SEC Must Stop Any Panic Withdrawals From Bond Market Systems

Zero has some belated hysteria about SEC attempts to change Rule 2a-7 so as to prevent a wholesale collapse of all our bond markets and banking systems if there is a concerted run on the banks like when AIG went bankrupt in 2008.  I say, this is necessary since the #1 job of any government is to prevent a total collapse of all systems.  Staying alive is more important than keeping investors happy by allowing them to suck out all funds from a system in a matter of days!  Duh, I say!  And the basic, real problem is how do we capitalize our banking system when we are rapidly decapitalizing our culture via taking on too much debt?  Ah!  A  major theme here at my own blog!


Ben Bernanke Won’t Take the Blame for Bubbles | Reuters

Fed Chairman Ben Bernanke insisted that low interest rates were not the root cause of the most recent real estate bubble. The New York Times says he used his “strongest language yet” in defending the central bank’s past decisions and emphasizing the importance of greater financial regulation moving forward. Bernanke said, “Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates.”


The Wall Street Journal notes that Bernanke’s views on how the Fed should handle bubbles have changed. Previously, the paper says, “Its bubble strategy was to mop up after a bubble burst with lower interest rates to prevent damage to the broader economy.” Recently, though, “Bernanke said, ‘never say never,’ when asked whether the Fed should instead use higher interest rates to pre-emptively prick future bubbles, and he later said he wouldn’t rule it out.”


I say, this man is certifiably insane and should be locked up for his own protection.  And to protect us from him doing dangerous things.  His job is to protect the value of the dollar and to prevent excessive credit creation.


Believing Barclays Means 8% Return in Dollar-Yen Bet (Update3) –

For clues to why the dollar is gaining strength after its worst year since 2007, look no further than Japan. .

While Fed funds futures show the Federal Reserve may raise interest rates as soon as August, the Bank of Japan is likely to keep borrowing costs near zero percent through 2011 as deflation persists, according to the median estimate of economists surveyed by Bloomberg. Betting the dollar will appreciate versus the yen is the top 2010 recommendation at UBS AG, the second- largest foreign-exchange trader. .

For the first time since before credit markets began to seize up in 2007, investors are starting to favor selling the yen instead of the dollar to fund higher-yielding investments. The European Central Bank, grappling with debt crises in Greece, Spain and Ireland, may wait until at least October before increasing borrowing costs, a separate survey shows.


The previous status quo is returning and this is bad for the US as a trading power.  I think I have covered this story a lot so we will now go onto another story that seems to be agitating parts of the blogsphere:   Zero Hedge’s latest story about the SEC Rule 2a-7.  Periodically, readers link to or send me stuff from that website.  I find some of the commentary there to verge on or slide into or go whole hog into hysterics and histrionics.  Not that being a freaked-out website is wrong.  There are lots of things to get hysterical about in today’s world.  But doing it for stupid reasons is futile as well as boring.  So, on to the latest hysteria…er…these are guys so they have no female sex organs so what is the word we should use for men who flip out?  Anyway, no one has to take me seriously, I often sound strange.  But  then, I have the right to do this, I have a hyster (uterus):


This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied | zero hedge

Yet new regulations proposed by the administration, and specifically by the ever-incompetent Securities and Exchange Commission, seek to pull one of these three core pillars from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7.


The debate about Rule 2a-7 has been going on ever since last spring.  I have covered this debate here at my own news service.  The Securitys and Exchange Commission has been the victim of Congressional/Presidential corruption.  That is, Wall Street regularly bribes the elected officials or are the elected officials and thus, set the rules or eliminate the rules as they see fit.  Naturally, the main thrust was to eliminate rules and restrict oversight.  Thus, the bubble and the con games that destroyed our banking system and our country’s finances.


A key proposal in the overhaul of money market regulation suggests that money market fund managers will have the option to “suspend redemptions to allow for the orderly liquidation of fund assets.” You read that right: this does not refer to the charter of procyclical, leveraged, risk-ridden, transsexual (allegedly) portfolio manager-infested hedge funds like SAC, Citadel, Glenview or even Bridgewater (which in light of ADIA’s latest batch of problems, may well be wishing this was in fact the case), but the heart of heretofore assumed safest and most liquid of investment options: Money Market funds, which account for nearly 40% of all investment company assets.


I found much of this article to be hysterical.  That is, there is a lot of verbiage and few facts.  Not to mention, direct quotes, links, dates and a sense of timeliness.  That is, this is OLD NEWS not new news.  The SEC has to try to fix this particular market for good reasons as I will demonstrate below, via links and direct quotes from various documents and speeches.  Suffice to say, the ‘suggests’ word conceals a lot of speculative stuff.  Namely, it covers the ass of the writer of this article at Zero Hedge who knows that there is no direct language that says what he suggests it says.


True, there is debate about the new regulations but guess what?  The people who are most upset about all this are….the guys who wrecked the present system and who want to keep the old status quo while being bailed out over and over again!  OF COURSE, the rules MUST change!  Duh.  And I hope the changes are strong ones, not minor cosmetic changes.  I happen to be a very big believer in regulating markets.  Unregulated markets tend to blow up in everyone’s faces like the Greenspan Libertarianistic Any Randian goofy systems.


The next time there is a market crash, and you try to withdraw what you thought was “absolutely” safe money, a back office person will get back to you saying, “Sorry – your money is now frozen. Bank runs have become illegal.” This is precisely the regulation now proposed by the administration. In essence, the entire US capital market is now a hedge fund, where even presumably the safest investment tranche can be locked out from within your control when the ubiquitous “extraordinary circumstances” arise.


Um, does Zero Hedge want bank runs? What is the matter? Miss the Great Crash of 1929 much? Or the many bank runs leading to collapse from 1930-1934? Interesting, as Mr. Spock would say with a straight face except for one raised eyebrow. As for the possibility of ‘extraordinary circumstances’: this happens. Being ready for it is necessary. The people who might object to this process of collapse being controlled are the same people who have INSIDER information that allows themselves to exit swiftly before the more trusting or less attuned people can also exit. And since everyone fears a collapse, this can spread rapidly to even solvent funds as everyone heads for the hills in total panic. Yes, these events are called ‘panics’ for a reason!


The second the game of constant offer-lifting ends, and money markets are exposed for the ponzi investment proxies they are, courtesy of their massive holdings of Treasury Bills, Reverse Repos, Commercial Paper, Agency Paper, CD, finance company MTNs and, of course, other money markets, and you decide to take your money out, well – sorry, you are out of luck. It’s the law.


I know this is a very harsh lesson to learn, but the #1 job of any government (to govern: from the word ‘to steer a boat’)—it must stay alive.  This imperative is extremely powerful and if it falls down or collapses, the sovereign state is destroyed via invasion or domestic anarchy and civil wars.  All the loot in the world is meaningless when this happens unless the lucky money/gold holders can flee to solvent, intact states with very strong governments.  The Ship of State cannot be a Ship of Fools.  And this is why we have to view ourselves not as individuals but as part of an ongoing vessel requiring the cooperation of everyone in order to sail through the seas of difficulties of various sorts.


To assure everyone that there is a lot more to this story than the Zero Hedge guys, here is more information from the SEC people:  SEC Speech: Strengthening the Money Market Framework with Investors in Mind; Washington, D.C.; June 24, 2009 (Luis A. Aguilar)

As we know, the Commission is responsible for regulating money market funds. Because of the importance of money market funds to so many investors and to other market participants, the Commission must keep a watchful eye on their operations. To that end, Rule 2a-7 was established in order to provide some limits on the risk that these funds may take. Accordingly, in order for a fund to hold itself out to the public as being a money market fund, the SEC requires that such a fund must meet the strong protections contained in Rule 2a-7. Among other things, Rule 2a-7 has “risk-limiting conditions” that protect investors and funds from excessive exposure to certain risks, such as credit, currency and interest rate risks.


Sounds absolutely scary, eh?  But then, Zero Hedge says the SEC is a crummy organization and I fear they mean, attempts at protecting us is inconveniencing people who view the system as a looting expedition.  That is, the people who are very prone to pulling money out of funds very suddenly if they sense any potential difficulties and want to run off to some pirate island and hide the loot there even if it means destroying the entire financial system of our country.


Under Rule 2a-7, investors have found money market funds to be resilient over the years. Only a couple of money market funds have ever actually “broken the buck.” Still, given the events of the last year and the continuing economic turmoil, it is only appropriate that the Commission revisit the safeguards embedded in Rule 2a-7. Accordingly, I am pleased that the staff’s proposal would increase the resilience of money market funds to market disruptions. The changes proposed today should make it even less likely that a money market fund will fail to provide investors with the security they seek. Investors in money market funds expect the SEC to keep a watchful eye to protect their interests, and I’m pleased to support the staff’s proposal.

. I want investors to know that my support for this proposal comes after careful review. I’ve been a practitioner in the securities industry for over 30 years. Although a lot of my practice involved capital formation — such as representing public and private companies financing their businesses — I also have a deep understanding of investment management, and money market funds. I spent a substantial portion of my career in the investment management industry. In the 90’s and the early part of this decade I served as General Counsel and Head of Compliance of a large global asset manager. During my private career, I organized and advised closed-end investment companies, mutual funds and money market funds.


Because of my experience with money market funds, I understand that Rule 2a-7 contains a highly technical set of conditions that a fund must comply with when it holds itself out as a money market fund. I have spent more time than I care to recount thinking through the language in 2a-7 and providing counsel on how to apply the rule under real operating conditions. I know well that this is a rule that has always been written and amended with investors and the general public in mind, and we must keep that as our touchstone.


Unlike Mr. Aguilar, I have no experience in running any fund like the ones covered by this rule that is being amended.  But I am assuming his experience is leading to him wishing to design a system that protects the ENTIRE process and the ENTIRE system.  Not various disconnected individuals. I seriously doubt that traders want a system that has no protections at all.  We had that 100 years ago and this led to panics.  Just as the political push to decapitate the SEC and prevent any regulations or restrictions on investment schemes and instruments led to the present collapse, on that could have been avoided if regulations were stronger and enforced more forcefully.


In stark contrast to the belated hysteria of the Zero Hedge guys is this article I found at the Bond website, discussing the various possible rule changes being proposed: SEC Officials Say Rule 2a-7 Changes Possible – Bond Buyer Article

The remarks by SEC officials come as the commission has registered nine credit rating agencies as NSRSOs, whose ratings can be used to comply with such rules as the commission’s Rule 2a-7 on money market funds, which generally limits those funds to securities that have ratings or double-A or higher.


The staff reconsideration of including NRSRO references in commission rules was requested by SEC chairman Christopher Cox, who wants to avoid creating a so-called moral hazard by bestowing the government’s endorsement of registered credit rating agencies, which are private firms, the SEC officials said.


Far from fearing government ‘interference’ the bond guys want PROTECTION.  The SEC and the government both worry that this will reduce risk too much.  That is, risky ventures will increase and the crashes and messes and bankruptcies will all be dumped yet again, into the lap of the government.  This is a real danger.  The rewards showered on anyone playing financial games has to come with these same parties taking losses.  Otherwise, everyone goes crazy if they win all bets, all the time, even bad bets are made winners.


Of course, this can bankrupt a nation pretty fast as the poor Icelanders are discovering.


…Meanwhile, Andrew Donohue, director of the SEC’s investment management division, said the commission had already planned to review provisions of 2a-7 that require money market funds to conduct a special analysis of a security if it is downgraded by a rating agency. With the growth in the number of registered credit rating agencies, any time one rater downgrades a security, the downgrade has a “cascading effect” within the money market funds, he said…. .

….The rule review comes as Cox has said the commission this summer will propose rules designed to, among other things, boost the disclosure and competitiveness of the rating agencies. But any changes to 2a-7 and other rules that reference the agencies are much further off, an SEC source said after the conference.


Of course, the SEC has to solicit commentary on any rule changes.  And Congress is very involved in all of this.  And I seriously doubt that the big money houses will allow a system whereby no one can EVER get their money.  Such an event CAN happen of course: when the sovereign nation backing these systems goes bankrupt and the currency suddenly has hyperinflation.  So we have to continue to keep our eye on the real balls here: the solvency of our sovereign nation is the top issue and the most important issue, bar none.  The fate of individual investors pales in comparison.  You can always rebuild you finances or even live in a tent like I did for several years.  But you can’t recover so easily or be intact if your nation collapses into violent convulsions like the French Revolution or WWII.  That is, these messes show us that there is something far, far worse than a simple loss of funds.


I looked around for scary news about this rule and came up with very little.  But here is the pdf page linked in the Zero Hedge fund story and it is well worth reading since it is pretty good, explaining all of this arcane stuff.  I have a little bit of the history here in this SEC paper:

Federal Register/Vol. 74, No. 129/Wednesday, July 8, 2009/Proposed Rules


As financial markets continued to deteriorate in 2008, however, money market funds came under renewed stress. This pressure culminated the week of September 15, 2008 when the bankruptcy of Lehman Brothers Holdings Inc. (‘‘Lehman Brothers’’) led to heavy redemptions from about a dozen money market funds that held Lehman Brothers debt securities.


On September 15, 2008, The Reserve Fund, whose Primary Fund series held a $785 million position in commercial paper issued by Lehman Brothers, began experiencing a run on its Primary Fund, which spread to the other Reserve funds. The Reserve funds rapidly depleted their cash to satisfy redemptions, and began offering to sell the funds’ portfolio securities into the market, further depressing their valuations. Unlike the other money market funds that held Lehman Brothers debt securities (and SIV commercial paper), The Reserve Primary Fund ultimately had no affiliate with sufficient resources to support the $1.00 net asset value. On September 16, 2008, The Reserve Fund announced that as of that afternoon, its Primary Fund would break the buck and price its securities at $0.97 per share.44 On September 22, 2008, in response to a request by The Reserve Fund, the Commission issued an order permitting the suspension of redemptions in certain Reserve funds, to permit their orderly liquidation.45


As we well know, this led to total panic as all the guys in the know figured it was time to run for the hills.  So they dropped everything and rushed out of the markets which caused a PANIC.  Panics are very, very bad and have to be stopped before they trample everything into the dust and leave nothing but smoking ruins in their wake.


These events led many investors, especially institutional investors, to redeem their holdings in other prime money market funds and move assets to Treasury or government money market funds.46 This trend was intensified by turbulence in the market for financial sector securities as a result of the bankruptcy of Lehman Brothers and the near failure of American International Group, whose commercial paper was held by many prime money market funds.


The AIG bailout cost the people of the US sovereign nation pretty dearly.  I am all for controlling these markets so they aren’t capable of crashing an entire economic system due to a panic!  This is life and death. We were assured, as this market ballooned in size during the last decade, that AIG was insuring everything so we didn’t need government regulations to insure security.  Well, that turned out to be a miserable mess!  So now, the government has to do its proper job.  The anarchists like Greenspan and his ilk are pissed about the need to have Rooseveltian controls imposed on beloved free money markets.  But that’s reality.  You can’t fight gravity!


During the week of September 15, 2008, investors withdrew approximately $300 billion from prime (taxable) money market funds, or 14 percent of the assets held in those funds.47 Most of the heaviest redemptions were from institutional funds, which depleted cash positions and threatened to force a fire sale of portfolio securities that would have placed widespread pressure on fund share prices.48 Fearing further redemptions, money market fund (and other cash) managers began to retain cash rather than invest in commercial paper, certificates of deposit or other short-term instruments.49 In the final two weeks of September 2008, money market funds reduced their holdings of top-rated commercial paper by $200.3 billion, or 29 percent.50


NO system can endure a two week redemption of all money systems like this! Just one third of this caused all markets to collapse pretty fast! The $200 billion redemptions caused trillions of dollars in global panic damage! And the damage continues to roil markets.


As a consequence, short-term markets seized up, impairing access to credit in short-term private debt markets.51 Some commercial paper issuers were only able to issue debt with overnight maturities.52 The interest rate premium (spread) over three-month Treasury bills paid by issuers of three-month commercial paper widened significantly from approximately 25–100 basis points before the September 2008 market events to approximately 200–350 basis points, and issuers were exposed to the costs and risks of having to roll over increasingly large amounts of commercial paper each day.53 Many money market fund sponsors took extraordinary steps to protect funds’ net assets and preserve shareholder liquidity by purchasing large amounts of securities at the higher of market value or amortized cost and by providing capital support to the funds.54


On September 19, 2008, the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System (‘‘Federal Reserve Board’’) announced an unprecedented market intervention by the federal government in order to stabilize and provide liquidity to the short-term markets. The Department of the Treasury announced its Temporary Guarantee Program for Money Market Funds (‘‘Guarantee Program’’), which temporarily guaranteed certain investments in money market funds that decided to participate in the program.55


If there was no government interference, would all of the holders of these pieces of paper been paid off?  Of course not!  This was the entire problem!  That is, 1/3rd of them managed to hike out in a madcap hurry but anyone following up would have been very badly surprised and the result would have been a tsunami of defaults leading to total collapse.  Now, I find that scary as hell and am glad this was curbed but it needs MORE curbs because the fundamental problem was and still is, the poor quality of all our paper financial instruments which have precious little capital to back up paper values!


As I keep pointing out, the real problem is always the condition of capital to feed the system.  NO modern system is 100% capitalized at all times.  This would be ridiculous.  There are ‘theorists’ out there in La La Land who want such a system.  But that would be rather unproductive, I would suggest.  This is what China had under Mao.  1=1 leads to 0 growth.  All systems that are not 100% capitalized have to prevent panics and runs on the system because they can never pay EVERYONE at the same time.  There has to be restrictions even if these can be cruel if the State itself is in danger, then even the seizure of all funds is justified.


Our creditors in Asia know this and have various plans for dealing with this and I would suggest that many others are doing this, too.  The US depends on goods flowing from overseas since we destroyed our native systems so we will be left high and dry if we try to stiff our creditors!  Like Iceland, we will be forced to bankroll our IOUs owed to Asia in the long run.  Which is why I keep suggesting, running perpetual trade deficits with all Asian powers is insane and will hurt us very badly even if we try to default.


Here is more useful information from the SEC about the Rule 2a-7 business that might clear up some confusion:

SEC Proposes to Modify Rule 2a-7 and Implement Other Regulatory Initiatives to Promote Stability of Money Market Funds

By Leslie K. Klenk July 23, 2009

A huge hunk of the distressed paper that triggered our national bond market meltdown was real estate deals that were daffy as well as stupid:   Housing Animal Spirits to Be Banished by Prime Foreclosures –

An increase in mortgage defaults among prime borrowers in 2009 is likely to accelerate this year, slowing the real estate recovery even as Americans become more optimistic about the economy, said Robert Shiller and Karl Case, the economists who created the S&P/Case-Shiller Home Price Index.


“There will be continuing foreclosures, and not just subprime, it will be prime mortgages,” Shiller, a professor at Yale University, said in an interview. “This is creating a huge shadow inventory of homes that are still owned, but they’re going to be on the market in the next year or so.”


The number of prime mortgages overdue by at least 60 days more than doubled in the third quarter from a year earlier to 838,000, according to a Dec. 21 report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Unemployed homeowners struggling to pay their bills will default on their home loans and increase foreclosures, Shiller and Wellesley College’s Case said.


The general mess is causing a cascade of more messes.  And this is a G7 collapse.  The BRIC nations are still seeing things going up.  The collapsing markets are the ‘present rulers’ of the earth’s economy and the same countries who run the World Bank and the IMF.  As well as the Basel international banking regulators.  US housing was grossly overpriced in relation to our incomes.  Even if one was solvent two years ago, more and more of  us are less and less solvent thanks to the collapse in all systems which cascade downwards.  Allowing everyone to stampede out of funds during this mess is counterproductive.


Getting people to buy into these funds is also very hard.  Thus, the government guarantees.  Which become dangerous in itself as countries too deep in debt begin to go under.  Britain is a case in point here: British fire service faces downsizing and privatisation

The Labour government in Britain is imposing budget cuts in the Fire and Rescue Service (FRS) that will result in hundreds of job losses and compromise public safety. The Audit Commission, the unelected body used by the central government to impose market-based discipline on public spending, claims that £200 million of savings can be made through efficiency improvements at local level without endangering the public. But there were already £200 million worth of cuts made between 2004 and 2008. Further cuts, therefore, must mean major job losses for firefighters.


When a country is in financial straits, the last thing they need is for the government to reduce services and cut spending.  But this is the only way out, too!  Ask the IMF.  This has been imposed on many second and third world countries and will end up being imposed on first world countries like the US and UK.  Already, people are being told to ‘go Russian’ and exist via local gardens and other schemes which we saw in the collapsing Soviet Union:  Grow your own food revolution plans to seed unused land | UK news |

Ministers believe the move could foster community spirit and skills as well as improve physical and mental health. Hilary Benn, the environment and food secretary, will announce the plans tomorrow as a part of a long-awaited and much-trailed package to ensure Britain grows more food, wastes less, reduces its dependence on imports, and leads the way in reforming the EU’s common agricultural and fishing policies.


And yet another state in the US is going bankrupt:  Arizona could be weeks away from going broke – KOLD News 13 live, local and late breaking-

KOLD News 13 talked with State Representative Vic Williams (R-District 26) on New Year’s Day to get his take on the budget crisis, and what he thinks it will take to get out of this mess. He says something like this hasn’t happened in nearly three-quarters of a century. “I don’t know what’s going to unfold here, but it’s not going to be good,” Williams said.


The housing bubble was big in Arizona and now it has collapsed and is causing all other systems like tax collections to collapse and the US government is misspending trillions of dollars, holding down foreign bases in Taiwan, Japan and South Korea, all countries running huge trade surpluses with us, while losing trillions in the ‘War on Terror’ and our states are going bankrupt????


Remember!  SAVING THE SOVEREIGN STATE IS MOST IMPORTANT!  Saving Japan or Afghanistan is less important than saving our own necks.  Period.  Why can’t anyone see this in DC?  Are they insane?

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38 responses to “SEC Must Stop Any Panic Withdrawals From Bond Market Systems

  1. if

    It was obvious to us and anyone who bothered to think about it for two seconds that you can’t really get rich by spending money. It’s NOT spending that makes you rich. It’s savings. You have to save and invest…so that you can produce more. Everybody knows that.
    But economists don’t work for ‘everybody.’ They work for the government…or Wall Street. Both sectors have a keen interest in making people believe in what isn’t so. ‘We live in the greatest, most flexible, most dynamic economy the world has ever seen,’ said the politicians. ‘Yeah…and it will only get better,’ added Wall Street.
    But it was a fraud. It didn’t get better. It got worse. And now, Americans pay the price. Ten years of work…and they’re poorer than when they started.
    The Aughts were ruined by Wall Street. Washington will ruin the next decade. It will take the lead in spending money it doesn’t have on projects it doesn’t need. It will lavish money on parasites: Those fellows in the Starbucks…39 million people on food stamps…AIG executives…much of Wall Street…most of the federal payroll.
    Instead of competing actively in the world economy – providing goods and services to honest people who are willing and able to pay for them – these people depend on government.
    And now, the whole US economy depends on government too – just like the Japanese economy. Now we need (or so we are told) big spending from Washington, or the economy will stop growing. But the ‘growth’ we are seeing now is not real growth – it is growth in government spending. And like all government spending, it rewards parasites, not the people who actually add wealth.

  2. LL

    Hi people,

    I just finished reading fekete and i have a question, he says the dollar will be last currency to collapse not the first because of the bonds (because everybody is hoarding it ), this means the currencies will all die to hyperinflation any time soon ? Can somebody explains me this dinamics ?

  3. LL

    I mean, all currencies that are close to 0% , like the pound , euro , yen , dollar will all hyperinflate and the dollar will be the last of them to die. But this not mean that the bric currencies will go under with them, is that right ?

  4. CK

    Savings come from profits earned by production. Don’t produce, there is nothing to save. Your Paper money held anywhere but in your own wallet, is not yours. Held in your own wallet, paper money depreciates at about a compound 6%/year.
    Money market funds are a mug’s investment, your investment there depreciates about 5.5% a year.
    If you really must give your money to banks/funds, at least give it to local institutions not the too big to fail too big to give a rat’s ass institutions. It would be appropriate for each of us to remove every cent we might have in any of the TBTF institutions immediately and open local accounts.
    Your money works for you when you control your money, when you give it to someone else to “make you money”, your money no longer works for you and in truth is no longer yours. Depending on the whims of others to do the hard work is probably not smart, but it is oh so happily merkin.

  5. emsnews

    Fekete is often right about things but not about this matter. This is because he refuses to understand Karl Marx and the nature of ‘capital’. Marx wasn’t joking when he called his immense seminal work, ‘Das KAPITAL’.

    When the Chinese communists told me, ‘I be bank’ many, many years ago when they were struggling to riddle out how to get rid of the US empire, this is because the light went on in their heads and they understood the power of an ALIEN banker foreclosing on someone for POLITICAL reasons.

    That is, they get to dictate terms. The banker does take a hit when they lose the value of loans but the bankrupt entity takes a much worse hit, they can’t access FOREIGN markets anymore. And guess what?

    We import most everything because we stupidly let Asia raid our entire manufacturing base! And we also live a lifestyle involving importing immense seas of oil and natural gas. The dollar’s collapse will not happen in today’s world economy because the entire planet still focuses on gaining advantage with the US by exporting to us like crazy.

    But note that more and more nations are now focusing on trade with China. Japan’s biggest export market used to be the US. Now it is the rest of Asia and in particular, China. This happened this year and this is a key shift in direction.

    China plans to ease us gently into bankruptcy, not push us quickly. They are half way done with the grand 50 year plan to push the US into bankruptcy after sucking out all our major industries. This plan was hatched right in front of my eyes (my dad has been a very important person to the Chinese since Nixon visited) and it is a powerful plan to gently ease the US out of our empire by making it increasingly expensive for us to dominate the world using our military. That is, China will cheerfully lend to us with the plan of losing this money!

    They said, and I do a direct quote here, ‘It is well worth a trillion dollars loss if this means the US ceases to be a world power.’ Take it or leave it. The Chinese will not be surprised if we default. They will be very angry if Europe and Japan let us default early! Like, say, next year.

    But I doubt both will let this happen. The EU and Japan use our very expensive military to protect themselves from say, Russia. And they spend about 10% of what we spend. They do not want our burden. So they can’t let us go bankrupt. And together, both the EU and Japan and OPEC hold more US debt and dollars than China. And they all do NOT want the US to go bankrupt while China doesn’t care and indeed, wants us to go bankrupt.

    The next world currency will be based on gold, after the Chinese buy up much of the gold reserves of the West during the period the EU and Japan try to prop up the value of the dollar.

  6. Patrick


    “…the US government is misspending trillions of dollars, holding down foreign bases in Taiwan, Japan and South Korea, all countries running huge trade surpluses with us, while losing trillions in the ‘War on Terror’ and our states are going bankrupt????”

    I do not believe our leaders are that “stupid.” My gut tells me there are unseen forces at work here. China is calling the shots. We are their one-nation wrecking crew. They get the spoils, we get the scraps. With an added benefit of propping up the USA’s one healthy sector, the military industrial complex.

  7. LL

    Thanks Elaine,
    I will take these words for life.
    But EU and Japan trying to hold the dollar won´t devalue it´s own currency, bringing inflation to the euro and yen. Meaning a collapse of both euro and yen at the bitter end… And with that , with everybody trying to devalue it´s own currency, won´t this bring a world high inflation time ? And with the Chinese seeing the dollar value up won´t threat they industrial base too ? How EU and Japan selling gold can hold they currency to collapse and prompt up the dollar ?

  8. B.A.

    I see emsnew as more than a new service: it’s an institution of higher learning, helping me unlearn ( not that I believed much in the first place ) all the propaganda on free trade and unrestrained free flow of capital, passing off as economic science.

  9. if

    Researchers at the Royal Institute of Technology (KTH) in Stockholm have managed to prove that fossils from animals and plants are not necessary for crude oil and natural gas to be generated. The findings are revolutionary since this means, on the one hand, that it will be much easier to find these sources of energy and, on the other hand, that they can be found all over the globe.
    “There is no doubt that our research proves that crude oil and natural gas are generated without the involvement of fossils. All types of bedrock can serve as reservoirs of oil,” says Vladimir Kutcherov, who adds that this is true of land areas that have not yet been prospected for these energy sources.
    But the discovery has more benefits. The degree of accuracy in finding oil is enhanced dramatically – from 20 to 70 percent. Since drilling for oil and natural gas is a very expensive process, the cost picture will be radically altered for petroleum companies, and in the end probably for consumers as well.
    “The savings will be in the many billions,” says Vladimir Kutcherov.


    ELAINE: HAHAHA. This story of abiotic oil is pure insanity. But fun for the nonce. Won’t happen, of course. On the other hand, there is most likely tons and tons and tons of fossil fuels buried under a mile of ice in Antarctica and Greenland. Something to think about, right?

  10. Vinz Klortho


    Don’t be too hard on the folks at zerohedge,
    they are on the same side things as you are.

    They beat on the SEC constantly for being a bunch of incompetent boobs, just like you do.

    They are some of the good guys, particularly in the areas of uncovering high frequency trading, and the FED and Treasury propping up of big, corrupt banks.

    Keep up the good work!


    ELAINE: True but for one thing: they fall for nearly every scam scare story online. Like the stupid one of the ‘Japanese’ guys with the counterfeit US bonds. I accurately called that story, they didn’t. They fell into conspiracy thinking traps. This is bad.

    And also, their anger was misplaced in this case: all the bond holders want to see the US control panics! They hate panics but are forced into panic behavior. They want government controls because this protects them from their own selves which is, of course, every gnome for himself, damn the torpedoes.

  11. BLake

    Rockin’. Look at those angry Arizonians blaming the budget shortfall on 1) Muslim Kenyans and 2) Mexicans.


    ELAINE: I grew up there. Arizona boomed when it became a major US nuclear missile installation point during the 1950-1970 period. We were ground zero for WWIII nuclear attack during this time and everyone I knew was totally blissfully unaware that we would all be vaporized in the first 20 minutes of WWIII. There is a lot of demented thinking in Arizona.

  12. isha

    Happy New Year!

    Here is a long overdue piece from Henry Liu on Krugman…

    Krugman’s China Hit-Job Is More Blame-The-Victim Nonsense

  13. Jim Dandy

    Once the SEC establishes control of when, if and to what degree people can withdraw their money (from money markets…followed likely by savings/checking accounts) the concept of private ownership of wealth is dead…not that it isn’t already on life support. MM accounts are supposed to be very liquid and comprised only of the highest quality paper/assets. The fact that the SEC is recognizing that the “best” underlying assets are in fact rotten is the real story here. People have a fundamental right to withdraw their assets any time they want, otherwise the assets aren’t really theirs.

    Your comment on the role of the government to assure economic “stability” flies in the face of that envisioned by the founding fathers. It is the role of congress to assure the value of the currency, not to be the nanny of the people. Congress chose to offload this core governmental responsibility to international bankers and we are now paying the price.

    Many people believe that the deindustrialization of the US is part of a larger scheme to defang the power base of the US, as you infer. The question is who is driving that policy.

    Pat Caddell has some interesting takes on this if people are willing to invest an hour of time.


    ELAINE: In the real world, ‘nanny governments’ are much preferred by real-live humans compared to the libertarian ideal where you sink or swim based on strength. That is, the disabled, the weak, babies, pregnant women, etc all must swim as well as strong, healthy young males who have no responsibilities or burdens to bear.

  14. PLovering

    Europe to investigate the UN over Pandemic scam:

    “The European nations have apparently not been paid off to the extent of the U.S. Congress, and have decided to look into things.”

    “In addition to the “global warming” rip-off, you can add another huge international racketeering operation — the H1N1 “pandemic” of 2009.”

    Jeebus, racketeering operation? Who knew!


    ELAINE: Only a looney would misunderstand this simple fact: the reason the epidemic didn’t get much, much worse was due to the US, one of the epicenters of this epidemic, vaccinating a huge number of people including my own family (we are smart, we didn’t play Russian roulette with the Viral Empire).

  15. Jim Dandy

    PLovering, you aren’t towing the political line. Please don’t get Elaine riled up on another tirade about how vaccines saved civilization.


    ELAINE: I know you long for the good old days when half of you guys would have perished from childhood diseases before age 15.

  16. Paul S

    “Remember! SAVING THE SOVEREIGN STATE IS MOST IMPORTANT! Saving Japan or Afghanistan is less important than saving our own necks. Period. Why can’t anyone see this in DC? Are they insane?” The US ruling class lives in a cocoon. The parasites who infest Washington DC insulate members of Congress from reality. This is why there is no jobs policy. Worst job market in years and what is the big story line? The “Fruit of the Loom” bomber. The ruling class is trying to justify an EXTREMELY expensive war(s) by using a knucklehead with some explosives in his undies as an example. Or Tiger Woods’ latest bimbo. Or note how much coverage Dick Cheney gets. The man is obviously insane, his policies are a demonstrated failure and yet Cheney still has credibility in some areas. Why? Because US leaders have this unshakeable arrogance, a belief in their supreme powers. A belief that they are superior beings. And NO amount of failure will change this self image. Common folk have NO place in policymaking. Nobody in DC cares if people are having their homes foreclosed or don’t have jobs. The DC elites are too important to worry about the proles needs. Revolutions happen in this environment.

  17. emsnews

    Economic collapses cause revolutions and wars. Obviously. History is pretty clear about this. Do these revolutions save everyone?

    Bad news there….as we all know.

  18. PLovering

    @Jim Dandy, “Please don’t get Elaine riled up on another tirade about how vaccines saved civilization.”

    The Lizards fall on Elaine like a ton of brick whenever she strays too close to the truth on 9/11, Global Warming, and Vaccines.

    Elaine must hew to the party line, or else … regardless of math and science to the contrary.

    I pray that Elaine secretly agrees with my findings per scientific methods.

    However, if Elaine really disagrees with the black print of math and science, then I have Ruth Fowler, author of “No Man’s Land” to take up the slack with her famous quote:

    “Feminism is all about finding things that aren’t there.”

  19. DrKrbyLuv

    Why are the banks and government so concerned with bank runs?

    If the bank is solvent it should not be a problem as there money will be there, though not in cash. Depositors would still be free to write a check to transfer their deposit or to spend it on assets such as gold.

    Only an insolvent bank need fear a bank run. While it would be a sales nightmare to the bank, they would have the money.

    This is the real problem. Regulators have not done their job for a long time and as a result, the crooked banks have allowed their “capital ratio” (equity to a risk weighted sum of the bank’s assets) and “leverage ratio” (equity to unweighted sum of assets).

    This places deposits in jeopardy as the banks liabilities outweigh their assets.

    It is utterly unfair to punish people by making them keep their money in banks and markets that are insolvent.

    Another example of private losses being transferred to the people.

  20. emsnews

    Solvent banks can be destroyed by bank runs. No banking system since the dawn of banking has 100% capitalization. If we demand this (meaning, the bank holds money but never lends any money above the amount it holds) we will see total freeze on all commerce. Even the Christians and Muslim religions who forbade lending with interest had to use others (such as the Jews) to charge interest so money would be lent!

    Otherwise, we would all buy gold and bury it in the back yard and all capital advantages would cease to be profitable. This, in turn, leads to a collapse in use of capital and capitalism dies.

    Communism, anyone?

  21. Jim Dandy

    ELAINE: In the real world, ‘nanny governments’ are much preferred by real-live humans compared to the libertarian ideal where you sink or swim based on strength. That is, the disabled, the weak, babies, pregnant women, etc all must swim as well as strong, healthy young males who have no responsibilities or burdens to bear.

    So what happened to families? Most asian countries don’t have the “nanny state” mentality, but asians understand that family takes care of family. That interdependence actually makes a cohesive family unit…now virtually unknown in the US


    ELAINE: Um, you are saying Japan and China, etc, have no ‘nanny state’???? Wow. I suggest you do some serious research.

  22. Jim Dandy

    ELAINE: I know you long for the good old days when half of you guys would have perished from childhood diseases before age 15.

    What good old days were those and where is the data to support a 50% mortality rate due to lack of vaccines? If that were true, how the hell do we get to 6 billion, with most of those residing in unvaccinated countries


    ELAINE: I covered that very heavily in the past. The very first insurance policies were based on real studies of how long people lived and why they died. The researchers in 1770 were stunned to see their own statistics in Europe showing a 50% death rate by age 17.

  23. the fool on the hill

    The United States is already starting to “go Russian” as well:

  24. DrKrbyLuv

    Elaine wrote:

    “Solvent banks can be destroyed by bank runs. No banking system since the dawn of banking has 100% capitalization.”

    Hello Elaine,

    You are wrong on this and I will try to explain why. First, banks do not lend their or their depositors money.

    Second, bank deposits are not part of their reserves. Reserves are almost entirely created as a liability (FOMC) to the Federal Reserve – not the bank. Reserves, other than cash, are held in the bank’s Federal Reserve account.

    If the banks are neither lending nor using their deposits, then it should be safe to say that 100% exists in private demand deposits and savings accounts.

    A bank run could occur whereby everyone writes checks for their money and if that happened, the money would simply be moved from one electronic account to another or cashed in (as long as the bank has enough cash and coins).

    If the bank is insolvent, then many of their deposits may be jeopardized.

    This being the case, what right does the government or banks have in expecting people to leave money in insolvent institutions?

    This is bad management and/or fraud on the bank’s part and totally irresponsible on the part of the regulators.


    ELAINE: Before the FDR nanny state, simple rumors of ‘The bank refused to give me my money back when I demanded it’ would launch entire cities into bank runs! Bank runs were COMMON and very destructive.

  25. nah

    we are rapidly decapitalizing our culture via taking on too much debt? Ah! A major theme here at my own blog!
    uh, yaaaaaaah we should work twords some stability… its why i post hateful comments bout the damn bankers that rooted out my fondness for competitive business and replaced it with dopey profit motives and shit
    i hope congress will grill these bastards at least a few times for ‘brinkmanship’ in the name of profits…. were a nation of human beings at some level not some wanton lot of lost zombies…. BANKERS are un-american, its one thing to hide the salami for tha’ US government… another thing entirely to be an idiot, profit, and make your neighbor pay your bills…. MILLIONARE BILLS EVEN
    and the saudis be buying US treasuries and pegging their currency to dollars… so its not the end of the world, but id sure as hell like to protect OUR investment in stability
    stability please sire

  26. justiceatsqualor

    By the time FIDC/SIPC guarantees are paid during a hyper-inflationary period, let’s say several months later, the dollar values of those accounts at bankrupt institutions will be nearly worthless. That means you get wiped out. Under the proposed rule changes, you get wiped out.

    Either way it seems, you get wiped out.

  27. emsnews

    Generally speaking, periods of time with many bank runs tend to be deflation periods, not inflation. In inflation times, people spend money like crazy. In deflation times, they save money as much as possible since prices are falling, not rising. Ergo, if you keep money in a bank that is seeing higher and higher interest rates as money moves faster and faster, you profit. In depressions, banks pay ZIRP rates and even then, can lose all the funds they hold. Ergo: people rush to get money out at the slightest cause.

  28. flash

    Yayyy! Dodd to stand down.

    Darn. I’ve been saving up my old shoes to wear to his campaign appearances (but not back.)

  29. charlottemom

    flash — you are funny! I agree…Good riddance to Dodd, however he still has plenty of time to do much damage if he wants to aas now he doesn’t have to worry about public outcry. He has freed himself himself of the shackles of a public constituency. Also of his indebtedness to donors. I suppose we’ll see his true colors.

    Elaine — I strongly disagree with your position on the government being able to block money market withdrawals. Whose money is it anyway? And really, in the long run, people will think twice about future investing in the relative safety of MMs and force more gambling and speculative into equities (maybe that’s another reason for this Fed move).

    This will force money into the market and keep the ponzi schemes going. Is that what you advocate? Pretend the money is there by preventing its “withdrawal.” Punish savers. And what of the individual that needs that money immediately to live on? That’s not a threat to the system and status quo?

    This money market withdrawal prevention move will not prevent financial ruin if it is in the cards.

  30. emsnews

    THE MOST DANGEROUS THING FOR ANY NATION is for a bunch of people to suddenly withdraw all funds very rapidly. More than one nation has learned the hard way that this is suicidal.

    Of course, there must be restrictions of both inflows as well as outflows. A sudden run on a bank is most dangerous and quite infectious. Being ‘good’ is no security if money can suddenly depart! On the other hand, we can be content and let regulated nations like China take over all banking as we rush from one event to another, fleeing this or running towards that.

    Governments must balance ALL forces, not pander to this or that. Our government is pandering, of course. Which is why it failed to govern systems.

    This is why we are now going bankrupt, trying to fix a panic via paying off everyone using the taxpayers as collateral.

  31. charlottemom

    Really Elaine, less transparency, hidden losses? MMs now allowed to break the buck and we’ll never know by how much, when etc.

    FED turns off the lights on the money market industry….in blocking redemptions, money market funds will die and they can decide who gets their monies when, where and under what circumstances. This is a great way to reduce panic.

    People will no longer put their money in mms if they are no longer assured that they can withdraw it. Mission accomplished. One less venue for savers…You ok with this? (and you don’t really think this is temporary do you?)

    This helps the ponzi schemers at the Fed who have viola! found a new source of future capital for speculative markets.

    Saving money – out. Where will it go? Under mattresses? (not with new and improved regulations on cash and movement for electronic money system) Did you see that NY post office lost 60,000 pension checks – NY state said this wouldn’t have been a problem if all have electronic transfers.)

    Or into Treasuries and/or equities…(sounds of corks popping on Wall Street and Washington). Do not waste any crisis in quest for total financial control.

    And besides there’s not enough money out there to guarantee those MM funds when the Fed/Treasury has other guarantees that it’s committed to with Fannie, Freddie, AIG et all.

  32. Colin

    Jebus! Their cutting the fire service! I’ll sleep with water bucket beside my bed. The really funny thing -it’s not actually funny- three months back our local fire station BURNED DOWN. Due to having been temporaly abandoned for budget reasons.

    The credit thing is a reall problem – if we want growth, then it has to start somewhere. And so there has to be credit – advanced to start off new investments. But the powers of issuing credit are so often abused to gamble with rather than invest. I always had an affection for Thorstein Veblen’s solution: separate the checking accounts (they pay no intrest anyway) and the loaning accounts into two seprate institutions; call the first a ‘clearing house’, and the second, um, a ‘casino’ for all i care. So checking account would be 100%, but the time-deposits in the casino wouldn’t be backed at all (and no risk of runs on the casino coz you can only get your money when the time on the time deposit is up). Thus solving the problem of banks loaning out the savings people gave them in good faith on crazy schemes; because money you want to save would be in one institution and money you want to lend at intrest (and your own risk) would be in another.

    What we have at the minute is USURY plain and simple. Usury under it’s reall definition is ‘charging intrest when you take no risk’. (see for a sane alternative to Ron Paul’s loonies: Banks take no risk, because their depostits are secured by the tax payer (and thus their loans collateralised by those deposits are in turn secured) – so why do they have the right to charge intrest?
    (and i also wory about Zero Hedge some times, but the guy does fourty posts a day, the brain must get pretty fuzzy by three in the moring)

  33. emsnews

    I also go ’40 posts’ a day but they are all in one posting which is very long and detailed.

    The thing is to not fall into the rut of ranting. This is why I like lots of information. It slows down the ranting. Ranting is fun, I do admit….heh.

    Also, there is no such thing as ‘no risk’ in the historical sense. All empires, for example, without exception, go bankrupt. So if an empire promises to pay off a debt or pay interest on a debt for 100 years (as we are now doing, rolling over more and more debt) they go bankrupt. So there is great risk here, very great risk.

    Only the Chinese are willing to take this risk because they want us to eventually go bankrupt anyway.

  34. Fred

    Hey there…a point you should consider-if money is not freely redeemable from any market,it can never attract future deposits. Period end of story. If this was not true then every banana republic in the world would never have needed IMF bailouts.
    That the US should not allow withdrawls of any magnitude, subject to previously agree account holder limits(ie the depositor knew what he was getting into), would be to condemn the banking system from ever recovering.

  35. emsnews

    If people leave the system and go to ones that don’t control panics, then we shall see who gets the last laugh here.

    SYSTEMS ARE ALL UNSTABLE NOW. So we are in a new cycle where risk will eventually cease to be saved by nations as more and more major economic powers go bankrupt.

    Incidentally, this is the #1 reason gold is going up in value! As I have cautioned in the past, if you want to save your wealth, holding gold is OK but it won’t grow except if people are buying it since it is a commodity, not money.

    But then, no one listens to me. People put money in bank accounts so these can then be uses as CAPITAL for INVESTMENT by the banks via LENDING.

    Bonds are borrowed money, directly! That is, you are a ‘bank’ if you buy a bond, all banks are merely buildings run by a consortium of individuals who buy bonds and then use these to lend to borrowers. This is what the Fed is, after all.

  36. Colin

    Yes, i supose your right, if the banks go on looting the nation; they will bring down the nation. So there is still risk for them. Of course the bankers can move on to another nation, but if they are alowed to do that too often or too easily; or even that they have a deluded expectation that they’ll be able to do that freely (as is now). They will eventually bring down the economy of the whole world. So not even then is there no risk for them. But i doubt the guy’s in wall street have the breadth of historical vision you do: i suspect they think they’ll always get away with it. And might that delusion make them very dangerous?

    Sorry stupidly i put a right bracket on the end of that link, it should be…

  37. Pingback: Farewell until January 2020 « Karmaisking's Blog

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