August 22, 2014

How Significant is the BRICS New Development Bank?

The argument that the creation of the BRICS Bank could make a significant difference to the global financial architecture should not be pushed too far. In the final analysis development banks are instruments of state capitalist development. Such specialised institutions are needed because of the shortfalls in the availability of long-term finance for capital-intensive projects in market economies, resulting from the maturity and liquidity mismatches involved. Resources mobilised are from those wanting shorter maturities and greater liquidity, and sums lent are to projects that are large and illiquid with long gestations lags and long-term profit profiles.

In non-market economies, allocations for such investments can be made through the budget and financed with taxes or the surpluses generated by state-owned enterprises. If the instruments are state capitalist, they are unlikely to serve non- or anti-capitalist objectives that sacrifice private profit to deliver social benefit. So the best that can be expected of the NDB is that it would serve better the interests of capitalist development in the less developed countries (with some concern for sustainability and inclusiveness) than would multilateral banks that are dominated by and serve as instruments of the developed countries.

Whether even this difference would be material depends on three factors. The first is the degree to which the emergence of the NDB alters the global financial architecture and perhaps, therefore, the behaviour of the institutions currently populating it. The second is the degree to which the BRICS bank can differ in its lending practices from the institutions that currently dominate the global development-banking infrastructure. And, the third is the degree to which a development bank set up as a tool of state-guided development by governments in countries pursuing capitalist and even neoliberal development trajectories can indeed contribute to furthering goals of more equitable and sustainable development.

As noted earlier, the establishment of the new development bank does make a difference to the global financial architecture. More so because of the relatively large authorised capital base of $100 billion and the paid-up capital commitment of $50 billion. Though established as far back as 1944, the capital base of the IBRD (the core lending arm of the World Bank) is only $190 billion of which only $36.7 billion is available as actual equity, the rest being “callable capital” that countries have committed to provide when called upon to do so. So even at inception the NDB seems significant in size compared to rivals still controlled by the developed industrial countries.

Regarding operational practices, there are clear signals that the new development bank’s lending is to be focused on large infrastructural projects that are seen as central to the development effort. Both cash-strapped developing country governments and the private sector are unable or unwilling to fully fund the lumpy investments involved in these long-gestation projects, making the role of development financing institutions crucial to development. An infrastructural focus has therefore been a characteristic feature of many of the currently existing multilateral development finance institutions as well. So if the NDB is to be different from the World Bank or regional development banks like the Asian Development Bank, the difference would have to be reflected in the choice of projects within the infrastructural space, in the terms on which large loans are provided, and in the concern it shows for keeping development sustainable and inclusive. Inasmuch as the institution has been established by a set of emerging nations that do not exercise hegemonic power in the international economy, it is possible that lending behaviour could reflect such differences, which possibly accounts for the discomfort of the currently dominant institutions.

However, the new development bank is fundamentally not detached from the global financial system. Being a bank, even if a specialised one, it must ensure its own commercial viability. And it must do so when a large part of the resources it lends would be mobilised from the market. While guarantees from the governments of its shareholding countries would improve the institution’s rating and reduce its borrowing costs, those costs will have to be borne. So any form of socially concerned lending that does not yield a return adequate to cover costs and deliver at least a nominal profit will be ruled out. There is only so much an institution whose activities are constrained by market realities can do.

In addition, the procedures finally adopted would be influenced by the nature of the governments that control the new institution, and paths of development pursued in countries that associate with the bank either as providers of finance or borrowers. The NDB does not decide on the projects that come up for lending. It would only choose among projects that apply for lending support. In that choice, the norms that shareholding governments apply in their own contexts would play a role. Moreover, wanting to be seen as respectful of the sovereign interests of borrowing countries, the NDB would be careful not to frame its lending rules in ways that threaten the policy sovereignty of borrowing countries. If the countries that approach the institution are pursuing neoliberal strategies, there may be clear limits in terms of what the new development bank itself can achieve.

There are other reasons why the NDB may not live up to the expectations it has generated in some circles. To start with, the new development bank not only keeps membership open to any United Nations member, but provides for a category called non-borrowing members, which can as a group acquire, with the consent of the board, shares that gives them voting power of up to 20 per cent of the total. This gives developed countries entry into the bank’s decision-making apparatus. Along with the declared possibility that the International Financial Institutions would be granted the status of observers in the meetings of the Board of Governors, a presence and voice for the developed countries in the NDB seems likely. They could exploit that presence and differences in degree of developed country dependence among the BRICS, to reduce the effectiveness of the NDB as an “alternative” institution.

This possibility is signalled by features of article 5 in the treaty establishing the Contingent Reserve Arrangement, which specifies the maximum borrowing limits and the terms of borrowing by members of the arrangement. The article specifies a maximum borrowing limit for each member, which is a multiple of the financial commitment made by the member. Access to 30 per cent of this maximum (the delinked portion) is available to a member based only on the agreement of the ‘Providing Parties’. The remaining 70 per cent (the IMF-linked portion) can be accessed in part or full only if, in addition to the agreement of the providing parties, the Requesting Party can provide evidence of “an on-track arrangement between the IMF and the Requesting Party that involves a commitment of the IMF to provide financing to the Requesting Party based on conditionality, and the compliance of the Requesting Party with the terms and conditions of the arrangement.” This substantially dilutes the role that the CRA can play as an alternative to IMF in offering balance of payments support to a distressed economy. If the CRA is being made a mere extension of the IMF, the possibility that the NDB can imitate the World Bank is also real.

It may be too much to expect the NDB (as some NGOs do) to adhere to sustainable development norms that its financing pattern does not permit and the governments backing the organisation do not respect. But, as noted, there are indications that the NDB and the CRA may not be too different from and completely independent of the World Bank and the IMF. Formally these institutions introduce more plurality into the international financial and monetary landscape. But in practice their presence does not guarantee significant difference. The decision of the BRICS to set up mini-versions of the World Bank and the IMF seems to be more a symbolic declaration of resentment at the failure of the US and its European allies to give emerging countries a greater say in the operations of the Bretton woods institutions. It may also reflect an effort by each member of the BRICS grouping to leverage this show of strength to extract as much benefit as it individually can from any changes in the international system. The desire to redress the obvious inequities in the global financial system seems far less important.

So a first effort of democratic forces in the BRICS countries and elsewhere should be to pressure the governments involved to act in ways that differentiate the NDB and CRA from the currently dominant global institutions in terms of funding patterns, rules and terms. If in the process the NDB is forced to show greater respect for norms of sustainable and inclusive development than the Bretton Woods institutions do, that would be a major advance.

August 21, 2014

"The Financial System Is Vulnerable," NYFed Asks "Could The Dollar Lose Its Reserve Status?"

When a tin-foil-hat-wearing blog full of digital dickweeds suggest the dollar's reserve currency status is at best diminishing, it is fobbed off as yet another conspiracy theory (yet to be proved conspiracy fact) too horrible to imagine for the status quo huggers. But when the VP of Research at the New York Fed asks "Could the dollar lose its status as the key international currency for international trade and international financial transactions," and further is unable to say why not, it is perhaps worth considering the principal contributing factors she warns of.

Could the dollar lose its status as the key international currency for international trade and international financial transactions, and if so, what would be the principal contributing factors?

Speculation about this issue has long been abundant, and views diverse. After the introduction of the euro, there was much public debate about the euro displacing the dollar (Frankel 2008). The monitoring and analysis included in the ECB’s reports on “The International Role of the Euro” (e.g. ECB 2013) show that the international use of the euro mainly progressed in the years prior to 2004, and that it has largely stalled since then. More recently, the euro has been displaced by the renminbi as the debate’s main contender for reducing the international role of the dollar (Frankel 2011).

This debate has mainly argued in terms of ‘traditional’ determinants of international currency status, such as country size, economic stability, openness to trade and capital flows and the depth and liquidity of financial markets (Portes and Rey 1998). Considerations regarding the strength of country institutions have more recently been added to the list. All of these factors influence the ability of currencies to function as stores of value, to support liquidity, and to be accepted for international payments. Inertia also plays a role (e.g. Krugman 1984, Goldberg 2010), raising the bar for currencies that might uproot the status quo.

We argue here – building on discussions we began during the World Economic Forum Summit on the Global Agenda 2013 – that the rise in global financial-market integration implies an even broader set of drivers of the future roles of international currencies. In particular, we maintain that the set of drivers should include the institutional and regulatory frameworks for financial stability.

The emphasis on financial stability is linked with the expanded awareness of governments and international investors of the importance of safety and liquidity of related reserve assets. For a currency to have international reserve status, the related assets must be useable with minimal transaction-price impact, and have relatively stable values in times of stress. If the risk of banking stress or failures is substantial, and the potential fiscal consequences are sizeable, the safety of sovereign assets is compromised exactly at times of financial stress, through the contingent fiscal liabilities related to systemic banking crises. 

Monies with reserve-currency status therefore need to be ones with low probabilities of twin sovereign and financial crises. Financial stability reforms can – alongside fiscal prudence – help protect the safety and liquidity of sovereign assets, and can hence play a crucial role for reserve-currency status.

The broader emphasis on financial stability also derives indirectly from the expanded awareness in the international community of the occasionally disruptive international spillovers of centre-country funding shocks (Rey 2013). We argue that regulatory reforms can play a role in influencing these spillovers. 

Resilience-enhancing financial regulation of global banks can help reduce the volatility of capital flows that are intermediated through such banks.

On financial stability and reserve-currency status

International reserve assets tend to be provided by sovereigns, notably due to the fiscal capacity of the state and the credibility of the lender of last resort function of the central bank during liquidity crises (see also De Grauwe 2011 and Gourinchas and Jeanne 2012). Systemic financial events can be accompanied by pressures on the government budget, however. While provision of a fiscal backstop to the banking sector is not the best ex ante approach to policy, fiscal support will tend to be forthcoming if the risk and estimated welfare costs of a systemic fallout are otherwise deemed too high.

Yet banking sector risks – and inadequate capacity within the banking sector to absorb these risks – can end up exceeding a government’s ability to provide a credible fiscal backstop without adversely affecting the safety of its sovereign assets. The fiscal consequences of bailouts may result in increased sovereign risk and the loss of safe-asset status, with implications for the status of the currency in question in the international monetary system.

To increase the likelihood that sovereign assets remain safe during systemic events, the sovereign can undertake financial and fiscal reforms that decouple the fiscal state of the sovereign from banking crises. Such reforms should achieve, in part, a reduction in the likelihood of and need for bailouts through increased resilience and loss absorption capacity of the financial system, and by ensuring sufficient fiscal space for credible financial-sector support (see also Obstfeld 2013).

Reform initiatives

A number of current reform initiatives already take steps in this direction. These include:
  • Reforms to bank capital and liquidity regulation, which reduce the likelihood that financial institutions, and notably systemically important ones (SIFIs), become distressed;
  • Initiatives that seek to counteract the procyclicality of leverage, and to strengthen oversight; and
  • Recovery and resolution regimes for distressed systemically important financial institutions (SIFIs) are being improved.
Importantly, initiatives are underway to improve recovery and resolution in the international context. While a global agreement on cross-border bank resolution is currently not in place, bilateral agreements among some pairs of countries are being forged ex ante to facilitate lower-cost resolution ex post. Further, the resilience of the system as a whole is being strengthened, to better contain the systemic externalities of funding shocks. Examples include:
  • The strengthening of the resilience of central counterparties and other financial market infrastructures; and
  • The foreign currency swap arrangements among central banks to provide access to foreign currency funding liquidity at times when market prices of such liquidity are punishingly high.
Nevertheless, the financial system contains vulnerabilities – globally, as well as in individual currency areas. The negative sovereign banking feedback loop may be weakened in many countries, but has not been fully severed. Moreover, reforms are not necessarily evenly implemented across countries. Fiscal capacities to provide credible backstops of the financial sector during stress vary widely. The consequences of recent reforms for the future of key international currencies are therefore open. Scope remains for countries vying for reserve-currency status to use the tool of financial stability reform to protect the safety and liquidity of their sovereign assets from the contingent liabilities of financial systemic risk.

Financial stability reforms matter for spillovers and capital flows

International capital flows yield many advantages to home and host countries alike. Yet the international monetary system still faces potential challenges stemming from unanticipated volatility in flows, as well as occasionally disruptive spillovers of shocks in centre-country funding conditions to the periphery. With the events around the collapse of Lehman Brothers, disruption in dollar-denominated wholesale funding markets led to retrenchment of international lending activities. Capital flows to some emerging-market economies then recovered with a vengeance as investors searched for yield outside the countries central to the international monetary system, where interest rates were maintained at the zero lower bound. After emerging markets were buoyed by the influx of funds, outflows and repositioning occurred when markets viewed some of the expansionary policies in the US as more likely to be unwound.

While macroprudential measures – and in extreme cases, capital controls – are some of the policy options available for addressing the currently intrinsic vulnerabilities of some capital-flow recipient periphery countries (IMF 2012), we point out that these vulnerabilities can also be addressed in part by financial stability reforms in centre countries.

Consider, for example, the consequences of the regulatory reforms pertaining to international banks that are currently being proposed or implemented. Improvements in the underlying financial strength and loss-absorbing capacity of global banks could have the beneficial side-effect of reducing some of the negative spillovers associated with unanticipated volatility in international banking flows – especially those to emerging and developing economies. Empirical research suggests that better-capitalized financial institutions, and institutions with more stable funding sources and stronger liquidity management, adjust their balance sheets to a lesser degree when funding conditions tighten (Gambacorta and Mistrulli 2004, Kaplan and Minoiu 2013). The result extends to cross-border bank lending (Cetorelli and Goldberg 2011, Bruno and Shin 2013).

While financial stability reforms may reduce the externalities of centre-country funding conditions, they retain the features of international banking that promote efficient allocation of capital, risk sharing and effective financial intermediation. By enhancing the stability of global institutions and reducing some of the amplitude of the volatility of international capital flows, they may address some of the objections to the destabilising features of the current system.

Cross-border capital flows that take place outside of the global banking system have recently increased relative to banking flows (Shin 2013). Regulation of global banks does very little to address such flows, and may even push more flows toward the unregulated sector. At the same time, however, regulators are considering non-bank and non-insurer financial institutions as potential global systemically-important financial institutions (Financial Stability Board 2014).


We have argued that the policy and institutional frameworks for financial stability are important new determinants of the relative roles of currencies in the international monetary system. Financial stability reform enhances the safety of reserve assets, and may contribute indirectly to the stability of international capital flows. Of course, the ‘old’ drivers of reserve currencies continue to be influential. China’s progress in liberalising its capital account, and structural reforms to generate medium-term growth in the Eurozone – as examples of determinants of the future international roles of the renminbi and the euro relative to the US dollar – will continue to influence their international currency status. Our point is that such reforms will not be enough. The progress achieved on financial stability reforms in major currency areas will also greatly influence the future roles of their currencies.

August 20, 2014

Merging Finance and Health Care Leadership – Robert Rubin Proteges Running DHHS, Spouse of Hedge Fund Magnate Running the FDA

Hidden between the lines of some not very prominent news stories were reminders of how close health care and financial leadership have become in these times of continuing economic unrest after the global financial collapse/ great recession.

After the events of 2008, it became more apparent that the dysfunction in academics and health care  paralleled that seen in finance.  One reason may have been the overlapping leadership of finance and health care.  For example, in 2008 we first posted about how Robert Rubin, who was then a Fellow of the Harvard Corporation, the top group responsible for the governance of that great academic and medical institution, bore responsibility for the global financial collapse/ great recession.  Mr Rubin as Treasury Secretary was a proponent of financial deregulation in the Clinton administration.  Later, he became a top leader of Citigroup, whose near collapse helped usher in the crisis of 2008 (look at our 2008 post here and our 2010 post here.  Rubin just stepped down from his Harvard position this year,)  Since 2008 we found many other links among the leadership of Wall Street and of academic medicine and of big health care corporations.  These links, if anything, seem to be getting stronger.

From the Department of Health and Human Services to Citigroup and then back to the Department of HHS

A tiny, four sentence Reuters story noted an apparently routine appointment to upper management at the US Department of Health and Human Services.  The first three sentences were:
U.S. Health Secretary Sylvia Burwell named Citigroup Inc executive Kevin Thurm as senior
counselor of the U.S. Department of Health and Human Services (HHS)
, which is implementing the controversial U.S. Affordable Care Act.

Thurm has served in a number of roles at Citi since joining the bank in 2001, including senior adviser for compliance and regulatory affairs and deputy general counsel.
Before joining Citi, Thurm, a former Rhodes scholar, was the deputy secretary of the U.S. Department of Health and Human Services.
Why is that significant?  First, the near bankruptcy of the huge, badly led Citigroup was widely acknowledged to be a cause of the global financial collapse.  A 2011 New Yorker article on the role of the revolving door between Washington and Wall Street (“Revolver,” by Gabriel Sherman) summarized the plight of Citigroup and the role of Robert Rubin in it,
Citigroup was the most high-profile of Wall Street’s basket cases, the definitionally too-big-to-fail institution. With massive exposure to the housing crash and abysmal risk management, the firm cratered, surviving as a virtual ward of the state after the government injected billions and took a 36 percent ownership position. Along with AIG and Fannie and Freddie, Citi came to be seen as a pariah institution, felled by management dysfunction and heedless greed in pursuit of profits. 
Complicating matters for Citi, the wounded bank found itself tangled in the populist vortex that swirled in the crash’s wake. On the left, there were calls that Citi should be outright nationalized, stripped down, and sold off for parts. Pandit was called before irate congressional-committee members to answer for Citi’s sins, an ignominious inquisition captured on live television. In January 2009, under pressure, Citi canceled an order for a new $50 million corporate jet. 
There was plenty of blame to go around at Citi. Chuck Prince, a lawyer by training who succeeded Citi’s outsize former CEO Sandy Weill, had little grasp of the complex mortgage securities Citi’s traders were gambling on. As late as the summer of 2007, when the housing market was in free fall, Prince infamously told the Financial Times that ‘as long as the music is playing, you’ve got to get up and dance.’ 
Bob Rubin himself pushed the bank to take on more risk in order to increase its profitability, a move that Citi’s dismal risk management was ill-equipped to handle
Pandit, whom Rubin had helped to recruit in 2007 just as the economy began to unravel, was tasked with cleaning up the mess when he became CEO in December of that year, and his early tenure had a deer-in-headlights character. Eventually, he realized that the asset class Citi lacked most was human capital, of the blue-chip variety.
The article also summarized Rubin’s role in the fervor of deregulation in service of market triumphalism that lead to the financial collapse,
In tapping Rubin to run Treasury, Clinton was sanctioning a revolution in the Democratic Party, one that fundamentally redefined the party’s relationship with Wall Street. Rubin, along with Alan Greenspan and Larry Summers, believed in an enlightened capitalism, which would spread prosperity widely. This enchantment with the beneficence of markets became the dominant view in Democratic Washington, hard to argue with when the economy was booming, as it was in the second half of the nineties. Rubin recognized that derivatives posed a risk but effectively blocked efforts to regulate them and pushed for the repeal of the Glass-Steagall Act, the Depression-era legislation that prevented commercial banks from merging with investment and insurance firms (the new law essentially legalized the $70 billion merger in 1998 of Citicorp and Travelers Group that created Citigroup).
Circling back to recent events, Once he got to Citigroup, Rubin assembled a team, partially from his old associates in the Clinton administration,
He also recruited several former Clinton aides to Citi, including former Health and Human Services deputy secretary Kevin Thurm….
So Kevin Thurm became something of a Robert Rubin protege at Citigroup. In fact, he rose to an important leadership position at the same time Citigroup was getting ready to become a “basket case,” in part apparently because of the advice of Robert Rubin.  According to a 2013 version of Mr Thurm’s official Citigroup bio,
Kevin L. Thurm is Senior Advisor for Compliance and Regulatory Affairs at Citigroup. 
Previously, Thurm served as the Chief Compliance Officer of Citi. In that role, Thurm led Global Compliance which protects Citi by helping the Firm comply with applicable laws, regulations, and other standards of conduct, and is responsible for identifying, evaluating, mitigating and reporting on compliance and reputational risks and driving a strong culture of compliance and control. Since joining Citi in 2001, Thurm has also served as Deputy General Counsel of Citi, where he led the Corporate Legal group, overseeing a number of Company-wide Legal functions and providing support on day to day matters, including issues involving the Board, senior executives, and regulators; Chief  Administrative Officer of Consumer Banking North America, where he helped lead the business group and was responsible for a variety of functions including Community Relations, Compliance, Legal and Public Affairs; Director for Administration in the Corporate Center; Chief of Staff to the President and Chief Operating Officer of Citigroup; and as the Director of Consumer Planning in the Global  Consumer Group.
To recap, Mr Kevin Thurm was a top compliance executive of Citigroup while the company was imploding, and being a protege of Robert Rubin, an architect of the financial deregulation that led to the global financial collapse, and a leader of Citigroup responsible for the risky behavior of that company that led to its near collapse, which was another precipitant of the global financial collapse or great recession.  It is not obvious that these are great qualifications to be Senior Counselor at DHHS.

Moreover, Mr Thurm’s responsibilities at DHHS would not be limited to compliance or financial leadership.  According to the official DHHS press release announcing his appointment,
As a Senior Counselor, Thurm will work closely with the Department’s senior staff on a wide range of cross-cutting strategic initiatives, key policy challenges, and engagement with external partners.
Yet, there is nothing in Mr Thurm’s public record to indicate that he has any actual experience in health care, medicine, public health, or biologic science.  So it is not obvious why he should be entrusted with leading “cross-cutting strategic initiatives, [and] key policy challenges.”

On the other hand, Mr Thurm might be simpatico with the new Secretary of DHHS, Ms Sylvia Burwell.  According to a Washington Post article at the time of the hearings about her nomination,
despite her Washington experience, … is not well known in health-policy circles, and, during her confirmation hearings, she gave little concrete sense of the direction in which she will take the complex department she will inherit.
This seems to be a polite way to see she also has no actual experience in health care, medicine, public health, or biologic science.   Her official biography lists no such experience.  However, she was also a Robert Rubin associate, and perhaps protege, during the Clinton administration,
During the Clinton administration, Burwell held several economic roles — as staff director of the White House National Economic Council, as  chief of staff under then-Treasury Secretary Robert Rubin,…
To summarize so far, the new Secretary of the Department of Health and Human Services, and now her new Senior Counselor, were both closely associated with Robert Rubin, who seems to bear major responsibility for the global financial collapse, and the new Senior Counselor worked with Rubin at Citigroup, whose near bankruptcy helped accelerate that collapse.  On the other hand, neither of these leaders has any experience in health care, public health, medicine, or biological science.

Hedge Funds, Tax Avoidance, and the US Food and Drug Administration

This story is even less obvious.  A July, 2014, report in Bloomberg recounted plans for a Senate hearing on tax avoidance by huge, lucrative hedge funds.  The basics were,
A Renaissance Technologies LLC hedge fund’s investors probably avoided more than $6 billion in U.S. income taxes over 14 years through transactions with Barclays Plc and Deutsche Bank AG, a Senate committee said. 
The hedge fund used contracts with the banks to establish the ‘fiction’ that it wasn’t the owner of thousands of stocks traded each day, said Senator Carl Levin, a Michigan Democrat and chairman of the Permanent Subcommittee on Investigations. The maneuver sought to transform profits from rapid trading into long-term capital gains taxed at a lower rate,
he said.
An accompanying Bloomberg/ Businessweek story described testimony at a Senate hearing by the Renaissance co-Chief Executive Officer Peter F Brown,
Renaissance was founded by the mathematician James H. Simons, whose fortune is now estimated by Bloomberg Billionaires Index at about $15.5 billion. 
Brown became co-CEO with Robert L. Mercer in 2010 after Simons retired and became non-executive chairman. Before joining the firm in 1993, he was a language-recognition specialist at International Business Machines Corp.
Mr Brown testified that the company was not so much trying to avoid taxes by the complex strategy but simply to make even more money.    But, per the New York Times, Senator Levin
focused on the lucrative nature of the transactions, most of which took place using Renaissance employees’ money. Between 1999 and 2010, the fund used basket options to produce profits of more than $30 billion, Mr. Levin said. Barclays and Deutsche Bank together made more than $1 billion in revenue.
Mr Brown’s firm seems, unlike Citigroup, to have a record of financial success, and no one is accusing Mr Brown or his firm of being responsible for the global financial collapse.  However, Mr Brown is certainly a very rich Wall Street insider.  Also, as we noted in 2009, his firm clearly has had major involvement in health care investments.   And the current hearings emphasize concerns that his firm has been executing questionable tax avoidance strategies.

Mr Brown has one other very major tie to health care.  As  noted in 2009 on Health Care Renewal, but apparently only parenthetically by one recent news article, (again from Bloomberg, written before the Senate hearing),
Brown lives in Washington with his wife, Margaret Hamburg, the commissioner of the U.S. Food and Drug Administration. She was appointed by President Barack Obama in 2009.
In 2009, we noted that as a condition of Dr Hamburg’s leadership of the US FDA, her husband, Mr Brown, would have to divest his shares of four Renaissance funds.  However, it is obvious that he remained at and became the co-CEO of Renaissance since.

While the current leader of the FDA clearly has medical and health care experience, she is also steeped in the culture of finance and Wall Street.


Thus we have two recent stories of how top health care leadership positions in the US government are held by people with strong ties to the world of finance, but not always with any direct health care or public health experience.  Why was the wife of a hedge fund magnate the best person to run the FDA?  Why was a person not known in “health policy [or health care] circles” the best person to run the Department of Health and Human Services?  Why was a Robert Rubin protege from Citigroup the best person to be a Senior Counselor at DHHS?  Presumably there were many plausible candidates for these government positions.  Why was it not possible to find people to fill them who were not tied to Wall Street?  Why was it not possible to find people with profound understanding of and sympathy for the values of health care and public health to fill all of them?

The leadership of health care and finance continue to merge.  This seems to be one broad explanation for why both fields continue to be notably dysfunctional.  While Wall Street has spread around plenty of money to influence public opinion and political leaders, many still remember how its foolish and greedy leadership nearly caused another great depression.  It is likely that the influence of Wall Street culture on the leadership of health care organizations, be they governmental, academic, other non-profit, or commercial, has fostered the continuing financialization of health care, with its focus on “shareholder value,” that is, putting short-term revenue ahead of patients’ and the public’s health.

I strongly believe health care would be better served by leadership that puts patients’ and the public’s health first.  Occasionally people with such values may come from a finance or economics background.  However, in an era where many people continue to believe “greed is good,” we at least ought to confirm that health care leaders really are about health care first, and money a distant second.

August 19, 2014

Manipulated Market Parties On?

Stocks rally: Dow up 175, Nasdaq hits 14-year high ... Stocks closed sharply higher Monday as the Dow surged 175 points and the Nasdaq jumped to a 14-year high. The rebound came as concerns over the Ukrainian conflict began to ease and investors shifted focus to corporate dealmaking and economic news. – USA Today 

Dominant Social Theme: The Dow climbs a wall of worry. 

Free-Market Analysis: What? Equities are up again? The Wall Street Party is yet in full swing? There's no logical explanation, of course, but those following securities will always try to make one up. And so we'll hear all sorts of strange reasons for yesterday's sudden climb. 

As this USA Today article points out, stocks supposedly went up as investors worried less about Ukraine and began to watch corporate deal-making. Say what? How do journos know these things? Do they take polls – or just make snap decisions when faced with deadlines? 

How do they know the markets are simply being manipulated upwards? How do they know that people haven't internalized central banking remarks that we reported on yesterday? When you have the three top bankers in the world all aligning on the side of continued monetary easing, isn't it possible you'll see the kind of price action that we just witnessed? 

Here's more: 

The Dow Jones industrial average gained 175.83 points, or 1.1%, to 16,838.74. The Standard & Poor's 500 index rose 16.68 points, or 0.9%, to 1971.74, and was inching closer to its record closing high of 1987.98, set on July 24. The Nasdaq composite index gained for a fourth straight session and hit a fresh high for the year, jumping 43.39 points, or 1%, to 4508.31. 

Good news on the housing front added to the rally as homebuilders were feeling more confident about sales prospects. The National Association of Home Builders/Wells Fargo builder sentiment index for August rose to its highest level since January. 

Despite various geopolitical tensions in Ukraine, Iraq and elsewhere, stocks are still an attractive investment, said Dan Curtin, a global investment specialist for JPMorgan Private Bank. "There are a lot of distractions out there, but the fundamental focus on equities is positive," Curtin said. 

The fundamental focus on equities is positive? If stocks descend tomorrow Curtin will surely sing a different song. These people don't know, nor do they care to know. 

Just the other week as markets moved down hard, people were predicting a great August unraveling, though that kind of market action almost never happens in August when most traders are vacationing in the Hamptons. 

If there is going to be a market blow off, it will happen in September or October – October most likely, as that's when mutual fund managers take profits and dress up fund performances preparatory to a new year. 

But even a crash such as the one that happened in 1987 may not be enough to crush this market move if central bankers are determined to keep priming the pump, as we've been documenting for many months. 

What a ride it's been. Never have we seen the top men so determined to print and print and so willing to say so publicly. We've predicted Dow 20,000 and even Dow 30,000 based on the almost sociopathic determination to drown the world in dollars. 

We call this the "Wall Street Party." And as an alternative media outlet dedicated to observing elite memes – especially financial ones – our analysis seems to be proving out so far. Others are noticing the weirdness, too, these days. 

Yesterday an article was posted to Bloomberg from bond trader supremo Mohamed A. El-Erian, who used to run a trillion dollar fixed income portfolio for Pimco. Here's an excerpt: 

Why Are Bonds and Stocks Acting Strangely? ... The past week saw a dynamic in financial markets that, not long ago, would have been deemed quite unusual: Prices of all kinds of assets, from safe government bonds to risky stocks, rose together. 

German bunds and U.S. Treasuries gained, pushing yields lower, as the Standard & Poor's 500 Index approached its all-time high. The movements continued to confound the once-traditional pattern, in which bond prices rise and stock prices fall when investors expect the economy to perform poorly, and vice versa. 

There are various explanations, some more consequential than others. One interpretation is that investors expect hyperactive central bankers to remain their best friends, buoying markets with continued unconventional policies. Last week's disappointing economic data out of the U.S. and Europe would support this view, putting pressure on the Federal Reserve and the European Central Bank to be more accommodative than they otherwise would. 

By demonstrating a consistent willingness and ability to contain market volatility and bolster the prices of financial assets, essentially divorcing equity performance from that of the underlying economy, central bankers have managed to bring more money off the sidelines and into the market. 

Lower borrowing costs have also boosted companies' actual profitability, allowing them to return more money to shareholders in the form of dividends and share buybacks, as has the notion that we are in a lower historical interest-rate paradigm. 

That's the optimistic view. It is also valid and, given how well it has played out, deeply entrenched in markets. But it may be only part of a less comforting explanation relating to the view that, at current valuations, bond investors may be reacting to something that the stock market has yet to recognize. 

We can see that El-Erian (who is desperately trying to think of something) is offering us the idea that investors are bidding up bonds in order to position their portfolios for an inevitable sell-off. In any event, like the rest, El-Erian is trying to explain what is irrational in rational terms. 

He adds this: 

The boom in merger and acquisitions, for example, has pumped a lot of cash into the market, helping to push prices higher than what the performance of the economy would justify. If this complementary interpretation is correct, it's just a matter of time before the correlation between risky and riskless assets starts returning to its historical pattern. 

So maybe it's the M&A boom! For individuals like El-Erian, it must be something. But probably there is a simpler explanation: The mask has slipped and is showing the previously hidden face of elite control. That's true not just for stock markets but in a lot of other places as well. 

 This is a phenomenon that we have labeled "directed history." Whether it is financial, economic, political or military actions, the 21st century has seen a significant degradation in the ability of the globalist elites to impose a believable narrative on the world's current events. 

In the 20th century, when the mainstream media fully shaped messages, there were no other explanations available. But today there are and thus, those who want to move world events in certain directions are taking less care about how they do so and moving more quickly, it seems, as well. 

The only explanation we've come up with regarding equity action is that the top men want a huge securities boom that will inflate assets of all kinds and finally bring Western economies into some sort of recovery. This is, in fact, not just risky; it is fairly insane. You've got a thousand-trillion dollars worth of "nominal" derivatives drifting around in a market that itself is divorced from any sort of historical price reality. 

And central bankers have admitted to printing something like US$50 trillion over the past six years to re-liquefy what was essentially a bankrupt economic system. The system, in fact, collapsed in 2008-2009 and what's going on now is probably an attempt to obscure what occurred and set the stage for the next scene, which will be sooner or later a horrifying crash that will generate calls for a truly global economic system so that the carnage "will never happen again." 

El-Arian writes this in conclusion: 

The hard part is specifying the timing, especially as it relates to a crucial psychological question: When will investors lose faith in central banks' ability to keep bolstering the economy through higher financial asset prices? 

The hard part for most investors is indeed the timing. If we are correct about this, vast fortunes may be made, huge amounts of "wealth" may be generated as powerful men cynically drive all sorts of assets higher and higher. 

We've been commenting on asset inflation on a regular basis now. Hotel rooms that are selling for US$40,000 a night, prices for new, top-line yachts headed toward a half-billion dollars, etc. We'll see more of this no doubt. These people don't seem to want to stop. 

If this trend does not fold in the fourth quarter but continues into the new year, we may see a truly biblical market mania. Of course, it will be explained in the most rational of terms. 

But there is nothing rational about it. It will be a purely sociopathic market, one that will likely mint the first "trillionaires."

Conclusion Party on! For some, what else is there to do? 


August 18, 2014

Did Fischer's Speech Mark the Beginning of a Significant Asset Reflation?

Can central bankers succeed in getting global economy back on track? ... Why is the world economy still so weak and can anything more be done to accelerate growth? Six years after the near-collapse of the global financial system and more than five years into one of the strongest bull markets in history, the answer still baffles policymakers, investors and business leaders. This week brought another slew of disappointing figures from Europe and Japan, the weakest links in the world economy since the collapse of Lehman Brothers, despite the fact that the financial crisis originated in the United States. But even in the United States, Britain and China, where growth appeared to be accelerating before the summer, the latest statistics — disappointing retail sales in the United States, the weakest wage figures on record in Britain and the biggest decline in credit in China since 2009 — suggested that the recovery may be running out of steam. – Reuters 

Dominant Social Theme: Bankers shall prevail. 

Free-Market Analysis: We expect Reuters to write about the economy from a central banking point of view and this editorial doesn't disappoint. But it also gives us a different perspective on a recent speech by Stanley Fischer, the vice-chairman of the US Federal Reserve. 

Fischer, we are informed, intended to send a message that central bankers were not going to be mere bystanders when it comes to economic low-growth. They intend to do something about it. 

This is an important point. 

Admittedly, we didn't come away with this message when examining Fischer's speech as we did a few days ago. 

Practiced Obfuscation of Central Banking: Fischer Gives A Speech 

But this Reuters editorial buttresses its analysis by reporting on how the head of the Bank of England, Mark Carney, added his own perspective two days later to reinforce certain parts of Fischer's message. It also makes the point that Mario Draghi, president of the European Central Bank, has indicated in recent statements that his perspective is similar to Fischer's. 

Astonishingly, both Carney and Draghi were students of Fischer's when he taught at MIT. This is not only a powerful triumvirate, it is one that is probably in substantial accord when it comes to larger policy issues. 

At the time we discussed the article, we focused on how it was crafted in part to absolve central bankers from current economic difficulties. Fischer had done what central bankers often do, which was to avoid causation by describing current events in detail. But according to Reuters, Fischer was also focused on sending a message that growth was to be boosted with sufficient force "unto the day." 

Central bankers intend to win this battle. Here's more from the article itself: 

As Stanley Fischer, the new vice chairman of the Federal Reserve Board, lamented on August 11 in his first major policy speech: "Year after year, we have had to explain from mid-year onwards why the global growth rate has been lower than predicted as little as two quarters back. ... This pattern of disappointment and downward revision sets up the first, and the basic, challenge on the list of issues policymakers face in moving ahead: restoring growth, if that is possible." 

The central message of Fischer's speech — that central bankers and governments should try even harder than they have in the past five years to support economic growth — was closely echoed by Mark Carney, the governor of the Bank of England, at his quarterly press conference two days later. 

This consistency should not be surprising: Carney was Fischer's student at the Massachusetts Institute of Technology in the 1970s — as, even more significant, was Mario Draghi, president of the European Central Bank. Because of Fischer's influence on other central bankers, as well as his unparalleled combination of academic and official experience, he is probably now the world's most influential economist. 

When President Barack Obama appointed him vice chairman of the Federal Reserve, Fischer was widely viewed as more hawkish than Chairwoman Janet Yellen. He was considered a restraining influence on her instinct to focus on jobs and growth rather than inflation control. 

So investors and business leaders should pay attention when Fischer makes his first major speech a call for more explicitly growth-oriented monetary policies — a call that other central bankers are already heeding. 

Carney made this clear when he surprised financial markets by revealing no hint of anxiety about inflation or financial bubbles. He instead reiterated the Bank of England's interest rate policy of "lower for longer" than almost anyone expects. To the chagrin of currency traders, who had been buying sterling on the assumption that Britain would be the first major economy to raise interest rates — perhaps as early as this year. 

Even at the European Central Bank, the once taboo idea that monetary policy can be used to stimulate growth is suddenly open for discussion — if not yet conventional wisdom. 

So this speech turns out not to be simply an exercise is ensuring that central bankers are not blamed for six years of economic stagnation. It is a declaration that central bankers intend to do even more. 

While this may not be clear from the speech itself (most central banking statements are not exceptionally clear) one can add in Carney's remarks and Draghi's "policy statements" to arrive at the interpretation that the world's most powerful central bankers are readying more powerful stimuli to try to shake Western economies out of their doldrums. 

The gist of Fischer's speech is unmistakable, according to the Reuters article: "Restoring pre-crisis growth rates should be possible — but only if economic policy is reformed to deal with three issues that have been treated as taboo, especially among central bankers" ...

The article makes the case that central bankers "must be allowed to interpret their inflation targets flexibly, to ensure that monetary policy promotes growth, as well as maintaining stable prices." This opens the door for significant additional money printing.

Second, policymakers "must distinguish weak demand, which is likely temporary, from weak supply-side growth, which may well be structural." The solutions – evident to Reuters anyway – are that central bankers will do their best to ensure that the economy itself is further liquefied. "The obvious solution is simply to stop raising taxes or cutting public spending."

Finally, central bankers must not accept the idea that the current low growth situation is in any way permanent. Cyclical slumps carry the danger of becoming permanent if bankers don't act aggressively via additional liquidity. 

Was Fischer's speech part of a larger message – that central bankers intend to inflate dramatically? They are not worried about bubbles, as Janet Yellen indicated not so long ago. 

They are, apparently, determined to expand the asset values of what we call the "Wall Street Party." And this is not merely a central banking gambit. Over at the UK Telegraph comes words that multinational corporations are sitting on US$7 trillion in assets that need to be put to work. 

One might wonder where these assets came from. The short answer is that they were printed by central bankers as part of the larger printing spree of some US$50 trillion over the past six years. And now, we hear, these assets are about to be put to work. 

Here, from the Telegraph: 

Investors are urging companies to put their billions to work and start spending ... The world's corporate giants are poised to tap into record cash reserves and possibly embark on a long-awaited spending spree, fuelling hopes of a massive boost to the global economic recovery. 

Companies, together with private equity firms, are coming under mounting pressure to delve into a global cash mountain of $7 trillion (£4.1 trillion) that has been amassed since the dark days of the financial crisis. 

As the economic recovery gets under way and factories begin to operate at full capacity, investors are growing increasingly frustrated at more than half a decade of prudence, pushing chief executives to loosen the purse strings, experts believe. 

"Capital spending could increase as early indicators show that industrial companies are beginning to run at higher levels of capacity than has been the case over the last five years," Dennis Jose, senior global and European equity strategist at Barclays, said. "When factories and the like are running at less capacity on the back of lower demand there is very low capital expenditure."

 Ever since the recession ended and the economy has picked up, many have continued to hoard cash leading to growing calls from investors to deploy cash reserves, which earns low returns sitting on balance sheets. Governments too are calling for a loosening of the purse strings to help propel the economic recovery, which is showing signs of stalling in many parts of Europe. 

The bulk of the cash is held by 5,100 of the world's biggest companies, which had combined reserves – cash and short-term debt – of $5.7 trillion as of the end of 2013, according to Thomson Reuters Datastream. The cash pile total excludes financial companies such as banks and insurers, who are required by regulators to hire capital. Corporate America dominates the pack with about $2 trillion at its disposal, led by a clutch of tech titans. ... 

Those companies are now expected by their investors to put the money to work, which is crucial to there being a pick-up in business investment in order to stimulate the world economy. 

Notice the imperious tone of this article. Companies are "now expected" to put money to work. And why? Because the recession is over! (Assert something long enough and people may begin to believe in its reality.) 

We often write about directed history, and this is a good example of how such history might be orchestrated. Central banks have been busy printing money for six years with no apparent result (as one cannot push on a string). But now the globalists orchestrating this command-and-control economy (is there another description for it?) are growing more impatient. 

Central bankers will continue to print (the heck with asset bubbles) and now the world's largest multinationals – already the recipients of central banking largesse – will be told that it is time to "reinvest." 

As always, one needs to look at what Western leaders are doing, and saying, in aggregate. When married to other statements that have now emerged, it seems as if Fischer's speech was a further enunciation of an impending aggressive approach – or even MORE aggressive. 

Conclusion We keep writing that this Wall Street Party may last longer than people expect, despite the idea that a crash is imminent in the fall. We'll see about that. Fischer, Carney, Draghi as well as certain industrial captains may have a different idea in mind ... 


August 15, 2014

NAFTA Is 20 Years Old – Here Are 20 Facts That Show How It Is Destroying The Economy

Back in the early 1990s, the North American Free Trade Agreement was one of the hottest political issues in the country.  When he was running for president in 1992, Bill Clinton promised that NAFTA would result in an increase in the number of high quality jobs for Americans that it would reduce illegal immigration.  Ross Perot warned that just the opposite would happen.  He warned that if NAFTA was implemented there would be a "giant sucking sound" as thousands of businesses and millions of jobs left this country.  Most Americans chose to believe Bill Clinton.  Well, it is 20 years later and it turns out that Perot was right and Clinton was dead wrong.  But now history is repeating itself, and most Americans don't even realize that it is happening.  As you will read about at the end of this article, Barack Obama has been negotiating a secret trade treaty that is being called "NAFTA on steroids", and if Congress adopts it we could lose millions more good paying jobs.

It amazes me how the American people can fall for the same lies over and over again.  The lies that serial liar Barack Obama is telling about "free trade" and the globalization of the economy are the same lies that Bill Clinton was telling back in the early 1990s.  The following is an excerpt from a recent interview with Paul Craig Roberts...
I remember in the 90′s when former Presidential candidate Ross Perot emphatically stated that NAFTA (North American Free Trade Agreement) would create a giant “sucking sound” of jobs being extracted away from the U.S.  He did not win the election, and NAFTA was instituted on Jan. 1, 1994. Now, 20 years later, we see the result of all the jobs that have been “sucked away” to other countries. 
“Clinton and his collaborators promised that the deal would bring “good-paying American jobs,” a rising trade surplus with Mexico, and a dramatic reduction in illegal immigration. Considering that thousands of kids are pouring over the border as we speak, well, how’d that work out for us?
Many Americans like to remember Bill Clinton as a "great president" for some reason.  Well, it turns out that he was completely and totally wrong about NAFTA.  The following are 20 facts that show how NAFTA is destroying the economy...

#1 More than 845,000 American workers have been officially certified for Trade Adjustment Assistance because they lost their jobs due to imports from Mexico or Canada or because their factories were relocated to those nations.
#2 Overall, it is estimated that NAFTA has cost us well over a million jobs.
#3 U.S. manufacturers pay Mexican workers just a little over a dollar an hour to do jobs that American workers used to do.
#4 The number of illegal immigrants living in the United States has more than doubled since the implementation of NAFTA.
#5 In the year before NAFTA, the U.S. had a trade surplus with Mexico and the trade deficit with Canada was only 29.6 billion dollars.  Last year, the U.S. had a combined trade deficit with Mexico and Canada of 177 billion dollars.
#6 It has been estimated that the U.S. economy loses approximately 9,000 jobs for every 1 billion dollars of goods that are imported from overseas.
#7 One professor has estimated that cutting the total U.S. trade deficit in half would create 5 million more jobs in the United States.
#8 Since the auto industry bailout, approximately 70 percent of all GM vehicles have been built outside the United States.  In fact, many of them are now being built in Mexico.
#9 NAFTA hasn't worked out very well for Mexico either.  Since 1994, the average yearly rate of economic growth in Mexico has been less than one percent.
#10 The exporting of massive amounts of government-subsidized U.S. corn down into Mexico has destroyed more than a million Mexican jobs and has helped fuel the continual rise in the number of illegal immigrants coming north.
#11 Someone making minimum wage in Mexico today can buy 38 percent fewer consumer goods than the day before NAFTA went into effect.
#12 Overall, the United States has lost a total of more than 56,000 manufacturing facilities since 2001.
#13 Back in the 1980s, more than 20 percent of the jobs in the United States were manufacturing jobs.  Today, only about 9 percent of the jobs in the United States are manufacturing jobs.
#14 We have fewer Americans working in manufacturing today than we did in 1950 even though our population has more than doubled since then.
#15 Back in 1950, more than 80 percent of all men in the United States had jobs.  Today, only 65 percent of all men in the United States have jobs.
#16 As I wrote about recently, one out of every six men in their prime working years (25 to 54) do not have a job at this point.
#17 Because we have shipped millions of jobs overseas, the competition for the jobs that remain has become extremely intense and this has put downward pressure on wages.  Right now, half the country makes $27,520 a year or less from their jobs.
#18 When adults cannot get decent jobs, it is often children that suffer the most.  It is hard to believe, but more than one out of every five children in the United States is living in poverty in 2014.
#19 In 1994, only 27 million Americans were on food stamps.  Today, more than 46 million Americans are on food stamps.
#20 According to Professor Alan Blinder of Princeton University, 40 million more U.S. jobs could be sent offshore over the next two decades if current trends continue.
For much more on this, please watch the video by Charlie LeDuff posted below.  It is well worth a few minutes of your time...

So if NAFTA is so bad for American workers, then why don't our politicians just repeal it?
Well, unfortunately most of them are not willing to do this because it is part of a larger agenda.  For decades, politicians from both major political parties have been working to slowly integrate North America.  The eventual goal is to turn North America into another version of the European Union.
Just check out what former general and CIA chief David Petraeus had to say about this...
After America comes North America,” Petraeus said confidently in answering the question about what comes after the United States, the theme of the panel discussion. “Are we on the threshold of the North American decade, question mark? I threw that away — threw away the question mark — and boldly proclaimed the coming North American decade, says the title now.” He also boasted about how the three economies have been put “together” over the last 20 years as part of the “implementation” of the North American Free Trade Act.
The “highly integrated” forces of Canada, the United States, and Mexico, Petraeus continued, will become the world’s powerhouse for energy and science. “There are four revolutions that are ongoing at various levels in each of the countries but foremost in the United States,” said the former CIA chief, who now serves as chairman of the KKR Global Institute. “The energy revolution is the first of those, which has created the biggest change in geopolitics since the rise of China since 1978.” The other “revolutions” include IT, manufacturing, and life sciences, which, “as highly integrated as they are, allow you to argue that after America comes North America,” he added.
When you hear our politicians talk about "free trade", what they are really talking about is integrating us even further into the emerging one world economic system.  And over the past couple of years, Barack Obama has been negotiating a secret treaty which would send the deindustrialization of America into overdrive.  The formal name of this secret agreement is "the Trans-Pacific Partnership", and it would ultimately result in millions more good jobs being sent to the other side of the planet where it is legal to pay slave labor wages.  The following is a description of this insidious treaty from one of my previous articles...
Did you know that the Obama administration is negotiating a super secret "trade agreement" that is so sensitive that he isn't even allowing members of Congress to see it?  The Trans-Pacific Partnership is being called the "NAFTA of the Pacific" and "NAFTA on steroids", but the truth is that it is so much more than just a trade agreement.  This treaty has 29 chapters, but only 5 of them have to do with trade.  Most Americans don't realize this, but this treaty will fundamentally change our laws regarding Internet freedom, health care, the trading of derivatives, copyright issues, food safety, environmental standards, civil liberties and so much more.  It will also merge the United States far more deeply into the emerging one world economic system.  Initially, twelve nations will be a party to this treaty including the United States, Mexico, Canada, Japan, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam.  Together, those nations represent approximately 40 percent of global GDP.  It is hoped that additional nations such as the Philippines, Thailand and Colombia will join the treaty later on.
Unfortunately, most Americans are as uneducated about these issues as they were back in 1994.

That is why we need to get this information out to as many people as we can.