My Views On Regulations – George Soros
Tuesday, March 24, 2009
Dear Friends and Colleagues:
I wanted to share with you two of my recent essays. In yesterday’s Financial Times, I talk about the impact of the financial crisis on developing nations and the need for the G20 to take forceful and decisive action. I will elaborate on this idea on Wednesday 25 March when I testify before the Senate Foreign Relations Committee. In the second piece, published in this morning’s Wall Street Journal, I call for new financial market regulation, specifically that only those who own the underlying bonds should be permitted to purchase CDS.
“Peripheral care should be the central concern”
By George Soros
Monday, March 23, 2009
The forthcoming Group of 20 meeting is a make-or-break event. Unless it comes up with practical measures to support the less developed countries, which are even more vulnerable than the developed ones, markets are going to suffer another sinking spell just as they did last month when Tim Geithner, Treasury secretary, failed to produce practical measures to recapitalise the US banking system.
This crisis is different from all the others since the end of the second world war. Previously, the authorities got their act together and prevented the financial system from collapsing. This time, after the failure of Lehman Brothers last September, the system broke down and was put on artificial life support. Among other measures, both Europe and the US in effect guaranteed that no other important financial institution would be allowed to fail.
This necessary step had unintended adverse consequences: many other countries, from eastern Europe to Latin America, Africa and south-east Asia, could not offer similar guarantees. As a result, capital fled from the periphery to the centre. The flight was abetted by national financial authorities at the centre who encouraged banks to repatriate their capital. In the periphery countries, currencies fell, interest rates rose and credit default swap rates soared. When history is written, it will be recorded that – in contrast to the Great Depression – protectionism first prevailed in finance rather than trade.
Institutions such as the International Monetary Fund face a novel task: to protect the periphery countries from a storm created in the developed world. Global institutions are used to dealing with governments; now they must deal with the collapse of the private sector. If they fail to do so, the periphery economies will suffer even more than those at the centre, because they are poorer and more dependent on commodities than the developed world. They also face $1,440bn (€1,060bn, £994bn) of bank loans coming due in 2009. These loans cannot be rolled over without international aid.
Gordon Brown, the UK prime minister, recognised the problem and designated the G20 meeting to address it. Yet profound attitudinal differences have surfaced, particularly between the US and Germany. The US has recognised that the collapse of credit in the private sector can be reversed only by using the credit of the state to the full. Germany, traumatised by the memory of hyperinflation in the 1920s, is reluctant to sow the seeds of future inflation by incurring too much debt. Both positions are firmly held. The controversy threatens to disrupt the meeting.
Yet it should be possible to find common ground. Instead of setting a universal target of 2 per cent of gross domestic product for stimulus packages, it is enough to agree that the periphery countries need aid to protect their financial systems. This is in the common interest. If the periphery economies are allowed to collapse, the developed countries will also be hurt.
As things stand, the G20 meeting will produce some concrete results: the resources of the IMF are likely to be doubled, mainly by using the mechanism of the “new arrangements to borrow”, which can be activated without resolving the vexed question of reapportioning voting rights.
This will be sufficient to enable the IMF to help specific countries at risk but it will not provide a systemic solution for the less developed countries. Such a solution is readily available in the form of special drawing rights. SDRs are complex but they boil down to the international creation of money. Countries that can create their own money do not need them but periphery countries do. The rich countries should therefore lend their allocations to the nations in need.
Recipient countries would pay the IMF interest at a very low rate, equivalent to the composite average treasury bill rate of all convertible currencies. They would have free use of their own allocations but would be supervised in how the borrowed allocations were used to ensure they were well spent.
In addition to the one-time increase in the IMF’s resources, there ought to be a big annual issue of SDRs, of say $250bn, as long as the recession lasts. It is too late to use the April 2 G20 meeting to agree this, but if it were raised by President Barack Obama and endorsed by others, this would be sufficient to give heart to the markets and turn the meeting into a resounding success.
The writer is chairman of Soros Fund Management and author of the forthcoming The Crash of 2008 (PublicAffairs 2009)
WALL STREET JOURNAL
One Way to Stop Bear Raids
Credit default swaps need much stricter regulation.
By George Soros
Tuesday, March 24th, 2009
In all the uproar over AIG, the most important lesson has been ignored. AIG failed because it sold large amounts of credit default swaps (CDS) without properly offsetting or covering their positions. What we must take away from this is that CDS are toxic instruments whose use ought to be strictly regulated: Only those who own the underlying bonds ought to be allowed to buy them. Instituting this rule would tame a destructive force and cut the price of the swaps. It would also save the U.S. Treasury a lot of money by reducing the loss on AIG’s outstanding positions without abrogating any contracts.
CDS came into existence as a way of providing insurance on bonds against default. Since they are tradable instruments, they became bear-market warrants for speculating on deteriorating conditions in a company or country. What makes them toxic is that such speculation can be self-validating.
Up until the crash of 2008, the prevailing view — called the efficient market hypothesis — was that the prices of financial instruments accurately reflect all the available information (i.e. the underlying reality). But this is not true. Financial markets don’t deal with the current reality, but with the future — a matter of anticipation, not knowledge. Thus, we must understand financial markets through a new paradigm which recognizes that they always provide a biased view of the future, and that the distortion of prices in financial markets may affect the underlying reality that those prices are supposed to reflect. (I call this feedback mechanism “reflexivity.”)
With the help of this new paradigm, the poisonous nature of CDS can be demonstrated in a three-step argument. The first step is to acknowledge that being long and selling short in the stock market has an asymmetric risk/reward profile. Losing on a long position reduces one’s risk exposure, while losing on a short position increases it. As a result, one can be more patient being long and wrong than being short and wrong. This asymmetry discourages short-selling.
The second step is to recognize that the CDS market offers a convenient way of shorting bonds, but the risk/reward asymmetry works in the opposite way. Going short on bonds by buying a CDS contract carries limited risk but almost unlimited profit potential. By contrast, selling CDS offers limited profits but practically unlimited risks. This asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. The negative effect is reinforced by the fact that CDS are tradable and therefore tend to be priced as warrants, which can be sold at anytime, not as options, which would require an actual default to be cashed in. People buy them not because they expect an eventual default, but because they expect the CDS to appreciate in response to adverse developments.
AIG thought it was selling insurance on bonds, and as such, they considered CDS outrageously overpriced. In fact, it was selling bear-market warrants and it severely underestimated the risk.
The third step is to recognize reflexivity, which means that the mispricing of financial instruments can affect the fundamentals that market prices are supposed to reflect. Nowhere is this phenomenon more pronounced than in the case of financial institutions, whose ability to do business is so dependent on trust. A decline in their share and bond prices can increase their financing costs. That means that bear raids on financial institutions can be self-validating.
Taking these three considerations together, it’s clear that AIG, Bear Stearns, Lehman Brothers and others were destroyed by bear raids in which the shorting of stocks and buying CDS mutually amplified and reinforced each other. The unlimited shorting of stocks was made possible by the abolition of the uptick rule, which would have hindered bear raids by allowing short selling only when prices were rising. The unlimited shorting of bonds was facilitated by the CDS market. The two made a lethal combination. And AIG failed to understand this.
Many argue now that CDS ought to be traded on regulated exchanges. I believe that they are toxic and should only be allowed to be used by those who own the bonds, not by others who want to speculate against countries or companies. Under this rule — which would require international agreement and federal legislation — the buying pressure on CDS would greatly diminish, and all outstanding CDS would drop in price. As a collateral benefit, the U.S. Treasury would save a great deal of money on its exposure to AIG.
Mr. Soros is chairman of Soros Fund Management and author of “The Crash of 2008″ (PublicAffairs, 2009).
Rule by “Hedge Fund Democrats”
Tuesday, March 24, 2009
TIMOTHY CANOVA, email@example.com,
Canova is a professor of international economic law at the Chapman University School of Law in Orange, California. He is the author of numerous articles and book chapters forewarning of financial crisis, in addition to such short essays as “Greenspan’s Grip” and “Legacy of the Clinton Bubble.”
Canova said today: “The latest Treasury plan by Timothy Geithner is befitting an administration run by ‘hedge fund Democrats.’ Such is the nature of bankster capitalism, the zombie banks are propped up by public subsidies and their losses are socialized. Under the plan, the Federal Reserve and Treasury as the ‘public partners’ would provide enormous subsidies to the ‘private partners,’ the unregulated and unregistered hedge funds that have been overleveraged and facing mounting losses of their own. The subsidies would go to hedge funds for taking near worthless assets off the books of the ailing banks.
“There’s been much criticism of the American Insurance Group for paying out $165 million in excessive bonuses to executives in its financial products division, the now notorious AIG unit that sold more credit default swaps than the firm could cover. Lost in the outrage was news that AIG had paid out $40 billion in taxpayer bailout money to some of the world’s largest banks and hedge funds. Most of that went to ten U.S. and foreign banks, with Goldman Sachs leading the list. This is the same Goldman Sachs that has owned the Treasury Department for two decades. Its former CEOs, Robert Rubin and Henry Paulson, became Treasury secretary. Its chief lobbyist, Mark Patterson, recently became chief of staff to Geithner, one of the few vacancies filled in the department, and one that required an immediate waiver to Obama’s supposedly tough ethics rules.
“Within the academy, there’s a recognition that the sanctity of private contract requires striking down sham contracts. Bert Ely, a Cato Institute banking analyst, now argues that credit default swaps should be considered unenforceable contracts since the counterparties lack any insurable interest in the underlying assets. Lucian Bebchuk, a Harvard Law professor and centrist, now proposes Chapter 11 bankruptcy for AIG to stop the bleeding on its $1.2 trillion in credit default swaps. Paul Krugman, Nobel economist, argues for nationalizing the zombie banks to get them to shed their toxic assets and jump-start their lending activities for productive investment in real economic activity.
“The subsidies to Wall Street hedge funds and banks are not without enormous costs. Last week the Federal Reserve announced that it would double the size of its balance sheet to $3 trillion by doubling its purchases of asset-backed securities from its favored clientele, which now includes foreign banks and central banks. Three trillion dollars that could be spent on real needs, like jobs and education, the kinds of large public spending programs that raised the economy out of the Great Depression, created the last great middle class boom for the Greatest Generation, and left future generations with tangible assets instead of worthless paper.”
From: Institute for Public Accuracy
Congressman Paul’s Texas Straight Talk: Bankruptcy is Economic Stimulus
Monday, March 23, 2009
Bankruptcy is Economic Stimulus
“The distraction on Capitol Hill this week has to do with the jackpot bonuses that executives at AIG recently received. The argument is over a relative drop in the bucket. The total amount of bonuses given out was $165 million. The government has put $170 billion into AIG so far. Many now are demanding we get this money back. We ought to be spending our time and effort doing something more worthwhile, like figuring out how the Federal Reserve is handling the trillions of dollars they are creating and pumping into the economy, and how that is affecting the purchasing power of dollars in your pocket…”
Click here to read the full article:
Dallas Fed International Economic Update: Difficult Times and Bold Response
Monday, March 23, 2009
International Economic Update
Global and Monetary Policy Institute
Federal Reserve Bank of Dallas
The global outlook continues to deteriorate. The latest data from industrialized countries point toward further declines in growth. Plummeting trade and capital flight are driving emerging markets
towards recession. Policymakers worldwide are employing a myriad of tools to stimulate demand and revive credit markets. World output is expected to fall in 2009, the first time it has done so since
World War II.
USGAO – Bank Secrecy Act: Federal Agencies Should Take Action to Further Improve Coordination and Information-Sharing Efforts.
GAO-09-227, February 12.
Highlights – http://www.gao.gov/highlights/d09227high.pdf
If Financial Reporters Knew Arithmetic, Then They Should Have Seen This Crisis, End of Story
Richard Cohen is continuing the stream of excuses for the financial media’s failure to warn of the economic crisis. At the center of the cover-up for the media’s incompetence is an effort to imply that the issues involved were very complex.
As Cohen puts it:
“There was not much they [financial reporters] could do, anyway. They do not have subpoena power. They cannot barge into AIG and demand to see the books, and even if they could, they would not have known what they were looking at. The financial instruments that Wall Street firms were both peddling and buying are the functional equivalent of particle physics. To this day, no one knows their true worth.”
This is pathetic. Financial reporters did not need subpoena power, they did not need access to AIG’s books, they did not even need to know what a credit default swap was. They just needed to know arithmetic.
The basic story is as simple as you can possibly have. Nationwide, house prices tracked inflation for 100 years from 1895 to 1995. In the decade from 1996 to 2006, they rose by more than 70 percent after adjusting for inflation, creating more than $8 trillion in housing bubble wealth.
There was no remotely plausible explanation for this increase in house prices on either the supply-side or the demand side. If there is a huge divergence from a 100-year long trend, with no explanation based on fundamentals, how could it be anything over than a bubble?
And, who could have thought that the country could lose $8 trillion in housing wealth ($110,000 for every homeowner) without enormous consequences for the economy?
Financial reporters did not need to do investigation (although exposing the corruption in the financial industry that supported the growth in the bubble– which some reporters did– would have been a great public service), they just needed to know arithmetic and have some commonsense.
For example, relying on David Lereah, the chief economist of the National Association of Realtors, as the main source for expertise on the housing market was not clever. Nor was it clever to rely on industry backed housing centers as a major source for news reports.
Also, running an occasional piece talking to Nouriel Roubini or one of the other bubble warners doesn’t cut it. The bubble was by far the biggest thing out there. It should have been in the news every single day.
The financial reporters blew it, bigtime. They should start by acknowledging this failure and then figure out how to avoid blowing it again in the future.
Yes, economists were far worse — how about a good news story explaining that even though nearly all economists completely failed to see the coming of the biggest economic disaster in their lifetime, none of them will suffer any consequences in their career? None will get fired and almost none of them will even miss a promotion. Reporting on the non-accountability of economists would be a very good story for financial reporters.
From: The ‘Beat the Press’ Weekly Roundup, 3/23/09
Jacob Heilbrunn on Alger Hiss
Posted on Mar 20, 2009
By Jacob Heilbrunn
In 1984 Ronald Reagan returned to his alma mater, Eureka College, where he had been a middling student who devoted himself to extracurricular activities such as the drama club rather than his studies. Now, the former B-movie star and pitchman for General Electric was returning in his latest role—as a popular, if unlikely, American president. He gave the students a dose of conservative political philosophy. He didn’t cite Barry Goldwater or economist Friedrich Hayek as his great heroes. Instead, Reagan focused on someone else, the former communist turned renegade, Whittaker Chambers, who created an uproar in the late 1940s by stating that his old friend, Alger Hiss, a State Department official and member of the Eastern establishment, was, in fact, a Soviet spy. Chambers, Reagan said, was a monumental figure in American history. He had single-handedly created a “counterrevolution of the intellectuals” by breaking with the communist movement. Chambers’ massive autobiography, “Witness,” had cured Reagan of a dangerous delusion that afflicted so many of his coevals. As Reagan put it, “For most of my adult life, the intelligentsia has been entranced and enamored with the idea of state power, the notion that enough centralized authority concentrated in the hands of the right-minded people can reform mankind and usher in a brave new world.”
Alger Hiss and the Battle for History
By Susan Jacoby
Yale University Press, 272 pages
Ever since he pulled microfilm of State Department documents from a hollowed-out pumpkin on his farm, Chambers has been a totemic figure for the modern conservative movement. In July 2001, I myself attended an event in the Old Executive Office Building held by the Bush White House to commemorate the 40th anniversary of Chambers’ death. As journalist Robert Novak spoke, I watched slack-jawed. It was as though time had been suspended for a moment and the McCarthy era had returned, as Novak lauded Richard M. Nixon and raged against the traitorous liberals who had sneered at Chambers for having the courage to expose a communist conspiracy at the heart of American government. Conservatives, Novak said, would be eternally grateful to Nixon for backing Chambers.
Indeed, for Reagan, William F. Buckley Jr. and other traditional conservatives, Chambers was a heroic prophet who alone had the moxie to endure the obloquy of the liberal-left in the service of truth. Obsessed with the notion that Yalta, where Hiss had been a minor figure, was a sell-out to the Soviets, a betrayal of Eastern Europe to Josef Stalin by a befuddled Franklin D. Roosevelt, conservatives flayed Hiss and other New Dealers as nefarious figures who had been working hand in glove with the KGB. And for generations of neoconservatives, Chambers’ searing experience in breaking ranks was one that they themselves tried to recapitulate, positioning themselves as former leftists who had seen the light and spurned the totalitarian American intelligentsia, no matter the cost to their careers, which somehow seemed to prosper, not despite but because of their supposed apostasy.
In “Alger Hiss and the Battle for History,” Susan Jacoby explores the anfractuosities of the Hiss-Chambers affair. Jacoby, a gifted writer who is the author of numerous books, including “The Age of American Unreason,” reports that her 86-year-old mother responded to the news that she was working on public perceptions of Hiss and Chambers by asking, “Who cares about that anymore?” It’s a fair question. The two men formed a sort of ideological fault line in American intellectual life for decades. On one side were the uncouth conservatives who lauded Chambers; on the other, the anxious liberals who sought to defend Hiss, or at least mitigate his espionage sins. Jacoby seeks to show that the dispute over the two men isn’t a musty affair from the past. Instead, it offers a revealing glimpse into American political history, whether it’s the Cold War or the war on terrorism. Her assessments of the positions of the two camps will probably meet with the approbation of neither, but she lucidly and expertly maps out the terrain upon which the Hiss-Chambers engagements have been fought over the decades.
As Jacoby reminds us—and it is a reminder that cannot come too often—the Hiss case offered for a vengeful postwar right a golden opportunity to tar the New Deal itself as a crypto-communist conspiracy. The stakes were never about Hiss himself, whose influence on Roosevelt was nugatory. Rather, he became a symbol for the iniquities of the New Deal, for the quislings such as Dean Acheson who had sold out America to the Reds. This exercise in historical revisionism allowed the right to efface its own history of having embraced isolationism during the 1930s and, sometimes, worse, having adulated Nazism and scorned the British Empire as trying to inveigle the U.S. into combat on the European continent, all of which is beautifully spelled out in Philip Roth’s indispensable “The Plot Against America.” As the Chicago Tribune, formerly the tribune of the isolationists and inveterate foe of FDR, proclaimed, “So we find this traitor hobnobbing through the years with the mightiest of the New Deal mighty. He advises the President. He is the favored protégé of two men who are kingmakers within the burocracy.” (The Tribune favored phonetic transliteration of some words.)
Complete article at:
Fox News Rides Obama Back to the Top
Source: National Public Radio, March 23, 2009
NPR notes that “times could hardly be better at the Fox News Channel, the cable channel liberals love to hate. … Ratings estimates from Nielsen Media Research indicate audience levels are up significantly — to extremely high levels for cable news — making Fox News among the highest rated of all basic cable channels. (MSNBC has had some of its best ratings in its existence since veering to the ideological left in primetime last year, but both it and CNN lag well behind.)” Driving the ratings are Fox’s “trio of pundits, Bill O’Reilly, Sean Hannity and Glenn Beck.” The Los Angeles Times noted, “After CNN scored key victories with its election coverage last year, Fox News has now regained its wide lead. … So much for the predictions that Fox News, reportedly the favorite channel of former Vice President Dick Cheney, wouldn’t fare well in an Obama administration.”
On Fox, Cavuto and Levin falsely claimed Obama administration wants to limit executive pay for all companies
Neil Cavuto and Mark Levin falsely claimed the Obama administration “want[s] to control executive pay” for companies that haven’t received bailouts. Earlier that day, Robert Gibbs said of such a proposal, “[T]here are not plans to do something broad like that.”
March 2009 Southwest Climate Outlook
Tuesday, March 24, 2009
The March 2009 Southwest Climate Outlook is online. This month’s feature article is entitled, “Climate data: the ins and outs and where to find what.”
To view the Southwest Climate Outlook in html format or the printer-friendly PDF file visit:
Highlights from the March 2009 Outlook
Drought– Above-average precipitation in December–February helped improve short-term drought conditions across northwestern Arizona. In New Mexico, drought conditions worsened with 55 percent of the state experiencing some level of drought.
Temperature– The past 30 days have brought warmer-than-average temperatures. Most of Arizona and nearly all of New Mexico have been 2–8 degrees F warmer than average.
Precipitation– In the past 30 days, most of Arizona and New Mexico has had less than 50 percent of average precipitation, with areas receiving less than 25 percent of average.
ENSO– The weak La Niña event that developed in December 2008 appears to be winding down.
Snow– Above-average temperatures and below-average precipitation over the past 30 days has led to a dramatic reduction in snowpack levels across much of Arizona and New Mexico.
Climate Forecasts– Long-lead temperature forecasts show increasing chances that spring and summer temperatures in the Southwest will be similar to the warmest 10 years of the 1971–2000 period. Summer precipitation has higher chances of being similar to the wettest 10 years.
The Bottom Line– A warm and dry February has led to a dramatic reduction in snowpack. Arizona has experienced above-average precipitation since December, helping to improve short-term drought conditions across the northwestern part of the state. In New Mexico, drought conditions are worsening. While snowpack in Arizona and New Mexico are well below average, most snow monitoring stations in Colorado measure near-average or slightly below-average snow water content.
Kristen E. NelsonAssociate Editor
Institute for the Study of Planet Earth
715 N. Park Ave., 2nd Floor
Tucson, AZ 85721
And now for the important news ….
By Argus Hamilton
The FDA faced demands to improve food inspections Monday. Last week one banana shipment hid cocaine and another bunch had a spider whose bite causes male arousal. All these warnings that we’re becoming a banana republic didn’t tell us the good part.
three thousand words
Mar 25, 2009
BILL DAY: starve the beast
Gary Markstein: … and the bad part?