September 2, 2014

Europe's Fantastic Bond Bubble: How Central Banks Have Unleashed Mindless Speculation

Capitalism gets into deep trouble when the price of financial assets becomes completely disconnected from economic reality and common sense. What ensues is rampant speculation in which financial gamblers careen from one hot money play to the next, leaving the financial system distorted and unstable—a proverbial train wreck waiting to happen.

That’s where we are now. And nowhere is this more evident than in the absurd run-up in the price of European sovereign debt since the Euro-crisis peaked in mid-2012. In that regard, 
perhaps Portugal is the poster-boy. It’s fiscal, financial and economic indicators are still deep in the soup, yet its government bond prices have soared in a triumphal arc skyward.

Unfortunately, the recent crashing landing of its largest conglomerate and financial group (Espirito Santo Group) is a stark remainder that its cartel-ridden, import-addicted, debt-besotted economy is not even close to being fixed. Notwithstanding the false claims of Brussels and Lisbon that it has successfully “graduated” from its EC bailout, the truth is that the risk of default embedded in its sovereign debt has not been reduced by an iota.


At the time of the 2011-2012 crisis, its central government was already sliding rapidly into a debt trap with a ratio of just under 100%. Self-evidently, the nation’s so-called EC bailout has only made its public debt burden dramatically worse. Today Portugal’s debt to GDP ratio is 129% and there is no sign of a turnaround.

But that has not deterred the rambunctious speculators in peripheral sovereign debt. Since mid-2012 and Draghi’s “whatever it takes” ukase, the price of Portugal’s public debt has soared. This means that leveraged speculators—-and they are all leveraged on repo or similar forms of hypothecated borrowings—-have made a killing, harvesting triple-digit gains on the thin slice of non-borrowed capital they actually have at risk in these carry trades.

As shown below, in response to this central bank induced bond buying campaign by fast money speculators, the 10-year Portuguese government bond yield has experienced a stunning plunge from 15% to 4% during the last 24 months. Among other things, this dramatic improvement virtually overnight in its fiscal financing costs has taught Portugal’s government a dangerously false lesson. Namely, that in the face of unsustainable fiscal profligacy all its takes is a little budgetary sleight of hand and fake austerity. In fact, nearly all of its fiscal improvement is owing to the one-time sale of state assets including the airport operator and various public utilities under financial arrangement which amount to little more than off-budget borrowing.

Moreover, regardless of the quality of its fiscal recovery measures, the sharp drop in its bond yield would ordinarily at least imply that Portugal has turned its chronic fiscal deficits on a dime, but that is not remotely the case, either.  Portugal has been burying itself in red ink for decades and despite being down from their crisis peak of 10% of GDP in 2010-2011, government deficits are shown are still running at the historic rate of 5% of GDP and will be lucky to break below that level in 2014 or anytime soon thereafter.

Needless to say, when a country’s nominal GDP is stuck on the flat-line, it can’t add 5% of annual output to the public debt each and every year without quickly being doomed by sheer arithmetic. That baleful fiscal math, in fact, is exactly the reason its bonds sold off so sharply in the first place, and why in the absence of massive central bank distortion of bond prices, Portugal would still be under the thumb of crushing yields on its monumental public debt.

So what is at work here is the opposite of is honest price discovery of the type that occurs on a genuine free market. There is virtually no logical basis for the bond market rally in Portuguese or other European sovereign debt. As detailed below, the whole thing is a central bank driven wave of short-term speculation and inflows of hot money which can reverse as quickly as it arrived following Draghi’s ukase.

in the meanwhile, the Wall Street and London sell-side continues to promote hairline and often transient  improvements as justification for the rally, which is to say, purchase of bonds and derivatives from their trading desks. In truth, the dismal facts of Portugal’s stunted economy and profligate fiscal practices have barely improved, but that does not prevent sell side ballyhoo from breaking out all over.

During recent quarters, for instance, Portugal’s real GDP has turned slightly upward, but the magnitude of improvement is laughably marginal—-certainly not remotely consistent with the massive gain in its bond prices. Thus, after three quarters of hairline gains, its real GDP in the Q2 2014 was a barely measureable 0.8% larger than the same quarter a year ago. And these rounding error gains, of course, have not yet made up a fraction of the deep shrinkage that occurred in the prior two years.

September 1, 2014

Trade, The Current/Capital Account, and the Value of the Currency

One thing that I notice on the blogs is that I don’t think I have ever seen anyone give a clear description of the external trade account of a country. Nor have I seen anyone give a clear explanation of what determines the value of a given currency. Now, I am sure that you can find some mainstream garbage where the external account always tends toward equilibrium and so forth. But that is obviously useless nonsense and anyone who has ever looked at the trade balances of countries and the currencies of those countries knows it.

Basically the mainstream theory states that if there is a trade deficit in a country two things will happen. First of all, interest rates will rise as the money supply contracts due to money ‘flowing out of the country’. Secondly, the value of the currency will fall in value as the domestic currency saturates foreign exchange markets. A combination of these two dynamics will reestablish equilibrium on the external account. The rise in interest rates will cause investment, GDP and, hence, imports to contract. While the fall in the value of the currency will decrease imports and increase exports.

There is so much wrong with this presentation that it would take a blog post in its own right to pick all the necessary holes in it. The most obvious error is the idea that interest rates would rise when these are obviously set by the central bank. In addition to this currency depreciations will not always correct the trade balance and trade imbalances will not always lead to currency depreciations. I could go on. I won’t.

Anyway, here I more so want to lay out a clear explanation of the external account and, in doing so, describe what determines the value of the currency in a floating exchange rate system like we have today. In fact, I do not need to do much of the heavy lifting here because G.L.S. Shackle has one of the clearest explanations of the external account that I have come across in his book Economics for Pleasure.

Since the book is hard to come by I’ve provided the chapter on the payments system here. I hope it will encourage people to seek it out because it is one of the best overviews of economic theory I have ever read. Shackle was a very gifted writer. Anyway have a quick read of the chapter, it is only a few pages, and then you should have a fair comprehension of the accounting involved.

I assume that you’ve now read the chapter. Good. Let’s turn to what determines the value of the currency in a modern system. The claims that foreigners make within the country that has a trade deficit can, as Shackle says, be either in the form of currency or securities. These are recorded in the capital account of the country running the trade deficit.

Let us break this down slightly. The trade balance is a flow. When the trade balance is in deficit more goods flow into the country than out of the country. A corresponding amount of claims flow out of the country into the hands of foreigners. Now, if the foreigners don’t want to hold these claims they may sell them and then convert the money they receive into money from their own country. This will drive down the price of the currency of the country with a trade deficit and drive up the price of the country with the trade surplus.

But we should be clear: this need not happen. There is every chance that the foreigners will hold the claims on the country running the trade deficit. If they do this there will be no effect on the value of the currency. Why might they do this? Any number of reasons really. Maybe they think that the country is a good investment. Or maybe the government of the surplus country wants to hold foreign reserves.

“But,” the reader might say, “these claims eventually have to be paid back and so the effect will eventually be felt on the currency.” Again, that is not altogether clear. For example, let’s say that all the claims are held in the form of stocks. Now let up say that these stocks were worth a total of $1bn. Basically what has happened is that foreigners have traded goods for these stocks. But what if these stocks half in value? Well then, the whole amount of the claim need not be ‘paid off’.

The key point to take away from this is that in order to understand trade dynamics in the modern world we must appreciate the financial dimension. Mainstream economists are altogether incapable of doing this and it completely blinds them to the real world. For them finance is just a veil. But for Post-Keynesians finance is very, very real. Most of the trade imbalances in the world today can only be understood by taking both finance and politics seriously.

August 29, 2014

Pump and Dump: How to Rig the Entire IPO Market with just $20 Million

How much does it cost to manipulate an entire market? Not much. And it’s getting cheaper!
It was leaked on Tuesday by “people with knowledge of that matter,” according to the Wall Street Journal, that VC firm Kleiner Perkins Caufield & Byers had decided in May to plow up to $20 million into message-app maker Snapchat, for a tiny portion of ownership. An undisclosed investor also committed some funds. The deal, which apparently hasn’t closed yet, would give Snapchat a valuation of $10 billion.

That’s a big step up from November last year, when the valuation was $2 billion. At the time, the company had raised $130 million in three rounds of funding. By now that would be closer to $160 million, after it was also leaked that Russian investment firm DST Global had put some money into it earlier this year, boosting its valuation to $7 billion at the time, once again, “according to two people familiar with the matter.”

At a valuation of $10 billion, it joins the top of the heap: app makers Uber ($18.2 billion) and Airbnb ($10 billion), cloud storage outfit Dropbox ($10 billion), and Palantir, the Intelligence Community’s darling ($9.3 billion).

Unlike the others in that group, Snapchat is marked by the absence of a business model and no discernable revenues. But there is hope that it could eventually pick up some revenues by advertising to its 100 million or so users, mostly teenagers and college students, without turning them off.

But in this climate, no revenues, no problem. Into the foreseeable future, the company will produce a thick stream of undisclosed red ink.

But the investment was an ingenious move.

For KPCB, a huge VC firm, the investment would amount to petty cash. Why did it do this deal? If it could exit at an enormous valuation of $20 billion, it would only double its money – a paltry multiple, given the risks. It would only make $20 million, still petty cash. But there was a reason….

By strategically deploying less than $30 million, KPCB, and DST Global before it, have ratcheted up Snapchat’s valuation from $2 billion to $10 billion. With the stroke of a pen, in a deal negotiated behind closed doors, they have created an additional $8 billion in “wealth” that is now percolating through the minds of employees with stock options and through the books of the early investment funds.

Snapchat’s new valuation isn’t an isolated event. It’s a product of all recent valuations, and it is itself now ricocheting around and is used to set the valuations at other startups. That’s the multiplier effect. What seemed like an absurd valuation yesterday becomes the norm tomorrow, on the time-honored principle that once a valuation is already absurd, it no longer faces resistance from any rational limit. And nothing stands in the way for the multiplier effect to ratchet valuations ever higher.

Nothing, except the potentially troublesome exit for these investors. Because, without exit, these paper gains will remain paper gains, and eventually will disintegrate into dust.

To exit gracefully, investors can sell the company via an IPO mostly to mutual funds and ETFs that are stashed in retirement funds and investment portfolios. Or they can sell it to giants like Facebook or Google that can pay cash (borrowed or not) or print their own currency by issuing shares, both of which come out of the pocket of current stockholders. At the far end of both transactions are mostly unwitting retail investors.

Inflating Snapchat’s valuation by $8 billion with a few million dollars rigs the entire IPO market that depends on buzz and hype and folly to rationalize these blue-sky valuations. Unnamed people “knowledgeable in the matter” who leak these valuations to the Wall Street Journal are an integral part of the hype machine: It balloons the valuations of other startups. And it creates that “healthy” IPO market where money doesn’t matter, where revenues and profits are replaced by custom-fabricated metrics.

The hope is that the IPO market remains “healthy” long enough for investors to be able to unload hundreds of these companies at crazy valuations. The hype surrounding these valuations is creating more enthusiasm about IPOs in a self-reinforcing loop. The hope is also that the broader stock market continues to soar so that potential acquirers can print more overvalued shares to acquire more overvalued startups so that the exists can come about. Under the motto: after us the deluge.

The deluge will wash over retail investors.

While it’s possible that one or the other startup might become the next Facebook or Google, there are only a few Facebooks and Googles, but there are many startups whose business model and permanent lack of profits will eventually bring them down to reality, either in the portfolios of retail investors, or as a write-off by the acquirers, whose shares are also stuffed into the nest eggs of retail investors. Along the way, Wall Street extracts fees from all directions. That’s the Wall Street money transfer machine. It smells like a rose when all stocks go up, but when the tide turns…. OK, that won’t ever happen.

August 28, 2014

The Nail In The Petrodollar Coffin: Gazprom Begins Accepting Payment For Oil In Ruble, Yuan

Several months ago, when Russia announced the much anticipated "Holy Grail" energy deal with China, some were disappointed that despite this symbolic agreement meant to break the petrodollar's stranglehold on the rest of the world, neither Russia nor China announced payment terms to be in anything but dollars. In doing so they admitted that while both nations are eager to move away from a US Dollar reserve currency, neither is yet able to provide an alternative.

This changed in late June when first Gazprom's CFO announced the gas giant was ready to settle China contracts in Yuan or Rubles, and at the same time the People's Bank of China announced that its Assistant Governor Jin Qi and Russian central bank Deputy Chairman Dmitry Skobelkin held a meeting in which they discussed cooperating on project and trade financing using local currencies. The meeting discussed cooperation in bank card, insurance and financial supervision sectors.

And yet, while both sides declared their operational readiness and eagerness to bypass the dollar entirely, such plans remained purely in the arena of monetary foreplay and the long awaited first shot across the Petrodollar bow was absent.

Until now.

According to Russia's RIA Novosti, citing business daily Kommersant, Gazprom Neft has agreed to export 80,000 tons of oil from Novoportovskoye field in the Arctic; it will accept payment in rubles, and will also deliver oil via the Eastern Siberia-Pacific Ocean pipeline (ESPO), accepting payment in Chinese yuan for the transfers. Meaning Russia will export energy to either Europe or China, and receive payment in either Rubles or Yuan, in effect making the two currencies equivalent as far as the Eurasian axis is conerned, but most importantly, transact completely away from the US dollar thus, finally putin'(sic) in action the move for a Petrodollar-free world.

More on this long awaited first nail in the petrodollar coffin from RIA:
The Russian government and several of the country’s largest exporters have widely discussed the possibility of accepting payments in rubles for oil exports. Last week, Russia began to ship oil from the Novoportovskoye field to Europe by sea. Two oil tankers are expected to arrive in Europe in September.

According to Kommersant, the payment for these shipments will be received in rubles.

Gazprom Neft will not only accept payments in rubles; subsequent transfers via the ESPO may be paid for in yuan, the newspaper reported.

According to the newspaper, the change in currency was made because of the Western sanctions against Russia.

As a protective measure, Russia decided to avoid making its payments in US dollars, which can be tracked and controlled by the United States government, Kommersant reported.
"Protective measure" meaning that it was the US which managed to Plaxico itself by pushing Russia to transact away from the US Dollar, in the process showing the world it can be done, and slamming the first nail in the petrodollar's coffin.

This is not surprising to anyone who has been following our forecast of the next steps in the transition from the Petrodollar to the Gas-O-Yuan. Recall from April:
The New New Normal flow of funds:
  1. Gazprom delivering gas to China.
  2. China Gazprom paying in Yuan (convertible into Rubles)
  3. Gazprom funding itself increasingly in Yuan.
  4. Russia buying Chinese goods and services in Yuan (convertible into Rubles)
And all of this with the US banker cartel completely disintermediated courtesy of the glaring absence of the USD in any of the above listed steps, or as some may call it: from the Petrodollar to the Gas-o-yuan (something 40 central banks have already figured out... just not the Fed).
Still confused? Then read "90% Of Gazprom Clients Have "De-Dollarized", Will Transact In Euro & Renminbi" for just how Gazprom set the stage for the day it finally would push the button to skip the dollar entirely. Which it just did.

In conclusion we will merely say what we have said previously, and it touches on what will be the most remarkable aspect of Obama's legacy, because while the hypocrite "progressive" president who even his own people have accused of being a "brown-faced Clinton" after selling out to Wall Street and totally  wrecking US foreign policy abroad, is already the worst president in a century of US history according to public polls, the fitting epitaph will come when the president's policies put an end to dollar hegemony and end the reserve currency status of the dollar once and for all, thereby starting the rapid, and uncontrolled, collapse of the US empire. To wit:
In retrospect it will be very fitting that the crowning legacy of Obama's disastrous reign, both domestically and certainly internationally, will be to force the world's key ascendent superpowers (we certainly don't envision broke, insolvent Europe among them) to drop the Petrodollar and end the reserve status of the US currency.

As of this moment, both Russia and China have shown not on that it can be done, but it is done. Expect everyone to jump onboard the new superpower axis bandwagon soon enough.

August 27, 2014

Burger King the Latest to Jump on the Corporate Tax Inversion Bandwagon

A number of corporations have engaged in corporate tax “inversions” this year, which typically involves a large U.S. company merging with a smaller counterpart in a lower-tax country abroad, then moving the corporate billing address to the lower-tax country to reduce the overall tax burden. The actual headquarters and the executives go nowhere, but the nominal address changes so the company can avoid U.S. tax rates. A number of corporations in the pharmaceutical space have pulled this off in 2014, but it took the drugstore giant Walgreen to flirt with the idea (through a merger with the Swiss company Alliance Boots) for the non-financial press and the public to really catch on. Outcry actually stopped Walgreen from going through with the inversion; they merged with Alliance Boots, but kept their headquarters in the U.S. Clearly, it was easier to rally public scrutiny to a consumer-facing brand attempting to skip out on America while still using the public resources afforded any company selling their wares here.

Now, the same coalition that stopped the Walgreen inversion will get another chance with Burger King:
Burger King Worldwide Inc. is in talks to buy Canadian coffee-and-doughnut chain Tim Hortons Inc., a deal that would be structured as a so-called tax inversion and move the hamburger seller’s base to Canada. 
The two sides are working on a deal that would create a new company, they said in a statement, confirming a report on the talks by The Wall Street Journal. The takeover would create the third-largest quick-service restaurant provider in the world, they said.
Inversion deals have been on the rise lately, and are facing stiff opposition in Washington given that they threaten to deplete U.S. government coffers. A move by Burger King to seal one is sure to intensify criticism of them, since it is such a well-known and distinctly American brand.
Tim Hortons actually has a pretty big following in America as well, particularly in the northeast and upper Midwest. They have over 850 U.S. locations (compared to 3,500 in Canada), with over $500 million in annual U.S. sales. They have 100 co-branded stores in America with Cold Stone Creamery, the ice cream shop owned by Kahala Management.

So this is at one level a merger between two American brands (which would apparently continue to operate stand-alone). Only Tim Hortons has a corporate structure and a history and a foothold in Canada, so Burger King wants to jump across the border and take advantage of their newly minted 15% nominal corporate tax rate.

Oddly enough, this would be the second burger joint pairing for Tim Hortons. In 1995, Wendy’s bought them out, and owned them for 11 years. After Bill Ackman and some other activist investors bought significant shares in Wendy’s in 2006, Tim Hortons spun back off through an IPO (traded on the NYSE), and by 2009 had organized themselves as a Canadian public company. (Hilariously, Ackman today has a big stake in Burger King.) As far as I can tell, Wendy’s never considered moving to Canada in 1995 to lower their tax rate. But it’s a different world now.

Interestingly, Scout Capital Management and Highfields Capital Management just bought a bunch of Tim Hortons stock in what seemed like a prelude to a private equity deal. They requested that Tim Hortons curtail U.S. expansion plans and take on more debt. So Burger King may save Tim Hortons from a private equity nightmare, in addition to saving themselves a big chunk of change. Of course, Burger King itself is both public but also controlled (through 70% of the shares) by private equity company 3G. If you find any company these days not touched in some way by private equity, let me know.

Burger King will certainly face some pressure to back down on the corporate restructuring aspect. The President has given a number of public statements against inversions, and the Treasury Department is in the midst of putting together rules on the subject to try and discourage them. Democrats seem to think that railing against companies deserting America will play well in the midterms, and they’re painting Republicans as indifferent to the practice. For their part, Republicans pay lip service to wanting to address inversions, but only in the context of overall tax reform that lowers corporate rates as it also closes loopholes (or at least pretends to do so). This is rooted in the noble lie that American corporations pay the highest tax rates in the world, which simply isn’t true when you look at the effective rates rather than the nominal ones. Corporate tax collection as a percentage of GDP was 17th out of 27 wealthy countries in 2011, per the OECD.

Long before the President and the Dem machine got involved, consumer and anti-corporate groups have been calling attention to inversions, which certainly serve to satisfy the drive for higher corporate profits, but carry a heavy aura of unseemliness with them. Especially as this one involves a fast-food chain that’s already in the sights of activists for their low wages, I think it’s ripe for a public campaign. I asked Frank Clemente, executive director of Americans for Tax Fairness, to comment about the rumored inversion:
Burger King’s announcement is one big whopper. If the company goes through with an inversion and deserts America, its customers are likely to bring their business down the street to the nearest McDonald’s or Wendy’s. Walgreens got the message that its inversion would be very damaging to its brand, and it walked away from a deal. Hopefully, Burger King will do the same. While changing its address to Canada rather than a tax haven country may not appear on the surface to be so objectionable, if the intent is to dodge paying its fair share of taxes the American people are likely to be no less sympathetic to Burger King.
With the 15% nominal rate in Canada, this is absolutely a move about taxes. As WSJ points out, a 2010 merger between Valeant Pharmaceuticals International and Biovail Corp, which led to a redomiciling in Canada, produced a company that “now has a tax rate less than 5%.” So this move would clearly save Burger King billions of dollars.

Once one of these brands successfully breaks through and moves their headquarters overseas, without significant blowback that hurts sales, it’ll be a run for the exits. Capital mobility has a long and storied history, and it’s even easier when you don’t have to move anything, just simply change the address on the corporate letterhead.

The bigger issue here is how the concept of shareholder value highlights the profit-at-all-costs mentality that has permanently changed the worldview inside corporations and the pools of private capital that increasingly run them. And I don’t know exactly how that changes. Maybe inversions are just a tipping point into some activism that gets at the fundamental root cause.

Continued EU Weakness Gives Rise to Two Inflationary Trends

German economy 'losing steam' as business confidence plunges again ... Survey of optimism among companies adds to gloom enveloping Europe's biggest economy ... Germany's businesses are rapidly losing confidence in the prospect of a recovery in the eurozone, in a further blow to the single currency's biggest economy. Companies' assessment of the business climate is now at a 13-month low, having deteriorated for four successive months, according to a survey of 7,000 firms conducted by the Munich-based IFO think tank. – UK Telegraph 

Dominant Social Theme: Something must be done to save Europe and the euro. 

Free-Market Analysis: What does the future hold? More and more money stimulation it would seem. China – the BRICS – and the US are printing endless gouts of money, and now it appears as if the European Union is headed in the same direction. 

In fact, the EU cannot simply print, as the Germans stand in the way. But according to this article and others, the German economic situation is declining, so perhaps there will be less pushback to plans to stimulate. 

 Certainly, without German economic vitality, the eurozone is even worse off than it's been in the past. Here's more: 

The study is the latest blow to Angela Merkel's hopes of Germany leading the eurozone out of its current economic malaise. Separate data for investor confidence and inflation have also shown activity slowing down. The economy contracted in the second quarter of the year, and another quarter of decline would tip it into recession. 

The IFO indicator - which measures business's assessment of the economic climate against a level of 100 at the start of 2005, came in at 106.3 for August. This was the lowest since the 106.2 in July 2013 - before the eurozone had officially exited recession. 

The guage has now fallen by a measure of 1.7 for the last two months, the largest falls since April 2013, The crisis in Ukraine and continuing weakness in the rest of the eurozone has weighed down Germany, which emerged relatively unscathed from the 2011 eurozone crisis. 

"The German economy continues to lose steam," said IFO president Hans-Werner Sinn. "The firms were again less satisfied with their current business situation. Also with regard to the further course of business, they are more sceptical than in the previous month." 

The dismal figures are likely to add further pressure on European Central Bank president Mario Draghi to pursue quantitative easing, the policy adopted by the Bank of England and the US Federal Reserve to stimulate growth. 

The article also mentions that French President Francois Hollande intends to form a new government after "criticism of its economic management by the country's economy minister." 

Germany and France lie at the heart of the EU's economic motor. But France has been staggering economically for years and now Germany is beginning to fade. Spain, Portugal and Greece are faced with various levels of economic dysfunction and it was recently announced that Italy has slipped back into recession. 

Blame it on the euro. This structurally flawed and rigid currency has submerged half of Europe in a Great Recession, and now it appears that the other half of Europe may be faced with a Great Inflation. 

Another UK Telegraph article entitled, "Eurozone opens doors to QE as Germany and France stumble," makes this point clearly. The article states bluntly that the European Central Bank may initiate "radical action" as the European malaise continues and widens after some six years of failed stimulus attempts. 

Here's how the article puts it: 

The eurozone has moved closer to adopting further radical measures to ward off a second recession and a spiral of deflation after its two biggest economies fell deeper into trouble yesterday. 

The dual shock of a French government reshuffle and weaker-than-expected German figures yesterday threatened to add to the malaise in the eurozone, where unemployment remains stubbornly high, and growth is at a standstill. 

Somewhat counterintuitively, this resulted in stock markets across Europe surging and government borrowing costs falling to new lows as traders reacted to indications that Mario Draghi, the European Central Bank president, may be opening the door for large-scale asset purchases and further cuts to interest rates. 

The continuing bad news reinforced comments from Mr Draghi on Friday in which he suggested the situation in the eurozone has reached a point where the ECB may be justified in following the Bank of England and US Federal Reserve in engaging in a substantial programme of money printing. 

The eurozone has been steadily heading towards deflation, with prices rising by just 0.4pc in the year to July, leading to fears of a Japanese-style "lost decade" of economic stagnation. In a speech delivered at the Jackson Hole symposium in Wyoming on Friday night, Mr Draghi acknowledged that even long-term inflation forecasts have now fallen below the ECB's 2pc mandate. He said the central bank would "use all the available instruments needed to ensure price stability over the medium term". 

According to Nomura economists quoted in the article, the ECB could cut interest rates even further while embarking on a campaign of asset-backed purchases that might include a "fullblown" QE. 

What's the timing of something like this? According to the article, "the market is clearly expecting a large-scale asset purchase programme, maybe not at the next meeting but by the end of the year." 

It would seem that even as the US is scaling back such programs, Europeans may be exposed to an aggressive variant of the same strategy. Again, yesterday, both the S&P and Dow averages were higher, with the S&P moving across an important 2000 level. There are two main results of these developments, one parochial and the other political. 

From a parochial perspective, various stimulating policies will continue to power markets upwards – at least in the near term or until a definitive market event generates a radical downward movement. 

Looked at in larger political terms, the European malaise is gradually creating a paradigm in which pan-European facilities like the ECB are accruing power at the expense of member nations. 

Conclusion Neither of these trends are especially positive from the standpoint of monetary stability but they are nonetheless in play and will continue to have a significant impact on the evolution of the West's and the world's economy. 

Source

August 25, 2014

Central Banking at Jackson Hole: Simplistic Dialectic, Significant Ramifications

Janet Yellen Takes On Jackson Hole ... The economic-policy debate in the U.S. is moving from, "Why is the recovery so sluggish?" to "Is inflation starting to get out of hand?" This shift is premature, to say the least. Federal Reserve Chair Janet Yellen should say so Friday when she addresses the annual summer confab of central bankers in Jackson Hole, Wyoming. – Bloomberg editorial

Dominant Social Theme: The question that cries out for an answer is whether Janet Yellen should raise rates.

Free-Market Analysis: Like Reuters, Bloomberg is a creature of the establishment and you can read Bloomberg editorials (especially) to garner an inkling about how we ought to be perceiving one of the most important dominant social themes of all: Central banking and the endlessly discussed deployment of its monetary arsenal.

In this case, as before – and as we have maintained – central bankers meeting this weekend at Jackson Hole will palaver earnestly but come up with reasons why monetary policy and interest rates should remain fairly "unchanged."

 Such a decision will be debated endlessly and reported earnestly. In fact, the amount of ink devoted to whether central bankers should raise interest rates or not is truly staggering. And it is not by accident. The simplistic conversation is meant to suck up all the oxygen in the room.

In this case, as before – and as we have maintained – central bankers meeting this weekend at Jackson Hole will palaver earnestly but come up with reasons why monetary policy and interest rates should remain fairly "unchanged."

Such a decision will be debated endlessly and reported earnestly. In fact, the amount of ink devoted to whether central bankers should raise interest rates or not is truly staggering. And it is not by accident. The simplistic conversation is meant to suck up all the oxygen in the room.

By discussing the "rate question" along with other central bank issues, we inevitably cease to discuss the one REAL issue, which is why central banks exist at all and why central bankers ought to be stopped from manipulating money with endless monetary "tools."

This Bloomberg editorial, however, is a perfect example of how to retain the dialectic at full force. There is no question as to whether a group of good gray men should have the power to move markets. The question is only how should they do so.

Here's more:

The meeting's main topic this year is labor markets. Good choice. Tightness in the labor market would be a strong sign that higher inflation, led by higher wages, is coming. In fact, there's little or no sign of this, despite the recent drop in headline unemployment. 

Almost 10 million people remain officially unemployed, and about a third have been out of work for more than 27 weeks. Inflation hawks -- a small but increasingly vocal group among the Fed's governors, together with a growing roster of academic economists -- think the long-term unemployed aren't likely to return to the job hunt. 

If the hawks were right about this, the 6.2 percent unemployment rate would be misleadingly high. Lately it has fallen faster than at any time since the 1980s -- but, the hawks argue, even this drop understates the job market's tightness. The long-term unemployed aren't looking for work, so they aren't offering to supply labor or helping to restrain wages. In effect, the unemployment rate has fallen to about 4 percent. 

That's full employment, and it implies that higher wages and higher inflation aren't far behind. It's time, in this view, to start raising interest rates. This is wrong because the long-term unemployed shouldn't be written off. Nor should all of the so-called discouraged workers who have dropped out of the labor market altogether (and no longer count as unemployed). If the recovery strengthens, many of both groups will resume their search for work. 

Raising interest rates too soon risks braking the still-recovering economy and foreclosing those job opportunities. Yellen's dashboard of labor-market indicators still shows labor-supply excess. The participation rate is low. Underemployment -- part-time workers and the jobless who'd like a full-time job -- has declined but remains elevated at 12.6 percent. It all points to ample slack in the market. ... 
Wage data from the U.S. Bureau of Labor Statistics point the same way. Hourly pay in nominal terms grew about 2 percent in the year to June -- far below the 3 percent to 4 percent Yellen considers normal. Bloomberg News reports that five years of economic expansion have done almost nothing for the typical American worker's paycheck. Inflation-adjusted hourly wages have grown by 0.5 percent since 2009 -- the weakest rate since World War II. At similar points in past expansions, wages had risen more than 9 percent. 

Okay ... grant the point: Low wages are showing clearly that the US economy has not returned to "normal." If it had, then wages would be going up much faster than they are. Wages, so the argument goes, are responsive to economic pressures. They are slack because employer demand is yet slack.

Yet all this is so much guesswork – and of the most banal kind. A small group of (mostly) men gather in beautiful rooms, eat canap├ęs from expensive plates and discuss the same question over and over again with varying manifestations of enlightenment.

Not only are we supposed to be fascinated – mesmerized – by the show. We're supposed to closely scan the verbiage for signs of what might be shifting. In fact we presented some insights yesterday from Mohamed A. El-Erian – a professional investor who used to manage hundreds of billions of fixed income securities for Pimco.

El-Erian has now weighed in on the Jackson Hole confab as well, posting an article at Bloomberg that provides yet another view of the endless rate debate:

A number of prominent economists are warning that the developed world may have fallen into a low-growth equilibrium known as secular stagnation, in which the extraordinary measures adopted by central banks to achieve more robust growth could ultimately destabilize financial markets. Paraphrasing what Ben Bernanke said in his 2010 speech to the Jackson Hole conference, policy makers will have to consider whether they are near or past the point where the benefits of their actions are harder to justify given rising costs and risks. 

El-Erian has indeed managed to make the old "new again," pointing out that the European central bank and the Federal Reserve could be headed in opposite directions. The Fed, he declares, may begin "easing off the accelerator at a time when the European Central Bank is likely to intensify its stimulus efforts."

What would be the result of such a divergence? "If the divergence persists, the further shifts in interest rates and currencies could trigger volatility in financial markets around the world."

It's easy to scoff at what central bankers do: Under any logical economic scenario, they shouldn't be allowed to do it. But undeniably these people have power. El-Erian is probably correct in writing that if the Fed is pulling in one direction and the ECB in another, a good deal of securities volatility could result.

Perhaps that won't happen: The Bank for International Settlements coordinates monetary policy, and will try to continue to keep rates low and stock markets high. Yet it is a measure of the success of the central banking meme that we cannot look away. The conversations are jejune, the economic justifications non-existent, the outcomes may be significant.

 Conclusion The dialectic works because of the power that underlies it. Here's hoping one day it won't.

Source

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).

Conclusions

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.

Summary

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.