Lehman II, The Redux (Only much, much bigger.)

Senate Republicans oppose help to the automakers and the Bush Administration has decided not to ask for the remaining $350 billion of the bailout money. This means it is almost a certainty that GM and the other American automakers will fail.

With one out of ten jobs in the American economy tied to the auto industry, the result will be catastrophic. It will make Lehman's failure look like a walk in the park.

Paulson's actions throughout this crisis have been beyond incomprehensible: Letting Lehman fail, his ill-conceived bailout plan then the flip-flop. His staunch resistance to helping the auto industry despite its huge economic influence on the economy. His ignorant and lame "confessions" to the American public that the government is powerless on its own to help. And let's not forget his threats to China on the question of their currency, etc.

A total disaster.

Weekly update on Monetary Base and Reserves

Reserves on deposit at the Fed


Reserve balances now $600 billion even with recent sales of securities. These are the funds that will be used to buy more securities as the Treasury sells them.

Monetary Base

Bush Administration Said to Not Seek Remaining Bailout Funds

Story came off of Bloomberg.com.

Bush Administration and Republicans essentially walking away from the economy's problems. Unbelievable!

Access here.

Bush continues pushing "free market" approach to crisis

President Bush continues to push the same tired, old, free market mantra at the G20 meeting in New York:

The greater threat to prosperity is "not too little government involvement, it is too much government involvement in the market," Bush said.

Even Brazil's president gets it:

Brazilian President Luiz Inacio Lula da Silva said last weekend in Sao Paulo, where G20 finance ministers met, that the world economic order "collapsed like a house of cards" because of a "dogmatic faith in non-intervention in markets."

Fed's forex swap lines increase another $41 billion in latest week. Total now stands at $615 billion.

Fed continues to dole out dollars to foreign central banks (to be used by foreign financial institutions). Another $41 billion was handed out in the week ended November 13. The grand total so far is $615 billion. This now comprises nearly 30 percent of the Fed's balance sheet. These loans are uncollateralized and non-recourse. We let our guys fail but we are supporting foreign financial institutions and keeping the dollar weaker than where it would be if these dollar handouts were not happening. It is a ripoff to American taxpayers.

Access the Fed's weekly statement here.

"Liar's Poker" author chronicles the End of Wall Street

Good article by the author of "Liar's Poker," Michael Lewis.

Here is an excerpt:

"I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance."

Full article here.

Chicago Mayor Daley: Prepare For Mass Layoffs

"This is going to be all year, so it's going to be a very frightening economy," Mayor Daley said. "Each one tells me what they're laying off, and they're going to double that next year. We're talking huge numbers of permanent layoffs for people in the economy. It's going to have a huge effect on all businesses."

The mayor said the gravity of the situation cannot be underestimated.

"We never experienced anything like this except people who came from the Depression," Mayor Daley said. "When you have that many layoffs early – and they're telling me this is only the beginning of their layoffs – that is very frightening."

Mayor Daley also warned that local governments will be in jeopardy and may not have enough money to meet payroll, although he is not worried about paying City of Chicago employees.

Full article here.

More awful advice from a former Goldman chairman

By Joseph A. Giannone

NEW YORK (Reuters) - The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, former Goldman Sachs chairman John Whitehead, said at the Reuters Global Finance Summit on Wednesday.

This guy was former Chairman of Goldman Sachs, so you can see why Paulson’s thinking is the same as his. This is where Paulson essentially got his “schooling” about the way the world works. (Or at least, the way gov’t finance works.)

Whitehead, 86, said the prospect of worsening consumer credit woes combined with an overtaxed federal government make him fear that the current slump is far from over.

Nothing that massive governments spending cannot cure. But there is no modern day Keynes, unfortunately. We need him more than ever.

"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system." Whitehead encountered plenty of crises during his 38 years at the investment banking firm and was a young boy during the 1930s.

Sovereign, currency issuing nations that spend by crediting bank accounts do not need, “credit.” The only potential downside to this spending, if done in sufficient degree and left unchecked, is a decline in the foreign exchange value of the nation’s currency.

Whitehead warned the country's financial strength is at risk due to the sweeping demand for tax relief and a long list of major government spending plans.

The country’s financial strength is at risk precisely because we don’t engage the government to a greater degree (as in, more deficit spending, not less).

"I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America," said Whitehead, who served as chairman of the Lower Manhattan Development Corp after the World Trade Center was destroyed during the September 11, 2001 attacks.

The deficit during WWII went to 40% of GDP. With the terrible mess we are facing now in the economy, the deficit is still under 4% of GDP. However, people like Whitehead will cause us to suffer far longer than if we were to address this with aggressive spending.

Whitehead, who helped make Goldman a top-tier Wall Street firm and led its international expansion, left in 1984 to become a deputy secretary of state under Ronald Reagan.

His old boss, Reagan, ran the biggest deficits in post WWII history. That’s why the economy boomed. This guy has selective memory, it appears.

He warned that the country's record deficit is poised to balloon as the public calls on government for more support.

Again, as a percent of GDP smaller than in the 1982-83,1990-91, 2001, recessions.

"Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds," he said. "Eventually U.S. government bonds would no longer be the triple-A credit that they've always been."

They will. But only because the rating agencies are clueless. They rated toxic subprime debt AAA. They downgraded Japan to the status of Botswana. Nothing to lose sleep over.

There are at least ten "trillion dollar problems," facing the United States, he said, including social security, expanding health insurance, rebuilding infrastructure and increased spending on green energy. At the same time, the public does not want to pay for it.

The public can only “pay for it” with funds provided to it by government spending. That’s the only thing the government accepts for the payment of taxes.

"The public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs -- all very costly and all done by the government," he said.

Government doesn’t need “income.” It spends by crediting bank accounts. The sale of securities and the collection of taxes function merely to maintain a certain level of reserves and that’s tied to the Fed’s targeting of an interest rate. That’s it. End of story.

Large deficits can weaken the country's credit and increase its borrowing costs, which already constitute a significant part of funding to cover expenses. Whitehead said it could take "several years" for the current problems to be resolved.

Japan has a public sector debt twice as large as the U.S. and official interest rates are near zero. No correlation.

Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes.

Higher taxes will reduce aggregate demand in the economy even further.

"I just want to get people thinking about this, and to realize this is a road to disaster," said Whitehead. "I've always been a positive person and optimistic, but I don't see a solution here."

It’s a road to disaster if we follow his misguided prescriptions.

Dollar libor spreads widening again after 23 days of decline

Remember,some of the Forex swaps that the Fed recently engaged in had 28 day terms. Could there already be a problem with some European institutions in paying back some of these loans? Are these debtors on the hook, bidding for dollars to close these swap positions?

City Council: Detroit needs $10-billion bailout

It's getting worse. Money must be made available to states and municipalities now. Too much time has been spent trying to prop up much of what is worthless in the financial sector. Very few non-bank entities really have any reason to still be around. The entire thing was an artificial construct born out of excessive deregulation. It added little benefit but brought enormous risk.

Paulson abandons his troubled asset purchase plan for what appears to be a "Whack the mole" strategy. Curiously, it is worth noting, that the troubled asset wharehousing scheme did get us out of the S&L mess. Paulson appears to be reeling, not knowing which way to turn. Bad. Really bad!

Bloomberg: Boehner Demands Fed Identify Recipients of Loans

It was only a matter of time before this happened. You can blame that terrible Bloomberg column of a couple of days ago. More of the same misinformed reporting today:

House Republican leader John Boehner called for the Federal Reserve to disclose the recipients of almost $2 trillion of emergency loans from American taxpayers and the troubled assets the central bank is accepting as collateral.

Boehner, in a prepared statement, also asked the Federal Reserve to comply with a Freedom of Information Act request seeking details about the loans.

The Fed ``should comply with this Freedom of Information Act request, and in the interest of full and fair disclosure, they must begin providing lawmakers and taxpayers all information about how they are using federal tax dollars,'' Boehner said.

My email to the Bloomberg journalist (Laura Litvan) who wrote this tripe.

These were not "emergency loans from American taxpayers." The Fed has infinite ability to create money in our system and does so by simply crediting bank reserve accounts.

If indeed the $2 trillion in credits were loans from American taxpayers then it would stand to reason that personal savings of Americans would decline by that amount. Yet this has not happened.

Furthermore, banks are regulated by the Fed, FDIC and Office of the Controller of the Currency as to what assets they are allowed to own. They are constantly monitored and scrutinized and must conform to minimum capital requirements. The need to post collateral is redundant under this institutional structure.

The assets that banks own are all government approved and marginable at the Fed's Discount Window. This list is available to the public, free of charge, at http://www.frbdiscountwindow.org/discountmargins.pdf

Your article is steeped in misinformation and displays a horrible lack of understanding of monetary operations and how the Fed functions. It is misleading and ignorant.

-Mike Norman

Paulson highlights the drawbacks of having a businessman in government

Government exists for the public purpose; businesses exist to make profits. Governments should not be run as profit seeking enterprises. If they are, they immediately crowd out private enterprise. (Because they can tax and often issue the "chips" with which we play the game, at least the Federal Gov't does. So they have a huge advantage and by applying this advantage they can quickly own all the means of production.)

The Federal Government is never spending constrained, but even the biggest corporations sometimes can be.

Businessmen like Paulson have been honed to think in terms of profits and constraints. Their view of what can and cannot be done is always colored by that.

This is why you hear him say, "There is nothing the Government can do by itself." Or, "We need the help of other countries." Or, "This is going to be a long and difficult road back."

Statements like the ones above can be true for businesses and even for state governments or nations that are not sovereign currency issuers. They are NOT true for governments that issue non-convertible currency and that spend by crediting bank accounts.

Paulson does not understand this, nor, unfortunately, do many members of Congress. As a result we will continue to operate under these self-imposed constraints. The road back will be long and difficult, because we will make it long and difficult by adhering to misconception and myth.

It doesn't need to be this way.

Obscene Wall Street pay

If there was ever any question in your mind as to how ridiculously overvalued Wall Street was, and how its compensation structure was beyond obscene, just look at the useless flailings of our vaunted Treasury Secretary. He made hundreds of millions as a Master of the Universe at Goldman, but is clueless on helping save the economy. Worse...his ineptness is rapidly destroying it.

Paulson is clueless

Paulson should be fired immediately. Back in September he let Lehman fail, for no apparent reason and that touched off the systemic nature of the current crisis. Look at a chart of any market—stocks, bonds, commodities, the dollar—and you’ll see that all hell broke loose when Paulson decided to let Lehman go under.

Today he admits his bailout plan stinks. So, instead of going with his first idea, which was buying troubled assets, he wants to support the very institutions that created those troubled assets in the first place.

On the suggestion of using some of the money to help GM and the other U.S. automakers, he states confidently, “That would be the wrong way to go.” If recent history is any guide, we ought to get very worried when Paulson confidently states what we ought to be doing. This guy should be given the boot immediately.

Paulson to markets: "My plan stinks"

The vaunted chief of Goldman Sachs (the firm itself is nothing less than a Pantheon of the Gods when it comes to Wall Street) brought in to save the day as Secretary of the Treasury, now says his plan was bad and he knew it the moment he signed off on it.

Unreal!!

What's even more unreal is that many people are praising him for "having the guts to admit he was wrong."

He's lucky to keep his job at Treasury. President Bush, in one of his last acts as president, should fire Paulson on the spot after that lame admission. If he did that his approval ratings would soar and he could at least go out on a somewhat positive note.

How dare he!! After imploring Congress to pass this package and after insisting his plan was the right one to save the financial system, he now says it was a bad plan??

Paulson got paid hundreds of millions while at Goldman, for what? Creating, packaging and selling the very instruments of mass destruction that now has our economy tanking. Whose bright idea was it to put him at Treasury? Why do we worship these Goldman people so? Why is that firm so admired?

In the end it had to run to the Fed to save its hide. Paulson will never have to worry. He's set for life, as are most of the Goldman bankers and traders.

It's just most everyone else in the economy that must now suffer. And we suffer doubly as a nation by having this idiot running Treasury. He tells us that the U.S. needs the help of other nations to right its economy. Nonsense! He tells us it was the "imbalances" that brought this on (you mean imbalances like other nations desiring to save in our currency, to the point that they were willing to suppress the standard of living of their own citizens in order to do that?). Nonsense!

Paulson is clueless. We should have let Goldman fail!

The really sad part is that Obama has an entire crew ready to come in and "help." Warren Buffet, a member of his economic "team" has put his money in sorry state Goldman. (Obama should jettison Buffet poste-haste, or this should at least raise some eyebrows regarding Buffet's "acumen.")

Americans beware! Obama's "experts" are all of the same creed as Paulson.

China stimulus doubters don't understand soft currency economics

On Barry Ritholtz's blog a story appeared that claimed, "China's stimulus is no such thing."

It states:

"Compare China — a country with a centrally planned economy, carefully managed by a communist regime — with the United States. The US has a $14 trillion economy, of which about $3 trillion is government spending (military, entitlements, discretionary). Any new stimulus plan — be it tax rebates, direct spending on public works programs, or aid to the auto industry — is essentially new spending that didn’t previously exist.

When $3 trillion becomes $3.17 trillion, it is significant. It is as if the US is adding more pieces to the economic chess board.

China, on the other hand, is merely moving resources from one region to another. They are not creating more economic activity, putting cash in the hands of consumers, or even increasing their infrastructure plans."

What the author misses is that the the Chinese Government can spend all it wants of its own currency and the People's Bank of China can credit bank accounts just like the Fed can in the U.S. The stimulus is as valid there as it is here. The fact that China has a centrally planned economy is irrelevant.

Workable solutions, along with things we must come to accept

The problem, it seems, is weak demand in the economy. Lending money to banks and other firms that are not seeing strong customer demand for their products and services on the other side does very little. Therefore, these loans return little bang for the buck.

There are myriad ways for the government to address the lack of demand. Some suggestions are, as follows:

• Increase the level of government spending on infrastructure, money to states and localities, extension and increase in unemployment benefits, health care payments, etc.

• Raise income and/or disposable incomes by doubling the minimum wage, income tax cuts (including suspension of the payroll tax), or money sent directly to households.

• Provide low interest or zero interest loans directly to consumers and households to be used for auto purchase and/or purchase of durable goods (appliances, large ticket items, etc.)

• End the forex swaps to foreign central banks. This is keeping the dollar lower than it otherwise would be if these swaps were not occurring. A weaker dollar hurts U.S. consumers’ purchasing power at a time when more, not less, purchasing power is needed.

• Back off on threats to foreign countries that they are manipulating their currencies to gain export advantage. Let them keep their currencies weak and export; let us have the strong currency and higher standard of living.

Things we must come to accept

Accept that Fannie Mae and Freddie Mac were designed for a public purpose—to foster home ownership—and consider their lending in that regard to be a public subsidy to achieve the stated goal. End their existence as publicly traded companies and the charade that they must remain profitable enterprises in a competitive environment. Either that, or declare that large-scale home ownership is not a worthy public goal and close them down altogether.

Accept that a large and growing function of the military is to provide social spending and support. For an increasing segment of the population the military provides health care, education, family services and employment. It is terribly inefficient to have it done this way. The government should invest directly in these services through existing administrations and departments or set up a new department and relieve the Department of Defense from acting in this role.

Accept that much government research and development (R&D) funding is channeled through the military and NASA. Many commercial applications of this R&D effort eventually hit the free market, but again, it is a very inefficient way to go about it. Create a new department--the Homeland Department of Technology--that directly funds research and development for civilian applications. This department could also fund R&D alternative energy projects. Its budget should be pretty substantial.

Any and all of these things are feasible, the only constraint is political. The Government deficit will rise no matter what we do and we shouldn’t be concerned with that. What we should be concerned with is whether or not the growing deficit reflects wise choices—choices that will restore economic health and vitality. Lending or investing money in institutions that are experiencing weak and deteriorating demand in their ongoing businesses is not very useful.

Here is a list of all the regulated collateral that the Fed is lending against

Lame brained journalists at Bloomberg.com like Mark Pittman, Bob Ivry and Alison Fitzgerald could have looked this up before they wrote their horribly irresponsible article on the Fed's lending.

Collarteral Margins Table.

Everything on that list is regulated collateral. Banks can pledge any of those things as collateral for loans.

Moreover, as Warren Mosler states:

"...the Fed asking for collateral from US member banks is ‘redundant’ in that FDIC/OCC regulation/supervision already requires all bank collateral be ‘bank legal’ and that required capital be sustained."

Bloomberg journalists stir needless concerns about Fed actions. Could harm Fed's ability to help financial sector.

An article on Bloomberg.com suggested that the Fed has been hiding behind a lack of transparency. The Bloomberg journalists do not understand that Fed lending is to banks with regulated collateral and all of that is publicly available information.

Here is the article.

The misinformation in the Bloomberg article could put pressure on the Fed that might result in hurting its ability to help the financial markets. We must try to stop journalistic ignorance and complicity in this time of crisis.

Please cut and paste the following letter and send it to the following Bloomberg journalists:

alack@bloomberg.net
mpittman@bloomberg.net
bivry@bloomberg.net
afitzgerald2@bloomberg.net

It is clearly stated under Section 13 Paragraph 3 of the Federal Reserve Act that in exigent and unusual circumstances the Fed is allowed to lend to whomever it pleases against any collateral that it deems satisfactory.

http://www.federalreserve.gov/aboutthefed/section13.htm

Moreover, all banks come under regulatory scrutiny by the Fed and Office of the Controller of the Currency and can only have bank-regulated collateral. The list can be found at the Fed’s Discount Window of Marginable Collateral.

http://www.frbdiscountwindow.org/discountmargins.xls

The Fed is not limiting transparency in its actions. All this information is publicly available. Your research and assertions are incorrect and misleading and you should publish a retraction with the proper information.

John Mauldin needs an education on government finance

John Mauldin is a widely followed market analyst. Every week he sends out his popular e-letter, "Thoughts From the Frontline." I receive it, but hardly read it anymore because I find it is too wordy. A listener of my radio show sent me his comments and highlighted the following paragraph:

"...a lower trade deficit means there will be fewer dollars to buy US debt, just at a time when US debt will explode. That means that US citizens must save and buy that debt, or the Fed will have to monetize it, or rates will have to rise to attract capital. These are somewhat counterintuitive concepts and need explaining. But not this week. It is time to hit the send button." -John Mauldin

What Mauldin and many like him don't seem to understand is that actions taken by the government and the Fed over the past two months have already boosted bank reserves to nearly $500 billion. That's the money that will be used to buy the bills, notes and bonds when they are sold. Bank reserves pay very little interest so reserves will be happily swapped for Treasury securities that yield more.

The claim that, "US citizens must save and buy the debt, or the Fed will have to monetize it, or rates will have to rise to attract capital," displays a monumental lack of understanding of government finance and monetary operations. Government spending has already put the money in the banking system to buy the securities. Moreover, the government doesn't even have to sell the bills, notes and bonds, it does so merely to adjust the level of reserves (bring them down).

Conservatives fear Rahm Emanuel...the ballet dancer

Conservatives like Rush Limbaugh and House Minority Leader, John Boehner (R-OH) fear White House Chief of Staff, Rahm Emanuel. Do they know that Emanuel is a ballet dancer? So, they're afraid of a ballet dancer?

Here's Limbaugh:

"...he is good a old-fashioned Chicago thug just like Obama is a good old-fashioned Chicago thug. On the night of the Clinton election, Rahm Emanuel was so angry at the president’s enemies that he stood up at a celebratory dinner with colleagues from the campaign; Rahm Emanuel grabbed a steak knife and he began rattling off a list of betrayers.

As he listed their names, he shouted, “Dead! Dead! Dead!” and he plunged the steak knife into the table after every name." -Rush Limbaugh on Rahm Emanuel

Emanuel is a former ballet dancer.

Letter to Stuart Varney, Fox Business anchor

November 9, 2008


Stuart Varney
Fox Business
1211 Avenue of the Americas
New York, NY 10036


Dear Stuart,

I heard you say on the O’Reilly Factor the other night that the Government was getting ready to borrow $900 billion over the coming months.

The selling of securities by the Treasury is often characterized as borrowing, but in reality it is simply the management of reserves in the system.

Actions taken by the Federal Reserve and Treasury over the past two months to address the credit crunch and help firms like AIG and a number of banks have caused reserves in the system to swell to $500 billion. (The average level of reserves in the system over the past 20 years has only been around $20 billion.)

In other words, the Government has already put the money in the banking system that will be used to “buy” the bills, notes and bonds that it sells over the next several months.

Remember that reserve balances at the Fed get paid a very low rate of interest (and even that has only been a recent phenomenon—reserves up until last month got paid zero interest), so it is quite normal for those reserves balances to be exchanged for higher yielding bills, notes and bonds that the government sells.

The key point—and the point that the media often misunderstands—is that the money to buy Government securities and pay taxes comes from government spending itself. The government spends first by crediting bank accounts (causing the level of reserves to rise) and then it sells securities and collects taxes, which brings down the level of reserves. If it didn’t do this we’d quickly see a hyperinflation.

The idea that the government must “raise the money” in some fashion, is rooted in gold-standard thinking. When nations were on a gold standard, the amount of gold it held determined its ability to create money. If a nation wanted to spend more it would have to get more gold.

We are no longer on a system like that. The only thing that constrains how much the Government can spend is the degree to which it creates inflation and that is a political constraint, not an operational constraint.

I hope this clarifies this for you.

Sincerely,



Mike Norman

China Announces 4 Trillion Yuan Economic Stimulus

As the U.S. proposes stimulus measures that equal a measely 1-percent or less of GDP, China goes for the big numbers. Its 4 trillion yuan ($586 billion) fiscal package is 20 percent of the nation's GDP. That would be like the U.S. implementing a $3 trillion stimulus package!

Here's the full article.

Weekly update on Monetary Base and Reserves

Monetary Base














Monetary Base (y-o-y % change)














Reserve balances at the Fed













Note that reserve balances at Federal Reserve banks is now about $500 billion. The average over the past 20 years has been about $19 billion. The Government has already put most of the money in the system that will be used to buy the securities it sells. DO NOT LISTEN TO PEOPLE WHO SAY, "The Government will have to raise the moeny in order to fund the bailouts." The money is already in the banking system and most of those resereve balances--that pay very little interest--will be happily swapped for the securities the Treasury will sell.

Obama makes 'no commitment' on missile shield

He doesn't seem to be about much "change" when it comes to economic policy, given those 17 economic advisors we saw on Friday.

However, he DOES seem to be about change when it comes to our commitments to our allies.


Read article below:

Barack Obama has made no commitment that a missile defense shield in eastern Europe will go ahead, an advisor to the president-elect said Saturday, in apparent contradiction of statements by Poland.

Earlier, a statement from Polish President Lech Kaczynski after the two men spoke by telephone said Obama had said he would go ahead with plans to build a missile defense shield in eastern Europe despite threats from Russia.

But Obama had given no such clear cut undertaking on the controversial program, his senior foreign policy advisor Denis McDonough said in a statement.

(The) "president-elect had a good conversation with the Polish President and the Polish Prime Minister about the important US-Poland alliance," McDonough said in a statement.

"President Kaczynski raised missile defense but President-elect Obama made no commitment on it.


"His position is as it was throughout the campaign, that he supports deploying a missile defense system when the technology is proved to be workable."

The statement by President Kaczynski appeared to put a different spin on the conversation between the two men.

"Barack Obama has underlined the importance of the strategic partnership between Poland and the United States, he expressed his hope of continuing the political and military cooperation between our two countries," the statement read.

"He also said the anti-missile shield project would go ahead," said a statement said.

Warsaw and Washington signed a deal on August 14 to base part of a US missile shield in Poland, despite Moscow's opposition and mounting East-West tensions over Georgia.


The United States wants to base 10 interceptor missiles in Poland plus a radar facility in the neighboring Czech Republic by 2011-2013 to complete a system already in place in the United States, Greenland and Britain.

Washington says the shield -- endorsed by NATO in February -- is aimed at fending off potential attacks by so-called "rogue states" such as Iran, and is in no way aimed at Russia.

The United States warns that Iran could develop long-range missiles capable of carrying nuclear warheads by 2015-2017.

The plan has enraged Moscow and the Kremlin has threatened to aim its own missiles at the planned US installations.

Just hours after Obama's historic election victory on Tuesday, Russian President Dmitry Medvedev said Moscow would station short-range missile systems in its Kaliningrad enclave wedged between Poland and fellow EU member Lithuania.

US negotiator John Rood said Thursday that Washington had given Russia fresh proposals to try to ease its concerns and hoped the row could still be resolved.


He said the offer was sent "earlier this week," before Medvedev announced his plans to deploy missiles in Kaliningrad.

Medvedev's remarks on Wednesday amounted to a warning shot to Obama and Washington's allies in central Europe.

The European Union and NATO also expressed strong concern over Russia's decision to deploy missiles on the EU's doorstep.

Polish lawmakers have yet to ratify the US missile defense deal while the Czech government has called for a delay in a final vote on its radar agreements until the inauguration of President George W. Bush's successor in January.

Fed forex swaps increase by $28 billion in the latest week

In the Fed's weekly release of "Factors Affecting Reserve Balances", shows that the level of foreign currency holdings rose by $27.9 billion for a total of $573.9 billion as of November 5. So the Fed continues to supply dollars to foreign institutions (through a number of central banks). If this were not happening the dollar would be much higher. The Fed let Lehman fail, but it has helped foreign financial institutions to the tune of nearly $600 billion since June. That's nearly the size of the Treasury's bailout package. Unbelievable!

Commercial paper holdings rose to $226 billion, up $185 billion from the prior week. This is why the commercial paper market is "unfreezing." It's all Fed. Like I said in an earlier post, the financial sector is not necessary. The Fed can do it alone and the economy will do just fine, without the redundancy or ever present danger of these freeze ups.

Get rid of the financial sector. It serves no real purpose.

As the Fed continues to step up to do the work that a large segment of the financial sector can no longer do (as a result of terrible, failed and misguided investments), expect to see its balance sheet grow. At the same time, the balance sheet of the private financial sector will shrink and we should be happy about that. What has become plainly evident is that the financial sector contributed pretty much nothing to the real economy (the Fed is doing all the work now), but increased the risks substantially.

The financial sector went on an unbridled, giddy, nonsensical spree of malinvestment the likes of which we’ve never seen before. Most of this was conducted by unregulated, non-bank financial entities—hedge funds, financial intermediaries, mortgage brokers, etc—that at its peak provided more than 80 percent of all credit to the economy. Yet there was no support net or backstop should something fail. (By the way, commercial banks were not innocent bystanders. They were involved in this too, but since they were regulated and had lifelines to the Fed, most of them will likely survive).

Who builds a structure like this? What critical system—an airplane, a hospital’s power source, a nuclear reactor—does not have multiple backups and constant supervision? How could we have allowed a system where nearly all the credit to the economy went through, in many cases, shadowy, unregulated entities run by greedy “cowboys” whose big stakes games of dice ended by coming up craps? When they were forced to stop playing as a result of their greed and recklessness, the rest of the economy was held hostage.

After many long months the Fed has finally stepped up to act in its most important capacity, as lender of last resort. It took a while for this to happen, because all along, the Fed, Treasury, the Administration and many members of Congress were hoping, praying, that they could get the cowboys to come back to the crap table. Finally, I think they saw, reluctantly, that it’s not going to happen. Nor should it be desired. (Although they have been giving some of the players new “stakes,” which, perhaps is a little disappointing.)

The system as it existed before was inherently unstable, prone to failure and as we are now finding out, lethal. My hope is that we give up the impractical goal of trying to reconstruct it, at least in the form it was. If it comes back at all it should be a fraction of what it was and highly regulated, with many of the now familiar institutional structures like hedge funds, financial intermediaries and finance companies, done away with permanently. They contribute nothing of real value, but add a high element of risk and in many cases, siphon off brainpower that can be used elsewhere in the real economy.

The most preferable solution, I think, is to simply have the Fed continue the credit provider role that it has assumed. Maybe we’d want to keep some commercial banks around to provide the public with its credit needs (the banks can be considered, after all, as agents of the government; they have charters, come under regulatory oversight and have direct access to the Fed in times of need) although the Fed can provide that function as well. With the Fed providing the credit function there would be no risk of systemic failure. The system would be stable and fail safe. The real economy could continue to be productive and grow without the risk of being shut down.

Another example of the ignorance of the financial media

The following story appeared on Bloomberg.com and highlights how clueless the media is:

BOJ Helpless as Yen Rises on Carry, UBS, Barclays Say

"Once the market realizes that we're now in a global recession, there's further deleveraging to come," said Geoff Kendrick, a senior currency strategist in London at UBS

That's a fallacy. While a central bank may be helpless at times in being able to support its currency, it can sell limitless quantities of its own currency if it wants. Any entity standing in the way of a central bank wanting to destroy its currency will be decimated.

At the present time, the Bank of Japan is allowing the yen to appreciate in an orderly fashion. Japanese policymakers probably do not like this and the BOJ can put an end to it any time if it wants, but probably risk incurring the wrath of Hank Paulson and the Bush Administration, who view a weak dollar as a good thing.

Dollar weaker, even as fear returns to stock markets

I've heard a lot of people commenting in the last two days that the reason the dollar has fallen back is because the so-called, "flight to safety" element has been removed. In other words, now that stock markets have stabilized and credit market spreads are narrowing, the dollar's decline was merely the markets' way of sending an "all-clear" sign.

I didn't see it that way.

With all the problems in Europe and elswhere, the dollar should have kept rallying. The world was short of dollars and still is, in a big way.

The reason the dollar has stopped falling is simple: Forex participants now understand that the Fed will provide dollars to any European institution (or Brazilian, Taiwanese, S. Korean, Mexican...) with dollar liabilities through the ECB or respective central bank, rather than see asset sales and/or the purchase of dollars in the open market. Therefore, for now, further dollar appreciation appears to be a low probability or even out of the question.

Down the road, however, it is possible that portfolio investors favor the dollar over the euro if they see U.S. conditions improving and Eurozone conditions worsening. However, it’s hard to assign a probability to that.

The Fed has missed a golden opportunity to let the dollar appreciate, with little or no policy adjustment. It would have brought important benefits on the inflation front, in terms of trade to U.S. consumers, and with respect to the asset holdings of central banks around the world like China, that hold lots of dollar denominated assets.

Instead, they put a cap on the dollar’s rise.

Personally, I find this hard to understand. The benefits of letting the dollar rise because of a technical “condition” rather than having to implement a major policy shift seem to outweigh the risks. Perhaps they felt that asset sales by foreign institutions would have some contagion or systemic impact? But even that doesn’t make sense because if they’re worried about contagion and systemic impact, why did they let Lehman fail?

I am baffled. Absolutely baffled.

It's official!

Yesterday's election results made official what most people pretty much expected--an Obama Presidency. There's not likely to be any huge market reaction.

Over the next week or so events the first of several events will take place. First, who will be on Obama's transition team. Those members, particularly in areas of economics, will be crucial in determining the nature of policy and the economy for the near term. After that will come his cabinet selections. That may take some time, but the posts of Defense, Health and Human Services, Labor, Education, Commerce and of course, Treasury, will be highly important to investors.