October 31, 2012

Now Central Bankers Directly Boost Occupy Movement

Occupy protesters were right, says Bank of England official ... The anti-capitalist protesters who occupied St Paul's Cathedral were both morally and intellectually right, a senior Bank of England official said ... Members of the movement occupied the grounds of St Paul's and remained camped there for more than three months until police evicted them in February last year. – UK Telegraph

Dominant Social Theme: This ragtag group of youngsters should be recognized for their truth telling. Out of the mouths of babes!

Free-Market Analysis: What a surprise ... not! We're long on the record as explaining the essential phony nature of this pseudo youth movement. Funded by George Soros among others and putatively generated out of the socialist-anarchist publication Adbusters, Occupy Wall Street is supposed to be an update of the 1960s hippy movement, complete with disdain for the "system," dislike for the wealthy and discomfort with capitalism generally.

In reality, it is one more manufactured meme of the power elite, another attempt at divide and conquer. The idea is to blunt the effects of Internet truth telling, what we call the Internet Reformation.

A funny thing happened on a way to a "movement." It was exposed. The alternative media, including The Daily Bell, pointed out the various contradictions, suspicious funding and general nonsensical nature of this manufactured effort. And that has helped sink it, or at least diminish it.

The phony anarchists and leaders − and the behind the scenes cooperation with the very establishment that OWS was supposed to deplore − all took their toll.

The power elite behind the movement doesn't give up, of course. And OWS is said to be making a resurgence. But it is almost November and like global warming (climate change) another dominant social theme that seems to be failing, OWS is having trouble gaining traction.

Ah, frustration! Now the minions of Money Power, driven by the failure of yet another gambit, are speaking out openly in favor of the "movement." Here's more:

Andrew Haldane, a member of the Bank's financial policy committee, said the Occupy movement was correct in its attack on the international financial system.

The Occupy movement sprang up last year and staged significant demonstrations in both the City of London and New York, protesting about the unequal distribution of wealth and the influence of the financial services industry. Members of the movement occupied the grounds of St Paul's and remained camped there for more than three months until police evicted them in February last year.
"Occupy has been successful in its efforts to popularise the problems of the global financial system for one very simple reason; they are right," Mr Haldane said last night. Mr Haldane, the Bank's executive director for financial stability, was speaking to Occupy Economics, an offshoot of the Occupy movement, at an event in central London.

In a speech entitled Socially Useful Banking, he said the protesters had helped bring about a "reformation" in financial services and the way they are regulated.

Partly because of the protests, he suggested, both bank executives and policymakers were persuaded that banks must behave in a more moral way, and take greater account of inequality in wider society.

This is a really incredible statement and surely indicates the way what we call directed history works. One sets up a movement, a crusade, a war ... and then uses it as a justification to pass laws that will reshape society as one chooses.

Haldane actually comes right out and says it: "Occupy's voice has been both loud and persuasive and policymakers have listened and are acting ... In fact, I want to argue that we are in the early stages of a reformation of finance, a reformation which Occupy has helped stir."

Ah ... "Reformation." We've been writing about the Internet Reformation for a decade. But Haldane wants us to believe the REAL Reformation is a regulatory one!

Wealthy, empowered, elite hacks like Haldane will justify further regulatory authoritarianism under the guise of being enlightened by the "youth" of OWS. You see? If you protest loudly enough and are morally pure, you will change the mind even of British central bankers.

Never mind these same bankers are inflicting bloody mayhem on Europe. In Greece and even Spain they will budge not an inch. Higher taxes and lower services are the norm. There is no sense that Greek protestors have made a smidgen of an impact on the central bank ruling elite. But OWS participants seem to have that "certain something" ...

Not really, of course. In the case of Europe, central bankers at the behest of their power elite managers are determined not to budge. The crisis, once manufactured, is to usher in a new political power to help alleviate the monetary problems caused by the euro.

Europe is awash in blood and tears but this does not move central bankers a bit. The technocrats now emerging rule with implacable rigor. But OWS protestors are saying something bankers like Haldane welcome.

This is the whole POINT of OWS, as we have long predicted. These movements are intended to provide justification for more regulation and more complexity. This is how the powers-that-be consolidate control, in fact, via regulation.

Engineer an economic meltdown via central bank money printing, create a social movement in response and then act as if the laws you are passing are an outgrowth of unstoppable populist sentiment.

This is the beauty of directed history. When managed properly it is almost seamless. Over time, it is very difficult to discern the reality of Money Power's historical manipulation. We are fortunate the Internet has given us the tools to do so.

Lest anyone think Haldane was just speaking "off the cuff," we want to point out that according to this article, the speech was directly distributed by the bank. And the rhetoric is truly remarkable. Haldane confirms the protesters "had been right about bankers' behaviour and the consequences of extremely high salaries and bonuses in the financial sector and other industries."

"I do not just mean right in a moral sense," he added. "It is the analytical, every bit as much as the moral, ground that Occupy has taken. For the hard-headed facts suggest that, at the heart of the global financial crisis, were − and are − problems of deep and rising inequality."

Conclusion: We learn he believes the activists "had helped bring about nothing less than a new financial order." He adds that a "new leaf is being turned," and that Occupy is playing "a key role in this fledgling financial reformation."

October 30, 2012

Savings Rate Plunges To Lowest In One Year As US Consumer Once Again Tapped Out

Today's personal income and spending report for the month of September was just the latest datapoint confirming that the US consumer is once again massively cash-strapped and is eating, literally, into their savings. While Personal Income rose at the expected pace of 0.4%, Spending in the last month came well above expectations of 0.6%, printing at 0.8%, which meant that on a net basis Consumers, always hopeful, outspent themselves by a margin of 0.4%. This meant that the savings rate declined from 3.7% in August to a tiny 3.3% in September. This was the lowest Savings print in 2012, and higher only compared to last November's 3.2%, which in turn was the lowest print since the start of the second great depression. In other words, overeager consumers saw their nominal incomes increase... and decided to outspend said rise at double the rate of increase! At this pace, by the time Thanksgiving rolls out, US consumers will have no savings at all left to tap and living will be strictly a month to month activity.

But wait, it gets worse. As the second chart below shows, the real story was that of the Real, not Nominal, Disposable Income, adjusted for the cost of living, which declined for the second consecutive month, and shows that the peak this year took place in July, having declined consistently ever since. In other words, even real incomes are now consistently declining, spending aside.

Based on this data, the US consumer is tapped out, has hit peak earnings power, and is looking at a holiday season where spending is expected to ramp up drastically with empty bank accounts and maxed out credit cards. But at least "housing has bottomed."

October 29, 2012

US Markets closed on Monday. From NBC and Reuters: NYSE and Nasdaq to close on Monday due to Hurricane Sandy

U.S. stock trading will be closed on Monday and possibly Tuesday in response to Hurricane Sandy, NYSE Euronext said late on Sunday.
NYSE Euronext, which runs the New York Stock Exchange, had previously said that electronic trading would remain open and that only the exchange's trading floor would close.
In a statement, the company said that "the dangerous conditions developing as a result of Hurricane Sandy will make it extremely difficult to ensure the safety of our people and communities, and safety must be our first priority."
Nasdaq said it would also close all U.S. equity and derivatives exchanges, as well as the Nasdaq/FINRA TRF on Monday, CNBC reported late Sunday night. It is likley the markets will also be closed on Tuesday, according to the statement from the exchange.

To all in the path of Sandy: Stay safe and dry!

• At 8:30 AM ET, the Personal Income and Outlays report for September is expected to be released. The consensus is for a 0.4% increase in personal income in September, and for 0.6% increase in personal spending. And for the Core PCE price index to increase 1.7% year-over-year.

• At 10:30 AM, the Dallas Fed Manufacturing Survey for October. The consensus is for a reading of 2, up from -0.9 last month. This is the last of the regional survey for October.

• At 2:00 PM, The Federal Reserve is expect to release the October 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices.

• Expected: the National Multi Housing Council (NMHC) Quarterly Apartment Survey. This is a key survey for apartment vacancy rates and rents.

The Asian markets are mixed tonight, with the Nikkei up 0.3%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P futures are down 2 and DOW futures are down 10.

Oil prices are down recently with WTI futures at $86.28 per barrel and Brent down to $110.12 per barrel.


October 26, 2012

David Einhorn Explains How Ben Bernanke Is Destroying America

David Einhorn knocks it out of the park with his very first statement during today's Buttonwood Gathering, in a segment dedicated to one thing only: explaining how the Fed's policies are not only not helping the economy, they are now actively destroying this country.
"Sometimes you have to look at what is the base assumption. because sometimes you have a groupthink around the base assumption and everybody agrees to the same thing and acts reflexively and doesn't really challenge what is going on. I think we have reached that point with the monetary policy. The assumption is that if you want the economy to improve, if you want more jobs, if you want more consumption, what we need is ever-easing monetary policy. My point is that if one jelly donut is a fine thing to have, 35 jelly donuts is not a fine thing to have, and it gets to a point where it's not a question of diminishing returns but it actually turns out to be a drag. I think we have passed the point where incremental easing of Federal policy actually acts as a headwind to the economy and is actually slowing down our recovery, and I am alarmed by the reflexive groupthink of the leaders which is if we want a stronger economy, we need lower rates, we need more QE and other such measures."
And that, in a nutshell is it: everything else follows.

Because in addition to explaining the same fundamental error in the Fed's logic (from an economic standpoint; we already showed what the "market" error is, namely that instead of forcing investors to buy risk assets as Bernanke's wealth effect prerogative demands, these same investors are merely frontrunning the Fed's purchases of bonds and MBS, in what is truly a risk free, if lower-returning trade, and is key reason why ever fewer equity market participants are left, leading to lower bank revenues, bank employee terminations, lower Federal and State tax refunds, and so on, in a closed loop) it also points out the social aspect. At one point in the interview, Einhorn observes that traders and economists now have diametrically opposing views on the effectiveness of QE (no need to explain whose view is what). The reason for this dichotomy is simple, if crucial: we are now at a point where the entire practice of new-classical economics - the bedrock thinking of all modern soecity - is at risk of being exposed for a sham "science" which is and has always been absolutely flawed. Because when one day the Fed fails to prop up the Fed, and fail it will, all the economists that encouraged the Fed to do what it does, without grasping the true implications of 'diminishing returns', will be forced to fall on their swords (hopefully metaphorically but who knows). And with that the end of the shaman cult that shaped the modern world will finally end. But not before every single "economist" keen on perpetuating their job, their tenure, and their paycheck for as long as possible, backs the Chairman fully and unconditionally: anything less, any outright dissent within the economic cabal, would lead to a far faster unwind of the Fed's policy artifice even faster than it otherwise will fail.

Recall that this was precisely the dilemma before the Bundesbank as we explained yesterday, when it did what it had full right to do openly, yet did secretly, when it pulled its gold inventory from London: it implicitly confirmed it was no longer a willing participant of the NWO, and no longer is willing to sacrifice its sovereign independence at the altar of Keynesianism, and monetary theory.

But back to Einhorn, who presents one of the most coherent explanations why QE, contrary to the Chairman's "best intentions" does nothing to stimulate the economy at the consumer level, and why it effectively serves as a hindrance to future growth:
"Lower rates drive up the cost of commodities: oil and food. And money that is spent on oil is sent out of the country to the Mideast and it doesn't help, and takes out income from people's pockets that could otherwise be spent on other goods. The second [ZH: and this is by far the biggest thing that the Fed refuses to acknowledge] is that not being able to earn a safe return on savings, is causing people to hoard savings rather than consume. In other words if I know I am going to earn 3% in the bank I can spend that income and I can have visibility towards that, but if I know I'm going to earn zero in the bank, in order to figure out how much I need to save for retirement I need to save a much bigger number. Which means I can't spend much now, I need to save more now, to build up those savings for retirement. If I am already retired and I am on fixed income, my income has now really gone down and I have to hoard money so I can spread it out thinner over a longer part of my life. So by denying individuals savings or interest on income on their savings, it is causing hoarding which is driving down consumption which is hurting the economy."
As a reminder, in America consumption, not the government (which despite incorrect claims to the contrary has never created even one penny of wealth), is responsible for 70% of annual GDP. Is it any wonder that the Fed's own policies, done solely to protect the financial system, and to enrich those whose wealth is already primarily in the stock market (the infamous "1%"), are the cause of the ongoing catastrophe that is the destruction of America's middle class, which day after day sinks lower and lower?

Also, in direct debunking of all those Magic Money Tree (aka MMT) "economists" who say that government deficits are a great thing because the lead to higher savings, while maybe true on paper, Einhorn shows that the "expectations" component of behavior here is far more critical than what simplistic Econ 101 textbooks claim, especially the ones that were written long before anyone thought that the US would have a Zero Interest Rate Policy for at least 7 years (and likely more until the runaway inflation finally hits):
In terms of the savings, I don't think it's a zero sum, because it's a multiplier on the behavior. It's not just the income I am not receiving now. It is the income I don't expect to receive in the future as well. Now we are years years into [ZIRP] with a promise of at least three more, so that's seven years, and you are getting a change in behavior on a multiplied basis.
Finally, and touching on the previous point of why theoretical economists' views differ so much from those who practically make a living by being right for a change, Einhorn is laconic: "It's very hard for economists with models, with very limited sample sets and empirical data to understand [that we've gone beyond the point of monetary policy diminishing returns.] I think you wind up with a different view from people like me in the real world who aren't just trying to figure out what do the models say, but how do people actually behave.... We've opened up enormous tail risks of what happens if the Fed loses control, what happens if the Treasury loses control and these scare people and drive up risk premiums, and drive down P/E multiples and make companies defer long-term investments in the country because they are worried about significant tail risks these very aggressive policies are creating." And there you have it - someone please advise Paul Krugman and his cotterie of useless voodoo shamans whose only recommendation has always been more of the same. Pardon: much, much more.

None of the what Einhorn said in today's Buttonwood gathering of course is news, as he simply reiterated everything he said in his letter to investors from Tuesday, which is just as effective at explaining how the Fed's solipsistic illogical methods are bankrupting America. The key section in that letter is the following excerpt:
It seems as if nothing will stop the money printing, and Chairman Bernanke in fact assures us that it will continue even after the economic recovery strengthens. Specifically, he says, “Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we’re not going to rush to begin to tighten policy.” Apparently, anything less than a $40 billion per month subscription order for MBS is now considered ‘tightening’. He’s letting us know that what once looked like a purchasing spree of unimaginable proportions is now just the monthly budget.

Chairman Bernanke concedes that this policy hurts savers, then offers some verbal sleight-of-hand worthy of a three-card monte hustle: He says the savers are helped by low rates because low rates support higher asset values and promote a healthy and growing economy. He then goes on to say that because savers benefit from a healthy and growing economy, we must therefore have an accommodative policy. This in turn begs the question: Does an accommodative policy promote a healthy economy? Chairman Bernanke argues that higher asset values create a wealth effect, which he again describes, “if people feel that their financial situation is better because their 401(k) looks better or for whatever reason, their house is worth more, they are more willing to go out and spend.”

We have just spent 15 years learning that a policy of creating asset bubbles is a bad idea, so it is hard to imagine why the Fed wants to create another one. But perhaps the more basic question is: How fruitful is the wealth effect? Is the additional spending that these volatile paper profits are intended to induce overwhelmed by the lost consumption of the many savers who are deprived of steady, recurring interest income? We have asked several well-known economists who publicly support the Fed’s policy and found that they don’t have good answers.
And so on. If by now it is unclear to anyone that Bernanke is not only not doing anything to help America, or the world, but is merely accelerating this country's destruction, and perpetuating the same practices that result in breakouts of food price shocks leading to isolated genocide in those parts of the world without a safety net, then we congratulate you on your imminent receipt of a Nobel prize in Economics.

Finally, for those asking "what should be done", Einhorn's suggestion is identical to the one Zero Hedge has preached to its readers since day 1, nearly 4 years ago. And we don't even charge 2 and 20...
If Chairman Bernanke is setting distant and hard-to-achieve benchmarks for when he would reverse course, it is possibly because he understands that it may never come to that. Sooner or later, we will enter another recession. It could come from normal cyclicality, or it could come from an exogenous shock. Either way, when it comes, it is very likely we will enter it prior to the Fed having ‘normalized’ monetary policy, and we’ll have a large fiscal deficit to boot. What tools will the Fed and the Congress have at that point? If the Fed is willing to deploy this new set of desperate measures in these frustrating, but non-desperate times, what will it do then? We don’t know, but a large allocation to gold still seems like a very good idea.

So who should listen to: a failed historian-economist who has never worked in the real world, who has no idea how human behavior plays out in reality, who has lived in an ivory tower all his life, and who has never had to put his money where his mouth is, or a self-made billionaire? For us the choice is clear.

And for more context, here is what Einhorn said about the Fed in his latest letter to clients:
Central bankers have been on a money printing spree. In Japan, they expanded monetary easing by ¥10 trillion. In the U.K., the Bank of England monetized another £50 billion of gilts. ECB President Mario Draghi promised “unlimited” bond buying, and the Swiss are committed to putting a floor under the Franc through unlimited purchases of Euros and other assets.

This buying binge brings to mind American Express cards, which are famous for their promise of no pre-set spending limits. But as some AmEx customers have learned, there is a spending limit – they just don’t tell you what it is. AmEx anticipates how much you can repay based on your annual income and your payment history. When your charges exceed their estimates, they cut you off until you pay off your balance.

Central bankers should keep this dynamic in mind, as they continue to run their printing presses. While the ink may be endless, the market’s tolerance is not (though there is no sign that it is nearly exhausted). Like American Express, the market won’t let the central bankers know what their spending limits are until they have exceeded them and get cut off.

Here in the U.S., Chairman Bernanke announced desperate measures in non-desperate times. The Fed will be using its new AmEx Debasium card to buy a minimum of $40 billion per month worth of mortgage-backed securities…indefinitely. If the job market doesn’t show “substantial improvement” the Fed might increase its monthly MBS allocation, or head over to aisle 3 to pick up some Treasuries. When asked what would bring the binge to an end, Chairman Bernanke was more intent on emphasizing all the things that would necessitate further easing. In conjunction with the money printing, Chairman Bernanke has promised zero percent interest rates through the middle of 2015.

It seems as if nothing will stop the money printing, and Chairman Bernanke in fact assures us that it will continue even after the economic recovery strengthens. Specifically, he says, “Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we’re not going to rush to begin to tighten policy.” Apparently, anything less than a $40 billion per month subscription order for MBS is now considered ‘tightening’. He’s letting us know that what once looked like a purchasing spree of unimaginable proportions is now just the monthly budget.
One observation: it is not $40 billion. It is $85 billion as we said the day QE3 was announced:

October 25, 2012

Central Banking Premises Are Lacking?

How Would Mitt Romney Influence the Fed? ... Binyamin Applebaum discusses who Mitt Romney would likely tap to replace Ben Bernanke at the Federal Reserve and says we'd likely get either Greg Mankiw or Glenn Hubbard whose views seem similar to Bernanke's or else we'd get John Taylor who seems like more of a hawk. Neil Irwin offered a longer list of contenders at the beginning of the month, but I think also has those three as his leaders. From my viewpoint, one thing I think we've learned over the past five years is two modes of inference that don't hold up. One is "the president is sure to appoint someone who'll deliver strong nominal growth to ensure his re-election" and the other is "new Fed Chairman X is sure to do Y because Y is what he said we should do in his academic work." Unfortunately that leaves the situation inherently murky. – Slate

Dominant Social Theme: "When I use a word, it means just what I choose it to mean, neither more nor less." – Humpty Dumpty

Free-Market Analysis: This article at Slate illustrates the growing radicalization of the Fed conversation and also how words and premises make it increasingly difficult to discuss central banking logically.

It is an analysis of whom Mitt Romney would pick for Fed Chairman if he became president – but the subtext is that the US central bank ought to adopt certain specific targets as related to employment especially.

It is written by Matthew Yglesias, "son of novelists Jose Yglesias, of Cuban and Spanish descent, and Helen Bassine Yglesias, daughter of Jewish Polish immigrants," Wikipedia informs us. "Yglesias went to high school at The Dalton School in New York City and later attended Harvard University where he studied philosophy [and] was editor-in-chief of The Harvard Independent, a weekly newsmagazine."

Yglesias is evidently a liberal who supported the Iraq war and reportedly voted previously for Mitt Romney. He has also written for the American Prospect and for The Atlantic magazine before taking up his post at Slate.

As might be expected given his progressive credentials, this article is a subdued argument for yet more central banking activism, which Yglesias refers to as "regime change." He's a bit coy about it but he seems to be arguing for greatly stepped up stimulation to cure the US "employment" problem. This is part of a larger argument that is gathering strength regarding Fed policy: that it is too timid.
The logic is that whatever the Fed has been doing (printing money) hasn't worked very well and therefore the Fed ought to do MORE of it. Of course, free-market oriented types believe the problem is that the Fed is already doing too much. But this is obviously not the perspective of Fed activists.
Additionally, such individuals often want the Fed to be clearer about its goals. They want the Fed to adopt numerical goals, in fact, and work toward meeting those goals by manipulating monetary volume.

Those around the Fed have been reluctant to adopt formal goals because of the dual mandate to control "inflation" (really, price inflation) while supporting "employment." Within a larger context, the US central banking brain trust has been reluctant to take the step toward numerical goals because the Fed is traditionally (and once again) a target of US populist resentment.

To announce that the Fed – a purposefully ruinous instrument of elite policy in many eyes – will now seek to mimic various scientific disciplines is akin to attaching a bullseye to its metaphorical back. Here's a little more from the article:

Rather than focus on individuals, lets look at what's promising and what's not promising about a Romney influence on monetary policy.

The promising element is that when Rick Perry, Ron Paul, Herman Cain and others were leading the GOP down the path of hard money mania, Romney was clearly reluctant to follow. He did notably little Bernanke-bashing and even appeared to defend him at times. So Romney has a foot in the camp of good sense and also perhaps has a grasp of the importance of this issue, making a topic he didn't want to immediately flip-flop on when opportune.

The non-promising element is that we're in the era of the "partisan presidency." A Democratic White House is staffed by Democratic Party bigshots and a GOP White House is staffed by GOP bigshots.
And there's no doubt that the prevailing winds in the GOP are toward hard money. Paul Ryan is passionate about monetary policy and is committed to hard money views he learned from Atlas Shrugged. The new conservative think tank E21 is a bastion of hard money thinking and Senator Robert Corker and other Republican members of congress have rallied to urge the Federal Reserve to care even less about unemployment and real output.

The salient point of this article is to suggest that Romney would choose a "hard money" chairman – and this would further separate the Fed from the laudable effort (in the eyes of some) of becoming more scientific and goal oriented. Of course, one must put "hard money" into context in order to discuss this suggestion logically.

The dollar is not backed by anything specifically and on top of that the world's largest oil producer, Saudi Arabia, demands payment for oil in dollars, forcing other countries to hold dollars. This has allowed the US Fed, with the connivance of Congress, to spend trillions more than the US could otherwise afford. Countries are forced to buy these dollars even if they don't want to.

At this point it is obvious that people would not hold dollars if they did not have to do so. The dollar is seen as a degrading investment. There are too many of them. For this reason among others it is strange to refer to certain Fed-centric economists as "hard dollar." A hard dollar viewpoint is one that espouses commodity backing for the currency, even full-reserve backing. To speak of those espousing fiat of any kind as hard dollar is surely to misuse the term.

What is meant by the term "hard dollar" is that those to whom the term is applied are in favor of FEWER soft dollars – fiat dollars. But to apply the term "hard dollar" to these folks is surely a misuse of the term.

"What we need is regime change," the author writes. But what is actually needed is a clarification of what is logical from a monetary standpoint.

Conclusion: We are told on good authority to check our premises because premises color conclusions. This article is a good example of how debasement of the fiscal conversation has made it difficult even to discuss necessary remedies.

October 24, 2012

A Non-Corporate Model for the Localized Economy: Guilds

Guilds offer a dynamic, flexible model for relocalizing and reinvigorating local economies.

The primary reason the U.S. economy is stagnating is that it is dominated by an increasingly dysfunctional Central State and the private cartels it protects. The solutions, therefore, cannot come from State central-planning or from global corporate cartels. The solution is to develop alternative models that reinvigorate the local, community-based economy and that leverage the new tools of productivity: the Internet, freely available software tools and new technologies such as desktop fabrication.

Though guilds have been around since ancient times, the Western model developed in the 1200s. The guild model is broadly based on mutual benefit and the conservation and sharing of applied knowledge. According to the Wikipedia entry:
An important result of the guild framework was the emergence of universities at Bologna, Paris, and Oxford around the year 1200; they originated as guilds of students as at Bologna, or of masters as at Paris.
While the Medieval guilds had an income-protection purpose much like a trade union or a cartel, modern incarnations of the model are aimed at serving both members of the guild and customers by establishing trusted information about local small-businesses.

To get a better understanding of the emerging guild movement in the U.S., I interviewed Mike Hartrich, guildmeister of the Santa Cruz Construction Guild(SCCG) in Santa Cruz, California.

1. What inspired you to start the Guild?

"I have always worked by word-of-mouth and never needed advertisement. The 'Great Recession' affected me personally in 2009 when the calls stopped coming in. That was a shock. I had been learning about online marketing so I looked into what was available for contractors to market their services online. I looked at Angie's List, ServiceMagic, Diamond Certified and others. These are all large national companies that use the power of computers to provide online referral services nationwide. Some do this better than others.

The bottom line is that while these companies focus on local business they themselves are not local. Construction is really a local business. You build up your business one job at a time through a growing referral network. Word-of-mouth is the essence of that.

Also, these companies are impersonal, not personal. They are not made up of people who connected through being part of the same community. They are strictly a business, and only secondarily concerned about the local area.

I decided to set up a local online referral site that would use the Internet to draw attention to the members. At the same time the focus would remain strictly local. That's how this adventure started. Little did I know what I got myself into. I had help from a webmaster and selected Wordpress as the platform so I could make changes myself. There was a lot to learn.

The basic principle is a LOCAL online hub for quality builders and constructions pros who are invited by REFERRAL.

The Santa Cruz Construction Guild (SCCG) grew quickly. We had our first meeting in March 2010 at Big Creek Lumber. Ever since then the guild has developed a life of its own. Members are getting leads and work. Not everyone, of course, but the site draws an average of 450 visits/week.

One of the main benefits is the ability for members to meet other good builders, subs and professionals. The members really like that. Our renewal rate is over 90%.

2. Please sketch out the basics of your Guild model for those of us who are unfamiliar with guilds.

Membership is based upon a referral. If the prospective member does not know an existing member then I check him out - contacting three recent clients, checking his status with the Contractors State License Board, look at his current web presence etc - and I refer him. This system has worked really well so far. As a member you get your own member page. This is customized with your text, images, videos logo etc. If you have a web site I usually copy, paste and edit from that. The end result is a custom one-page web site that gives you a real web presence as part of a quality trusted local group. If you have a web site then we link to it. Same for Facebook and Linked-in. Once you have your page you can invite testimonials from your past customers.

You also get signed up to our email list. This simple way of communicating with the members works really well. Members can ask questions, offer tips, look for help , buy/sell items, etc. I forward their email to the general membership. Right now the latest email covered the County of Santa Cruz late-fee structure and penalties for prior unpermitted work. I also got an email from a member who was told that he could not have his over-the-counter permit request approved for at least 52 days.....

These days if you don't have an online presence you get left behind. The guild uses the Internet to connect members with customers, as well as with each other.

I just started our Facebook strategy. This really is the ideal avenue for members to publicize their projects with images and posts, complain about the heavy-handedness of the County etc. I have a hunch that our Facebook strategy will be quite popular with the members.

I just checked the Facebook status of the 163 members of the Santa Cruz Construction Guild (SCCG). 60 have Facebook business pages and over 103 do not. Of the 60, only five or six are actually using them. So this is an area where the Guild can help build their business presence for next to free.

The cost for membership is currently $240/year with a $60 discount in place right now. I intend to keep it as low as possible because even at that it's expensive for some members. Everyone is watching their nickels these days. My intention is to give members the best possible deal for their money.

We also have meetings. These are usually held at Big Creek Lumber, a local family-owned yard. There is a natural alliance between the guild and the local lumberyards. I intend to build on this alliance. Members like these meetings. They are a good way to meet your peers. We also have had meetings held at member offices. The topics of the meetings vary. Recent meetings covered construction financing ( at Lighthouse bank ) waterproofing details at Myles F. Corcoran Construction Consulting, Building Science by Scott Milrod, etc etc.

Over the past three years the guild has taken on a life of its own. We have good local press. We've been featured five or more times in the local paper (see our media page). We now have hats with the guild logo, bumper stickers, etc. Members like that.

I set up a member-referral program that rewards members $60 for each new member they bring in. But almost no one has used this. It doesn't seem to be a big driver. Big Creek Lumber used this for our charity drive and is donating these to Second harvest Food Bank.

3.How is the Guild’s model different from the national/commercial “contractor referral/recommendation” services?

We use the Internet & computer to create an online presence. But this presence is a reflection of a very real local presence. That's what makes the guild different. It's all based on real local people, local reputations, local histories. We all need an online presence these days. Customers want to check you out first. That's what all the big online services offer.

Angie's List is good. Yelp is questionable, Diamond Certified is expensive - $7,500/year - SeviceMagic charges for leads, etc etc. They can be useful. It's not an either/or choice. You could subscribe to one or all of these. I want to make the guild so valuable to the members that it becomes the foundation of their online presence.

We also started a Member Recommended Services. These are local companies that provide our members with a 10% discount. This is a new service/feature.

4. Do you see the Guild as part of the “relocalization” movement which seeks to emphasize the local economy rather than the global-corporate economy?

Yes, I certainly do. Members love the LOCAL focus of the guild. That's what makes it work.

5. The risk in any recommendation/referral model that is open to the public such as Yelp is that one customer can unjustifiably damage the reputation of a contractor/service. On the other hand, customers need to be confident that comments from previous customers haven’t been screened to hide legitimate complaints. How does the Guild manage feedback from customers and members?

A customer makes a bad comment on a member's page. I get to see that that before it gets published. I send the comment on to the member and ask for hi s side of the story. So far all three cases have been resolved quickly this way. I published one complaint in order to get a quick response from the member. That happened. Amazingly, we have had only three complaints in three years. Two of them were old grudges - 3-5 years old. Not much you can do about that. They preceded the guild so I did not leave them published. One member did not renew because of that. The third complaint was for a missed appointment. The member contacted the customer and made it right.

Any member who is a bad apple will not remain a member for long. Membership is not a right, it's a privilege. If you mess up seriously you won't be a member for long.

6. Is the Guild model one that you believe can be duplicated elsewhere in the nation?

That's the challenge. Chad Cornette, an architect-builder in Green Bay WI contacted me after our first big newspaper article about two years ago. We started the Green Bay CG a little over a year ago. I quickly realized that any expansion required a huge expenditure of energy and back-end infratructure: Shopping Cart, CRM module, SEO, email, web site replication, etc etc etc. AAAAaaargh.

After a year-plus of working on this I have come full circle to my original assessment, but with a deeper understanding. The key to duplicating this model lies in each community. I can provide the template, the model, the 'business-in-a-box', the back-end IT, etc. But I cannot make the local connections because I'm not a local.

That connection requires a local lumberyard, to act as the hub, AND, primarily, a local 'guildmeister' to build the membership. That is the hurdle. So now I am thinking of how to attract the right kind of guildmeisters who want to do this in their community. They get compensated between $60 - $100 for each member renewal.

150 members x $100 = $1,5000/year or $1,250/month. That is not a full time income, but a comfortable extra income for doing very part-time work in your existing field of business.

I'd like to see guilds grow in all kinds of places across the country. It's a good model. I'd like to be able to offer group business and health insurance to the members once we get large enough." Thank you, Mike, for sharing your experience in building and expanding a local guild model that can be copied in other locales. Guilds, like co-operatives, are an extremely flexible model that could be extended beyond craft guilds.

One sure way to improve the local economy is to keep more of the community's income in the community itself rather than send it to distant corporate cartel headquarters. Guilds can play a dynamic role in that relocalization movement.

October 23, 2012

Obama And Romney Both Favor A One World Economic System That Kills American Jobs

Either way this election turns out, American jobs are going to continue to get slaughtered by the millions. During this campaign, Mitt Romney and Barack Obama have both attempted to portray each other as the "outsourcer in chief". Unfortunately, they are both right. Barack Obama and Mitt Romney have both participated in the outsourcing of American jobs, and both are openly admitting to the American people that they favor the emerging one world economic system which will continue to destroy millions of American jobs. In fact, they argue with each other about which of them will be more aggressive in pursuing more "free trade" agreements over the next four years. Unfortunately, the "free trade" agreements that the U.S. government enters into are never "fair trade" agreements. As a result, over the past decade we have lost tens of thousands of businesses, millions of jobs and trillions of dollars of national wealth. This year alone, we will buy about half a trillion dollars more stuff from the rest of the world than they will buy from us. This trade deficit will be about 7 times larger than the trade deficit of any other nation on earth. Our economy will continue to bleed jobs at a horrifying pace, but Obama and Romney insist that the answer to our problems is even more "free trade". What makes all of this even more dreadful is that most Americans continue to fall for this nonsense.
It doesn't take a genius to figure out that merging our labor pool with the labor pools of nations where it is legal to pay slave labor wages was going to kill American jobs and drive down wages for the jobs that remain in the United States.

Why should some giant predator corporation pay you 15 dollars an hour plus benefits when they can pay a worker on the other side of the planet a dollar an hour with no benefits to do the same job?

During the second presidential debate, when Obama was asked why high tech products such as the iPhone could not be made here in the United States, Obama openly admitted that there are some jobs that aren't ever going to come back.

But why does that have to be so?

Why can't those jobs come back to America?

It seems to me that if you cracked down on nations that are cheating such as China, imposed a system of common sense tariffs and cut the corporate tax rate to a level more consistent with the rest of the world that you could get a lot of those jobs flooding back in by the end of next year.

But Obama is so blinded by his faith in the emerging one world economy that such measures are unimaginable to him.

In recent years, the Obama administration has entered into new "free trade" agreements with Panama, South Korea and Colombia. In addition, the Obama administration is making the Trans-Pacific Partnership ("the NAFTA of the Pacific") a very high priority.

Considering what a nightmare the first NAFTA was, do we really need another one?

The Trans-Pacific Partnership is a treaty that would essentially ban all "Buy American" laws. It is being touted as one of the most comprehensive "free trade" agreements in history, and it would open up the door for millions more good jobs to be shipped out of the country.

The workers of America simply cannot afford another four years of Barack Obama.

In fact, the Obama administration has actually spent billions of taxpayer dollars to create jobs in other countries. The following is from a pro-Republican website...

Over his four years in office, Obama promised that he would focus on creating "jobs that pay well and can't be outsourced." However, as he racked up trillions in new debt, billions of dollars did go to create jobs that were outsourced or spent overseas. Whether it is electric cars made in Finland or solar panels in Mexico, taxpayers would be astonished to learn that their hard earned money went abroad for jobs that weren't created in the United States.

You can get all the details right here. Needless to say, the Obama administration has been an absolute disaster on these issues.

So would Romney be an improvement when it comes to trade?

That is very doubtful.

The truth is that Mitt Romney was involved in outsourcing jobs while he was at Bain Capital. The following is from a recent article posted on Forbes.com...

David Corn of Mother Jones reports that “according to government documents . . . Romney, when he was in charge of Bain [Capital], invested heavily in a Chinese manufacturing company that depended on US outsourcing for its profits—and that explicitly stated that such outsourcing was crucial to its success.”

This didn’t happen after 1999, when Mitt Romney says he left Bain Capital to run the Salt Lake City Olympics (Corn was one of the first reporters to raise questions, now gaining wide exposure, of whether Romney really left Bain then), but the year before. On April 17, 1998, Brookside Capital Partners Fund, a Bain Capital affiliate of which Romney was the sole shareholder, sole director, president, and chief executive, invested an estimated $14.2 million in Global-Tech, an appliance maker in Dongguan, China.

On Monday, November 5th Bain Capital is outsourcing my job to China. On Tuesday, November 6th I'm casting my vote against Mitt Romney.

Global-Tech made products for American companies like Sunbeam, Hamilton Beach, Mr. Coffee, and Proctor-Silex. In September 1998 Global-Tech’s CEO announced that the company was postponing a factory expansion because Sunbeam was slowing its rate of outsourcing, and said, “Although it appears that customers such as Sunbeam are not outsourcing their manufacturing as quickly as we had anticipated, we still believe that the long-term trend toward outsourcing will continue.”
Since Romney left, Bain Capital has become even more aggressive with outsourcing jobs. In fact, Bain Capital has been forcing American workers to train their Chinese replacements even in the midst of this campaign. Aren't they concerned that they are making their former boss look bad? The following is from an article written by an American worker that is having his job shipped to China by Bain Capital...

Yes, I blame Mitt Romney for the loss of my job. Here's why.
I've worked at the same factory in Freeport, Ill. for thirty-three years, making sensors and controls for the auto industry. It's tough work, but it pays a living wage with health benefits that folks can count on, and it fuels our town's economy and tax base.

That's been changing since Bain Capital came to town. Two years ago, our factory was sold to Sensata Technologies, a company created by Bain Capital, and they told us that by December 2012, all 170 of our jobs would be shipped to China. They even made us train our Chinese replacements.

Layoff notices have been sent out, and some folks have already been laid off. Where there was once lots of people and energy and life, now there's only the discoloration on the floor where the machinery used to be. It's depressing. They're not just dismantling the equipment and the plant; they're dismantling our community.
All of this outsourcing is killing America.

Back in 1950, the population of this country was less than half of what it is now, and yet there were more Americans working in manufacturing back in 1950 than there are today.

The decline in manufacturing jobs in the United States has been really dramatic since the year 2000.

In 2000, there were more than 17 million Americans working in manufacturing, but now there are less than 12 million...

I think that it is interesting to note that China joined the WTO in 2001. Since that time we have been losing jobs to them at an astounding pace. According to a new report by the Economic Policy Institute, U.S. trade with China "cost more than 2.7 million jobs between 2001 and 2011".

The Chinese slap huge tariffs on many of our goods, they manipulate currency rates to make sure that U.S. companies cannot compete, they steal our intellectual property and they deeply subsidize their own businesses.

And yet Obama and Romney insist that this is "free trade".

What a joke.

And our tax structure is absolutely killing us as well. The following is from a recent article by Ernest F. Hollings...
A U.S. manufacturer exporting to China pays the 35% Corporate Tax and a 17% VAT when its exports reach Shanghai. A China manufacturer exports tax free to the U.S.
Are you starting to get the picture?

Our trade policy is a complete and total disaster, and yet Obama and Romney continue to insist that we just need to become even more integrated with the emerging one world economic system.

Well, in a previous article I listed 22 statistics which prove that the current path that we are on has been absolutely disastrous for American workers...

#1 One professor has estimated that cutting the U.S. trade deficit in half would create 5 million more jobs in the United States.

#2 The United States has a trade imbalance that is more than 7 times larger than any other nation on earth has.

#3 Overall, the United States has run a trade deficit of more than 8 trillion dollars with the rest of the globe since 1975. That 8 trillion dollars could have gone to support U.S. businesses and pay the wages of U.S. workers. Federal, state and local taxes would have been paid on that 8 trillion dollars if it had stayed in the United States.

#4 When NAFTA was passed in 1993, the United States had a trade surplus with Mexico of 1.6 billion dollars. In 2010, we had a trade deficit with Mexico of 61.6 billion dollars.

#5 In 2001, American consumers spent 102 billion dollars on products made in China. In 2011, American consumers spent 399 billion dollars on products made in China.

#6 The Chinese undervalue their currency by about 40 percent in order to gain a critical advantage over foreign competitors. This means that many Chinese companies are able to absolutely thrive while their competition in the United States goes out of business. The following is from a recent Fox News article....
To keep Chinese products artificially inexpensive on US store shelves, Beijing undervalues the yuan by 40 percent. It pirates US technology, subsidizes exports and imposes high tariffs on imports.
#7 According to the New York Times, a Jeep Grand Cherokee that costs $27,490 in the United States costs about $85,000 in China thanks to all the tariffs.

#8 The U.S. trade deficit with China during 2011 was 295.4 billion dollars. That was the largest trade deficit that one nation has had with another nation in the history of the world.

#9 Back in 1985, our trade deficit with China was only about 6 million dollars (million with an "m") for the entire year.

#10 U.S. consumers spend about 4 dollars on goods and services from China for every one dollar that Chinese consumers spend on goods and services from the United States.

#11 The United States has actually lost an average of about 50,000 manufacturing jobs a month since China joined the World Trade Organization in 2001.

#12 According to the Economic Policy Institute, America is losing about half a million jobs to China every single year.

#13 The United States has lost more than 56,000 manufacturing facilities since 2001.

#14 During 2010 alone, an average of 23 manufacturing facilities closed their doors in America every single day.

#15 Since the auto industry bailout, approximately 70 percent of all GM vehicles have been built outside the United States.

#16 As I have written about previously, 95 percent of the jobs lost during the last recession were middle class jobs.

#17 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.

#18 The percentage of working age Americans that are employed right now is actually smaller than it was at the end of the last recession.

#19 The average duration of unemployment in the United States is nearly three times as long as it was back in the year 2000.

#20 Due in part to the globalization of the labor pool, only about 24 percent of all jobs in the United States are "good jobs" at this point.

#21 Without enough good jobs, more Americans than ever before are falling into poverty. Today, more than 100 million Americans are on welfare.

#22 In recent years the U.S. economy has embraced "free trade" and the emerging one world economy like never before. Instead of increasing the number of jobs in our economy, it has resulted in the worst stretch of job creation in the United States in modern history....
If any single number captures the state of the American economy over the last decade, it is zero. That was the net gain in jobs between 1999 and 2009—nada, nil, zip. By painful contrast, from the 1940s through the 1990s, recessions came and went, but no decade ended without at least a 20 percent increase in the number of jobs.
At this point, more than 41 percent of all working age Americans do not have a job, and the vast majority of the new jobs that are being created are low paying jobs.

Median household income has fallen for four years in a row. In fact, median household income is down by more than $4000 since Barack Obama entered the White House.

One recent survey found that about 40 percent of all Americans have $500 or less in savings. We are a country that is full of broke people.

What we need are more good jobs. But Obama and Romney are both determined to keep shipping good jobs out of the country.

The path that we are on will only lead to disaster. Please wake up America.

October 22, 2012

Goldman loses bid to end lawsuit by hedge fund over CDO

A judge refused to dismiss a $1.07 billion lawsuit against Goldman Sachs Group that accuses it of selling risky debt that it intended to lose value to an Australian hedge fund, causing the fund to become insolvent.

New York state Supreme Court Justice Shirley Kornreich denied Goldman Sachs' bid to toss claims of fraud, unjust enrichment and negligence, among others, by the Basis Yield Alpha Fund.

The fund accuses Goldman of making false and misleading statements in connection with the sale of securities to offload toxic subprime mortgages from its books.

Goldman has argued the losses were caused by the collapse of the housing market.

The fraud claims survive for the "big picture of fraudulent conduct," not only on the representations in the complaint, Kornreich wrote in her decision, citing a similar case in Manhattan federal court against Goldman by Dodona I, LLC, a hedge fund that invested in another CDO.

Michael DuVally, a spokesman for Goldman Sachs, declined comment Friday.

"We're very pleased the court agrees with us that Goldman needs to answer for its conduct," said Washington, D.C., attorney Bruce Grace, a partner in Lewis Baach, who represents the fund.

Goldman's CDO practices have drawn regulatory scrutiny. In April 2010, Goldman agreed to pay $550 million to settle U.S. Securities and Exchange Commission charges that it sold the risky Abacus 2007-AC1 CDO while letting hedge fund billionaire John Paulson bet against it. The bank did not admit wrongdoing.

Basis Yield Alpha Fund is seeking to recoup $67 million of losses plus $1 billion of punitive damages from transactions known as Timberlake and Point Pleasant. Basis Yield was managed by Sydney-based Basis Capital Funds Management Ltd.

In her decision, made public Friday, the judge also denied Goldman's claim that the New York court was an inconvenient forum, noting that Goldman's headquarters and many witnesses are in New York. She also refused to compel arbitration.

Kornreich did dismiss claims for breach of contract and breach of implied covenant of good faith and fair dealing. Among the fraud claims she left were for fraudulent inducement and fraudulent concealment.

Basis Yield filed the lawsuit in New York state court in October 2011, three months after a U.S. judge dismissed a similar case, saying the fund could not sue in federal court under U.S. securities laws because its investment in the Timberwolf 2007-1 collateralized debt obligation did not qualify as a "domestic" transaction.

Timberwolf was cited in a scathing U.S. Senate panel report in April 2011 that faulted Goldman and others for pushing debt they expected to perform poorly.

The panel report said Goldman kept marketing Timberwolf even after an executive in an email to a colleague called Timberwolf "one shitty deal."

Basis Yield said it lost $56.3 million on Timberwolf in less than six weeks, and $10.8 million on Point Pleasant in less than three months.

The case is Basis Yield Alpha Fund (Master) v. Goldman Sachs Group Inc et al, New York State Supreme Court, New York County, No. 652996/2011.


October 19, 2012

Banks Punished For Central Bank and Political Errors

In recent decades politicians have increasingly followed the Keynesian prescription of economic growth through continued government borrowing and the creation of undreamt of amounts of fiat money by central banks. To facilitate this process, the larger commercial banks have acted as the central banks' de facto distribution system, and as a result have grown ever larger while accepting progressively greater risks.

In 2008, potential catastrophe loomed as the entire international financial system was challenged with collapse. But, as the 'darlings' of the central banks, the "too big to fail" banks were saved by taxpayer bailouts so that they could continue to play their role in the stimulus engine. But as a result of these distortions, the environment for those banks outside of the exclusive "too big to fail club" has been increasingly challenging. In the United States, the financial services industry is changing radically and many fear that the days of US dominance will be coming to an end.

Public ire resulting from the 2008 financial crisis largely missed politicians and central bankers and landed squarely on "Wall Street." As a result, bankers have become easy political targets. Increased regulation of the banking sector has become the rallying cry for the political left.

In addition to direct assaults on the banks, the ill-designed 2010 Dodd-Frank financial overhaul law has raised considerably the cost of entry to small entrepreneurial financial companies. Already, it is forcing the business of smaller financial companies offshore to the benefit of other countries.

Daniel Tarullo, an influential executive at the Federal Reserve Board, has suggested curbing bank growth by demanding a limit on the non-deposit liabilities of banks. Too often, short-term debt comprises the majority of these liabilities and is a source of potential vulnerability in a credit crunch. Meanwhile, some politicians have urged higher capital requirements in order to curb increasing bank size. Even ex-bankers such as Sandy Weil who led the lobbying effort to abolish the Glass-Steagall Act are now calling for its effective restoration. As a result, many corporations are deciding to leave the banking sector.

Companies for whom banking services provide an added benefit to their non-bank clients are fearful of the threat of increased capital requirements and of new, as yet to be clarified, Federal Reserve banking regulations. As such, it is a classic example of how excessive and uncertain regulations are hurting American business and employment. A specific example is that of tax preparation firm H&R Block. Years ago the company launched a service that provides some banking services to its customers. Recently they re-evaluated that strategy and have engaged advisors Goldman Sachs to help them "evaluate strategic alternatives." In other words, they are looking to shed the unit.

Those large banks that remain, firmly entrenched and supported by government guarantees, see little reason to provide cost effective services for retail clients. Most people with bank accounts in the United States will likely agree that in recent years banking fees have gone up while the level of service has gone down. This has resulted in private enterprise proposing innovative solutions. Recent moves by retail giant Walmart provides one example.

The Federal Deposit Insurance Commission (FDIC) pointed out some weeks ago, some 51 million Americans are "under banked." Worse, about 17 million are "unbanked." This implies a massive potential need for banking services for individuals at the lower end of the socio-economic spectrum. Many such Americans do a great deal of their shopping at Walmart, which purveys a wide variety of merchandise at extremely low prices.

To provide a service to these potential customers, Walmart has announced an agreement with American Express to issue a prepaid debit card entitled 'Bluebird.' This will enable less well-off consumers to purchase products from Walmart without surrendering their paychecks to a bank, thereby exposing themselves to high banking fees, or to put their purchases on conventional credit cards, which are notorious for high fees. As the service involves no extension of credit, Bluebird should provide cost effective service to the poor while involving no financial risk to either Walmart or American Express.

While Walmart's efforts may be timely and successful, the move will not reverse the fading glory of the US financial services sector. In order to perpetuate its system of massive money distribution, the Fed has insured that American banking will become as competitive domestically and globally as American manufacturing, which is to say, not at all.


October 18, 2012

'Shadow Banking' In China

Xiao Gang, Chairman of the Bank of China (one of the “big 4” banks the Chinese government controlls), published an interesting op-ed in China Daily on October 12th. Although some may consider the China Daily the English-language mouth piece of the Chinese government, its op-ed columns often hold some genuinely interesting discussions and analysis of events and affairs in China.

In this op-ed, Xiao Gang takes on the issue of “shadow banking,” that hazy and complicated area of finance that in the developed economies is often associated with hedge funds. As discussed in greater detail below, things are slightly different in China itself.

Chinese finance is undergoing dramatic changes which are not yet widely understood. Historically (mainly before 2008), the vast majority of lending in China was done by the normal banking sector in the form of loans. The process was a cornerstone of the government’s control over the economy. The vast majority of banks in China are controlled by the government, so the “who and when” of lending was firmly in the hands of China’s leaders.

The years 2008/9 will be remembered as watershed years for Chinese finance. The financial crisis rippling out from the United States caused a dramatic reaction by China’s policymakers as exports collapsed. Two key trends developed.

The first is fairly obvious; a wave of credit was unleashed and has continued since that time as China’s growth became more and more reliant on investment and the lending needed to support it. This exacerbated the fears that an unbalanced Chinese economy is undergoing an unsustainable build-up of debt, much like Japan’s did during its boom years.

The second trend came later and is much harder to pin down. In late 2009 and 2010, as policymakers began to worry about the credit boom, inflation, a property bubble, and overcapacity, they attempted to put a brake on lending activities. The reduction in formal lending forced an economy addicted to credit to increasingly turn to less usual financing channels – some of them in the “shadow banking” sector. This trend really began taking off near the end of 2009 and has generally increased ever since. The latest data (September 2012) shows that these non-normal bank credit channels now account for a substantial amount of the financing going on in the economy.

Taking these two trends together – an economy relying increasingly on debt creation for growth, and that debt creation becoming more and more complicated and obscure, it is easy to see why so many officials and analysts are worried.

Formal banks are key players in the “shadow banking” system, helping to create, fund and market wealth management products to their customers – products which are riskier than deposits but which potentially pay a healthier return to investors. Their goals are obvious, if credit taps are shut off, many borrowers who are not able to repay loans will default, hitting the banks’ formal loan books hard. Hence the shadow and formal banking systems have become intertwined, and the transmission of problems from one to another, or a negative feedback loop between the two, are not hard to imagine.

As Mr. Xiao bravely states in his column, it is paramount that the government increases its regulation of the “shadow banking” sector. The difficulty is that shadow banking is just one of the main economic dilemmas facing China at present: Is an economic rebalancing necessary? Is pushing through an economic rebalancing worth than pain of slower growth?


October 17, 2012

Depression-Proof Banks

Not every banker succumbed to the insanity of the housing bubble. Some saw what was happening and dodged it. These are the guys you want to stick with as an investor.

Marc Stefanski is one of them. He is the CEO of Third Federal Savings & Loan (TFSL on the Nasdaq). It is a Cleveland-based thrift founded by Marc’s parents in 1938.

“We were founded during the Great Depression,” Stefanski wrote in a letter in 2009, “so my parents built our company to be Depression-proof.” And so it is. Today, TFSL is one of the best-capitalized banks in the US. (More on that below.) But TFSL had to walk a lonely road to get here.

Stefanski’s bank pays its loan officers no commissions. They are paid salaries only. Hence, there is no pressure to make loans. His bank also keeps most of the loans it makes. So there is no slicing and dicing of mortgages and passing them off to investors. And finally, TFSL did not make no-money-down loans. It stuck to plain vanilla loans even as competitors offered snazzy new takes on the old mortgage loan. TFSL began making adjustable-rate mortgages only in 2010. It avoided all the junk that went into making the financial sausages that wound up giving the banking system such indigestion.

But it was costly. TFSL had a market share of 30% in northeastern Ohio. Its refusal to play ball meant that its market share dwindled to 11% by 2001. How many CEOs could survive such a decision?

Yet today, TFSL has worked its market share back up to 24%. It has done so because it has lots of capital while many of its peers have leaky loan books. It is still sticking to its conservative approach. For instance, for more-risky borrowers, TFSL requires borrowers take classes that show how their loans will work and what the consequences are of not paying. Such strategies have earned TFSL praise from community activists.

Stefanski is blunt about it all. “The whole system was based on raping the public,” he says in a New York Times article. “Not everyone should own a home — just those who can afford it.”

There is an old saying that there are more banks than bankers. Most of the people running banks have no business doing so. Banking as a corporate art requires a careful approach and a willingness to stick to conservative principles even during the good times. Stefanski has earned the title of banker in the best sense.

His institution is, as I noted, one of the best-capitalized banks in the US. It never took TARP money or any other handout. TFSL today has capital ratios far in excess of what’s required. For example, the rules require Tier 1 capital of at least 6% of assets for a thrift to be considered “well capitalized.” TFSL’s figure is 21%. It has enough excess capital to buy back all of the public shares outstanding at today’s price of $9.50 per share.

Ironically, TFSL works under a memorandum of understanding (MOU) issued in June 2010 by the OCC, which regulates TFSL. Among other things, the OCC said TFSL’s percentage of home equity lines was too high. What this meant was that TFSL cannot pay a dividend or buy back stock until the OCC lifts the MOU.

It’s a weird tale, but the short of it is that TFSL has now met the requirements of the MOU. Now TFSL is just in a waiting game. I expect the OCC will lift the MOU by the end of the year. Then TFSL should start to pay dividends and buy back shares as it did before. That is a nice catalyst for the stock, which was $12-$13 per share before the MOU.

There is another important part of this to know: TFSL is owned by a mutual holding company (MHC). There are about 81 million shares public. But there are 227 million shares in the hands of the MHC. The usual course of these things is to undergo a “second-step conversion.” The second step sells the MHC shares to the public. If done at 80% of book value, TFSL would raise $2.3 billion in cash — all of which goes to the bank. Add this cash — net of estimated friction costs of 12% — to the existing equity in the business and TFSL’s fully converted book value comes to about $12.50 per share. The stock as I write is only $9.50. While there are no plans for a second step, it’s another embedded catalyst in the shares.

At today’s price, you get a thrift with an awful lot of capital to buy back stock and/or pay a big dividend. Once the OCC lifts the MOU, I believe TFSL will start to do both of these things — and because it trades for under fully converted book, these transactions are accretive (read: value-adding) for shareholders.

I should tell you, as an aside, that I love converted thrifts. Carefully chosen, they are cash-rich, trouble-free and simple lending institutions. And they have a long history of producing winners for patient investors. I have about 40% of my personal account in just such cash-rich thrifts.

And in my Mayer’s Special Situations newsletter, I have recommended five such thrifts. I recommended three of them in January 2011, and they are up 20% or more. The two I recommended last summer are also up double digits. Slow, but steady. I’ve never lost money on a single one.
Back to TFSL. I did not formally add it the portfolio of my investment letter, Capital & Crisis. But I do believe this stick is a solid idea and that it clearly illustrates the kind of banking institution that investors should seek to own.

If US housing has bottomed and will only improve, as I believe is the case, so too should the stocks of cash-rich banks, especially those that sidestepped the worst of the housing bubble — such as Stefanski’s TFSL.


October 16, 2012

US Households Are Not "Deleveraging" - They Are Simply Defaulting In Bulk

Lately there has been an amusing and very spurious, not to mention wrong, argument among both the "serious media" and the various tabloids, that US households have delevered to the tune of $1 trillion, primarily as a result of mortgage debt reductions (not to be confused with total consumer debt which month after month hits new record highs, primarily due to soaring student and GM auto loans). The implication here is that unlike in year past, US households are finally doing the responsible thing and are actively deleveraging of their own free will. This couldn't be further from the truth, and to put baseless rumors of this nature to rest once and for all, below we have compiled a simple chart using the NY Fed's own data, showing the total change in mortgage debt, and what portion of it is due to discharges (aka defaults) of 1st and 2nd lien debt. In a nutshell: based on NYFed calculations, there has been $800 billion in mortgage debt deleveraging since the end of 2007. This has been due to $1.2 trillion in discharges (the amount is greater than the total first lien mortgages, due to the increasing use of HELOCs and 2nd lien mortgages before the housing bubble popped).

In other words, instead of actual responsible behavior of paying down debt, the primary if not only reason there has been any "deleveraging" at all at the US household level, is because of excess debt which became insurmountable, not because it was being paid down, the result of which is that more and more Americans are simply handing their keys in to the bank and walking away, and also explains why the US banking system is now practicing Foreclosure Stuffing, as defined first here, as the banks know too well, if all the housing inventory which is currently in the default pipeline were unleashed, it would rip off any floor below the US housing "recovery" which is not a recovery at all, but merely a subsidized bounce, as millions of units are held on the banks' books in hopes that what limited inventory there is gets bid up so high the second housing bubble can be inflated before the first one has even fully burst.

Naturally, two concurrent housing bubbles can not happen, Bernanke's fondest wishes to the contrary notwithstanding, especially since as shown above, US households do not delever unless they actually file for bankruptcy, and in the process destroy their credit rating for years, making them ineligible for future debt for at least five years. It is thus safe to say that all the other increasingly poorer US households (who are not getting paid more as we showed this morning with the chart showing Y/Y change in US household earnings) are merely adding on more and more debt in hopes of going out in a bankrupt blaze of glory just like everyone else: from their neighbors, to all "developed world" governments.

And why not: after all this behavior is being endorsed by the Fed with both hands and feet.

October 15, 2012

Why is a Price-Fixing/Collusion Lawsuit Against the Biggest Names in Private Equity Getting Only Cursory Notice?

It’s troubling that some stinging charges against the very biggest names in private equity are getting only passing attention in the financial media.

The New York Times last week managed to get some court filings unsealed last week in a class action lawsuit, Dahl v. Bain Capital Partners. This revelation came after the parties tried to satisfy the NY’s motion with a heavily redacted filing, which the judge nixed. This short post by yours truly in the New Republic gives an overview; due to space constraints, I had to stay pretty high level:
One of the salutary side effects of the Mitt Romney presidential bid is that it has shed light on one of the most secretive yet influential parts of the financial services industry: the major buyout firms. Thanks to motions filed by the New York Times, a federal judge in Boston released court filings this week that had previously been under seal in a class action, anti-trust lawsuit — Dahl v. Bain Capital Partners — against the eleven biggest and most blue-chip names in the private-equity industry, including Blackstone, Carlyle, Goldman, and TPG. The plaintiffs contend that they lost billions as shareholders in companies that were sold at lower prices than they would have otherwise fetched in the 2003 to 2007 period due to buyer collusion through a system they called “club deals.”
No wonder the defendants had been keen to keep the case under wraps. The 221-page complaint goes through 27 transactions, and with each, presents not only persuasive economic analysis, but more important, damning e-mails showing how the heads of each of the firms were involved in submitting sham bids, sharing information about their offers, working with management of the target companies to restrict the sales process, enforcing elaborate systems of quid pro quos (for instance, not submitting a bid with the expectation of being cut in on that deal or future deals), and other forms of market manipulation. The messages make clear that the intent was to reduce competition and buy the companies on the cheap. For instance, on the sale of Toys R’ Us,
KKR representatives admitted that KKR decided to partner with Bain and Vornado due in part to its “desire to effectively eliminate a competitor from the auction process.”…. Richard Friedman, head of merchant banking and PIA at Goldman Sachs, acknowledged in an email the belief that “the competing bidders ha[d] colluded and ganged up.”
It’s obvious that reducing the number of bidders and containing the competition among them would lower prices. I ran a mergers and acquisitions department in the 1980s, shortly after auctions became the preferred way for selling companies. The rule of thumb was that getting an additional bidder increased the sales price by 10 percent. The complaint includes economic analyses that show that these mega funds got better prices on average on these deals than on the ones where they duked it out.

Now after ordinary consumers have been on the wrong end of bank bailouts, foreclosure fraud, credit card tricks and traps, and debt collectors from hell, this scheme might seem like a fight between different types of investors and hence of limited real world import. That view could not be more wrong. Private equity firms concentrate enormous financial power in comparatively few hands. Their $2 trillion of assets under management, which they augment with a typical $3 of borrowed money for every $1 of their investors’ money that they put down, translates into $8 trillion of buying power. Compare that to the roughly $16 trillion value of the U.S. stock markets at year end 2011. More people in the U.S. work for companies owned by PE funds than belong to unions. More than half the corporate debt in the U.S. is rated junk, and the high leverage used by PE firms in their deals is far and away the biggest culprit. It’s a virtual certainty you are supporting the private equity industry. Public pension funds, whose monies come from state and local tax dollars, are one of the biggest investors in LBO funds, particularly the mega funds like KKR and Blackstone.

LBO firms fetishize secrecy and use their power to maintain it. Given that governments, both public pension funds and sovereign wealth funds, are important investors in these vehicles, their contracts with these firms are of public interest. Yet PE firm threats to turn away government investors in states where their agreements might be exposed through state Freedom of Information Act requests have led to extreme measures such as the passage of state laws to keep executed private equity from being classified as public records, unlike every other contract for goods and services. This double standard pervades the funds’ dealings with their investors. For instance, the extensive communications among private equity firms presented in Dahl v. Bain look to a layperson like clear-cut anti-trust violations. Yet the PE firms try to cow their investors by claiming that communicating with each other could violate anti-trust laws!

It’s time to pull the veil off this industry. Public interest requires much greater transparency. Congress should call hearings and require that the heads of these private equity firms testify under oath. And any settlement in this case should be a matter of public record.
I wish there had been more space in the TNR post to provide extracts from e-mails, which are typically among either the heads of the mega buyout firms, or other managing directors. They show a clear understanding of what they were up to. These players were engaged in an effort to collude, by submitting sham bids, not bidding in the auction but being invited in as a co-investor on that deal later or getting a slice of a future deal, all clearly intended to buy the target companies at more favorable prices. You really need to skim the filing. If you thought the quotes from the Libor traders in the FSA’s letter to Barclays were damning, they pale in comparison to this (the juicy stuff starts on page 26 of the pdf, which is numbered page 22):
A Lawsuit Against Private Equity
And the riveting quotes are only half of it. The filing also discusses, as asides, how investemnt banks would steer deals to private equity buyers (“financial buyers” in the parlance) rather than corporations (“strategic buyers”) because they’d rack up far more fees. And in case the pleased quotes from the PE overlords about the success of their efforts aren’t enough to persuade you, the filing also includes extensive deal by deal analysis.

Now admittedly, one reason for the understated media response is this is a private suit, not one by a regulator. But flip this around: where is the Department of Justice? It issued civil investigative demands to some of the firms who are defendants in this suit, including KKR, Carlyle, and Silver Lake, in October 2006. The content of these e-mails, along with the extensive and persuasive economic analysis of the transactions, raise serious question about the failure of the Department of Justice and the FTC to move forward.

This Department of Justice overview document titled “Price Fixing, Big Rigging, and Market Allocation Schemes” is admittedly written informally, to encourage individuals to contact the Department of Justice, but it is instructive to read it against the sort of behavior presented in the Dahl v. Bain Capital Partners filing. Consider this section:
Most criminal antitrust prosecutions involve price fixing, bid rigging, or market division or allocation schemes. Each of these forms of collusion may be prosecuted criminally if they occurred, at least in part, within the past five years. Proving such a crime does not require us to show that the conspirators entered into a formal written or express agreement. Price fixing, bid rigging, and other collusive agreements can be established either by direct evidence, such as the testimony of a participant, or by circumstantial evidence, such as suspicious bid patterns, travel and expense reports, telephone records, and business diary entries.

Under the law, price-fixing and bid-rigging schemes are per se violations of the Sherman Act. This means that where such a collusive scheme has been established, it cannot be justified under the law by arguments or evidence that, for example, the agreed-upon prices were reasonable, the agreement was necessary to prevent or eliminate price cutting or ruinous competition, or the conspirators were merely trying to make sure that each got a fair share of the market.
It’s hard to read the private lawsuit and not wonder why this behavior didn’t lead to a criminal investigation by the DoJ. Might it have something to do with the importance of private equity in funding the Obama campaign? Rahm Emanuel raised lots of money from PE kingpins, and at least two of Obama’s New York City fundraisers were hosted by LBO heavyweights.

As Matt Taibbi has pointed out, big rigging is not like what the Mafia does, it is what the Mafia does. Yet the harm here seems too remote to ordinary people, compared to, say, overpriced garbage services or municipalities blowing up thanks to toxic swaps.

If the Dahl allegations pan out, and they certainly look convincing, it provides further confirmation of the charge that these firms don’t even earn the returns they claim to (returns earned by cheating aren’t legitimate). And if their raison d’etre, that they provide better ourcomes than, say, an index of industrial firms (which we plan to address independent of the price fixing issue) is bogus, that means (ex the limited number of cases where they turn around failing companies) they are really in the business of extraction, looting, and transferring income from ordinary people to the top 0.1%. Not that many people don’t suspect that already, but there is a world of difference between instinct and proof. So no wonder the industry works so hard at secrecy, and must be delighted to have the lapdog Department of Justice by its inaction support that effort.