THE MAN NOBODY WANTED TO HEAR – Global Banking Economist Warned of Coming Crisis
SPIEGEL ONLINE
07/08/2009
By Beat Balzli and Michaela Schiessl
William White predicted the approaching financial crisis years before 2007′s subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.
William White had a pretty clear idea of what he wanted to do with his life after shedding his pinstriped suit and entering retirement.
White, a Canadian, worked for various central banks for 39 years, most recently serving as chief economist for the central bank for all central bankers, the Bank for International Settlements (BIS), headquartered in Basel, Switzerland.
Then, after 15 years in the world’s most secretive gentlemen’s club, White decided it was time to step down. The 66-year-old approached retirement in his adopted country the way a true Swiss national would. He took his money to the local bank, bought a piece of property in the Bernese Highlands and began building a chalet. There, in the mountains between cow pastures and ski resorts, he and his wife planned to relax and enjoy their retirement, and to live a peaceful existence punctuated only by the occasional vacation trip. That was the plan in June 2008.
And now this.
White is wearing his pinstriped suits again. He has just returned from California, where he gave a talk at a large mutual fund company. Then he packed his bags again and jetted to London, where he consulted with the Treasury. After that, he returned to Switzerland to speak at the University of Basel, and then went on to Frankfurt to present a paper at the Center for Financial Studies. From there, White traveled to Paris to attend a meeting at the Organization for Economic Cooperation and Development (OECD). Finally, he flew back across the Atlantic to Canada. White is clearly in demand, including in North America.
Since the economy went up in flames, the wiry retiree has been jetting around the globe like a paramedic for the world of high finance. He shows no signs of exhaustion, despite his rigorous schedule. In fact, White, with his gray head of hair, is literally beaming with energy, so much so that he seems to glow.
Perhaps it is because someone, finally, is listening to him.
Listening to him, that is, and not to his rival of many years, the once-powerful former chairman of the US Federal Reserve Bank, Alan Greenspan. Greenspan, who was reverentially known as “The Maestro,” was celebrated as the greatest central banker of all time — until the US real estate bubble burst and the crash began.
Before then, no one in the world of central banks would have dared to openly criticize Greenspan’s successful policy of cheap money. No one except White, that is.
‘A Disorderly Unwinding of Current Excesses’
White recognized the brewing disaster. The analysis department at the BIS has a collection of data from every bank around the globe, considered the most impressive in the world. It enabled the economists working in this nerve center of high finance to look on, practically in real time, as a poisonous concoction began to brew in the international financial system.
White and his team of experts observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies. In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market. To give all this money somewhere to go, investment bankers invented new financial products that were increasingly sophisticated, imaginative — and hazardous.
As far back as 2003, White implored central bankers to rethink their strategies, noting that instability in the financial markets had triggered inflation, the “villain” in the global economy. “One hopes that it will not require a disorderly unwinding of current excesses to prove convincingly that we have indeed been on a dangerous path,” White wrote in 2006.
In the restrained world of central bankers, it would have been difficult for White to express himself more clearly.
Now White has been proved right — to an almost apocalyptical degree. And yet gloating is the last thing on his mind. He, the chief economist at the central bank for central banks, predicted the disaster, and yet not even his own clientele was willing to believe him. It was probably the biggest failure of the world’s central bankers since the founding of the BIS in 1930. They knew everything and did nothing. Their gigantic machinery of analysis kept spitting out new scenarios of doom, but they might as well have been transmitted directly into space.
For years, the regulators of the global money supply ignored the advice of their top experts, probably because it would require them to do something unheard of, namely embark on a fundamental change in direction.
The prevailing model was banal: no inflation, no problem. But White wanted central bankers to take things a step further by preventing the development of bubbles and taking corrective action. He believed that interest rates ought to be raised in good times, even when there is no risk of inflation. This, he argued, counteracts bubbles and makes it possible to lower interest rates in bad times. He also advised the banks to beef up their reserves during a recovery so that they would be in a position to lend money in a downturn.
If White’s model had been applied, it might have been possible to avoid the collapse of the financial system — or at least soften the fall. But there was simply no support for his ideas in the singular, and highly secretive, world of central bankers.
Prima Donnas of the Banking World
The BIS is a closed organization owned by the 55 central banks. The heads of these central banks travel to the Basel headquarters once every two months, and the General Meeting, the BIS’s supreme executive body, takes place once a year. The central bankers — from Alan Greenspan and his successor Ben Bernanke, to German Bundesbank President Axel Weber and Jean-Claude Trichet, the head of the European Central Bank (ECB) — are fond of the Basel meetings. When they arrive, the BIS’s dark office building at Centralbahnhof 2 in Basel suddenly comes alive. Secretaries inhabit the otherwise deserted offices of the governors, stenographers and chauffeurs stand at the ready and dark limousines wait outside.
The penthouse at the top of the building, with its magnificent view of Basel, is decorated for the annual dinner, the nuclear shelter in the basement is swept out and the wine cellar is restocked with the best wines. At the BIS’s private country club, gardeners prepare the tennis courts as if a Grand Slam tournament were about to be held there. The losers of matches can find comfort in the clubhouse, where the Indonesian guest chef serves up Asian delicacies à la carte.
“Central bankers can sometimes be prima donnas,” says former BIS Secretary General Gunter Baer. He remembers the commotion that erupted at one of the annual events when it became known that a certain vintage of Mouton Rothschild was unavailable.
The corridors of the BIS headquarters buildings are lined with retro white leather chairs and sofas from the 1970s. The round table where the delegates address the problems of the global economy is polished to a high gloss. But the most impressive space of all is the auditorium, with its modern armchairs in white leather and chrome, the thousands of tiny LED lights, the booths in the back where the interpreters sit behind one-way glass, and the console where the financial masters of the world do their work, centrally positioned at the front of the room. The room is evocative of the control room in “Star Trek.” It was supposed to be the hub from which the financial world was to be guided through every possible hazard.
Naturally, the building is largely bugproof, the goal being to prevent anything from leaking to the outside and any unauthorized individuals from penetrating into its interior. There are no public minutes of the meetings. Everything that is discussed there is confidential. The word transparency is unknown at the BIS, where nothing is considered more despicable than an indiscreet central banker.
Central bankers, proud of their independence, are intent on holding themselves above all partisan influences while taking all necessary measures to keep the global economy healthy.
These traits make the BIS one of the world’s most exclusive and influential clubs, a sort of Vatican of high finance. Formally registered as a stock corporation, it is recognized as an international organization and, therefore, is not subject to any jurisdiction other than international law.
It does not need to pay tax, and its members and employees enjoy extensive immunity. No other institution regulates the BIS, despite the fact that it manages about 4 percent of the world’s total currency reserves, or €217 trillion ($304 trillion), as well as 120 tons of gold.
“Our strength is that we have no power,” says BIS Secretary General Peter Dittus. “Our meetings are generally not oriented toward decision-making. Instead, their value consists in the exchange of views.” There are no across-the-board agreements on the order of: “Let’s raise the prime rate by a point.” Opinions take shape in a much more subtle fashion, through something resembling osmosis.
Central bankers are not elected by the people but are appointed by their governments. Nevertheless, they wield power that exceeds that of many political leaders. Their decisions affect entire economies, and a single word from their lips is capable of moving financial markets. They set interest rates, thereby determining the cost of borrowing and the speed of global financial currents.
Their greatest responsibility is to prevent a bank or market crash from jeopardizing the viability of the financial system and, with it, the real economy. It is no accident that central bankers are also in charge of bank supervision in most countries.
But this time they failed miserably. How could this community of central bankers, despite its access to insider information, have so seriously underestimated the dangers? And why on earth did it not intervene?
“Somehow everybody was hoping that it won’t go down as long as you don’t look at the downside,” William White told SPIEGEL. “Similar to the comic figure Wile E. Coyote, who rushes over a cliff, keeps running and only falls when he looks into the depth. Of course, this is nonsense. One falls, because there is an abyss.”
But why did they all refuse to recognize the abyss? Why did the central bankers, of all people — those whose actions are above profit expectations, shareholder pressure and the need to please voters — keep their eyes tightly shut? Did they too succumb to the general herd instinct?
“As long as everything goes well, there is a great reluctance to (make) any kind of change,” says White. “This behavior is deeply rooted in the human mind.”
White calls it the human factor. And that factor had a name: Alan Greenspan.
The Killjoy Vs. the Party Animal
Greenspan was long a member of the BIS board of directors and was effectively White’s superior. As a fervent champion of the free market, he advocated the model of minimal intervention. In his view, the role of central banks was to control inflation and price stability, as well as to clean up after burst bubbles. Because no one can know when bubbles are about to burst, he argued, it would be impossible to intervene at the right moment.
In his eyes, the instrument of sharply raising interest rates to counteract market excesses routinely failed. Leaning “into the wind,” he argued, was pointless. He could even cite historical proof for his thesis. Between the beginning of 1988 and the spring of 1989, the Fed raised the prime rate by three percentage points, the goal being to curtail lending by raising the cost of borrowing. The textbook conclusion was that this would be toxic to the markets, but precisely the opposite occurred: Prices continued to rise.
This supposed paradox repeated itself five years later. Once again, the Fed raised interest rates and, again, the market shot up.
These experiences only strengthened Greenspan’s conviction that raising interest rates was an ineffective tool to counteract bubbles. However he never tried raising interest rates to a significantly greater degree than had previously been done, to see what would happen.
The question of who was right, Greenspan or White, didn’t exactly lead to a power struggle in Basel. The forces were too unevenly distributed for that. On the one side was the admonishing chief economist, with his seemingly antiquated model that advocated the establishment of reserves, and on the other side was the glamorous central banker, under whose aegis the economy was booming — the killjoy vs. the party animal.
The central bankers certainly discussed the competing models. But most of them were behind Greenspan, because his system was what they had studied at their elite universities. They refused to accept White’s objections that the economy is not a science. There was no way of verifying his model, they said.
Besides, who was about to question success? Greenspan was their superstar, the inviolable master, a living legend. “Greenspan always demanded respect,” White recalls, referring to the Maestro’s appearances. Hardly anyone dared to contradict the oracular grand master.
And why should they have contradicted Greenspan? “When you are inside the bubble, everybody feels fine. Nobody wants to believe that it can burst,” says White. “Nobody is asking the right questions.”
He even defends his erstwhile rival. “Greenspan is not the only one to blame. We all played the same game. Japan as well as Europe followed the low interest policy, almost everybody did.”
Meanwhile, White noted with concern what the central bankers were triggering as a result. Their policy of cheap money led to the Asian financial crisis in 1997. When the debt that banks had accumulated went into default, the International Monetary Fund (IMF) and other donors had to inject more than $100 billion (€71 billion) to rescue the world economy.
In describing the failure of the markets as far back as 1998, White wrote that it is naïve to assume that markets behave in a disciplined way.
But Greenspan, the champion of free markets, remained impassive.
…
Complete article at:
http://www.spiegel.de/international/business/0,1518,druck-635051,00.html
Translated from the German by Christopher Sultan
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The UBS Imbroglio
UBS bank
13 Jul 2009
The widely reported UBS-IRS tax row scheduled to go to court later today in Miami for an initial hearing has been delayed until 3 August, and a settlement still looks a ways off, Claudio Guler comments for ISN Security Watch.
By Claudio Guler for ISN Security Watch
Judge Alan S Gold of the United States Florida Southern District Court was to preside over civil proceedings in the tax dispute between the US and Union Bank of Switzerland (UBS) later today in Miami. US authorities are outraged that UBS client advisors roamed the US from 2002 to 2007 in search of wealthy clients and provided them with unlicensed, tax-free wealth management services.
The US hopes to crack Switzerland’s banking secrecy and obtain the client information of up to 52,000 high-net-worth Americans suspected of withholding an estimated $14.8 billion in taxes from the US Internal Revenue Service (IRS). The Swiss are looking to hammer out a deal that preserves banking secrecy and eschews further disrepute. The US claims that tax havens deprive its treasury of roughly $100 billion a year.
UBS admitted wrongdoing on 18 February 2008, after a former US-based employee, Bradley Birkenfeld, informed on the bank in exchange for a reduced penalty in his own tax fraud investigation. UBS entered into a Deferred Prosecution Agreement and pledged to cooperate with US authorities or again face criminal charges. It also released the names of some 300 alleged US tax cheats, paid a $780 million fine and immediately began exiting the US offshore wealth management business.
The IRS, with the backing of US Senator Carl Levin (D-Michigan) who has since introduced the Stop Tax Haven Abuse Act in the US Congress, felt a civil suit was the best and possibly only means to compel UBS to cooperate and demanded UBS reveal its entire roster of American offshore clients. UBS and the Swiss authorities declined, arguing that the request constituted a “fishing expedition” and would expose UBS employees to criminal proceedings in Switzerland.
The Swiss have largely deemed the IRS’ follow-up civil suit an underhanded blow. They accuse the US – a country with questionable corporate taxation practices of its own, a fresh record of financial calamity, and a thirst for funds to plug fiscal deficits – of targeting asymmetric Switzerland unreasonably.
Yet UBS and Switzerland are on the defensive. UBS’ actions assured that should a climate of fiscal thrift arise, the proverbial sleeping dog would be prime for an awakening. Now, a compromise, one that avoids devastating entirely the integrity of Swiss banking secrecy increasingly looks like the best Switzerland can hope for.
Recent glimmers of hope have proven ephemeral. Switzerland renegotiated a double taxation treaty with the US on 19 June: It is still in ministerial channels. The move is part of Switzerland’s broader initiative to renegotiate 12 double taxation treaties before the end of 2009 to bring itself into line with OECD standards on information exchanges and get off the OECD’s grey list. Some hoped, to no avail, that these negotiations would also resolve the tax dispute.
On 23 June, the New York Times published an article headlined “Settlement Anticipated in UBS Case,” which quoted an American official arguing, “To have a complete meltdown in Swiss-US relations and go to the mat with Switzerland three years from now when money is getting back into the system doesn’t make sense.” The US swiftly denied the official’s conjecture. UBS has three years to appeal any adverse ruling by Judge Gold.
In the interim, frustrations are growing and Swiss-US relations are suffering a setback. The conservative Swiss People’s Party (SVP) is pining to anchor banking secrecy in the national constitution. Other, smaller Swiss banks are avoiding or retreating from the lucrative US market altogether, never mind their legal status.
If releasing names in bulk is not an option for Switzerland (assuming it can mount and maintain a proper defense), the US and Switzerland will likely have to reach a diplomatic compromise – it promises to be expensive. Swiss Finance Minister Hans Rudolf Merz hinted on 7 July that USB might consider paying back lost taxes. Switzerland has also been in talks with the US to receive Guantanamo Bay inmates as President Obama shuts down the base. These overtures, however, may be ineffective in the short run.
In response to the UBS scandal, on 23 March, the IRS initiated a temporary, more lenient voluntary disclosure program to encourage US taxpayers with offshore accounts to come clean.
Considering the unusually aggressive nature of the US’ offensive against UBS, it seems unlikely that the US would settle before the IRS concludes its program has paid adequate dividends. Moreover, for the US, this case is about money, but it is also about names, sovereignty limitations, and just maybe, some showcase criminal proceedings down the road.
If a settlement is in the cards, it may still be some time. But the trial injunction looks auspicious.
Claudio Guler is an ISN Security Watch correspondent based in New York. His areas of expertise include international criminal justice and climate change. Guler holds a degree in political science from Oberlin College, Ohio, USA.
Complete article at:
http://www.isn.ethz.ch/isn/Current-Affairs/Security-Watch/Detail/?lng=en&id=103183
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Goldman Sachs executives sold $700m of stock
14 Jul 2009
Executives at Goldman Sachs sold almost $700m (£431m) worth of stock following the collapse of Lehman Brothers last September, according to filings with the Securities and Exchange Commission compiled by the Financial Times. Most of the sales at the Wall Street investment bank occurred during the period in which the firm enjoyed the support of $10bn in government funds from the troubled asset relief programme.
At:
http://www.ft.com/cms/s/0/ea2e3032-700c-11de-b835-00144feabdc0.html
From: CLG News
Bailed-out Goldman Sachs profit soars to 3.44 bln dlrs
13 Jul 2009
Wall Street giant Goldman Sachs on Tuesday posted a forecast-busting 3.44 billion dollars in quarterly profit after paying back a US government bailout, suggesting the financial crisis is easing. Goldman, which reimbursed a 10-billion-dollar federal bailout in full in the second quarter, said its net profit soared 65 percent thanks to robust trading operations.
At:
http://www.google.com/hostednews/afp/article/ALeqM5ijTL9gzIW5XKPH-ltVrRTmfRn5vw
From: CLG News
Goldman Sachs VaR Reaches Record on Risks Led by Equity Trading
15 Jul 2009
Goldman Sachs Group Inc. ratcheted up risk-taking to an all-time high in the second quarter, increasing equity bets 58 percent to amass record trading revenue and quarterly earnings. Value-at-risk, a measure of how much money the firm could lose in a day’s trading, rose to $245 million from $240 million in the first quarter, the New York-based firm said yesterday.
At:
http://www.bloomberg.com/apps/news?pid=20601087&sid=anh9S6AJxcbY
From: CLG News
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‘BLOWOUT PROFITS’ FOR GOLDMAN SACHS? CAPITALISM AIN’T SUPPOSED TO BE LIKE THIS
By Joshua Holland, AlterNet
Goldman’s shareholders and employees are set to make billions, and the rest of us are on the losing end.
Jack Ohman: goldman sachs …
(images.ucomics.com)
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“Harry and Louise” Against Consumer Protection
Source: Reuters, July 6, 2009
The industry backlash against the Obama administration’s financial reform plans — especially the proposed Consumer Financial Protection Agency — is taking shape. “A coalition of financial trade groups is brainstorming on how to sink the agency,” reports Reuters. They claim the agency “will create new costs and red tape while doing little to help consumers.” The American Financial Services Association is coordinating opposition to the agency, which will likely include “using advertising and grass-roots political tactics to turn lawmakers against the idea. Last week, public relations firms hatched an idea to mimic ‘Harry and Louise’ ads that helped sink President Bill Clinton’s health care plan in the early 90s.” While industry opposition to the Consumer Financial Protection Agency was expected, existing U.S. regulators “are gearing up campaigns to preserve their consumer protection roles,” reports Reuters. The Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency are concerned the proposed agency may “step on their toes.” Yet the agencies are staying positive, mindful that they must “avoid looking as though they are allying themselves with the banks they regulate.”
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HOW BAD WILL THE ECONOMY GET? REALLY, REALLY BAD
By Thomas Greco, Jr., AlterNet
Historically, every financial and economic crisis has been used to further centralize power and concentrate wealth. This one is no different.
http://www.alternet.org/workplace/141281/how_bad_will_the_economy_get_really%2C_really_bad/
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Politico’s Allen says $1 trillion deficit “awesome issue for Republicans,” ignoring role they played in creating it
Mike Allen claimed that the budget deficit reaching $1 trillion “is an awesome issue for Republicans.” However, as numerous economists have noted, Bush administration policies are responsible for a large portion of the deficit.
Read More
http://mediamatters.org/items/200907140057?lid=1050668&rid=31556620
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The Death of “Why?”
We exercise our power as citizens by asking questions. Inquiry is less valued today, however, as our society demands quick and dirty answers. We see this play out all around us: in the increased ideological segregation that divides us, the outsize role of Google, a news industry that opines rather than investigate, and the decline in value of civics education where young people are taught to question their democracy. In The Death of “Why?” Andrea Batista Schlesinger, a prominent progressive voice, offers a passionate defense of the role of questioning in fulfilling the promise of democracy. And she profiles those individuals and institutions renewing the practice of inquiry–particularly in America’s youth–at a time when our society demands such activity from us all.
http://www.thedeathofwhy.com/index.php
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Awesome news about the economy:
BorowitzReport.com
July 13, 2009
In a sign that the economic stimulus may be beginning to work, AIG executives who have received multimillion-dollar bonuses in recent days now say they are upbeat about the national economy.
“I was definitely feeling negative about the economy last year, when I lost the company billions of dollars and all,” says Josh Harbock, an AIG executive who just cashed a seven-figure bonus check. “But now I’m starting to feel like things are beginning to turn a corner.”
Mr. Harbock says that his consumer confidence has also taken a positive turn since receiving his bonus check, which totaled $5.4 million.
“I was tightening my belt the last few months, but now I think I’m going to buy a house in the Hamptons,” he says.
But even though Mr. Harbock believes that the stimulus package has succeeded in sparking the economy, he feels that a second stimulus may be needed.
“Let’s face it, my bonus check is not going to last forever,” he says. “And frankly, I’d like to buy a boat.”
Andy Borowitz is a comedian and the author of “Who Moved My Soap? The CEO’s Guide to Surviving in Prison: The Bernie Madoff Edition.”
Follow Andy Borowitz on Twitter: www.twitter.com/BorowitzReport
Complete article at:
http://www.huffingtonpost.com/andy-borowitz/aig-bonus-recipients-upbe_b_230892.html
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Three Thousand Words
|
Pat Bagley
Salt Lake Tribune Jul 15, 2009 |
Mike Lane: … your friendly banker …
(www.cagle.com)
Monte Wolverton, The Wolvertoon: at the sotomayor hearings
www.cagle.com
Read the Tract: “Plea for a New World Economic Order.”, which explains the nature and causes of economic depressions and proposes a plausible alternative solution.