Bill Meyer Show KMED with Will Reishman on 06/24/2010

Secretive and Powerful BIS Report Released

Eric King, kingworldnews.com, 06/28/2010

The very fabric and the seams of the financial system are coming apart. Who knows what the timetable is for the implosion of the current monetary system? We are witnessing the greatest wealth transfer in history, and the horrors of the aftermath of this tragedy will not be forgotten for decades.  Keep in mind that the stark warnings from today’s annual BIS (Bank for International Settlements) report are the very reason why it is so important for all readers globally to protect themselves and their families by owning gold.

This was from the annual report released today by the very secretive and extremely powerful BIS: “Three years after the onset of the crisis, expectations for recovery and reform are high but patience is wearing thin. Policymakers face a daunting legacy: the side effects of the ongoing financial and macroeconomic support measures, combined with the unresolved vulnerabilities of the financial sector, threaten to short-circuit the recovery; and the full suite of reforms necessary to improve the resilience of the financial system has yet to be completed.”

The BIS release continues: “When the transatlantic financial crisis began nearly three years ago, policymakers responded with emergency room treatment and strong medicine: large doses of direct support to the financial system, low interest rates, vastly expanded central bank balance sheets and massive fiscal stimulus. But such powerful measures have strong side effects, and their dangers are beginning to become apparent.” Read more»

Why Friedrich Hayek Is Making a Comeback

Russ Roberts, wsj.online.com, 06/28/2010

He was born in the 19th century, wrote his most influential book more than 65 years ago, and he’s not quite as well known or beloved as the sexy Mexican actress who shares his last name. Yet somehow, Friedrich Hayek is on the rise.

When Glenn Beck recently explored Hayek’s classic, “The Road to Serfdom,” on his TV show, the book went to No. 1 on Amazon and remains in the top 10. Hayek’s persona co-starred with his old sparring partner John Maynard Keynes in a rap video “Fear the Boom and Bust” that has been viewed over 1.4 million times on YouTube and subtitled in 10 languages.

Why the sudden interest in the ideas of a Vienna-born, Nobel Prize-winning economist largely forgotten by mainstream economists?

Read more»

Bond Bubble?

Doug Noland, www.prudentbear.com, 06/25/2010

The major rally in Treasurys and the dollar over the past couple of months helped solidify the bullish view that our nation’s fiscal situation is relatively benign and that the U.S. retains its premier safe haven status.  An alternative explanation posits that much of the rally has been “technical” – the result of the crowd caught on the wrong side of global leveraged speculations.

Back in November – and in spite of gross borrowing excesses – the markets were fine lending to Greece for two years at about 2%.  Two-year Greek yields traded today at 10%…

So there is now a clear policy divide for the markets to contemplate.  In Europe, there appears a willingness to accept some short-term pain for the good of long-term stability.  Here at home, there remains a stubborn adherence to inflationism.

“I find it truly amazing to see how many pundits refer to the bond market as if it is in some sort of a bubble. How can a security whose price is constantly projected to decline by the economics community be in a bubble? How can any asset class be in a bubble where the capital is guaranteed and which pays out a coupon twice a year? It makes no sense.”  David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, writing in the Financial Times, June 21, 2010

As an analyst of Bubbles, the economic community’s price sentiment is not high on my list of key Bubble indicators.  And it is the nature of Bubbles to flourish specifically because of perceptions of seemingly guaranteed returns (tech stocks only go up, home prices have never gone down, governments don’t default, etc.).  I have theorized that policymaker response to the 2008 bursting of the Wall Street/mortgage finance Bubble unleashed a Bubble in sovereign debt – the “Global Government Finance Bubble.”  I see ongoing evidence supporting this thesis. Read more»

Doug Noland’s Credit Bubble Bulletin

www.prudentbear.com, 06/25/2010

[Weekly News Review - Selections]

June 23 – Bloomberg (Shobhana Chandra and Timothy R. Homan):  “Purchases of new homes in the U.S. fell in May to a record low as a tax credit expired, showing the market remains dependent on government support. Sales collapsed a record 33% to an annual pace of 300,000 last month from April… the fewest in data going back to 1963… Demand in prior months was revised down.”

June 25 – Financial Times (Edward Luce):  “Peter Orszag, Barack Obama’s budget director, resigned this week partly in frustration over his lack of success in persuading the Obama administration to tackle the fiscal deficit more aggressively, according to sources inside and outside the White House. Mr Orszag… is seen as the guardian of fiscal conservatism within the White House. Other members of Mr Obama’s economic team, notably Lawrence Summers… have placed more emphasis on the need for continued short-term spending increases to counteract what increasingly looks like an anaemic economic recovery in the US.”

June 25 – Bloomberg (Jeff Kearns and Christopher Palmeri):  “The widening gap between the cost of insuring U.S. municipal and federal debt shows investors are betting that state and local governments can’t contain their budget problems, according to Macro Risk Advisors LLC, which predicted the European crisis… ‘People are just starting to wake up to this,’ said Justin Golden, a strategist for the… firm. ‘The market is starting to assign greater levels of fear. The further you go out, things look challenging for a lot of these states.’  With state deficits estimated to total $104 billion in fiscal 2011, ‘it seems likely that the federal government will eventually be faced with the choice of allowing municipal bankruptcies or backstopping the states,’ the report said.”

Read more»

States of Crisis for 46 Governments Facing Greek-Style Deficits

By Edward Robinson - Jun 25, 2010

Californians don’t see much evidence that the worst economic contraction since the Great Depression is coming to an end.

Unemployment was 12.4 percent in May, 2.7 percentage points higher than the national rate. Lawmakers gridlocked over how to close a $19 billion budget gap are weighing the termination of the main welfare program for 1.3 million poor families or borrowing more than $9 billion in the bond market. California, tied with Illinois for the lowest credit rating of any state, is diverting a rising portion of tax revenue to service debt, Bloomberg Markets magazine reports in its August issue. Read more»

Orszag exit reveals deficit policy split

By Edward Luce in Washington

Published: June 25 2010 19:29 | Last updated: June 25 2010 19:29

Peter Orszag, Barack Obama’s budget director, resigned this week partly in frustration over his lack of success in persuading the Obama administration to tackle the fiscal deficit more aggressively, according to sources inside and outside the White House.

Mr Orszag, whose publicly stated reasons for leaving were that he was exhausted after years in high pressure jobs and also that he wanted to plan for his wedding in September, is seen as the guardian of fiscal conservatism within the White House. Read more»

Ben Bernanke needs fresh monetary blitz as US recovery falters

Federal Reserve chairman Ben Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral.

Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.

Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed’s balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts. Read more»

Small Banks and Big Risks

David Wessel, onlinewsj.com, 06/24/2010

Congress is planting the seeds of the next big bank bailout.

Attention is focused on the House-Senate conference on a once-in-a-generation rewrite of the rules of finance. Meanwhile, a provision added, almost unnoticed, to a help-small-business bill that passed the House last week would allow all but the 100 largest banks to pretend they haven’t made bad loans. The goal is to prompt them to lend more readily to small businesses.

The provision would permit more than 7,800 banks, with nearly $3 trillion in assets among them, to spread losses on bad real estate loans over six to 10 years instead of recognizing reality immediately.

This wink-wink accounting, which would allow banks to act as if they have bigger capital cushions than they do, is a remake of an old movie: the savings-and-loan horror show of the 1980s and the Japanese banking monster of the 1990s.

Allowing a bank that is broke or near-broke to pretend otherwise in the hope that temporarily depressed commercial real estate prices will eventually rise sounds nice. But history shows that too many such bankers realize the only survival strategy is to make more risky loans and pray they’re paid back. If they aren’t, well, the government deposit-insurance fund, not the shareholders, gets the tab.

Treasury Secretary Timothy Geithner thinks this is an awful idea. “Could increase costs for the taxpayer by raising the likely losses from future bank failures,” he wrote to House leaders. Federal Reserve Chairman Ben Bernanke thinks this is an awful idea: “Banks that are allowed to carry these losses do not engage in sound lending.”

Read more»

Dick Morris and Eileen McGann

The Next Big Crisis: State Bankruptcies, Townhall.com

Many say that the situation in Greece is a harbinger of what is coming to the United States. They are right. But first it will come to states like New York, California and Michigan, which are stretched way beyond their means and deeply in debt.

Until now, the problems in these states have been papered over by federal aid. Essentially, Washington has relieved these states (and the local governments they fund) of their constitutional obligations to balance their budgets by giving them welfare checks in the nick of time. Barack Obama now seeks to pass $50 billion in additional welfare to the states.

But, since these federal funds are not necessarily recurring — and the jobs and obligations they fund are — they simply enlarge each year’s deficit hole and enable the states to go more deeply into the red.

As these deficits mount — particularly if a newly elected Republican House and/or Senate refuse to fund them — bondholders will get more and more nervous. Eventually, they will realize that the less solvent states are bankrupt and will refuse to buy their debt. Eyes in Sacramento, Lansing and Albany will turn helplessly to Washington to guarantee their debt, just as Athens turns to Berlin.

Republicans, if they control either or both Houses, should stand firm and insist that these states sink or swim on their own. America’s taxpayers will not take kindly to having to bail out other states — or even their own — to pay for years of reckless spending. Americans will swarm to the GOP and will hail its stand.

The time is long passed when a local newspaper can generate sympathy — even from its own readers and the state’s own citizens — with a headline like “Ford to New York: Drop Dead.” Now, people in other states (and even in the affected state) would stand up and cheer should the Republicans take so strong a position.

There is currently no legal procedure for a state government to go bankrupt. Congress, especially if it is Republican in 2011, should pass a mechanism that permits states to discharge in bankruptcy their collective bargaining agreements and contracts with their municipal unions. Of course, this procedure would have to let school boards and local governments do likewise.

Obama will veto this bill, and a stalemate will ensue.

On the left will stand Obama, the unions and the Democrats demanding bailouts for the states and, truly, an end to our federal system of government. Once Washington guarantees state debt and spending, there will be no more state governance, only national rule.

On the right will stand a Republican Congress refusing to do so unless the states declare bankruptcy and cleanse themselves of the union agreements that got them into trouble in the first place. The GOP will point out that state funding is leaking as surely as the Deepwater Horizon oil well and polluting our nation’s balance sheet as badly in the process.

The money will run out. States, school boards and localities will stop sending out checks. Emergency state funding may keep schools open, prisons locked, and police and fire services running, but otherwise all hell will break loose.

Something will give in this national game of chicken. If it is the states and Obama that blink first, we will free our local governments of the grip of municipal unions, their rigid work rules and their unaffordable pensions. If the Republicans blink first, they will forfeit their right to represent the American people, having backed down from the challenge of our times.

This Armageddon looms in 2011, presenting us with either an opportunity to reform our government in fundamental ways or to set in stone our path to an Athens-esque meltdown.