Six Years After the Global Financial Crisis, What Have We Learned?

Five years on since the US recession ‘officially’ ended in June 2009, urban land prices are rising, the pattern of history is repeating, and this time, the players on the chessboard have changed.

But our Governments are turning a blind eye.

They have yet to acknowledge why the global financial crisis happened, or put policies in place to prevent it happening again.

Expensive welfare systems, elaborate tax and transfer policies, and the financial ‘cures’ following the previous land induced crash in the early-1990s, did nothing to prevent the swiftest and sharpest synchronised global downturn in human history.

Taxpayers were punished, bankers got a “get out of jail free” card, and the largest real estate investment trusts spent $50 billion purchasing 386,000 foreclosed homes, to rent out to previous owners who believed and acted on the lie that “there is no bubble.”

The IMF, and policy makers are now twisting themselves in economic knots trying to pin down a ‘cure’ for the dangers of excessive house price inflation, which they readily admit lead to most banking crises, with Australia featuring in the top five of each of their highlighted risk assessments:

“……our research indicates that boom-bust patterns in house prices preceded more than two-thirds of the recent 50 systemic banking crises…..” IMF “Era of Benign Neglect of House Price Booms is Over” June 11 2014

The IMF claims the ‘neglect of house price booms is over’, but as the OECD ‘Post Mortem’ of the 2008 crises reveals, these economists can’t see.

They ignore the role that rent (unearned income,) debt and the financial sector play in shaping the economy.

They have a colourful history of recurrent boom-bust land cycles, all replete with rampant speculation and easy credit, spanning in excess of 300 years from which to study … and yet:

“The macroeconomic models available at the time of the crisis typically ignored the banking system…” (OECD Forecasts During And After The Financial Crisis: A Post Mortem – February 2014)

In other words, based on the aesthetic qualities of their equations, the 2006/7 bubble couldn’t exist. A story we hear repeated every year as prices continue to defy gravity and economist try and explain it away with ‘sound fundamentals.’

Neo-liberal policy made matters worst.

Less government interference protecting labour or redistributing wealth through taxing the rich, deregulation of capital markets, lowering trade barriers, reducing state influence though privatization and fiscal austerity – was termed by American scholar Robert Waterman McChesney as “Capitalism with the gloves off.”

It promised to lead to efficient markets and lower unemployment.

But at the onset of the global financial crisis, unemployment in developed nations rose above any previous recession of the past three decades, whilst wages, as a share of GDP plummeted to their lowest point since the Second World War.

“This should be a wake-up call…” concluded the UN in their annual Trade and Development report that revealed the findings:

“There must be something fundamentally wrong with an economic theory, that justifies the rise of inequality mainly in terms of the need to tackle persistent unemployment.” Annual report by the UN Conference on Trade and Development 2012, Ch 11. Section C (analysing the effects of “labour market flexibility.”)

In the UK, the Bank of England has imposed a 4.5 times loan to income cap on 85% of mortgages, along with various ‘stress tests’ to please the regulators.

But the Council of Mortgage lenders show only 19% of recent London mortgages are at or above this ratio, whilst the national figure is a mere 9%.

By volume, London accounts for around a quarter of loans nationally, (Q1) so the 85% cap will do little to nothing, except perhaps eliminate home ownership for low-income groups.

But stemming inflation or deterring speculative activity is not, and never will be, Central Bank policy:

Carney – “These actions should not restrain current market housing activity … these actions will have minimal impact in the future if the housing market evolves in line with the Bank’s central view,” (i.e. up) 

Guardian – “Bank of England will not act on house prices yet” 27 June 2014

In the U.S.A just five megabanks and their holding companies control a derivatives market worth hundreds of trillions of dollars. In Australia, the ‘Big Four’ command 80% of the market and 88% of residential mortgages.

‘These are the men who have the most economic power in the world’ wrote British philosopher, mathematician and historian, Bertrand Russell, one of the 20th century’s leading logicians; “..and they derive it from land, minerals, and credit, in combination.”

Russell understood only too well, that all productive gains, every improvement in society and the economy, would be capitalised into rising land values, enriching those who owned the assets but more so, those who created the credit and traded on the debt.

Milton Friedman meanwhile tutored that societies are structured on greed.

But greed means taking something from another, grasping for a larger slice of the pie. (see pareto efficiency.)

Greed is not a natural feature of a well functioning community; rather it’s a feature of a dysfunctional economy that allows a country’s wealth to gravitate into an elite nucleus of financially strong hands.

It remains that the economy is fueled by what is termed the FIRE sector – Finance, Insurance, and Real Estate.

The FIRE Economy is dependent on rising asset prices – on you and me buying houses – so it can extract economic rent.

The three sectors work together – they’re intrinsically linked.

The banking sector pumps a colossal amount of credit into the system by way of a home loan. Real estate businesses sell the products – some trading as REITs – insurance companies underwrite the owners debt, property, and income, and as the interest payments compound – doubling and doubling again – the debt is recycled into more lending, more borrowing, higher house prices – making those who trade on the debt in an obscure concentrated market of derivatives, increasingly wealthy.

See Bubble Economics: Australian Land Speculation 1830 – 2013, by Paul D. Egan and Philip Soos

The Government, many members of which come directly from the industry itself, receive substantial payments from the FIRE sector.

For example, between 1998 and 2008 the banking industry spent $3.4 billion lobbying the US government.

In Australia, the ICAC investigations into illegal donations from developers and “wealthy property tycoons” reveal tens of thousands of dollars have been used to influence decisions by local, state and federal governments.

It should, therefore, be of no surprise that ‘affordable housing policy’ always seems to work in reverse.

Generous subsidies are handed over to investors – all of which are capitalised into land prices.

Restraints on supply are imposed, ‘rich neighbourhoods’ are protected from over development, land on the fringes is no longer dirt cheap, acreages are banked, exempt from State Land Tax until subdivision at the owner’s pleasure.

To survive, the FIRE sector must effectively sell the illusion that the economy can grow on rooftops, that we can all take part in an orgy of economic rent.

“Only the little people pay taxes” (i.e. work for a living) – we can all become wealthy through property investment, dining out and trading on leveraged gains, perhaps donating a little to charity, or taking part in some publicity-generating event to raise funds for homelessness along the way – as our politicians are fond of doing.

Of course, first homebuyers suffering alarm at rapidly escalating costs are necessary oxygen for the system.

So their judgement is manipulated as housing affordability is now reclassified as mortgage serviceability – how far the pay cheque can stretch each month rather than highlighting the upfront cost, while young buyers are encouraged to enter the market as speculators, living off their parents, until they gain a ‘foothold’ from leveraging the equity.

Banks assist with an array of financial products – offset accounts, honeymoon rates, shared equity schemes – mortgages treated like credit card payments, where all that’s required is the interest and should the market collapse with money still outstanding, they’ll collect the house too.

The result is land is now used for greed rather than need, pushing city boundaries outwards, requiring an excessive use of durable capital, which eventually leads to a shortage of loanable funds.

You will never be told the system can fail.

Instead you will hear that house prices can maintain a ‘high plateau’ – stagnate for a while until we all ‘catch up.’

However, the increase in the annual rate of growth is now part of the income that buyers pay for and lenders rely upon.

This is how real estate is sold – investors gravitate to areas that advertise ‘good capital gains,’ calculating the land’s value based on both the rent a tenant will pay plus the projected annual increase (land rent.)

Buyers live in fear of land values collapsing, yet, while prices trend higher, expectations over shoot the mark by no small degree. Landowners treat their unearned increment as income, raising consumption, lowering saving, putting to upward pressure on inflation, which eventually results in interest rates rising.

Never, throughout the course of history, has such a process been economically sustainable.

At some point the productive capacity of the economy can no longer support the boom – and as Australia’s history of land induced financial crises reveal, the end is not always as kind as experienced in 2008 (see Bubble Economics: Australian Land Speculation 1830 – 2013, by Paul D. Egan and Philip Soos).

“House prices don’t always go up” warned the Governor of the RBA, Glenn Stevens at a recent speech in Hobart, just as he did in March – a message he has repeatedly reiterated since appearing on Seven Network’s Sunrise in 2010.

But Australian investors aren’t listening to Glenn – they’re reading the media headlines, covering the latest findings in the BRW Rich 200, which shows property to be the ‘single biggest source of wealth,’ and entrepreneurs “piling into property faster than ever.”

Banks remain disturbingly under-capitalised.

“I’ve had land that has doubled in value in the past 12 months,” said Harry Triguboff … (BRW Rich 200: Fatter profits for property barons – 27th June 2014)

But while Triguboff paid a lot for his land, he did not make his cheque payable to the local school, park, rail network, or the array of public and community services that yield his land a healthy source of locational revenue that grants such windfall gains.

His payment went direct to the previous owner of the land, who pocketed the profit, while the funding needed for maintaining the facilities and attracting workers to the city, come from an elaborate network of taxes, which fall primarily on income and productivity – ‘the little people.’

This is the kind of rent seeking most of us have some experience of, a process that effectively punishes and disheartens the priced-out sectors of the community, whilst encouraging the hoarding of land as the road that leads to riches – thereby ignoring the social and ethical problems that result from the process.

The effect is to turn us into a nation of speculators where moral judgement is subverted by the unearned yields one can receive.

Investigate most societal problems, wages, housing, health, poverty, the loss of jobs to off shore markets, and this will be found at the root.

No one is born into poverty or inequality – these things are not by-products of nature – in a modern society the extremes we experience that lead to protests and riots over cuts in expenditure to welfare (a requirement exacerbated by the process outlined above) are due to policy and political ignorance.

When the Henry Tax Review in 2008 concluded “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases”, it was onto something important.

Lifting taxes off labour and restructuring our tax and supply policies is a good start, but alone it won’t do. Removing the power embedded in the banking industry to create credit based on their own vested interests is equally important. It would free up the creative capacity of the community and move instead toward a society and culture that is able to provide for all.

However, it remains that every effort in history to effect the changes suggested above have been fought by the establishment. In this respect, change can never come from the top down. It requires a system that can return democracy to the people through a slow process of re-education, and it’s a system we need to advocate if social and economic justice is the goal.

But until such a time, it’s business as usual – and we have a way to go yet, but be well aware, the date for the next global financial crisis has been set.

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Germany Bucking Toxic, Nation-State Eroding Transatlantic Trade and Investment Partnership

We’ve inveighed against the dangers of two Orwellianlly-branded “trade” deals, the TransPacific Partnership and its ugly twin, the Transatlantic Trade and Investment Partnership. Both negotiations have been shrouded in a deeply troubling level of secrecy, with their draft terms being given classified status and Congressmen kept largely in the dark as to their content (summaries provided by the US Trade Representative aren’t remotely adequate, since as in all contracts, much hinges on exact language).

The business press in the US has tended to amplify Administration messaging, that both deals are moving forward. In fact, as we’ve covered in some detail, the TransPacific Partnership is in quite a lot of trouble, and as we’ll discuss below, the Transatlantic Trade and Investment Partnership is also going pear shaped.

So far, it’s the TransPacific Partnership that has gotten the press in the US, due in part to its strategic role (it’s meant to isolate China) as well as the heated opposition of some of the intended partners to key terms (such as Chile and Malaysia to provision that would prevent them from having the sort of capital controls that reduced the damage that they suffered during the financial crisis).

Congress, in a remarkable show of spine, has gone into opposition over the TPP due to the Administration’s refusal to provide remotely adequate information about the negotiations, as well as concern over what they can see of the provisions.

The controversy over the TPP increased when Wikileaks exposed some draft chapters, one on intellectual property and the other on the environment. They which how bad the deals were as well as how the “partners” oppose many of the sections of the drafts.

But heretofore, the assumption has been that the Transatlantic Trade and Investment Partnership is moving towards completion, and the only risk is whether Congress will dig in its heels as it has with the TPP. That assumption now looks questionable, since Germans are wildly opposed to the deal, and the souring of US/German relations over US wiretapping and spying (and its refusal to commit to a big change in conduct) means the German government is much more likely not to stand up to the US and refuse to go along with provisions that are destructive to national interests, namely, secret “investor” panels that supercede national laws and regulations.

By way of background, we described how these panels work in a 2013 post:

Even though no one has seen the exact language of the text, since it is being kept under wraps, both deals are believed to strengthen and extend investor rights, which means give them easier access to the courts. Consider this description from a July presentation by Public Citizen:

What is different with TAFTA [pending Trans Atlantic Free Trade Agreement] (and TPP) is the extent of “behind the border” agenda

• Typical boilerplate: “Each Member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed Agreements.” … 

• These rules are enforced by binding dispute resolution via foreign tribunals with ruling enforced by trade indefinite sanctions; No due process; No outside appeal. Countries must gut laws ruled against. Trade sanctions imposed…U.S. taxpayers must compensate foreign corporations. 

• Permanence – no changes w/o consensus of all signatory countries. So, no room for progress, responses to emerging problems 

• Starkly different from past of international trade between countries. This is diplomatic legislating of behind the border policies – but with trade negotiators not legislators or those who will live with results making the decisions. 

• 3 private sector attorneys, unaccountable to any electorate, many of whom rotate between being “judges” & bringing cases for corps. against govts…Creates inherent conflicts of interest…. 

• Tribunals operate behind closed doors – lack basic due process

• Absolute tribunal discretion to set damages, compound interest, allocate costs

• No limit to amount of money tribunals can order govts to pay corps/investors
• Compound interest starting date if violation new norm ( compound interest ordered by tribunal doubles Occidental v. Ecuador $1.7B award to $3B plus

• Rulings not bound by precedent. No outside appeal. Annulment for limited errors.

And that’s alarming in light of some of the cases already brought before these panels in existing trade agreements like NAFTA. For instance:

Eli Lilly is suing the Canadian government for not having the same extremely pro-drug-company patent rules. It is seeking $500 million in damages for two drugs that Canada approve to be sold as generics. If Eli Lilly prevails, other drug companies are sure to follow suit. 

Vattenfal, a Swedish company, is a serial trade pact litigant against Germany. In 2011, Der Spiegel reported on how it was suing for expected €1 billion plus losses due to Germany’s program to phase out nuclear power:

According to Handelsblatt, Vattenfall has an advantage in seeking compensation because the company has its headquarters abroad. As a Swedish company, Vattenfall can invoke investment rules under the Energy Charter Treaty (ECT), which protect foreign investors in signatory nations from interference in property rights. That includes, according to the treaty’s text, a “fair and equitable treatment” of investors. 

The Swedish company has already filed suit once against the German government at the ICSID. In 2009, Vattenfall sued the federal government over stricter environmental regulations on its coal-fired power plant in Hamburg-Moorburg, seeking €1.4 billion plus interest in damages. The parties settled out of court in August 2010.

Phillip Morris threatened suit against Australia for its plain cigarette packing rules and is suing Uraguay for anti-smoking regulations

Now consider what this means. These companies are not suing for actual expenses or loss of assets; they are suing for loss of potential future profits. They are basically acting as if their profit in a particular market was guaranteed absent government action. And no one else enjoys these rights. Consider highly paid workers in nuclear plants. Will they get payments commensurate with the premium they’ve lost over the balance of their working lives from the phaseout of nuclear power? Will cigarette vendors in Australia get compensated for the decline in their sales? Commerce involves risk, which means exposure to loss, yet foreign investors want, and seem able to get, “heads I win, tails you lose” deals via these trade agreements. 

And it’s even worse than you imagine once you understand how these panels work. Recall how Public Citizen mentioned the role of the panelists who go between working for the companies and serving on the panels? A small and tight-knit group has disproportionate influence (click to enlarge):

Consider the implications of the fact that the 15, and the larger community of panel “regulars,” work both sides of the street. They draw cases that go before the trade panel, as well as hear them. Thus it’s in their interest to issue aggressive rulings in order to facilitate more cases being filed.

Not surprisingly, this self-reinforcing system is, as expected, producing more claims even before its gets its hoped-for turbo-charging through the pending trade deals:

Back to the current post. You may have noticed the suit against Germany for phasing out nuclear power. That has brought the issue of the investor panels to the attention of the press and public. In the Huffington Post, Larry Cohen describes the widespread opposition to the Transatlantic Trade and Investment Partnership in Germany:

As negotiations move forward on the Transatlantic Trade and Investment Partnership (TTIP), a wide range of German elected and civic leaders are in disbelief that the U.S. remains serious about including Investor-State Dispute Settlement (ISDS). From the German perspective, that’s a failed 20th century approach…. 

By most benchmarks, Germany is the most successful large economy in the world, with a rising standard of living, an educational system that creates real opportunity to move from school to work, a deep economic safety net, and worker participation in economic decision making…. 

Much more could be said about the divergent paths of our two nations in the past 60 years. But thanks to a suit brought by the Swedish energy firm Vattenfall against the German government, opposition to ISDS is nearly universal… 

Ironically back in the U.S., proponents of TTIP and the more imminent Trans Pacific Partnership (TPP) criticize those of us who oppose ISDS as anti-trade Neanderthals. But in my discussions with German leaders last week, it is clear that the U.S. looks like the Neanderthal by supporting ISDS, coupled with dramatic increases here in economic inequality and nearly unlimited influence by corporate America in all aspects of our lives. If [US Trade Representative Michael] Froman proceeds with ISDS in the final version of the TPP, Germans and most other Europeans will never trust a future TTIP, even if there are ISDS carve outs for certain national legislation. They can read the handwriting on the TPP wall very clearly.

Yves here. This is priceless. Even though Japan and other prospective TPP partners have serious reservations about the investor panels, along with numerous other provisions, Froman appears to be operating as if he can bulldoze them, when the Japanese media indicates that this is a non-starter (and if Japan is not in the deal, there is no deal). But the US messaging (and the US media readings are likely to get more play in Europe than the Asian accounts) are that the talks are on track. So the overhyping of the state of play with the TPP may backfire with the TTIP talks. It would be delicious to see the Obama Administration hoist on its propaganda petard.

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BRICS Announce $100 Billion Reserve To Bypass Fed, Developed World Central Banks

As we suggested last night, the anti-dollar alliance among the BRICS has successfully created a so-called "mini-IMF" since the BRICS are clearly furious with the IMF as it stands currently: this is what the world's developing nations just said on this topic "We remain disappointed and seriously concerned with the current non-implementation of the 2010 International Monetary Fund (IMF) reforms, which negatively impacts on the IMF’s legitimacy, credibility and effectiveness."

 As Putin explains, this is part of "a system of measures that would help prevent the harassment of countries that do not agree with some foreign policy decisions made by the United States and their allies." Initial capital for the BRICS Bank will be $50 Billion - paid in equal share among the 5 members (with a contingent reserve up to $100 Billion) and will see India as the first President. The BRICS Bank will be based in Shanghai and chaired by Russia. Simply put, as Sovereign Man's Simon Black warns, "when you see this happen, you’ll know it’s game over for the dollar.... I give it 2-3 years."

• BRICS MINISTERS SIGN DEVELOPMENT BANK AGREEMENT
• INITIAL SUBSCRIBED CAPITAL OF BRICS BANK IS $50 BLN: STATEMENT

A quick take on existing monetary policy.

• MONETARY POLICY MUST BE CAREFULLY CALIBRATED: BRICS STATEMENT

The punchline, however, is that using bilateral swaps, the BRICS are effectively disintermediating themselves from a Fed and other "developed world" central-bank dominated world and will provide their own funding.

We are pleased to announce the signing of the Treaty for the establishment of the BRICS Contingent Reserve Arrangement (CRA) with an initial size of US$ 100 billion. This arrangement will have a positive precautionary effect, help countries forestall short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net and complement existing international arrangements.... The Agreement is a framework for the provision of liquidity through currency swaps in response to actual or potential short-term balance of payments pressures. 

Incidentally, the role of the dollar in such a world is, well, nil.

For those who have forgotten who the BRICS are, aside from a droll acronym by a former Goldman banker, here is a reminder of the countries that make up 3 billion in population.

Key excerpts from the Full statement:

We remain disappointed and seriously concerned with the current non-implementation of the 2010 International Monetary Fund (IMF) reforms, which negatively impacts on the IMF’s legitimacy, credibility and effectiveness. The IMF reform process is based on high-level commitments, which already strengthened the Fund's resources and must also lead to the modernization of its governance structure so as to better reflect the increasing weight of EMDCs in the world economy. The Fund must remain a quota-based institution. We call on the membership of the IMF to find ways to implement the 14th General Review of Quotas without further delay. We reiterate our call on the IMF to develop options to move ahead with its reform process, with a view to ensuring increased voice and representation of EMDCs, in case the 2010 reforms are not entered into force by the end of the year. We also call on the membership of the IMF to reach a final agreement on a new quota formula together with the 15th General Review of Quotas so as not to further jeopardize the postponed deadline of January 2015.

BRICS, as well as other EMDCs, continue to face significant financing constraints to address infrastructure gaps and sustainable development needs. With this in mind, we are pleased to announce the signing of the Agreement establishing the New Development Bank (NDB), with the purpose of mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging and developing economies. We appreciate the work undertaken by our Finance Ministers. Based on sound banking principles, the NDB will strengthen the cooperation among our countries and will supplement the efforts of multilateral and regional financial institutions for global development, thus contributing to our collective commitments for achieving the goal of strong, sustainable and balanced growth.

The Bank shall have an initial authorized capital of US$ 100 billion. The initial subscribed capital shall be of US$ 50 billion, equally shared among founding members. The first chair of the Board of Governors shall be from Russia. The first chair of the Board of Directors shall be from Brazil. The first President of the Bank shall be from India. The headquarters of the Bank shall be located in Shanghai. The New Development Bank Africa Regional Center shall be established in South Africa concurrently with the headquarters. We direct our Finance Ministers to work out the modalities for its operationalization.

We are pleased to announce the signing of the Treaty for the establishment of the BRICS Contingent Reserve Arrangement (CRA) with an initial size of US$ 100 billion. This arrangement will have a positive precautionary effect, help countries forestall short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net and complement existing international arrangements. We appreciate the work undertaken by our Finance Ministers and Central Bank Governors. The Agreement is a framework for the provision of liquidity through currency swaps in response to actual or potential short-term balance of payments pressures.

Goodbye visions of an SDR-world currency. As for the USD...

Source

Anti-Dollar Alliance Prepares Launch Of BRICS Bank

Three months ago we discussed in detail the growing anti-dollar hegemony alliances that were building across the BRICS countries (Brazil, Russia, India, China and South Africa). Their efforts at the time, to create a structure that would serve as an alternative to the IMF and the World Bank (which are dominated by the U.S. and the EU), appear to be nearing completion. As AP reports, Brazil's President Dilma Rousseff and Russia's Vladimir Putin have discussed the creation of a development bank to promote growth across the BRICS and hope to produce an agreement on the proposed institution at this week's BRICS Summit.

As AP reports,

Brazil's President Dilma Rousseff and Russia's Vladimir Putin have discussed the creation of a development bank to promote growth in Brazil, India, China, Russia and South Africa.

Rousseff received Putin in the presidential palace in Brasilia on Monday, a day before leaders of the five emerging BRICS nations meet in the northeastern city of Fortaleza.

Rousseff told reporters the bank would top the summit's agenda, adding she hoped the event would produce an agreement on the proposed institution.

She said the five countries "are among the largest in the world and cannot content themselves in the middle of the 21st century with any kind of dependency."

Brazil and Russia also signed bilateral accords on air defense, gas and education

The leaders who will be present (not so many big fans of the US there)...

They seem serious:

• *BRICS DEVELOPMENT BANK KEY TO FOSTER GROWTH IN GROUP: BORGES
• *BRICS BANK AT 1ST TO FINANCE EXCLUSIVELY INFRASTRUCTURE:BORGES
• *RUSSIA'S PUTIN SAYS COOPERATION WITH CHINA IS GROWING
• *PUTIN SAYS RUSSIA TO PROMOTE CURRENCY SWAP WITH CHINA: XINHUA

As we concluded previously, as RBTH reports, it seems the BRICS are not slowing down efforts to create their own IMF-alternative...

The BRICS countries (Brazil, Russia, India, China and South Africa) have made significant progress in setting up structures that would serve as an alternative to the International Monetary Fund and the World Bank, which are dominated by the U.S. and the EU. A currency reserve pool, as a replacement for the IMF, and a BRICS development bank, as a replacement for the World Bank, will begin operating as soon as in 2015, Russian Ambassador at Large Vadim Lukov has said.

Brazil has already drafted a charter for the BRICS Development Bank, while Russia is drawing up intergovernmental agreements on setting the bank up, he added.

In addition, the BRICS countries have already agreed on the amount of authorized capital for the new institutions: $100 billion each. "Talks are under way on the distribution of the initial capital of $50 billion between the partners and on the location for the headquarters of the bank. Each of the BRICS countries has expressed a considerable interest in having the headquarters on its territory," Lukov said.

It is expected that contributions to the currency reserve pool will be as follows: China, $41 billion; Brazil, India, and Russia, $18 billion each; and South Africa, $5 billion. The amount of the contributions reflects the size of the countries' economies.

The creation of the BRICS Development Bank has a political significance too, since it allows its member states to promote their interests abroad. "It is a political move that can highlight the strengthening positions of countries whose opinion is frequently ignored by their developed American and European colleagues. The stronger this union and its positions on the world arena are, the easier it will be for its members to protect their own interests," points out Natalya Samoilova, head of research at the investment company Golden Hills-Kapital AM.

Perhaps the following sums it all up perfectly...

Economists warn the IMF's legitimacy is at stake, and they say U.S. standing abroad is being eroded.

"Eroded" indeed...

Read more here on the BRICS morphing into an anti-dollar alliance...

If the current trend continues, soon the dollar will be abandoned by most of the significant global economies and it will be kicked out of the global trade finance. Washington's bullying will make even former American allies choose the anti-dollar alliance instead of the existing dollar-based monetary system. The point of no return for the dollar may be much closer than it is generally thought. In fact, the greenback may have already past its point of no return on its way to irrelevance.

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The Head Of ‘The Central Bank Of The World’ Warns That Another Great Financial Crisis May Be Coming

Most people have never heard of Jaime Caruana even though he is the head of an immensely powerful organization.  He has been serving as the General Manager of the Bank for International Settlements since 2009, and he will continue in that role until 2017.  The Bank for International Settlements is a rather boring name, and very few people realize that it is at the very core of our centrally-planned global financial system.  So when Jaime Caruana speaks, people should listen.  And the fact that he recently warned that the global financial system is currently "more fragile" in many ways than it was just prior to the collapse of Lehman Brothers should set off all sorts of alarm bells.  Speaking of the financial markets, Caruana ominously declared that "it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally" and he noted that "markets can stay irrational longer than you can stay solvent".  In other words, he is saying what I have been saying for so long.  The behavior of the financial markets has become completely divorced from economic reality, and at some point there is going to be a massive correction.

So why would the head of 'the central bank of the world' choose this moment to issue such a chilling warning?

Does he know something that the rest of us do not?

According to a recent article in the Telegraph by Ambrose Evans-Pritchard, Caruana is extremely concerned about rising debt levels and the current level of euphoria in the financial markets...

The world economy is just as vulnerable to a financial crisis as it was in 2007, with the added danger that debt ratios are now far higher and emerging markets have been drawn into the fire as well, the Bank for International Settlements has warned. 

Jaime Caruana, head of the Swiss-based financial watchdog, said investors were ignoring the risk of monetary tightening in their voracious hunt for yield. 

“Markets seem to be considering only a very narrow spectrum of potential outcomes. They have become convinced that monetary conditions will remain easy for a very long time, and may be taking more assurance than central banks wish to give,” he told The Telegraph. 

Mr Caruana said the international system is in many ways more fragile than it was in the build-up to the Lehman crisis. Debt ratios in the developed economies have risen by 20 percentage points to 275pc of GDP since then.

And you know what?

Caruana is certainly correct to be warning us about these things.

As I have written about previously, the total amount of government debt in the world has grown by about 40 percent since the last recession, and the "too big to fail banks" have collectively gotten 37 percent larger since that time.

The U.S. national debt has grown from about 10 trillion dollars to more than 17.5 trillion dollars, and even the Bank for International Settlements admits that the global derivatives bubble has grown to at least 710 trillion dollars.

The massive financial imbalances that we were facing during the last crisis have not been fixed.  Instead, they have gotten much, much worse.

But should we trust the Bank for International Settlements?

Of course not.

This is a very secretive organization that very few people know about but that possesses absolutely enormous power.  The following is a brief overview of the Bank for International Settlements from one of my previous articles entitled "Who Controls The Money? An Unelected, Unaccountable Central Bank Of The World Secretly Does"...

An immensely powerful international organization that most people have never even heard of secretly controls the money supply of the entire globe.  It is called the Bank for International Settlements, and it is the central bank of central banks.  It is located in Basel, Switzerland, but it also has branches in Hong Kong and Mexico City.  It is essentially an unelected, unaccountable central bank of the world that has complete immunity from taxation and from national laws.  Even Wikipedia admits that "it is not accountable to any single national government."  The Bank for International Settlements was used to launder money for the Nazis during World War II, but these days the main purpose of the BIS is to guide and direct the centrally-planned global financial system.  Today, 58 global central banks belong to the BIS, and it has far more power over how the U.S. economy (or any other economy for that matter) will perform over the course of the next year than any politician does.  Every two months, the central bankers of the world gather in Basel for another "Global Economy Meeting".  During those meetings, decisions are made which affect every man, woman and child on the planet, and yet none of us have any say in what goes on.  The Bank for International Settlements is an organization that was founded by the global elite and it operates for the benefit of the global elite, and it is intended to be one of the key cornerstones of the emerging one world economic system.

The role that the Bank for International Settlements is playing today was envisioned by the global elite long ago.  In another previous article, I quoted from a book that Georgetown University history professor Carroll Quigley wrote in 1975 entitled "Tragedy & Hope" in which he discussed how the BIS was to one day become "the apex" of the global financial system...

[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations.

And it is interesting to note that Professor Quigley was not against the system that the elite were setting up.  He was just an academic that was trying to accurately convey what he had learned about how the global system works.

Sadly, the system that Quigley wrote about all the way back in 1975 has fully blossomed today.

Every two months, the central bankers of the world travel to Switzerland for "Global Economy Meetings" in Basel.  Most people have never heard of them, but these Global Economy Meetings were actually discussed in the Wall Street Journal...

Every two months, more than a dozen bankers meet here on Sunday evenings to talk and dine on the 18th floor of a cylindrical building looking out on the Rhine. 

The dinner discussions on money and economics are more than academic. At the table are the chiefs of the world's biggest central banks, representing countries that annually produce more than $51 trillion of gross domestic product, three-quarters of the world's economic output.

So how do you feel about the fact that the central bankers of the world regularly gather to plot their next moves for the global economy?

Should an unelected group of central bankers that has no accountability to any national government really have so much power?

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Ex-Goldman Banker Confirms "Profits Above Principles" With 100%-Plus Business Loans

Confirming every Wall Street stereotype that "ethics are all well and good, but money is more important," the ex-Goldman Sachs banker who wrote a book on whether the bank always put "profits above principles" has started a firm charging extremely high rates of interest (above 100% in some cases) for struggling small businesses... oh the irony.

As Bloomberg reports,

Steven Mandis was working on a book about whether Goldman Sachs Group Inc. (GS) put profit above principles when he hit upon a new way to make money.

The former Goldman Sachs banker decided two years ago to get into lending money to struggling small businesses, a niche on Wall Street where brokers offer loans with interest rates that can climb past 100 percent to dentists with bad credit and pizzeria owners behind on their bills. To some, it’s the new face of subprime.

Doing god's work?

“If I’m going to do something, I want to focus on a really big problem so it would mean something,” Mandis said. “And small businesses, I mean, this is the heart of everything.”

Small-business lending has yet to recover from the financial crisis. Loans of less than $1 million are down 22 percent from 2007 because of tighter lending standards, Federal Reserve research shows. Even as banks have pulled back from funding businesses directly, Wall Street investors funneled at least $1.7 billion in financing over the past two years to the high-rate lenders rushing in to fill the gap, according to data compiled by Bloomberg.

Investors seeing a chance to profit from the risky loans include Chase Coleman’s Tiger Global Management LLC, early Facebook Inc. backer Accel Partners and Doug Naidus, a former head of mortgages at Deutsche Bank AG, whose World Business Lenders LLC charges as much as 125 percent....

“This is like a payday loan for a business,” said Pat Fossett, a bankruptcy lawyer in Corpus Christi, Texas, making a comparison to costly cash advances for workers. “Unless they’re making a large profit to pay that high interest, they’re shooting themselves in the foot.”

For the good of America...

“There’s this obligation to try to do something to solve a problem in America in my own way,” he said. “Providing capital to people to grow their businesses and to give jobs to people is I think a good thing.”

Not everyone's so excited...

Goins borrowed $122,000, agreeing to pay back $165,920 in about 11 months, according to a copy of the contract. While Stiles was aware of the loan terms, she said they turned out to be more onerous than she thought. Goins furloughed employees so it could afford the sums that Kalamata took daily and then weekly from the company’s bank account, she added.

“I don’t think it’s fair,” Stiles said. “He’s taking advantage of the small-business owners because of the interest rate that he charges.”

But Mendis defends it thus...

“When you put it in a percentage, it sounds big and eye-popping, but you need to have a relative sense of it all,” Mandis said. “Should we let that company just go bankrupt?”

Whether the detritus of firms should indeed BK or not - especially if they can't function without the need to pay triple-digit interest rates for liquidity - is a tough question. Shamefully, in our new normal, everyone's a winner, there are no consequences, and 'entrepreneurs' believe very idea can be worth a billion dollars (or $5 billion in the case of CYNK) at the flip of a switch. Perhaps the real risk-adjusted cost of capital Mendis is offering should send a message to some that their idea/business is FUBAR... or perhsps he is just another Wall Street extractor.

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How Mandatory Arbitration Cheats Consumers

A few weeks ago, the topic of arbitration clauses became a contretemps when General Mills tried the remarkably cheeky stunt of trying to assert that consumers who had downloaded coupons or simply liked the company on Facebook had given up their right to sue if they were harmed by using its products and could seek remedy only through “informal negotiation via email” or arbitration. The firestorm of criticism forced the food giant to back down.

But consumers and other customers, like small businesses, are increasingly being denied access to courts though the use of mandated “pre-dispute” arbitration clauses and these are often paired with class action waivers. Anyone who is familiar with libertarian ideas or “free markets” arguments about the virtues of reliance on contracts and markets as the solution to every problem can see how that fantasy simply isn’t operative. Consumers (and notice “consumers” as opposed to citizens) were already at a power disadvantage in doing business with large vendors, which is counter to the libertarian/free market fantasy that individuals can contract freely, as equals, and can rely on the courts to enforce their rights. As anyone who has applied for a credit card or checked a terms of service box on a software license knows, the “agreements” bear no resemblance to negotiated contracts; tehy are take it or leave it propositions. As a new article in the Nation elaborates:

Contracts like these are not negotiated agreements between equal parties. They are applications for services. Known in the law as “adhesion contracts,” they are standardized agreements drawn up by business lawyers, with the arbitration and class waivers usually placed in dense paragraphs in fine print that is unreadable. Few people know about the clauses, fewer read them and even fewer can understand them. Consumers and others who sign such contracts certainly do not “consent” to these conditions in any meaningful sense of the word.

In addition, individuals and small companies lack the financial firepower to go toe to toe with business behemoths in court. And these contracts are frequently designed to deny users access to the judicial system.

Georgetown law professor Adam Levitin wrote that “the fight over arbitration is another chapter in the fight over whether public services should be privatized.” And like past privatizations of public goods and services, the aim is to further entrench the privileges of the powerful. As we wrote recently:

…one of the hoary old notions of jurisprudence is equality before the law. That doesn’t serve our corporate-overlords-in-the-making too well. Subverting jurisprudence over time via inculcating pro-business thinkings through the law and economics movement apparently isn’t good enough for them; they want even higher odds of favorable outcomes. One of them is sneakily getting customers to relinquish their right to sue via getting them to agree to be subject to binding arbitration. 

This requirement has long been in place as a condition of getting a securities brokerage account. Although it is difficult to prove, many securities brokerage customers feel that they don’t get the restitution which they deserve through this process (and one might cynically observe that that is a feature, not a bug). Some arbitration forums have been so clearly biased as to lead attorneys general to sue. For instance, as described by Martin & Jones:

The Minnesota Attorney General recently sued the National Arbitration Forum (“NAF”), contending that NAF committed fraud and engaged in false advertising and deceptive trade practices by intentionally misrepresenting its independence and neutrality and by hiding its ties to the debt collection industry. Soon after the case was filed, NAF agreed to a settlement, the terms of which included a requirement that NAF stop accepting all future consumer arbitrations. 

The Attorney General’s lawsuit and others recently filed against NAF demonstrated that NAF was anything but the neutral, unbiased forum it represented itself to be. The lawsuits exposed the following: (1) NAF actively concealed the fact that it was owned and managed by the same New York hedge fund which also owned the three largest debt collection law firms which had claims decided by the NAF; (2) NAF helped creditors draft claims to be filed against consumers or referred them to debt collection law firms which would then file arbitration claims against the consumers before the NAF; (3) NAF solicited business from creditors by touting arbitration before the NAF as a less costly and more effective debt collection tool than the courts; and (4) NAF instructed arbitrators how they should rule with respect to certain claims and denied assignments to arbitrators who found against repeat business filers.

In other words, arbitration forums can all too easily become privatized kangaroo courts. And even when generally well-run arbitration panels have serious shortcomings in process, challenging the results of arbitration due to arbitrator bias rarely succeeds.

The Nation gives an update on how the reach of these mandatory arbitration agreements has been increasing, propelled by recent Supreme Court decisions. The article contains quite a lot of detail on the recent Supreme Court decisions, but my take was it didn’t crisply parse out the two-front attack that companies are waging against consumers’ rights to court remedies, admittedly because legal issues are a bit hairy and something of a moving target.

In simplified form, companies are trying to stymie both individual litigation and class actions suits, and the Supreme Court has addressed both issues in key decisions in recent years. A high-level overview from Levitin in May:

I have an op-ed in today’s American Banker on the supposed efficiency and fairness of binding mandatory arbitration..the needle has moved a bit on binding mandatory arbitration in consumer contracts–both ways. 

On the downside, the Supreme Court both overturned a state law doctrine preventing binding mandatory arbitration (AT&T v. Concepcion), and then, in a truly shameful opinion, held that class action waivers in arbitration clauses were enforceable, even if it that meant there was no effective way to vindicate federal rights (Amex v. Italian Colors Restaurants)… 

On the upside, however, some courts have read the Supreme Court opinions with a fine comb and recognized that they were 4-1-4 (Concepcion) or 4-1-3 (Italian Colors), with Justice Thomas’s concurrence leaving room to avoid arbitration clauses if the entire contract is unconscionable–with arbitration clauses being potential evidence of the unconscionability. That’s exactly the position that the California and Missouri Supreme Courts have taken.

Levitin also pointed out that in Dodd Frank, Congress banned certain types of pre-dispute arbitration clauses, in home mortgages, in broker/dealer and investment advisor agreements, and for whistleblower claims involving commodities and securities fraud. The CFPB has the power to ban pre-dispute arbitration in all consumer financial contracts, and in the late spring, released the first part of its study on this topic.

But keep in mind these Dodd Frank restrictions apply only to certain financial products. A whole swathe of consumer agreements, such as cell phone and cable agreements, nursing home care, airplane tickets, as well as other financial services, aren’t included. And here is where the Nation report gives a more complete picture of the sorry state of play. Key sections:

In recent years, and especially since Chief Justice John Roberts and Associate Justice Samuel Alito joined the Court, a major weapon in this campaign has been the Federal Arbitration Act (FAA) of 1925. The conservatives have used the act to prevent victims of such abuses from seeking redress in the courts, forcing them into pre-dispute arbitration instead. In doing so, they lose a public trial, a jury and a neutral judge, as well as an appeal to a higher court; in many cases they may also have to give up discovery rights. It is not uncommon for them to wind up before an arbitrator who is dependent upon the defendant’s business community for work and fees, and who may not even be legally trained. Not surprisingly, those forced into arbitration almost always fare much worse than they would in court… 

Last December, the Consumer Financial Protection Bureau (CFPB) issued a preliminary report, which found that contract clauses mandating pre-dispute arbitration are a “common feature of consumer financial contracts”… 

The CFPB found further that about 90 percent of such contracts, including almost all credit card loans, insured deposits and prepaid cards, also prohibit participation in current or future class or other joint actions in both judicial and arbitration proceedings. This usually forces consumers who have been injured in small amounts to drop the matter entirely, even though the defendant may have harmed many others the same way, for too little is at stake for each individual to justify the time, trouble and expense of individual arbitration.

The Nation also notes that post the AT&T v. Concepcion decision, class action suits have been few and far between:

A group of corporate defense lawyers triumphantly reported that since 2011, when the Supreme Court ruled in AT&T Mobility v. Concepcion that the FAA did not allow state courts to nullify class arbitration waivers in consumer cases even if those courts considered them “unconscionable,” plaintiffs had been forced to arbitrate individually in 72 percent of 375 cases. According to a study by Public Citizen’s Congresswatch, at least 139 class actions have been dismissed since Concepcion.

And predictably, low income groups fare the worst:

These recent Court decisions forcing individual arbitration hit the poor especially hard. In North Carolina, payday lending is illegal, but no individual judicial or arbitration proceedings had ever been filed, despite many illegal loans. Paul Bland, executive director of Public Justice, a public interest law firm for victims of corporate abuse, says that in cases resolved before Concepcion, his firm sued on behalf of payday borrowers and obtained more than $45 million in three North Carolina cases, and $20 million in four Florida settlements. After Concepcion, nothing: payday class actions that were still pending were dismissed, leaving these low-income borrowers with no recourse.

The Nation argues that consumer groups need to mobilize on this issue, since most Americans aren’t aware how much their rights to legal remedies have been eroded. Since Elizabeth Warren is increasingly being positioned as the stalking horse to Democratic party presidential nominee presumptive Hillary Clinton, and this sort of “protect consumers from tricks and traps” is in the middle of her beat, she might be susceptible to pressure to show leadership on this issue. Of course, the “don’t rock the corporate moneybags” considerations would lead to the opposite outcome, that of continued inaction (with waiting for the final CFPB report as her cover). This issue could serve as a good litmus test of Warren’s bona fides, whether she is really the middle class advocate she holds herself out to be, or whether her real loyalties are to her fellow elite technocrats.

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