Wednesday, March 26, 2014

The Berkeley Free Speech Movement - Happy 50th

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

            Fifty years ago, after a few scuffles, the Free Speech Movement established its foothold at the University of California, Berkeley. On December 2, 1964, Mario Savio gave a well-known speech before a thousand or more students. In part: "There's a time when the operation of the machine becomes so odious - makes you so sick at heart - that you can't take part."

            In February 2014, Neil Fligstein, a sociologist at U Cal Berkeley, along with professors Jonah Stuart Brundage and Michael Schultz, released a paper: "Why the Federal Reserve Failed to See the Financial Crisis of 2008: The Role of Macroeconomics." In conclusion: The suppressed and carcinogenic operation of the country by the Federal Reserve has become so odious - it should make Americans sick at heart - that it took a sociology department to exercise free speech, when no economics department dared take part.

From the professors' abstract: "One of the puzzles about the financial crisis of 2008 is why the regulators were so slow to recognize the impending collapse of the financial system. In this paper, we propose a novel account of what happened. We analyze the meeting transcripts of the Federal Reserve's main decision-making body, the Federal Open Market Committee (FOMC), to show that they had surprisingly little recognition that there was a serious financial crisis brewing as late as December 2007."

            This certainly is novel. No economist exposed to the Federal Reserve's tentacles (99%), would dare write this paper.

            The sociologists explain their methodology: "We use topic modeling to analyze transcripts of FOMC meetings held between 2000 and 2007, demonstrating that the framework provided by macroeconomics dominated FOMC conversations throughout this period."

 From "topic modeling" (whatever that may be), the sociologists explain why the Fed will do nothing as the current asset bubbles pop: "The topic models... show that each of the issues involved in the crisis remained a separate discussion and were never connected together."  

For current asset allocation, that is all you need to know.

Just as former Federal Reserve Chairman Ben S. Bernanke said - and he really did believe - that subprime mortgage defaults were "contained" (abandoned houses in Maricopa, Arizona and the Inland Empire would not inhibit the nation's economy), whoever rules the suffocating Eccles Building when stocks, bonds, houses, and paper currencies gasp for air, will do no differently.

There is talk now that Fed Chair Janet Yellen is monitoring bubbles. She is doing no such thing. It is impossible for Yellen to see outside her oh-so-tiny world, having lived her life in the minutiae of the late-20th-century economic sandbox (regression analysis). If reports are true (this seems hard to believe, but, life and art...) Yellen set her sights in high-school to be a researcher for the Federal Reserve. She loves this stuff! So does everyone else in the room. There are the occasional interlopers, such as Richard Fisher today. The problem though, is academic economists cannot understand anything outside their own abstractions, since the only reference to their own abstractions are their own abstractions.  

The Berkeley professors write: "Our results suggest that regulators use economic theory to make sense of a macro economy that, in key respects, does exist independently of their models. This understanding limits their ability to understand the 'real' connections between markets." Since models have been constructed for the mutual pleasure and (more-so-then-ever) need to retain academia's credibility, discussion at FOMC meetings is of the construction of models, not of anything real.

The sociologists write: "Not surprisingly, the majority of people appointed to the FOMC are formally trained as economists." They add a footnote: "Incidentally, we also found that, despite their status as central bankers, only 6 of 31 FOMC members had spent any time working in the financial industry." This is not "incidentally."

There is so much in the University of California paper that has been said for years - but never by the academic economist mafia. Such as, the Federal Reserve's own zero-interest rate policy (ZIRP) of the early 'oughts was directly responsible for the housing-CDO-private equity-TBTF bank failures. To say this again: If not for the Federal Reserve's ZIRP policy, there would have been no financial crisis in 2007 and 2008. Fannie and Freddie would never have grown beyond their Lilliputian mandates; Angelo Mozilo would be managing a tanning salon; and Bernie Madoff could not have levitated predictably increasing returns without the Federal Reserve's constantly rising cushion of credit absorption.

Let's review footnote number 11 of the paper: The first paragraph may frustrate those not interested in the sociologists' theory, but please bear with it: "It is possible that the FOMC's macroeconomic models were performative in the specific sense of 'counter-performativity,'" defined as a situation in which economic models shape economic processes in such a way 'that they conform less well to their depiction by economics' (MacKenzie, 2007, p. 76; emphasis added)."

Okay. Theory in place, let's go to the evidence: "[T]he Fed's extended interest rate accommodation of the early 2000s, designed-at least overtly-to promote growth through the standard policy channels of consumer and corporate investment, also appears to have directly fueled asset prices, contributing to the housing-price bubble at the same time that the FOMC's models consistently rooted housing prices in economic 'fundamentals' (see below). Further research would need to demonstrate the extent to which the FOMC could be considered counter-performative in this and other respect."

            The evidence is manifest.

Thursday, March 20, 2014

Deceived by a Mirage

The Second Crimean War has brought forth wonder, at least among some, at the stock market's indifference. Some would say stock market "exuberance," but with daily, government interference, stocks will rise - until they don't. What follows is a look at market indifference in 1914, right up until the guns were rolling.

            Hindsight can be a handicap. We know what happened in August 1914. No one in Europe foresaw four years of trench warfare. The British periodicals quoted below were caught up in the "Ulster Crisis," which seemed far more important than an assassination in Sarajevo.

            Aside from the markets, the views quoted below show how quickly the media can about face, in a complete dismissal of formerly held opinions. Many will look at this as evidence the government controlled the press, but it should be remembered that Gustave Le Bon preceded Joseph Goebbels. It may also be noted how disagreements between Russia and its underbelly, among different ethnicities and alliances, are ancient, modern and do not lend themselves to sweeping solutions.

Of the periodicals quoted below, The Spectator and The Economist were weeklies, the Manchester Guardian and Daily News were daily newspapers.

The Spectator - 6 June 1914 - page 3:

Bank Rate 3 per cent, changed from 4 per cent.

The Spectator - 20 June 1914 - page 1:

"IN THE BALKANS, ALSO, THINGS ARE GETTING WORSE RATHER THAN better. Throughout the week a confused battle has been proceeding round Durazzo, the Albanian capital. It is true, the latest news is more reassuring, but.... How will it be possible to prevent Austria-Hungary and Italy quarreling over the disposition of Albania? Neither will let the other intervene. Partition between the two seems impracticable...."

"MR. CHURCHILL EXPLAINED AND DEFENDED THE GOVERNMENT'S AGREEMENT WITH THE Anglo-Persian Oil Company in the Commons on Wednesday. His speech, which lasted an hour and a half, was in great measure an expansion of the Admiralty Memorandum; but Mr. Churchill was careful to explain that we were not depending exclusively or primarily on the Persian oilfields.... and explained that the £2,200,000 invested by the Government would not be used in buying out existing shareholders, nor in payment for goodwill and commissions, but would be employed for the actual development of the oil supply, and would bring in new properties and new assets."

"SIR EDWARD GREY, REPLYING TO CRITICISMS OF THE SCHEME... maintained that the good relations between Russia and Great Britain would be unaffected by the deal. The Anglo-Persian Company's concession antedated the Anglo-Russian Agreement.... Mr. Lloyd George asked how the government proposed to defend the property "surrounded by material far more inflammable than oil" and Sir Edward Grey suggested that two brigades of British troops could defend the pipeline if the worst came to worst.... [H]e held there was no place outside the British Empire where the risks were less."

On June 28, 1914, Gavrilo Princep, a Serb, assassinated Archduke Franz Ferdinand, heir presumptive to the Austrio-Hungarian Empire, and his wife Sophie, Duchess of Hohenberg, in Sarajevo, Bosnia.

In England, interest was muted, but not everywhere. When the Austrian ultimatum to Serbia was published, the foreign secretary, Sir Edward Grey, described it as "the most formidable" ever sent "by one State to another." Winston Churchill described it as 'the most insolent document of its kind ever devised." Christopher Clark, author of The Sleepwalkers: How Europe Went to War in 1914, is wary of these judgments. Clark interposes the 1999 Rambouillet agreement, the ultimatum presented by NATO to Serbia-Yugoslavia, which Belgrade rejected, as much more aggressive than the Serbian document. (In part: "NATO personnel shall enjoy, together with their vehicles, vessels, aircraft, and equipment free and unrestricted passage and unimpeded access through the Former Republic of Yugoslavia, including associated airspace and territorial waters....") Clark quotes Henry Kissinger's appraisal of the Rambouillet agreement: "an excuse to start bombing." Clark describes Grey's and Churchill's summaries as "misleading... to think of the Austrian note as an anomalous regression into a barbaric and bygone era before the rise of sovereign states."

Although Clark does not make the comparison directly, the Rambouillet agreement (1999) is to a future "regression into a barbaric and bygone era [during the unfurling] of sovereign states." It is no surprise that as savagery captures the culture, international provocations grow more savage. The vast bureaucratization of such decisions, whether a central bank coaxing the bottom 50% into sub-prime mortgages or NATO's bombing memorandum, are part of modern unaccountability and detachment from the people they supposedly serve. 

In July 1914, markets yawned. Within a month, investors in some countries would lose everything. The historian Niall Ferguson published a study of sovereign bond yields: "Political Risk and the International Bond Market Between the 1848 Revolution and the Outbreak of the First World War," in the Economic History Review (available on, 2006.) His source was weekly issues of the Economist between 1848 and 1914.

Over that period, the British consol was the benchmark for all Great-Power, sovereign bonds (Austria, Britain, Germany, France, and Russia.) Three-percent consols were perpetual issues with covenants that authorized the government to redeem if the price reached par. Yields rarely rose above 5% during the entire 1848-1914 period. The exception was Austria; the imperial credit traded at around 6% or 7% during good times and soared into double-digits during crises. By the 1890s, the four other sovereign issuers traded at yields of 3% or below. The trend for the following 20 years was of higher yields, rising by 0.5%% to 1.0 %.

The 2-1/2% British consols rose from a 3.30% yield on July 7 to 3.31% on July 22 - a single basis point of fear. Tensions rose on the exchanges and grew acute on July 27 when the Vienna and Budapest exchanges closed. The Sarajevo incident could still be interpreted as a local affair, but trading slowed on the other European exchanges. Now consols rose to 3.45%. The St. Petersburg exchange closed on the 29th and the Economist considered the "Berlin and Paris bourses closed in all but name."

It was by no means clear who would fight or even if there would be a war. Nevertheless, British exchanges suffered a two-fold crisis. In Ferguson's words: "First, foreigners who had drawn bills on London found it much harder to make remittances; those British banks that had accepted foreign bills suddenly faced a general default as bills fell due. At the same time, there were large withdrawals of continental funds on deposit with London banks and sales of foreign-held securities. London became, as The Economist put it, 'a dumping ground for liquidation for the whole Continent of Europe'."

A wholly unanticipated domino effect now engulfed London. The bond market did not seem to acknowledge this vaporization of liquidity: "Even these developments had a remarkably limited impact on great-power bond yields. Between 22 July and 30 July (the last day when quotations were published), yields on consols rose by 26 basis points; yields on French rentes by 22 basis points; and yields on German bonds by 17 basis points. The rises were twice as large for Austrian and Russian bonds, yields on which rose by nearly half a percentage point... The Economist was especially struck by the widening of the bid-ask spread for consols (the gap between buyers' offers and sellers' asking prices) to a full percentage point, compared with a historic average of one-eighth of 1 per cent... "

The London market started to close on July 29. London clearing banks concentrated on funding their stock-exchange clients, eight of which failed by the end of the day. On July 30, the Bank of England raised its discount rate from 3% to 5%. On July 31, the Stock Exchange was closed and the Bank of England raised its discount rate from 5% to 8%.

The Spectator - 25 July 1914 - Page 1:

NEWS OF THE WEEK. The event of the week which eclipses all others in interest and importance is the meeting of the Conference of political leaders which assembled at Buckingham Palace on Tuesday.... The fact that the proposal was the King's proposal... undoubtedly rendered it easier for the four Unionist members to take part in the proceedings.

The Conference at Buckingham Palace addressed the Ulster Crisis.

The Spectator - 25 July 1914 - Page 5:

AUSTRIA-HUNGARY AND SERVIA. THE NATION'S DEEP ANXIETIES CONCERNING HOME POLITICS [Northern Ireland - FJS] have to a very great extent obscured for them the European prospect. Yet, if we judge by the telegrams in the Press and by the agitated condition of many of the Continental Stock Exchanges, it is hardly too much to say that the public mind of Europe is greatly moved by the question whether the peace of the world can be maintained. We are alluding, of course, to the diplomatic friction between Austria-Hungary and Servia.... Austria-Hungary is attempting to fasten some part of the responsibility for the infamous murder of the heir to the Austrian throne and his wife upon Servia as a nation.... If this is the kind of pressure that is being put upon Servia, one can well imagine that the Chancelleries of Europe are anxious about peace. The tone is altogether too like that of the ultimatum addressed by the wolf to the lamb about the drinking water. The injury done to the Dual Monarchy and to the Imperial House by the murder at Serajevo was terrible, but such demands as we have summarized would be tantamount to the provocation of war. It is hard to see how Servia could acquiesce in them without in effect making an admission of guiltiness which she must naturally feel it impossible to make.

"Though it is difficult to regard Austria-Hungary as politically a wise Power or to look upon the statesmen who control her destinies just now as men of foresight, we cannot think it possible that she is intent upon attacking Servia. Hostilities begun on these terms would be almost certain to involve first the rest of the Balkan peninsula and then Europe as a whole. No doubt nations sometimes go mad, but, distracted as Austria-Hungary no doubt is, both by her home and her foreign policy, there is no reason to think that insanity or anything approaching it has fallen on her."

            "[T]here is no reason to think that insanity or anything approaching it has fallen on her," was a "however" statement. The Spectator then delved into the cross-currents of ethnicities, borders, and alliances across Europe. It concluded if some sort of peace pipe were not arranged between Austria-Hungary and Servia, a continental war would follow.

Daily News - 27 July 1914 - "On the Brink of War":

"...If it should prove impossible at this late hour to prevent the outbreak of war between Austria and Servia, it is at least possible to isolate the struggle. If Great Britain, Germany, France and Italy, acting together in good faith, do not achieve that they will be responsible for the greatest crime in history."
Daily News - 29 July 1914 - "Russia and the War":

"...No one has ever yet dared to claim that Russia is the champion of the freedom of anybody. She has enslaved many, but she has freed none. Her claim to be the protector of the Slav peoples has no historic basis... For ourselves, it is unthinkable that we should be drawn into such a quarrel. We have done much for the advancement of Russian interests in recent years. We have remained silent while the liberties of Finland have been trodden in the dust and while Russia, in defiance of her agreement with us to preserve the independence and integrity of Persia, has made the northern half of that country a Russian province. But the suggestion that we should spend British lives and British treasure to establish Russia in the Balkans would be an inconceivable outrage to a democratic country. Our hands are free in this business and we must take care to keep them free. Let us work zealously to preserve peace; but let us remember that the most effective work for peace that we can do is to make it clear that not a British life shall be sacrificed for the sake of a Russian hegemony of the Slav world."

Manchester Guardian - 30 July 1914 - "England's Danger":

"We wish Servia no ill; we are anxious for the peace of Europe. But Englishmen are not the guardians of Servian well-being, or even of the peace of Europe. Their first duty is to England and to the peace of England. Let us for a moment drop solicitude for the peace of Europe and think of ourselves. We ought to feel ourselves out of danger, for, whichever way the quarrel between Austria and Servia were settled, it would not make a scrap of difference to England. We care as little for Belgrade as Belgrade does for Manchester."

Manchester Guardian - 1 August 1914 - "England's Duty":

"Then is it honour that we must fight for? No; for honours sake we must keep the peace. There are, as Mr. Asquith and Sir Edward Grey have both told us, no engagements with European Powers that would take away our perfect freedom of choice in the event of a general European war. Being free as regards Europe, we are not free as regards our own people, but must decide in favour of neutrality. For if we decide differently, then we violate dozens of promises made to our own people the promises to seek peace, to protect the poor, to husband the resources of the country, to promote peaceful progress. These promises are in honour binding, and if they are broken, then not only are our interests sacrificed but our honour is tarnished."

The Spectator - 1 August 1914 - page 3:

Bank Rate 8 per cent, changed from 3 per cent.

The Spectator
- 1 August 1914 - Page 3:

ON MONDAY IN THE COMMONS SIR EDWARD GREY EXPLAINED THE position of the Government in the Austro-Servian crisis. So long as the dispute was between Austria-Hungary and Servia alone Great Britain had no title to interfere, but if Russia were drawn in, the question would be one of the peace of Europe. He had told the Austrian Ambassador that if this happened the only chance of peace seemed to be that the four Powers-Germany, France, Italy, and Great Britain- should try to induce Austria-Hungary and Russia to suspend military operations while the four Powers tried to arrange a settlement. When he had learnt that Austria-Hungary had actually broken off relations with Servia, he immediately tried to bring about a conference of the four Powers in London. He had been compelled to act rapidly and without the usual precaution of making preliminary inquiries as to whether his proposal was likely to be welcomed.

[Sire Edward Grey] added :-

"It must be obvious to any person who reflects upon the situation that the moment the dispute ceases to be one between Austria-Hungary and Servia and becomes one in which another Great Power is involved, it can but end in the greatest catastrophe that has ever befallen the Continent of Europe at one blow; no one can say what would be the limit of the issues that might be raised by such a conflict; the consequences of it, direct and indirect, would be incalculable."

The Economist - 1 August 1914:

"The financial world has been staggering under a series of blows such as the delicate system of international credit has never before witnessed, or even imagined. . . . Nothing so widespread and so world-wide has ever been known before. Nothing . . . could have testified more clearly to the impossibility of running modern civilisation and war together than this closing of the London Stock Exchange owing to a collapse of prices, produced not by the actual outbreak of a small war, but by fear of a war between some of the Great Powers of Europe." [My italics - FJS]

Ferguson writes: "The key phrase here is 'fear of a war'. Although Austria had declared war on Serbia on 28 July, it was still far from certain that the other great powers would join in; it was not until 31 July that Russia, after three days of indecision, began general mobilization, prompting the German government to issue its ultimatums to St Petersburg and Paris. The Germans did not declare war on Russia until 1 August; their declaration of war on France came two days later. Britain entered the fray only on 4 August (an event readers of The Economist had certainly not been led to expect).What happened between 22 July and 30 July was therefore no more than a sharp rise in the perceived probability of a great power war on the continent; it was still not considered a certainty when the markets had to close."

The Spectator - 8 August 1914 - page 3:

Bank Rate 5 per cent, changed from 6 per cent.

Daily News -
11 August 1914 - "Our Business Now":

A Letter from Mr. G.B. Shaw:

".... we shall punch Prussia's head all the more gloriously if we do it for honour and not for malice, meaning to let her up [?-FJS] we have knocked the militarism out of her and taught her to respect us. Prussian militarism has bullied us for 40 years; and a month ago neither Germany nor France believed that we would fight when it came to the point...."

Daily News - 14 August 1914 - "Concerning Mr. Maximillan Craft":

A Letter from Mr. H.G. Wells:

"I find myself enthusiastic for this war against Prussian militarism. We are, I believe, assisting at the end of a vast, intolerable oppression upon civilisation. We are fighting to release Germany and all the world from the superstition that brutality and cynicism are the methods of success, that Imperialism is better than free citizenship and conscripts better soldiers than free men. And I found another writer who is also being, he declares, patriotically British. Indeed, he waves the Union Jack about to an extent from which my natural modesty recoiled. Because you see I am English-cum-Irish, and save for the cross of St. Andrew that flag is mine. To wave it about would, I feel, be just vulgar self-assertion. He, however, is not English. He assumes a variety of names, and some are quite lovely old English names. But his favourite name is Craft, Maximilian Craft-and I understand he was born a Kraft. [In other words, of German ancestry - FJS] In appearance Kraft is by no means anglicised himself. He is a large-faced creature with enormous long features and a wooly head; he is heavy in build and with a back slightly hunched; he lisps slightly and his manner is either insolently contemptuous or aggressively familiar. He thinks all born Englishmen, as distinguished from naturalised Englishmen, are also born fools...." [Mr. H.G. Wells was just warming up at this point; he still had 1,500 words to go. - FJS]

The Spectator - 15 August 1914 - page 1:

NEWS OF THE WEEK: "THE war continues to be as amazing as ever. We have now had actual firing for over ten days, and yet there has been no serious invasion of French soil. What one was always told would happen in the great war, and what undoubtedly the Germans meant should happen, was a steady and rapid advance of the stupendous tide of German soldiers into France. Wave was to succeed wave of men on the frontier, and all of them were to have their faces turned to France and Paris.... Instead of France being invaded, and the first great battle taking place on French soil, it is, Belgium that is being invaded, and the battle which is beginning as we write is not only in Belgium, but one largely against Belgian troops -a battle in which German guns will point west and the Belgian and French guns east."

The Spectator - 15 August 1914 - page 4:

TOPICS OF THE DAY:  THE CALL TO ARMS. "Let us say once more what we said as emphatically as we could last week-that the first thing to do is to get Lord Kitchener the five hundred thousand men whom he must have to make the country safe. Till that is done, till we have got the men for the firing line, all philanthropic schemes, however good, nay, however essential in themselves, must wait."

The Spectator - 15 August 1914 - page 4:

RIFLE CLUB AND VILLAGE GUARDS. "We understand that the High Sheriff of Surrey, Mr. St. Lee Strachey, is this afternoon holding a Conference of the Surrey Rifle Clubs at Brett Reynard's Restaurant, Guildford, at five o'clock, with the object of making proposals for the formation of Town and Village Guards. It must be obvious to every one that it would be an enormous advantage if every small town and village had such Guards...."

The Spectator - 15 August 1914 - page 9:

TERMS OF SERVICE. IN connecxion with our explanation of the conditions required for enlistment in the Regular Army, we are glad to learn that in the latest leaflets issued by the War Office all references to "three years" have been omitted. The conditions are now perfectly clear.... FOR THE DURATION OF THE WAR."

The Spectator - 15 August 1914 - page 10:

THE GERMAN MILITARY MIND. "ALL Englishmen are now agreed that Germany made the war, and that the moving force within the German nation was and is German militarism...."

The Spectator - 15 August 1914 - page 19:

BOOK REVIEW: Jane's Fighting Ships, 16th edition. "The latest Dreadnoughts, which are not yet completed, will carry at least eight 15-inch guns. At the moment a contrary movement is going on, however, between the sizes of ships and of guns.... On the other hand, to tie up so much capital value in a single vessel is perhaps to put too many eggs in one basket. And there are many experts who believe that the lesson of the victory of the small British ships over the larger vessels of the Spanish Armada is a lesson that may by no means have ceased to be true even for the navies of to-day.... No German Dreadnoughts in commission have guns larger than 12-inch. Our 13-inch guns in the ships in commission give us a distinct superiority in gunpower.... The only other Navy besides the British which is largely employing oil is that of the United States. So far as one can foresee, the ships of the future will burn only oil. While the British Admiralty has secured control of a Persian oilfield, the United States Navy has an oilfield in California."

Manchester Guardian - August 19, 1914 - "A Great Feat":

"The landing of the British Expeditionary Force on the Continent within a fortnight of the declaration of war is one of the most remarkable in the history of war, and the newspapers have not appraised it at its true value... It is, in fact, perhaps the most striking example of the use of naval power that even our history has ever afforded, and it should, if rightly understood, do more for the opening of the seas to commerce than a great victory... The Admiralty is to be heartily congratulated on a most brilliant beginning. There will, we think, be no talk at the end of this war of our "unpreparedness", at any rate..."

In 2014, there are many who believe assets will continue to rise and central banking will wisk away troubles. In 1914 (quoting Ferguson), "the British and Continental financial authorities pulled every trick." The author furnishes a list of clever, arbitrary and confiscatory maneuvers, but, "systematic central bank interventions to maintain bond prices" only worked for a time. Government assistance "could only disguise the crisis that had been unleashed in the bond market; it could not prevent it."

In the end: "For all save the holders of British consols, who could reasonably hope that their government would restore the value of their investments when the war was over, these outcomes [for Continental sovereign bond holders] were even worse than the most pessimistic pre-war commentators had foreseen. The fact that investors do not seem to have considered such a scenario until the last week of July 1914 surely tells us something important about the origins of the First World War. It seems as if, in the words of The Economist, the City only saw 'the meaning of war' on July 31-'in a flash'."

The Spectator - 22 August 1914 - page 10:

UNDER FINANCIAL FIRE. DURING the last fortnight or so most of us have undergone some new experiences. A great many of us have seen a terrible apparition-the apparition of personal financial ruin.... We saw as men see when they are deceived by a mirage, a reflection of something which we had always thought of as very far off-indeed, out of our sight. To the prosperous, in whatever section of the middle or upper classes they may live, real ruin seldom appears as a probability. They think they may have, if things go badly for them, to "do differently "; they do not take into consideration the possibility that they will not know what to do at all.... [W]hen we say 'home,' [w]e do not mean a house; we mean a habit, a way of life, our own social niche. Death is not the only step which leads into the unknown. The step from prosperity to poverty is less terrible, but it is something of the same nature.... It is that which men fear. It is terrible also to pass to the other side of one of those invisible barriers which divide us from those below us. We may call it pride or snobbishness, or an overweening feeling for tradition. Whatever we call it, it marks the frontier of our country, and it is in real truth one of the fences which shut us off from the precipice down which men fall among the seething mass where hunger and squalor are known, and where men are fighting for life. There may be a dozen barriers between us and them, but if we pass one there will be only eleven. Truly there are short ways from wealth to poverty, just as there is a short cut from heaven to hell, according to Bunyan. But the most frequented route is long, and at each stage in the journey we are a little less safe than we were.... Any very great financial blow strikes us everywhere. We cannot do what we would have done for our children. In a horrible moment we see them "going down"-they pass in our imagination over barrier after barrier till they are very near the edge of that horrid precipice.... [T]his is a day of uncertainties, and with the railways taken over by the State, freedom of contract limited by a moratorium, maximum prices fixed by law-all these things done in a few days, and not a gasp on the part of the public, nothing in any man's heart but loyal co-operation-we must come to doubt a great many things that once seemed sure."

The Spectator - 1 January 1916  - page 11:

Bank Rate 5 per cent, changed from 6 per cent, 8 August 1914

Wednesday, March 19, 2014

Silent Minority or Majority?

            Understanding what the people think (popular opinion) is a difficult task. It is not the same as what the experts and media tell us to think (public opinion), but the two have much in common. The correct judgment of if, or when, popular opinion will say "enough" to public opinion's mistreatment of the people could produce a multi-trillion dollar payoff.

            Without personally having a clue if or when that time is approaching, it is as a public service that an undercurrent of American opinion is hereby forwarded.  

Federal Reserve Chairman Janet Yellen will gush with the media on March 19, 2014. MarketWatch asked its audience just what the Federal Reserve chairman should be asked:   

From MarketWatch - What's your question for Janet Yellen? March 18, 2014


Most recent responses at 2 PM, March 18, 2014:

ron swaim 33 minutes ago: "Why she been incompetent her entire life which matches every single person in his administration, i.e., Kerry, Clinton, holder, etc.?!?!?!?!?"

Sammy Edwards 1 hour ago: "Why don't you dye your hair?"

Lori Smith 1 hour ago: "On that I would say give her a break. At least she is trying to grow old gracefully. Look at Hitlary that hairs dyed and it still doesn't stop the ugly anyway."

PHILLIP LARREA 1 hour ago: "If 2.5% variance is defined as price stability, why does this variance only apply to inflation, and not deflation?"

Jay Lazo 2 hours ago: "When will it all end ?"
Rodney Olives 2 hours ago: "Hey Janet,  Sooooooo....what are you doing after the press conference? Wanna grab a latte?"

John Warren 2 hours ago: "why do old people feel a need to continue hanging on as though they are important?  oh yes, gives mw something to print about, i forgot"

Jay Lazo 2 hours ago: "Any relation to Moe Howard ?"

MISSINGMW 2 hours ago: "I would like to know when you are willing to let savers participate in the game? The economy has lost a lot of buying power in the last 5 years. Not everyone wants to take risk, some that are retired are looking for preservation of capital. If we do jump off the deep end will be considered as too big to fail and be made whole again just like the banks?"

             From the above (only one of the latest 10 questions was deleted, due to length) one might think the public is less pleased with the Federal Reserve than the media establishment would like us to believe. But, one must then ask why the hostility was similar in questions posed before Federal Reserve Chairman Ben S. Bernanke held a press conference in December 2012:

What's your question for Ben Bernanke? WASHINGTON (MarketWatch) December 12, 2012 - "Bernanke Claus is coming to town, and the bearded central banker from his helicopter sleigh is about to drop more cash on the U.S. economy specifically because it's been more naughty than nice....MarketWatch invites you to ask your question, in the Story Conversation below. MarketWatch may take or amend your question when it's our turn to query Bernanke":

Robert Drobot  When will the FED permit an independent source to perform a complete and comprehensive audit of FED books? Why don't you support an end to FED control of America's financial matters?

Nick Henderson  What I would ask is how Mr. Bernanke and his associates draw a moral distinction between what they do and what a criminal counterfeiter does?

jim davis  Bernanke, why do you continue to steal from prudent savers, retirees and widows by devaluing the dollar year after year?

Shambrook Whoppers Are you a traitor or you just hate America ?

Ms. Judy Rosner  When are you going to retire?

             These were the five most recent questions posed to Bernanke at the time. Maybe others were more congenial, but the fact is, in both the December 2012 and March 2013 samples, every question copied was hostile, except (possibly) the hair-do inquiries. (As for the latte invitation, my advice for her chairmanship is to decline.) We could spend hours attempting to attribute the difference between public opinion and the menacing fragrance wafting from the inquisitive bunch quoted above. To add one speculative comment: the type of person who responds to such a question on a website may betray a sinister disposition. Or, maybe not. 

Wednesday, March 12, 2014

David Stockman's Contra Corner

          David Stockman's Contra Corner website went "live" today. Contra Club, in which I am flattered to be a member, includes several contributors. This link to David's opening salvo is aimed at Bernanke redux: Yellenomics: The Folly of Free Money. You will see members of the Contra Club with links to their contributions on the right side of the page.

            David published The Great Deformation: The Corruption of Capitalism in America in 2013. This is an important book. "The Blackberry Panic of 2008" alone shows how unnecessary were the ad hoc nationalizations and bailouts of that year. He recasts the past century's monetary history, having read what was written at the time and after digging through the economic numbers from then 'til now.

He was Budget Director under President Reagan. After stepping down and joining Salomon Brothers, he wrote The Triumph of Politics. This, too, was an important book. It was also a dispiriting book. Here was the situation: Reagan was elected in 1980 with the backing of the electorate to bring government under control. For those who are too young, the late 1970s were a dispiriting time in the United States. When Reagan was elected, Americans were prepared to be run through the ringer. The excesses and mistakes needed to go. The new cabinet members were chosen under this premise. The new budget director, David Stockman, worked with secretaries of Defense, of State, and onward. Within weeks of Reagan's inauguration, every one of them (I think, I read the book a long time ago) was an Empire Builder. You know how it's gone from there.

We Are All Lab Rats Now

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

"They sit there across the Pond, and sometimes I think they feel like they're in a lab and they're running experiments on rats and not understanding the consequences of what they are doing," the Russian president said at a press conference."

-Russian President Vladimir Putin, March 4, 2014

            Adam Posen, co-author with Ben S. Bernanke of Inflation Targeting: Lessons from the International Experience gave a thumbs up to the Japan's inflation-targeting experiment in the February 25, 2014, Financial Times: "Abe Has Good Medicine but Japan Needs a Stronger Dose." The heavyweight (literally) economist opens: "Japan's recovery program is showing promising early results." Results include the falling currency that has led a creditor country (Japan has been a net lender since 1981) to post whopping trade deficits in recent months, of increasing size.

            This is a direct result of "Abenomics": the effort to devalue the yen and inflate prices. This ludicrous avenue to self-destruction comes from aping Posen's inflation-targeting gimmick. He is not the sole progenitor, of course, but he is flagrantly dishonest in such assertions as: "Too often, economic reform programmes fail to deliver. Some get the analysis wrong and end up driving the economy further into the ditch. [Exactly what Posen has done to the U.S., U.K., and Japan. - FJS] This was the case in the 1990s when policy makers failed to recognize the risk of persistent deflation. Arguably, it has been the case with U.S. fiscal policy since the 2009 stimulus." In other words, Bernanke - and now Yellen - have not created electronic, dollar credits fast enough to pump U.S. inflation to an appropriate rate. "Appropriate" for Posen will be revealed below.

            When sitting before politicians, Ben Bernanke closed discussions of his money-printing policy by stating the Fed needed to target a positive inflation rate - otherwise, the U.S. would risk: (1) another Great Depression, and, (2) repeat the deflationary mistake of Japan in the 1990s.

            I would like to deposit this essay into a thermonuclear-proof time capsule, to be opened in a hundred or so years. The question I would like some future researcher to probe is how Bernanke & Co. has gotten away with this. Yellen is on the same page. It will be obvious (maybe two centuries from now) the Great Depression Expert knew nothing about that period and there was no Japanese deflation in the 1990s.  According to official numbers, the only years of deflation were 1995, (-0.39%) and 1999 (-1.0%), the latter year was when Asia was imploding. The Ministry of Internal Affairs and Communications publishes the annual inflation rate back to 1958. The chart shows a red squiggle (deflation) within the first year or two, then another year of prices falling in 1986 (-0.3%), then 1995 and 1999.

By the mid-1980s, economists of Posen's persuasion (very well-paid, life-time bureaucrats), but not necessarily Posen, lectured the West. It needed to emulate the Japanese or starve. The Experts were referring to one of the most extraordinary asset inflations of the 20th century, though they do not understand that. (They presumably ignore the 1986 deflation) The ballooning of stock market and property prices, along with sleight-of-hand relationships between corporations and banks, brought on a collapse that was as obvious as the impending, worldwide, bubble collapse, expected soon: probably in 2014. The Japanese stock market peaked on December 31, 1989; the subsequent asset deflation has produced consequences, but price deflation has not been among them. (Salary deflation has been daunting. Since 1997, the average, annual, Japanese salary has fallen by the equivalent of $6,700. Yet, Posen pats the Japanese on their collective heads for being such good, little inflators.)

            A year into "Abenomics," this no-longer, creditor nation needs foreign capital to arrest the country's waning industrial strength. A potential overseas investor might see opportunities, but would need to weigh those against the disinvestment inclinations of the locals.

            Posen claims, in the case of Japan "the economic analysis was correct: a return to inflation ["Return"? Wasn't deflation the supposed norm? - FJS] will make it easier for taxes to rise and reforms to take hold, as they must if the country is to return to a sustainable path." This inflate prices - devalue the currency - to boost business plan: overlooked the nasty fact that Japan imports almost all materials, including energy. The fall in the yen makes production more expensive (and less inviting) than, cateris paribus, in the United States.

Lord Circumference then goes on to dictate some lab-rat experiments of minuscule importance compared to the damage wrought by inflation targeting. Abenomics was supposed to boost business. Instead, manufacturing is getting out of Japan as quickly as possible. Nissan, Honda, and Mazda will open new manufacturing plants in Mexico. Andy Lees writes: "With 17% of Japan's manufacturing base overseas, it is easy to imagine production being brought back home with major consequences for economies in which Japanese companies invest, yet Credit Suisse expect exactly the opposite. They forecast overseas production to grow to 21% of Japan's production base over the next few years. Ideally the weak yen would bring production back home, but for the moment that is not happening. Mexico will eclipse Japan as the second largest exporter of autos to the U.S. in 2014.... For the first time ever, the United States is turning a net exporter of one of the Japanese car brands - the Honda - which is investing heavily in the US." (Andy Lees, "Japanese Futility," February 17, 2014)

The 2013 Car of the year in Japan was the Volkswagen Golf. There is more to the recent, box-office success of "Eien no Zero" (the celebration of a kamikaze pilot) than a spat with China.

            One reason for lethargy in business is Posen's inflation: "90% of auto labor union confederation members to demand pay hike," reported Kyoto News on March 3, 2014. This trend does not appeal to foreign investment, in a country where the capital stock has aged from 9-1/2 years in 2000 to 14-1/4 years today (Andy Lees, "Japanese Futility," February 17, 2014). Nor does the barmy sales-tax hike, from 5% to 8%, planned for April 2014.("When Japan last hiked the sales tax from 3 percent to 5 percent in 1997, consumer spending tumbled by 13 percent in the quarter after the higher tax went into effect. That was followed by a recession." - Reuters, August 31, 2013) This, in a country where zero-inflation rates are entering their second generation, the population is constantly threatened with Inflation Targeting of 2%, and where nearly half the population is entering retirement. A large public-works, building program is at the center of Abenomics, but government-funded construction slowed fast in the fourth quarter of 2013. Reuters reports the number of construction workers has shrunk by one-third since 1997, and 20% of all construction workers are over 60 years old.


The contradictions grow worse, yet, American economists are still permitted to use Japan as a laboratory. To look at one of Posen's sweeping, grandiose, Trotskyite reforms: "Increasing female labour force participation is the right priority for structural reform. At least three million women who could work are neither in employment nor looking for a job. A few million more are squandering their capabilities in limited roles....[T]he government should be creating as many as 400,000 new nursery places [whether that is children or teachers is not clear]... instead of providing [just] 150,000 new" nursery places. How any of this will help Japan is unfathomable since the government (in Posen's proposal) will pay for it. They are raising the sales tax to pay for this.


Where does he come up with this stuff? What if they don't want to work? What if those "squandering" their capabilities are content? What if the women don't want to send their children to nursery-school, boot-camp? Slave labor is the solution. In fact, Posen's type of mind favors such plans since they put both the three million new workers and the children in the nursery into the taxable economy. (Imagine the state of the U.S. Treasury today if women had not started working en masse in the 1970s, with the attendant day-care costs and meals at McDonald's. Can't imagine it? Neither can I.) 


Posen is now at the Peterson Institute in Washington. This think-tank is funded by Pete Peterson, who is now elderly. The people and ideas wobbling through the corridors of the Peterson Institute are anti-ethical to Peterson's principles. Lord Circumference and his cronies are living high while kicking Peterson in the proverbial teeth.  


Posen believes inflation rates of "4, 5, or 6 percent a year, say, will [not] hurt growth. [Remember: these rates are above the interest rate that can be earned. - FJS] It is just not there in the data." Posen can be trusted with the data as much as Al Capone could be counted upon to berate Prohibition. He went on to say (in Challenge, July/August 2008) that researchers have found once "you get to an annual inflation rate of 10 percent - some would say 8 percent, some people would say 12 percent," you "begin to see significant negative effects on growth." With  that contribution to inflating the world's debt away, Posen served on the Monetary Policy Committee at the Bank of England. Why? He's American; so is Stanley Fischer; one of Ben Bernanke's MIT thesis advisers. Fischer recently served a hitch running the central bank of Israel. Fischer's efforts to inflate world asset prices included regular purchases by the Israeli central bank of U.S. stocks. Fischer will soon be voted into the vice-chairmanship of the Federal Reserve Board. He will be the glue of conformity to forestall attempts at nixing QE 5, 6, and 7. Sending American economists to foreign command posts ensures other central banks remember who is in charge. 

The executioners will protract their experiment, in Russia, Tokyo, or in the worst American sub-prime sewer pit, as long as they possibly can.

Wednesday, March 5, 2014

Another Go

Advocates for Federal Reserve disclosure harp on the five-year wait for FOMC transcripts. The reasoning goes that institutions in a democracy should be more democratic: let the people know what the Fed plots behind closed doors. The question arises: to what end?

            The 2008 transcripts were released in late-February. Most media operations published stories about the Fed's absent-minded professors who missed the importance of failing financial institutions during 2008. This was not news. That has been described over the past five years, among other places, in Panderer to Power. The release, however, was an opportunity to remind investors, retirees, florists, and students receiving government financing of their precarious state.

Now, the story of the 2008 transcripts has died, without much in the way of help to the bewildered. Granted, bewilderment is the general state of affairs today, whether at the FOMC, among the media, the people, and those who cannot understand how such as state-of-affairs continues. Nevertheless, the opportunity exists to elevate comprehension. This was the goal in"Those FOMC Transcripts: Watch Out Below," (February 26, 2014). The effort continues, here, to describe how the whirlwind of noise escaping the Eccles Building reflected through the self-serving interpretations of the Wall Street experts is so perilous. 
  From the March 3, 2014, King Report: "Due to quivering Fed officials' incessant assertions that the Fed would halt or even reverse QE tapering if economic conditions warrant, an increasing universe of investors and traders see little or no downside equity risk."

There we have the reason various U.S. stock indices alternately hit all-time highs. We should not need The Charge of the Light Brigade to worry investors. The February 21, 2014, issue of Grant's Interest Rate Observer includes a front-page reminder that pre-tax profits of U.S. corporations as a percentage of G.D.P. are the highest since records began in 1946; after 382 of the S&P 500 reported fourth quarter results, average year-on-year gain on profit has been 10.7%; of the same cohort, revenue growth has been 0.7%. Presumably, these are not adjusted for price inflation which is currently raging in the United States, all claims to the contrary deserving ridicule.

At the September 16, 2008, FOMC meeting, Chairman Ben S. Bernanke was not blind to financial woes. He declared: "Conditions clearly have worsened recently, despite the rescue of the GSEs, the latest stressor being the bankruptcy of Lehman Brothers and other factors such as AIG." He did not stop there, acknowledging "[a]lmost all financial institutions are facing significant stress, particularly difficulties in raising capital, and credit quality is problematic, particularly in residential areas."

Nevertheless, Bernanke was not troubled. He concluded this discourse by opining: "We may have to wait for some time to get clarity of the last week or so." As discussed in my first go at the 2008 transcripts, the FOMC voted to sit still, voting unanimously to keep the fed funds rate at 2.0%. The reason for such repose is the central-banking fable that finance can be ignored; its Dynamic Stochastic General Equilibrium model will produce a monetary solution to address a dyspeptic stock market or a dollar meltdown.

In the same discussion as quoted above, Chairman Ben said: "We have been debating around this table for quite awhile what the right indicator of monetary policy is." He mentioned some proposed numbers, but, in any case: "I think the only answer is that the right measure is contingent on a model." And: "[Y]ou have to have a model."

(On a different topic, unrelated to the main discussion here, Simple Ben declared: "The ideal way to deal with moral hazard is a well-developed structure that gives clear indications.... We have found ourselves in this episode in a situation in which events are happening quickly, and we don't have those things in place." He had been Fed chairman for almost three years yet mentions the Fed's negligence in not addressing Too-Big-to-Fail banks as if he forgot to order corn-on-the-cob for the Fed's clambake.)  

This slapdash approach has not changed, is obviously unattached to the real world, and will leave Chairman Yellen helpless the next time markets and financial institutions melt. The otherworldliness of it all is captured in this discussion itself. The world's financial backstop (our man Ben) goes on for several pages at a time when Goldman Sachs and Morgan Stanley could not get funding from a counterparty. This is quite different than at the FOMC meeting on September 29, 1998, after Long-Term Capital Management went belly up. Then-Chairman Alan Greenspan took on a different personality from previous FOMC meetings. He demanded answers to questions about collateral and leverage that made him wonder if modern-day bankers knew what they were doing. (He recovered from this revelatory meeting as soon as LTCM faded, in a sycophantic stunt before the derivatives lobby that pays him so extravagantly today. See pages 189-190 of Panderer to Power. )

Of course, one wants to know: are we up a creek with Chairman Janet Yellen in command? Let us compare and contrast two speeches delivered on February 27, 2014. (I thank Doug Noland, at the Prudent Bear Fund for his transcription of Dr. Issing's comments in Bundesbankification .) 

Otmar Issing, former chief economist of the Bundsebank and ECB, spoke at the Bundesbank Symposium on Financial Stability, in Frankfurt, on February 27. Unlike Bernanke and Yellen, Issing thinks financial bubbles have consequences: "[P]rice stability is not enough. And I think this has dramatic consequences for the conduct of monetary policy. For me, the implication is very clear: policy which relies on a forecast (model) based on a real economy only without a financial sector - without taking into account money and Credit in a sensible way - is not anymore state of the art." Was it ever? Possibly when 59% of American profits came from manufacturing and 9% from finance. That was in 1950.

Issing never made headway during the mortgage madness: "I'm reminded of many, many meetings here or especially in the U.S. with my friends from the Fed. Their reaction was absolutely clear: when I referred to a potential bubble in real estate, what I heard always was 'never in the last 50 years have real estate prices fallen on a nationwide aspect.' For me, this was not a comfort."

He did not stand a chance of making headway with Bernanke and Yellen in 2006 and 2007: "[T]heir reaction to my critique or argument was very relaxed: 'In the meantime, we have had much higher GDP, higher employment, more houses, etc. So compared to the cost of raising interest rates would be much too high - much too high.' I have never seen so far the comparison of the high cost of the mess we are in if we take this 'risk management' approach."

Issing addressed the hostile stupidity of the academics in charge: "I learn that we're allowed to talk of Bubbles now, which was out of the question for a long time in research - "the buildup of Bubbles goes very slowly - softly - but the collapse goes very fast. So it's obvious that that the [central] bank should react in a decisive way one prices collapse." I think Issing may not have ventured to the U.S. lately. The "bubbles do not exist" lobby is pressing its point once again, and, once again, it is from the universities.

Back in Washington, on the same day, Federal Reserve Chairman Janet Yellen talked to the Senators. She is lost in space. A few statements that will not receive interpretation:

"Fiscal policy really has been quite tight and has imposed a substantial drag on spending in the U.S. economy over the last several years..."

"I'm slightly surprised that he [Fed Board Governor Daniel Tarullo] said we are 'nowhere close' [on resolving Too-Big-To-Fail] because I personally think we've made quite a lot of progress in putting in place regulations that will make a huge differences [sic] to this...."

"I agree that an environment of low rates ... and we have had a long period of low interest rates ... can give rise to behavior that poses threats to financial stability and therefore we need to be looking at that very carefully and we are doing so in a very thorough way, I believe."

"Since the financial crisis and the depths of the recession, substantial progress has been made in restoring the economy to health and in strengthening the financial system."

Closing on a higher plane:

Shirley Temple died recently. There have been many accolades but I don't know if the tributes have discussed her admirable character. She serves as a model for children and adults alike.

Her talent was described by Will Friedwald in the Wall Street Journal: "The most obvious thing to remember Shirley Temple for - a point so overwhelming that it barely needs to be stated - is that she was the greatest child star in the history of not just the movies but all of popular culture. No other youngster so dominated the box office and no other individual, other than Franklin D. Roosevelt himself, did more to deliver both Republicans and Democrats alike from the Great Depression. But what isn't said often enough about Shirley Temple Black is that when you compare her to the many dancing ladies in the movies who couldn't really sing (Ginger Rogers, Rita Hayworth, Cyd Charisse) and those terrific singers in films who danced merely passably (Judy Garland, Doris Day), Temple emerges as the major female triple-threat of her era and since. She was a singer of uncommon ability, capable of putting a song over with the best of them in an age when the competition was Al Jolson and Bing Crosby; a dancer worthy of comparison with Fred Astaire, Gene Kelly and even her longtime costar, the great African-American tap dancer Bill "Bojangles" Robinson; and an actress who could break your heart just by looking at you."

She was born with talent; it was her unalloyed resolution that made her an exceptional person. Each morning when she showed up on the set, she knew her lines, her steps, and her songs. This five, six, and seven-year-old girl was angry, joyful, or remorseful when the shooting started. The studio did not require second takes on Shirley Temple's account. It was said her mother pushed her into show business, but such strength is a habit that comes from within. She could have demanded the concessions movie stars are noted for exacting. She never did. Her talent could never have achieved the praise bestowed by Will Friedwald without habits "rooted deep in the whole personality. They have to be cultivated like any other habit, over a long period of time, by experience." (Flannery O'Connor) Few can match her industry, but, as was said above, she is a model of character.

            The actress Louise Brooks wrote: "Anyone who has achieved excellence knows it comes as a result of ceaseless concentration."