our elected leaders doing to help the average family or small business owner drowning in debt and exorbitant interest rates? Nothing. The "Do Nothing Coalition" has turned its back on the citizens it's supposed to represent. Instead, they've decided to protect the robber barons of Wall Street and the predatory loan sharks who brought us this economic crisis that has seen millions lose their jobs, their homes, their health care and their retirement savings.

The coalition, which is made up of Republicans, bankers, Wall Street lobbyists and certain Democrats who are afraid of their own shadows, opposes limiting the interest rates which have propelled millions of people into unsustainable debt.

But there is something we can all do about it - we can join Metro Industrial Areas Foundation's (IAF) "Ten Percent is Enough!" campaign, a national effort being launched today in Washington, New York, Boston, Chicago and Durham that seeks to reinstate usury laws to cap interest rates at 10 percent for credit cards and personal loans, including payday loans and rapid-return tax refund businesses. The IAF is one of the country's leading community organizing networks, founded by Saul Alinsky. The IAF has pioneered strategies to rebuild cities, create affordable housing and enact living wage laws and the local level, and now they are bringing their experience and deep local leadership into a major campaign at the national level. A similar effort is being launched in the United Kingdom today by the IAF affiliate in London.

IAF organizing is rooted in faith institutions, and one of the most provocative aspects of this campaign is the way it questions our economic arrangements on the basis of morality and scripture. "If ten percent is enough for God, it is enough for Bank of America," notes Bishop C. Joseph Sprague from Columbus, Ohio, a leader with the IAF. This fundamental moral question is at the heart of the economic calamity we are now enduring: is there any amount of profit that is too much? Any level of exploitation that we will not tolerate?

We have been the victims of market fundamentalist ideology for so long, that we've forgotten that the ability to charge unlimited interest is a relatively recent phenomenon, not natural and not inevitable. "For most of human history, our religious sages and political leaders have condemned the practice of lending at exorbitant interest. We stand with them against the profiteers who have pillaged our communities," says IAF leader Bishop Douglas Miles from Baltimore, MD. Usury laws, which protect consumers from abusive interest rates, were in place in America until 1980. It was one of Jimmy Carter's last acts as president to allow banks and other institutions to charge unlimited interest rates, ushering in the era of unfettered markets. The consequences of lifting usury laws for individual families and our nation have been dire.

There are legions of outrageous stories about the manner in which people have become victims of loan sharking. There is a lawsuit pending by the City of Baltimore against Wells Fargo for targeting low-income neighborhoods with sub-prime mortgages that caused foreclosure rates in those neighborhoods that is nearly double the city's average.

In another case from the area, Pauline Charles reports: "I got trapped in a car title loan that made me pay back $11,000 in interest on a $1,000 loan. When I fell behind, payments ballooned to $2,000 a month. This loan put tremendous stress on my family relationships. I wish someone had stopped me. And now it's time for us to stop them."

Between March of 2007 and February of 2008, some 70 million American card holders experienced increases in finance charges. Hidden fees and penalties are used to hide the truth - rates of 25-35 percent and higher are common. The result has been predictable: Americans are flooding into bankruptcy court at the rate of 5,593 per day.

Beyond personal tragedies, the elimination of usury laws helped shift the investment of American capital and talent away from manufacturing and material innovation and into an unproductive financial sector based on trading paper rather than producing long-term wealth. That shift has damaged other sectors of the economy, decimated America's labor force and weakened America's position in the world.

A cap on interest rates makes as much sense as speed limits. It makes as much sense as pollution limits. Why? Because reckless speed and too much pollution are bad for individuals, our communities, and our country just as are sky high interest rates.

There is a simple solution that will restore moral order and stability to our economy: cap interest rates at 10 percent.

Why 10 percent? Because 10 percent is enough. It is enough to allow credit to flow to all worthy borrowers. It is enough to allow bankers their fair share of profit. It is enough to protect families from permanent indebtedness. And it is enough to divert our economy away from speculative gambling and back towards productive wealth creation in the industries of the future: green manufacturing, sustainable energy and others that the American entrepreneurial spirit has yet to imagine.

Many of us have been wondering when the abuses of Wall Street and the banking industry would trigger a populist revolt to rebalance the scales in favor of working families. Thanks to Metro IAF, that day has arrived -and not a moment too soon. To get more information or join the campaign go here: www.10percentisenough.com

Ten percent is enough.

Pablo Triana: In Finance, History Often Written By Losers

2009-07-08T17:07:37Z

Nassim Taleb, the famed author and iconoclast, explains in the foreword to my new book how he spent nearly two decades trading a type of complicated financial product known as exotic options, on underlyings such as stock prices, interest rates, currencies, or commodities. In fact, he was there right at the beginning, when those products were being first invented by Wall Street and the City of London, in response to client needs and desires for ever more tailored risk taking. As the years passed, he was puzzled to see the publication of academic papers employing convoluted mathematics dealing with the theoretical analysis of those same exotic options (long after the real thing had began to be traded in the real world) where the products were named after the non-practicing theoretician, as if he had in fact first come up with the concept. Clearly, there was a big attribution problem going on. The world at large was being told something which was plainly not true. The real innovators were ignored, the faked ones were glorified. History got to be written not by those who actually made it into the game, but by those who didn't. What the winners created, the world was conned into believing that the non-winners had designed.

Finance is full of examples of non-winners being perceived and even declared as winners, and thus as the referential icons whose acts and opinions must be unquestionably bowed to and abided by. This clearly is a very dangerous process for nothing could be more lethal than transforming into admired ways that which has failed. Nothing could be more deleterious than allowing demonstrable failures to keep roaming among us, under the disguise of unassailable successes no less.

Take the famous Black-Scholes option pricing model. To this day, almost forty years since it appeared on stage, the indefatigable conventional wisdom remains that this is a practical, needed, successful breakthrough. And yet, the inevitable truth is that Black-Scholes, notwithstanding its technical brilliance, has always been a failure. It doesn't work and it can cause lots of wreckage (the October 1987 crash was indeed caused by the model). That it was awarded the Nobel a decade after it had become crystal clear how flawed and lethal the construct can be powerfully symbolizes how losing propositions are perplexingly allowed staying power in finance. Or take risk "forecaster" Value at Risk, a tool that as much as anything else caused the credit crisis. We had known for years that VaR had the potential for enabling recklessly leveraged reckless risk-taking. Taleb had loudly warned since at least 1996, including prescient mentions of bank failures and public bailouts. VaR had caused wreckage before, and its structural defects were insultingly obvious. Yet, what did bankers and policymakers do? Reward VaR with ever more power, with ever more influence, all the way to the current malaise. An underperforming device was once more rabidly promoted (it is still with us!), and now we burn as a result.

Or take flesh-and-bone characters. A lot of the people who just sank us are still running things, shaping the future for all of us. A lot of losers remain in positions of financial influence. How many Subprime CDO traders, structures, and salesmen who caused trillions of dollars in losses are still holding highly-paid jobs on Wall Street or the City? How many theoreticians who failed to predict and who sponsored destructive math are still being employed by universities and banks? How many regulators who failed to police and who allowed (in fact, enforced) the toxic leverage are still dictating policy? Far too many. Finance may be the only place on Earth where so many people who failed so much are not castigated, reprimanded, or forever banned from the premises. Losers are allowed to stay. Be not surprised then if a future similar destruction is duly unleashed.

Bad things and Texas-size misconceptions have surprisingly long staying power in financeland. Why? Perhaps it's losers protecting losers; perhaps it´s that no one had ever denounced, even noticed, these things; perhaps finance practice and theory are too complicated for outsiders to judge properly and thus the con goes on unperturbed. Whatever the actual reason behind the puzzle, one thing we can be sure of: we can't allow this to happen again. We must learn our lesson and irrevocably conclude from the present mayhem that we simply can't have so many deleterious non-winners not just roaming around but actually getting to shape things in the markets. Too much is at stake.