Never Again?

Once again, we are moving farther into Never-Never Land of excessive financial speculation. Why? Point 1 below presents a version of the argument laid out by Dr. Simon Johnson in his 2009 instant classic, The Quiet Coup. Just as rail interests dominated the U. S. post-Civil War, leading to overcapacity, financial panics and numerous railroad bankruptcies, financial interests have overexpanded and have led to numerous financial company collapse; yet their power continues and as their interests derive from volatility and surprises, Fed and Federal policies support Big Finance at the one unthinkable cost of pay cuts to ordinary workers, post-Depression unprecedented financial strains in state and local finances, and zero returns to savers. Here are 3 points laying out a view of how things stand and, first, how they came to be so durable.

1. It's not my usual source for commentary, but Mother Jones (linked to by Naked Capitalism this AM) has quite a summary and screed about Big Finance's influence titled Capital City. Here are some excerpts.

"If you get Chuck Schumer on your side, you are okay," one former SEC official told [16] the New York Times, and that's exactly what the finance lobby has done. The New York Democrat is a member of both the Senate Committee on Finance and the Senate Committee on Banking, Housing, and Urban Affairs, and he's received so much money from Wall Street over the years—more than $14 million—that he actually shut down his personal fundraising efforts between 2005 and 2008. Since then he's raised a staggering $284 million for the Democratic Senatorial Campaign Committee, which he headed until recently, and much of it has come from Wall Street. In June 2007 alone, when lobbying for the carried interest rule reached a fever pitch, employees of private equity firms contributed nearly $800,000 to the DSCC.

It was money well spent: Schumer agreed to support a repeal of the rule only if taxes were also raised on things like venture-capital and real-estate partnerships, a stand that guaranteed resistance from enough interest groups to let the hedge funds' special treatment survive unscathed. A million-dollar investment had allowed the hedge fund industry to keep a billion-dollar loophole. Not a bad return. . .

To get a better sense of just how much money, let's take a virtual stroll down K Street and see what everyone is spending on the world's second-oldest profession. It's all laid out for us by OpenSecrets.org. The defense lobby? Pikers. They contributed $24 million to individuals and PACs during the last election cycle. The farm lobby? $65 million. Health care? We're getting warmer. Health care was the No. 2 industry, at $167 million.

And the finance lobby? They're No. 1, with a very, very big bullet. They contributed an astonishing $475 million during the 2008 election cycle. That's up from $60 million almost two decades ago. . .

After a brief dip in political outlays at the end of 2008, the financial industry spent $402 million in the first 10 months of 2009 on both lobbying and campaign contributions, enough to put them on track to break 2008's record. Members of the House Committee on Financial Services alone received more than $8 million in industry contributions.

Whether the CFPA eventually survives is still up in the air, but the finance lobby scored a big victory almost immediately when Obama's proposal went to Capitol Hill and was quickly stripped of its requirement that banks offer consumers "plain vanilla" products—things like standard 30-year fixed mortgages and low-interest, low-fee credit cards—in addition to their more convoluted options. A couple of weeks later banks with less than $10 billion in assets—a category that includes 98 percent of all US banks—were exempted from the CFPA's scrutiny entirely. And proposals to regulate derivatives by forcing them to be traded on supervised exchanges, as stocks and commodity futures already are, were watered down as well.

How could all this happen so soon after the financial industry's reckless behavior nearly caused a global meltdown? Ironically, it's probably because the bailout was so successful. Without a sense of crisis to drive things, the political will to take on the industry has largely dissipated. Even after nearly destroying the world economy, the finance lobby is, still, simply too big to fight.

Interestingly, the FDR-era reforms that were most appealing to conservatives were probably the financial system reforms, as recounted by then-Judge Pecora in Wall Street Under Oath, a polemic defending these reforms and using that point as one of its key closing arguments.

2. I don't watch much TV, but I saw my first "buy gold" ad in the 6:30 slot on a well-viewed cable news show last night. And then there's this illogic that we started seeing a few years ago in the energy market, when refinery shutdowns, which depress demand for crude oil, reflexively led to rises in crude pricing. Huh? Even Mark Haynes on CNBC questioned that dynamic. Per Bloomberg.com today in Metals Gain as Cold Threatens Output; Yen, Greek Bonds Decline:

Metals rose for a fourth day as icy weather across the Northern Hemisphere threatened to disrupt production. . .

Copper advanced to the highest price since August 2008 at 11:23 a.m. in London and aluminum increased the most since October 2008. . .

Near-record snowfalls and below-average temperatures from Beijing to London closed airports and roads, while the U.S. may suffer its worst winter in 25 years, AccuWeather.com predicted. (Ed.: At which time there was residual concern about global cooling) The freeze may hamper the global economic recovery after the deepest slump since World War II. Investors speculated that China, the world’s biggest aluminum producer, will struggle to maintain output.

“The cold snap in many parts of the world will weigh on gross domestic product,” Steven Barrow, head of Group of 10 foreign-exchange strategy at Standard Bank Plc in London, wrote in an e-mailed note today. “The impact might not be huge but coupled with hints of underlying softness in the global economy’s performance it could raise question marks over recent stock strength and bond market weakness.”

OK again. The cold snap will decrease economic activity and will likely (temporarily) decrease Chinese demand for bauxite (aluminum precursor). How on earth can this cause a rise in raw materials pricing? Yes of course, if production is disrupted, there could be some small increase in finished goods pricing. Not logical.
Only in a world of heavy speculation can this occur.

3. A reader recently passed on some prices, yields and maturities on sovereign debt (let us assume the data are current enough to use the present tense for purposes of discussion). While the U. S. 30 year Govvie its long-term average of about 4.7%, what is astonishing is that Russian and Indonesian debt is almost as dear, running for 20+ years in the 5% range for Russian debt and under 7% for 28 year Indonesian paper. How would you like to lend to Peru with a 2014 maturity at 3.92% per year? Heck, you can get higher yields from Merck or Total, and almost as high a yield as is provided by McDonald's stock. Russia? Peru?

This can only come from a wild abnegation of responsible lending. Remember: who borrows your money has your money. Go sue Russia for it back. Who in his/her right mind would lend hard-earning savings to the Kremlin for 20 years at about 5% per year when one can earn a 5% dividend by owning a piece of the oil giant Total, with retained earning to boot? Any lender bears two risks: credit risk (default) and interest rate risk. Over 20 years, lending to Russia has both of those big-time. But the lender's upside is capped. Sounds like a miserable deal to me. It was only about 20 years ago that Boris Yeltsin stood on a tank fighting off a coup attempt. And it's only a little over a decade ago that Russia "restructured" its debt.

Exactly why so many funds have been and are being created that would allow money to bid up the price of long-term Russian, Indonesian, Peruvian etc. debt, not to mention increasingly aggressive speculation in commodities, can't be known, but it must involve leverage keying off of central bank zero interest rate policies.

What is an investor to do?

In a world where the Fed has floated the idea of issuing its own debt--which of course can be paid off by simply creating the "money" with which to pay it back, the unthinkable is thinkable. Can the S&P 500 reach 2000 in 3-4 years, as I heard touted on CNBC yesterday while exercising? Or could it go to new lows much sooner than 2013?

We need but are not getting a "never again" set of actions from the powers that be.

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