mfioretti: debt* + banks*

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  1. finance should, in an ideal world, be creating debt in order to finance growth of activity in the real economy. Instead, what has happened since the 1970s de-regulation of global finance, has been that finance has, over time, been increasingly financing…finance. That is, it has been financing itself. Indeed, in most of the western world, the growth of financial intermediation as a percentage of gross value added, has over the last two decades outpaced the growth of the real economy. That is until the bubble burst in 2007. Finding ways to redirect finance towards productive activity in the real economy is thus crucial.

    Third, in Italy, the effect of financialization has been made even worse by the presence of entrenched interests and “clientelismo” governing Italy’s economic system. Projects receiving loans are often not judged objectively, with criteria that are based on viable potential returns and the productive nature of an investment. Rather, they are often judged by clientilistic and nepotistic relations – as was made evident with the bank Monte Paschi di Siena (although this is really just the tip of the iceberg). Indeed, lets remember that the term “clientelismo” comes from the Latin clientes which means not modern day clients, but parasites feeding on presents (regalias) from the rich and powerful who, as described by the latin writer Giovenale, every day would visit their patronus for the morning salutatio. Italy’s sick banks are thus both a cause and a symptom of its never ending clientalist culture.

    Fourth, when growth is low—as it has been in Italy for the last two decades where both GDP and productivity have hardly grown at all—the above dynamic by which finance finances itself (or lends based on dodgy criteria in the real economy) becomes even worse. If finance has fewer good opportunities for investment in good companies and good projects in the real economy, then finding those opportunities in the speculative world of finance becomes even more appetizing. Indeed, research conducted in a large EC project on finance and innovation I coordinated some years ago showed that in many countries the problem is often not one of the supply of finance for firms, but the lack of good firms demanding finance. For example, most small medium enterprises that are innovative and productive, DO find the finance that they require. There are simply too few of those types of companies. Why? High growth innovative firms tend to prosper more in countries with dynamic innovation eco-systems, with strong links between science and industry, with high public investment in education and vocational training, high private spending on training programs for workers, strong R&D, and patient strategic long-term finance. When these are lacking growth will not follow – no matter how much emphasis a government puts on reducing red tape, or making labor markets less rigid (e.g. the Jobs Act). And when the real economy does not grow, finance becomes a betting casino.
    http://marianamazzucato.com/2016/08/1...ve-key-points-for-italys-banking-woes
    Tags: , , , , by M. Fioretti (2016-08-11)
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  2. The euro zone is to benefit German industrial output.

    ECB turned off the money supply to Greece to force Greece to its knees. Once there was unconditional surrender, a choice between suicide or execution, ECB turned back on the money supply to Greek banks. The money that was lent, flowed back out to pay off international creditors, a point Germans should note when they keep referring to bailing out Greece.

    The Fourth Reich showed they would happily destroy a country if that country did not give in to its demands. They forced onto Greece, not only a surrender, but an unconditional surrender, part of which is rape and pillage of the country, enclosure of the commons, sell off of Greek assets on the cheap. But at least we all now know what the Fourth Reich is capable of, Its brutality was exposed for all the world to see. At least Podemos in Spain now know exactly what they are dealing with.

    It was meant to set an example to Podemos, do not dare oppose the Fourth Reich this too will be your fate.

    But it has had had the opposite effect, for pro-democracy activists across Europe to double their efforts to defeat the Fourth Reich.

    What we have learnt, we have to work from the grass roots upwards. Syriza has grass roots support that most parties would die for, the NO vote showed that. But it was not enough. We have to restructure society from the bottom up.

    Greece may have lost a battle, but not the war, the fight continues.

    John Cassidy, writing in The New Yorker:

    Syriza’s surrender wasn’t necessarily an ignominious one. As Lenin commented of the failed 1905 revolution in Russia, it was a retreat for a new attack, which ultimately proved successful. “I’m not going to sugarcoat this and pass it off as a success story,” Tsipras said to parliament on Wednesday, prior to the vote, acknowledging that the spending cuts and tax increases contained in the agreement would deal another blow to the Greek economy. However, that wasn’t the full story, Tsipras insisted. “We have left a heritage of dignity and democracy to Europe,” he said. “This fight will bear fruit.”

    The euro zone is to benefit German industrial output.

    The problem Greece has is many idle hands, work that needs doing, and no money to connect the two. What connects the two is money.

    In the Great Depression there was no money, in US banks were closed, because they were bust.

    They created scrips, alternative currencies, across Europe and in the States. They were successful, incredibly successful. The reason they do not exist today is because they were too successful, the Central Banks closed them down.

    In 1931, a German coal mine operator decided to open his closed mine by paying his workers in wara. It was backed by coal. Because it was backed by coal, which everyone could use, local merchants and wholesalers were persuaded to accept it. The mining town flourished, and within the year at least a thousand stores across Germany were accepting wara, and banks began accepting wara-denominated deposits. Feeling threatened, the German government tried to have the wara declared illegal by the courts; when that failed, it simply banned it by emergency decree.

    The following year, the depressed town of Wörgl, Austria, issued its own stamp scrip inspired by the success of the wara. The Wörgl currency was by all accounts a huge success. Roads were paved, bridges built, and back taxes were paid. The unemployment rate plummeted and the economy thrived, attracting the attention of nearby towns. Mayors and officials from all over the world began to visit Wörgl until, as in Germany, the central government abolished the Wörgl currency and the town slipped back into depression.
    https://keithpp.wordpress.com/2015/07/27/an-alternative-greek-currency
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  3. They said, in effect: “If you, the IMF, want to be a part of all of this debt restructuring, we want to pay off all the private bond holders so that they don’t lose money. We want to let the speculators gain because that’s our constituency.” But the IMF economists pressured the head of the IMF at that time, Dominique Strauss-Kahn, to write down Greece’s debt.

    The problem is that Strauss-Kahn wanted the IMF to be a player in the European Central Bank and the European Union, the main financial interests. He also wanted to run for the presidency of France, and most of Greece’s debts were owed to French banks. So Strauss-Kahn had to essentially operate in the interest of France, and his own political fortunes rather than what IMF economists recommended. Basically, he agreed to have the Central Bank and IMF lend Greece enough money to pay the bondholders.

    It turned out that the IMF economists were quite right, and Greece couldn’t pay. The result is that the leading economists in the IMF’s European division resigned in anger. They’ve written a series of reports.
    http://blog.p2pfoundation.net/michael...3A+P2pFoundation+%28P2P+Foundation%29
    Tags: , , , , , , , by M. Fioretti (2015-07-27)
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  4. Millennials are rejecting home ownership across the land. Millennials aren’t buying crap anymore, destroying businesses that, well, sell crap. Millennials are changing the workplace to be, I kid you not, more friendly to “millennial values.” Millennials this, millennials that, and those are just some of the stories published this week on this critical, hot-button issue.

    Frankly, as a millennial, I’d like to copyright the term and earn a royalty every time it is uttered. Like that Happy Birthday song.

    I hate this generational garbage as much as the next person, but there is a kernel of truth that people born in the same years face similar contexts in their lives. My generation witnessed 9/11 and the wars in Afghanistan and Iraq at a very formative age, and we were hit with the global financial crisis right as we were expected to get started in the workforce. That colors your worldview.
    http://techcrunch.com/2015/05/30/mill...hcrunch+%28TechCrunch%29#.ph1qij:JERv
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  5. Billionaire oilman Harold Hamm, referred to by Bloomberg as “the founding father of the U.S. shale boom” who helped drive the discovery and development of North Dakota’s oil-heavy Bakken shale formation, lost half his fortune in the last three months, the publication reports.

    “Will this industry slow down? Certainly,” Hamm told Bloomberg. “Nobody’s going to go out there and drill areas, exploration areas and other areas, at a loss. They’ll pull back and won’t drill it until the price recovers. That’s the way it ought to be. This is a bump in the road, a correction, an adjustment that we’re going through right now.”

    Oil prices of more than $100 a barrel were a large driver of fracking exploration. But as prices drop, fracking for oil in areas such as the Bakken could become unprofitable. But Hamm believes the price will rebound. He claims that his company, Oklahoma-based Continental Resources, can make a profit at $50 a barrel and plans to boost output next year. “Hamm declined to say how those plans may change if prices fall further,” Bloomberg reported, adding “In the most profitable areas of the Bakken, producers can turn a profit on average with oil prices above $65.03 a barrel, according to Bloomberg New Energy Finance.”

    But Hamm isn’t the only one getting edgy about declining oil prices. The oil and gas industry sold Americans a rosy portrait of energy independence thanks to fracking, and some banks, buying into this picture, exposed themselves to risk from dropping prices.

    despite his relentlessly optimistic outlook abut the future of fracking and domestic oil production, Hamm told Steffy that Continental wouldn’t be adding any new rigs in the Bakken in 2015.

    “The company had announced plans in late September to increase capital spending to $5.2 billion from $4.6 billion this year, but Hamm said it now intends to keep its spending flat, essentially cutting its capital budget by $600 million,” Steffy wrote.

    With its much lower oil production costs, Saudi Arabia has the upper hand in this international game of chicken.

    “U.S. producers, having pushed output to its highest in three decades, find themselves facing the paradox of achieving energy independence: the more oil they produce, the harder it becomes to reduce imports,” said Steffy. “That’s because as oil prices fall, expensive hydraulic fracturing projects become unprofitable, tipping the scales in favor of cheaper imports.”
    http://ecowatch.com/2014/12/02/fracking-bust-harold-hamm
    Tags: , , , , , by M. Fioretti (2014-12-04)
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  6. The story shows a not-surprising backstory: bankers were actively soliciting the Chicago Public Schools with proposals involving auction-rate securities, the hot product of the day. CPS hired a politically connected former banker to evaluate the deals. Any regular reader of this site no doubt has figured out that it takes a high level of expertise to evaluate derivatives, and that’s well beyond the skill level of most “bankers”. The open question here. Even so, in this case the analysis was so slipshod that it raises the question of whether the advisor ever intended to do anything more than provide a paper trial supporting going ahead with the deal.
    http://www.nakedcapitalism.com/2014/1...onstrates-high-cost-high-finance.html
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  7. As most people with a passing interest in the financial crisis know by now, our economies got into trouble through debt. Banks over-extended themselves, which forced governments to build up big deficits to bail them out. As we saw in 2007-08, the global nature of the financial system demonstrated that a “local” crisis such as the US sub-prime collapse can have much wider consequences.

    In the aftermath of that crisis, financial institutions have had to reduce the amounts that they are lending – but at what cost? New lending has gone down. Weak firms and households have become bankrupt (though not banks, importantly). Firms and banks have hoarded cash and liquid assets. Weak countries have teetered on the edge of default.

    Among the knock-on effects, there have been falls in aggregate private investment in new projects and for funding research and innovation. Workers have had to accept cuts in real wages, while unemployment has gone up. Some of the new unemployed have become “self-employed” and a greater proportion of employed have moved into part-time or “zero-hour contract” jobs. All these changes in the labour market have led to lower aggregate consumption. Lower investment has adversely impacted on the productive potential of these economies.
    The QE experiment

    Quantitative easing (QE) was part of the strategy for preventing these consequences from being even worse, after it became clear that ultra-low interest rates alone were not going to provide enough stimulus. QE consists of central banks temporarily “creating” money with which to buy assets from banks as a way of improving the banks' balance sheets.
    https://theconversation.com/the-main-...onversationedu+%28The+Conversation%29
    Tags: , , by M. Fioretti (2014-10-14)
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  8. The Fed, it seems, has finally run out of other ammo. It has to taper its quantitative easing program, which is eating up the Treasuries and mortgage-backed securities needed as collateral for the repo market that is the engine of the bankers’ shell game. The Fed’s Zero Interest Rate Policy (ZIRP) has also done serious collateral damage. The banks that get the money just put it in interest-bearing Federal Reserve accounts or buy foreign debt or speculate with it; and the profits go back to the 1%, who park it offshore to avoid taxes. Worse, any increase in the money supply from increased borrowing increases the overall debt burden and compounding finance costs, which are already a major constraint on economic growth.

    Meanwhile, the economy continues to teeter on the edge of deflation. The Fed needs to pump up the money supply and stimulate demand in some other way. All else having failed, it is reduced to trying what money reformers have been advocating for decades — get money into the pockets of the people who actually spend it on goods and services.
    http://ellenbrown.com/2014/09/01/even...-it-time-to-rain-money-on-main-street
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  9. raising interest rates could implode the monster derivatives scheme. Michael Snyder observes that the biggest banks have written over $400 trillion in interest rate derivatives contracts, betting that interest rates will not shoot up. If they do, it will be the equivalent of an insurance company writing trillions of dollars in life insurance contracts and having all the insureds die at once. The banks would quickly become insolvent. And it will be our deposits that get confiscated to recapitalize them, under the new “bail in” scheme approved by Janet Yellen as one of the Fed’s more promising tools (called “resolution planning” in Fed-speak).

    As Max Keiser observes, “You can’t taper a Ponzi scheme.” You can only turn off the tap and let it collapse, or watch the parasite consume its food source and perish of its own accord.

    Collapse or Metamorphosis?

    The question being hotly debated in the blogosphere is, “What then?” Will economies collapse globally? Will life as we know it be a thing of the past?

    Not likely, argues John Michael Greer in a March 2014 article called “American Delusionalism, or Why History Matters.” If history is any indication, governments will simply, once again, change the rules.

    In fact, the rules of money and banking have changed every 20 or 30 years for the past three centuries, in an ongoing trial-and-error experiment in evolving a financial system, and an ongoing battle over whose interests it will serve. To present that timeline in full will take another article, but in a nutshell we have gone from precious metal coins, to government-issued paper scrip, to privately-issued banknotes, to checkbook money, to gold-backed Federal Reserve Notes, to unbacked Federal Reserve Notes, to the “near money” created by the shadow banking system. Money has evolved from being “stored” in the form of a physical commodity, to paper representations of value, to computer bits storing information about credits and debits.

    The rules have been changed before and can be changed again. Depressions, credit crises and financial collapse are not acts of God but are induced by mechanical flaws or corruption in the financial system. Credit may stop flowing, but the workers, materials and markets are still there. The system just needs a reboot.
    http://ellenbrown.com/2014/07/25/you-...t-taper-a-ponzi-scheme-time-to-reboot
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  10. It is worth stressing, once more, that little of this is dependent on public sector debt. Government debt rose sharply as a direct result of the crash, having remained very stable for the decade or so beforehand. On Cuthbert’s figures it’s now around 105% of GDP: substantial – and certainly more than its historic average – but utterly inconsequential relative to the 1,364% of GDP that are the total liabilities of the UK’s financial sector. This is much larger than the estimate NEF has used in the past. We quite deliberately took a conservative approach to the calculation, following the method used by McKinsey in this 2011 report, since the case for transformation is solid even on these conservative figures. Cuthbert, more ambitiously, includes financial derivatives, the use of which expanded wildly over the 2000s.

    These are (largely) private sector liabilities, held by (largely) private sector institutions – the twist being, of course, the semi-public ownership of two major UK banks. But 2008 revealed that the location of ownership need not matter: in the event of a major crash, it is the whole of society that can be forced to carry the costs of a privately-owned financial system. This is precisely what happened, through the bailouts and the recession.

    So one way to understand the seeming irrationality of austerity is in part, as Cuthbert suggests, not the need to shrink government debt now, on which it has in any case been so far wholly unsuccessful. Rather, it is the need, as far as possible, to clear the decks in the event of a future crash. Bailouts last time came close to bankrupting us; there is no way they could be afforded on this scale the next time round. And “next time round” may, on current evidence, be far sooner than we would wish.
    http://www.neweconomics.org/blog/entry/another-crash-around-the-corner
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