mfioretti: debt* + finance*

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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. Professor Hudson stressed that if the International Monetary Fund (IMF) were to state that the Kremlin's $3 billion loan is not official, "this would rewrite international law and mean that loans from Sovereign Wealth funds of any nation (OPEC, Norway, China, etc.) have no international protection."

    Furthermore, such a move would have shattered the world's debt markets "along New Cold War lines," "with financial warfare replacing military warfare," the economist underscored, adding that the world is not ready for this.

    Ukrainian servicemen deploy a weapon at the beach of the Azov Sea in Shyrokyne, eastern Ukraine
    © AP Photo/ Evgeniy Maloletka
    Donbass on Brink of Major War, Conflict May Escalate Any Time - DPR
    On the other hand, Professor Hudson denounced the decision of Ukraine's Verkhovna Rada to seize Russia's assets in Ukraine as a "radical step" that it is "beyond civil law."

    "If Ukraine did this while still receiving IMF, US and Canadian lending, its creditors could be held as responsible," he remarked.

    Meanwhile, it seems that the Western financial aid to Ukraine still goes into a "black hole," due to the country's high corruption and lack of transparency. It is highly doubtful though that Washington or Brussels will simply print money and lend it to President Petro Poroshenko endlessly.

    "The 'West' is not in the charity business. Its firms do not want to lose money, and the EU Constitution bans the European Central Bank and European taxpayers from financing foreign governments," the economist emphasized.

    In his interview to The Saker, Professor Hudson underscored that the US interventionism and deep involvement in domestic affairs of other countries will eventually do a disservice to Washington.

    "US foreign policy is simply "Do what we say, privatize and sell to US buyers, and permit them to avoid paying taxes by transfer pricing and financialization gimmicks, or we will destroy you like we did Libya, Iraq, Syria et al," the professor pointed out, stressing that such an approach will prompt foreign countries to unify into a resistance and to create a viable alternative to American financial hegemony.
    http://sputniknews.com/business/20150...ntent=t8G&utm_campaign=URL_shortening
    Tags: , , , , , , by M. Fioretti (2015-06-15)
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  3. 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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  4. An essential and enduring insight of Keynes is that what works for a single family in hard times will not work for the global economy. One family whose breadwinner loses a job can and should cut back on spending to make ends meet. But everyone can’t do it at once when there’s generalized weakness because one person’s spending is another’s income. The more people cut back spending to increase their savings, the more the people they used to pay are forced to cut back their own spending, and so on in a downward spiral known as the Paradox of Thrift. Income shrinks so fast that savings fall instead of rise. The result: mass unemployment.


    If Keynes were alive today, he might be warning of a repeat of 1937, when policy mistakes turned a promising recovery into history’s worst double dip. This time, Europe is the danger zone; then it was the U.S. What’s called the Great Depression was really two steep downturns in the U.S. The first ended in 1933. It was followed by four years of output growth averaging more than 9 percent a year, one of the strongest recoveries ever. What aborted the comeback is still debated. Some economists blame President Franklin Roosevelt for signing tax hikes and cuts in New Deal jobs programs. Others blame the Federal Reserve. Dartmouth College economist Douglas Irwin argues that the Roosevelt administration triggered the relapse by buying up gold, removing it from the U.S. monetary base. The move to prevent inflation succeeded all too well, causing deflation. Whatever the cause, Britain and other trading partners were dragged down, and U.S. output plunged and didn’t fully recover until America’s entry into World War II. “We are really at a kind of 1937 moment now,” says MIT’s Temin. “It’s a cautionary history for us.”
    http://www.businessweek.com/articles/...ries-can-fix-the-world-economy#r=read
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  5. 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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  6. 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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  7. 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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  8. Today, money comes into existence by debt creation when commercial banks borrow from central banks and when governments, producers or consumers borrow from commercial banks. Thus, the money supply of the economy can only be maintained if the private or public economic actors get into debt. Economic growth requires a proportionate increase in the money supply in order to avoid deflation that would paralyze business, but an increase in the quantity of money involves a simultaneous increase in debt. This way, economic actors run into danger of excessive indebtedness and bankruptcy. It is not necessary to say that overindebtedness causes serious problems to societies and individuals in the face of the ongoing debt crisis. It began as a debt crisis of private homeowners in the United States and then transformed into a debt crisis of commercial banks and insurance companies before being absorbed by national treasuries and so turned into a sovereign debt crisis. Reductions in national expenditure required to pay off public debt often lead to social unrest and are inequitable, because they impose burdens on citizens who did not profit equally from debt creation.
    http://p2pfoundation.net/What%27s_Wro...s_debt_contributes_to_growth_pressure
    Tags: , , by M. Fioretti (2014-05-09)
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  9. In the final week of January 2014 two current executives and one retired top level executive of major financial firms were found dead. Both media and police quickly tagged the deaths as likely suicides. Missing from the reports is the striking fact that all three of the financial firms that the executives worked for are under investigation for possibly momentous financial fraud.

    The deaths began on Sunday, January 26. London police reported that William Broeksmit, a top executive at Deutsche Bank who retired in 2013, was found hanged at his residence in South London. The next day, Eric Ben-Artzi, a former risk analyst turned whistleblower at Deutsche Bank, was scheduled to speak at Auburn University in Alabama on his assertions that Deutsche had hid $12 billion in losses during the financial crisis with the knowledge of senior executives. Two other whistleblowers at Deutsche brought similar charges.

    Deutsche Bank is also under investigation by global regulators for rigging foreign exchange markets. In 2013 Deutsche settled charges of rigging the Libor interest rate.

    Two days after Broeksmit’s death, 39-year old Gabriel Magee, a Vice President at JPMorgan in London, fell from the roof of the bank’s 33-story European headquarters. Magee was involved in “Technical architecture oversight for planning, development, and operation of systems for fixed income securities and interest rate derivatives.”
    http://www.projectcensored.org/mysterious-series-deaths-banking-industry
    Tags: , , , by M. Fioretti (2014-03-22)
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  10. This continued attachment to big bonuses might lead you to ask whether bankers, and the organisations which employ them, have learned anything from the financial crisis. But a more beguiling question is why bankers remain so attached to bonuses, despite the significant evidence that they often cause more harm than good.

    There are many answers to this question on offer, but one of the most intriguing comes from an ex-trader. Writing in the New York Times, Sam Polk claims the reason bankers can’t let go of bonuses is because they are addicted to them. He explains how in his final year as a banker he “wanted more money for exactly the same reason an alcoholic needs another drink: I was addicted”.
    http://theconversation.com/bonus-obse...onversationedu+%28The+Conversation%29
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