George Soros Sends a Message

For those who believe Soros is an insider – certainly not in the innermost ring, but closer than the rest of us – the following comments from a review of his upcoming book, “The Tragedy of the European Union,” are telling:

George Soros, the billionaire investor, believes the banking sector is a “parasite” holding back the economic recovery and an “incestuous” relationship with regulators means little has been done to resolve the issues behind the 2008 crisis.

“The banking sector is acting as a parasite on the real economy,” Mr Soros said in his new book “The Tragedy of the European Union”.

“The profitability of the finance industry has been excessive. For a while 35pc of all corporate profits in the United Kingdom and the United States came from the financial sector. That’s absurd.”

“Very little has been done to correct the excess leverage in the European banking system. The equity in the banks relative to their balance sheets is wafer thin, and that makes them very vulnerable.

“A real danger to the financial system is the incestuous relationship between national authorities and bank managements. France in particular is famous for its inspecteurs de finance, who end up running its major banks. Germany has its Landesbanken and Spain its caixas, which have unhealthy connections with provincial politicians.”

Each of the above statements could qualify for top billing at LRC or as the main topic in a Mises Daily article.  Robert Wenzel could not have penned a more biting criticism of the current crony-banking environment.

But these statements aren’t the most telling; Soros has written such words before, writing like an Austrian economist in the past, for example:

I believe that the failure [of modern economic theory] is more profound than generally recognized. It goes back to the foundations of economic theory. Economics tried to model itself on Newtonian physics. It sought to establish universally and timelessly valid laws governing reality. But economics is a social science and there is a fundamental difference between the natural and social sciences. Social phenomena have thinking participants who base their decisions on imperfect knowledge. That is what economic theory has tried to ignore.

Social events, by contrast, have thinking participants who have a will of their own.  They are not detached observers but engaged decision makers whose decisions greatly influence the course of events…. [A participant’s] lack of perfect knowledge or fallibility introduces an element of indeterminacy into the course of events that is absent when the events relate to the behavior of inanimate objects. The resulting uncertainty hinders the social sciences in producing laws similar to Newton’s physics.

To be sure, while he sounds promising in describing the situation, Soros doesn’t go full-boat Austrian / free-market for the solution.  For example, taken from the preface of the book (available as a preview from Amazon), he blames collateralized debt obligations and credit default swaps for the boom-bust cycle, without pointing to the root. He doesn’t question central banking; he doesn’t question government regulation.

The most telling statements from the aforementioned book review?

Rand Paul Goes Total Neocon; He Should Check With the CFR

I have written several posts regarding Rand Paul – primarily around the time and decision where he first sent strong signals that his approach to politics would not be a principled one.  After a time, this theme got tired – how many times would I write such a thing about any other unprincipled politician? 

In the last six months, I have exactly one post labeled “Rand Paul,” and even this was only regarding a recent NY Times hack-job on his father and the Mises Institute.  The entire subject – Rand Paul isn’t principled – became a dead-horse to me.  I had made a soft-decision to drop this subject from my writing orbit.

Until today.  Rand Paul has written an op-ed regarding the situation in Ukraine, and Russia’s role in it.  It has opened a crack in the resolve of my soft decision.  But before I get to why, first I will be clear: my comments will not be made through a libertarian lens – in my book, he almost always flunks this test.  In any case, he doesn’t want to be judged by such a standard.  Fair enough. 

Second; why my reference to the CFR?  I think Rand is missing a shift in elite intentions, one that has been in evidence for at least six years.

But first to Rand’s op-ed; I will examine his comments using his own yardstick – he runs away from the label “libertarian” whenever he finds himself in polite society. 

Instead, from his website:

…he has proven to be an outspoken champion for constitutional liberties and fiscal responsibility, and a warrior against government overreach.

Rand Paul has gone total neocon regarding Russia as evidenced in his op-ed regarding Russia and Ukraine in Time.  I will view his comments through the lens of the “constitution,” “government overreach,” and common sense applied to the totality of events surrounding this situation.

Forgive the extensive quotes from his op-ed, but virtually every line is troubling – and could have been said by any neocon with a pulpit:

Vladimir Putin’s invasion of Ukraine is a gross violation of that nation’s sovereignty and an affront to the international community…. It is important that Russia become economically isolated until all its forces are removed from Crimea and Putin pledges to act in accordance with the international standards of behavior that respect the rights of free people everywhere.

Is it possible to have any meaningful dialogue regarding events in Ukraine without recognizing the significant role the US government has played in creating this reality?  Russia may have something to answer for, but the US agitations have been blatant and obvious for all to see.

This isn’t Rand’s first foray into ignorance or willful blindness when it comes to Russia and foreign policy.  The last meaningful post I wrote regarding Rand Paul was when he wrote a response to a Putin op-ed regarding Syria.  My criticism of Rand today is the same as it was six months ago.

Back to the current op-ed:

I have said, and some have taken exception, that too many U.S. leaders still think in Cold War terms and are quick to “tweak” the international community. This is true.

Tweak?  The US government has taken actions that have directly resulted in the death of millions since the end of the Cold War.  Every single action was taken in a region that posed no threat to the security of the territory of the United States.  I count sixty-one actions and interventions since 1991, not one of them (on quick glance) in the western hemisphere.

The Fallacy of Written Constitutions

Sunday’s interview at the Daily Bell was with George Burdeau.  In the interview, he discussed the Magna Carta.  I will begin with his concluding statement on this subject, and then proceed to some of the detail.  (In all cases, emphasis added).

Attributing the following concept to the Magna Carta, Burdeau states:

In other words, the king was not above the law, and it this principle and its various accompanying points that remain relevant today.

This concept was not new to the Magna Carta.  It was a fundamental concept in medieval law dating back to the earliest days following the collapse of Rome.  The king was subservient to the law, just as the other barons and nobles were:

The relationship between monarch and subject in all Germanic communities was expressed by the idea of mutual fealty, not by that of unilateral obedience.

Especially in the time of the early Middle Ages, there was no concept of the king as sovereign.  There was also no concept of the people as sovereign.

The king is below the law….if the monarch failed in these duties – and the decision of this question rested with the conscience of every individual member of the community – then every subject, every section of the people, and even the whole community was free to resist him, to abandon him, and to seek out a new monarch.

Both king and people had a duty to the law; the duty was not to each other.

Back to Burdeau:

It is this last series of chapters [of the document] that proved to be the lasting impact of the Magna Carta because it put the English king under the umbrella of lawfulness that extended to the rest of his subjects.

The concept of king under law was first destroyed by William the Conqueror in England, hence the subsequent document.  The Magna Carta did not establish a new relationship.  At best, it attempted to document an old relationship – that of both king and lord all equal under the law.  Under medieval law, the only thing that differentiated the king from the rest was his duty to enforce the law – not create law, only enforce law.

Fed Transcript January 21, 2008

[This post continues my running series regarding the recently released minutes of Fed transcripts from 2008.  I have also updated the permanent tab on this subject.]

Conference Call of the Federal Open Market Committee on January 21, 2008

This is the second inter-meeting meeting in the month, called apparently on short notice:

BERNANKE. Good afternoon, everybody. Thank you for taking time on your holiday. The purpose of this meeting is to update the Committee on financial developments over the weekend and to consider whether we want to take a policy action today.

The holiday is Martin Luther King, Jr.  Just twelve days earlier, in the previous inter-meeting meeting, it was determined not to take any policy action.

Bernanke turns the floor over to Dudley, to give an update of the markets; as in the previous meeting, after a brief comment on various credit markets (including the known-to-be-manipulated LIBOR), he turns to equity markets:

…the macro outlook and broader financial market conditions have continued to deteriorate quite sharply. The S&P 500 index, for example, fell 5.4 percent last week; it is down almost 10 percent so far this year. Today it fell another 60 points, or 4.5 percent, so that means that the cumulative decline in the S&P 500, if it opens near where the futures markets closed today, will be nearly 15 percent since the start of the year. Global stock markets were also down very sharply today—Monday. Depending on where you look, the range of decline was anywhere from 3 percent to 7½ percent, pretty much across the board.

Losses at Merrill Lynch and Citigroup are noted, indicative of further write-downs in subprime, credit card, and other loans.

A newish wrinkle here in terms of bank markdowns reflects the deterioration of some of the monoline guarantors. Merrill Lynch, for example, announced a multibillion dollar charge for its exposure to ACA, which is the most impaired of the monoline guarantors.

What is a “monoline guarantor”?

An insurance company that provides guarantees to issuers, often in the form of credit wraps, that enhance the credit of the issuer. These insurance companies first began providing wraps for municipal bond issues, but now provide credit enhancement for other types of bonds, such as mortgage backed securities and collateralized debt obligations.

The rapidity of deterioration is noted, for example:

The problem with the monoline guarantors is that raising capital has become much more difficult. Ten days ago, for example, MBIA issued 14 percent surplus notes, which are now trading at about 70 cents on the dollar.

Further downgrades of these monoline guarantors are likely, and will affect money-market funds, municipal bond funds, and other financial institutions – this last risk is interesting, as Dudley explains:

The monoline insurers don’t have to mark to market the consequences of the deterioration in, say, the structured-finance product they insured. All they have to do is pay out, as it is incurred, the interest that the structured-finance product can’t pay out. So their losses are going to be realized only very gradually over a long period of time. There is no sort of foreshortening of all that into the present. In contrast, if a monoline guarantor gets downgraded and so the financial institution no longer has the support of that monoline guarantee, they have to write down instantaneously the value of the assets that were wrapped by that guarantee. So it’s quite a big difference in terms of the market impact as you transfer that risk from the monoline guarantors to the financial institutions that bought that insurance.

The markets are pricing in further rate cuts:

At this point, monetary policy expectations have priced in a lot of easing over the near term. As of Friday’s close, there were about 67 basis points priced in through the January meeting at the end of the month and about 110 basis points priced in through the March meeting (if you look at the April federal funds futures contract).

Bernanke then offered his thoughts.  He was reluctant to call this meeting – after all, less than two weeks earlier the decision was made not to take an inter-meeting policy action:

However, I think there are times when events are just moving too fast for us to wait for the regular meeting. I know it is only a week away, but seven trading days is a long time in financial markets.

It will be seven trading days until the regularly scheduled meeting.  Bernanke treats these seven days as if they encompassed the events described in Genesis 1.

As Bill described, over the holiday, global stock markets have been falling very sharply, both in Asia and in Europe. As he mentioned, even though the U.S. markets are closed, the S&P 500 was off about 60 points today, close to 5 percent. That makes the cumulative decline in the S&P 500 since our last FOMC meeting 16½ percent.

Don’t worry; even though the chairman is obviously focused on stock markets, he isn’t really focused on stock markets.  Really.

Obviously, it is not our job to target stock values or to protect stock investors, but I think that this is a symptom of both sharply mounting concerns about the economy and increasing problems in credit markets.

See, he said so himself.

Obamacare: The Big Punt

Shocking news:

In what is becoming an epic embarrassment, the WSJ reports that the Obama administration announced today that consumers can keep insurance plans that don't comply with the federal health law for another two years, pushing a potential firestorm over cancellations and broken promises that "you can keep your health plan".

The democrats want to survive the next mid-terms.

My guess is the insurance portion of the law will never be fully implemented as written.

Two years ago, when the Supreme Court was ruling on the constitutionality of the law, I wrote the following:

I have long believed that the health care portion of ObamaCare was always secondary.it was the Trojan Horse for something more valuable to government.

“What?” you say. “How can the health care portion of health care legislation be secondary, or be unimportant? That was the entire point.”

I believe the entire point was the tax increase – an increase that is certain to survive, no matter what the court decides regarding the insurance and no matter who is elected in November (except, of course, you know who). However, it isn’t just a tax increase, but a new tax on a new source of income.

The new tax is the Medicare payroll tax applied to investment income.  This tax previously only applied to wages.

This tax, for the first time, applies Medicare taxes to income earned on capital – a 3.9% increase applicable to those earning over $200,000 / $250,000. As with all newly introduced taxes, rest assured the rate will slowly go higher while the threshold will grow lower (either in nominal, but certainly in real terms).

Wanna bet Obama never delays this portion of the law?

Cato Once Again Misses the Obvious

This can’t be by accident….

In a commentary entitled “How Ukraine Can Move Forward,” Dalibor Rohac manages to write nearly 900 words on the roots of the current crisis in Ukraine without once mentioning the contribution of the Unites States government. 

There, now you know the punch-line.  You are free to skip the rest, if you like.

For the rest of you, let’s start with… who is Dalibor Rohac?

Dalibor Rohac is a policy analyst with the Cato Institute’s Center for Global Liberty and Prosperity. His work focuses on international political economy and development. Before joining Cato, he was an economist at the London-based Legatum Institute, where he worked on topics ranging from the Eurozone crisis to economic transitions in the Arab world. Rohac has worked at the Office of the President of the Czech Republic, has been a research associate at the Centre for the New Europe in Brussels and was a Weidenfeld Scholar at Oxford University. He is a Junior Visiting Fellow at the Max Beloff Centre for the Study of Liberty, University of Buckingham, and an Economics Fellow at the Institute of Economic Affairs in London.

The Centre for the New Europe appears to now be defunct; however an interesting tidbit is to be found here:

The Centre for the New Europe (CNE) was a free-market think tank based in Brussels, and focused on EU issues such as economic growth, managing environmental change, health and welfare policy, competition policy, and innovation. Most recently, it was headed by Stephen Pollard, a British journalist and policy expert who previously worked at the Fabian Society and the Social Market Foundation.

The Fabian Society:

The Fabian Society is a British socialist organisation whose purpose is to advance the principles of socialism via gradualist and reformist means.  The society laid many of the foundations of the Labour Party and subsequently affected the policies of states emerging from the decolonisation of the British Empire, most notably India and Singapore.

Originally, the Fabian society was committed to the establishment of a socialist economy, alongside a commitment to British imperialism as a progressive and modernizing force.  Today its viewpoints are more social democratic.

The Social Market Foundation:

The Social Market Foundation (SMF) is a British public policy think-tank based in Westminster, London. It was set up by supporters of David Owen after the Social Democratic Party (SDP) was disbanded in the late 1980s. It aims to promote and produce policies supporting the “social market”. This was the concept of the SMF’s first publication.

Now on to his commentary:

…to really understand where Ukraine is headed, it’s important to understand the roots of the unrest that led to the ousting of President Viktor Yanukovych.

This shouldn’t be so difficult, should it? 

Ukraine and the Shifting Orbits

One of the longer running themes I have written about at this blog is the slow shrinking of the US orbit as empire, and the slow increase in orbit of an alliance including Germany, Russia, China, and ultimately perhaps including Japan (and…Australia). 

For those not so familiar with my thoughts on this topic, perhaps my most thorough post on this topic is here.  This post was written shortly after events in Syria last summer – events that moved Russia forward and the United States backward in terms of importance of orbit.  One of the more significant events during that time was the British Parliament vote against military action in Syria.

Fast forward a few short months to Ukraine.  In November, Ukraine backed away from a closer relationship with Europe in favor of maintaining ties to Russia.  This set off apoplectic seizures in parts of the West – certainly Europe, but especially in the United States.

And of course, a recent chain of events brought us to the military posturing and belligerence of today.  No need to go through the details, I believe.

But what does this say of the evolving era, the shifting of orbits?  A couple of data points:

From EPJ, and as reported in the Telegraph:

A secret briefing document held by an individual walking into Downing Street has been photographed. It suggests the UK will oppose trade sanctions against Russia following the country’s invasion of Ukraine.

Is the photo authentic?  Is the policy position definitive?  I guess we will have to see how the British Parliament reacts in the coming days.

The document also suggests that the UK will not try and restrict Russian trade through the City of London.

The City of London isn’t London, but one square mile in the center of the larger city.  It is a distinct governmental entity.  For an enlightening, yet sanitary backstory of the City:

The City of London has been granted various special privileges since the Norman Conquest, partly due to its power as Britain's financial capital. These are also mentioned by the Statute of William and Mary in 1690.

The Norman Conquest marked the end of medieval decentralization on the island, and the beginning of centralization, including the insidious idea that all land belonged to the king).

Author and journalist Nicholas Shaxson argues that, in return for raising loans and finance for the British government, the City "has extracted privileges and freedoms from rules and laws to which the rest of Britain must submit" that have left the corporation "different from any other local authority". He argues that the assistance provided to the institutions based in its jurisdiction, many of which help their rich clients with offshore tax arrangements, mean that the corporation is "a tax haven in its own right". Writing in The Guardian, George Monbiot argued that the corporation's power "helps to explain why regulation of the banks is scarcely better than it was before the crash, why there are no effective curbs on executive pay and bonuses and why successive governments fail to act against the UK's dependent tax havens" and suggested that its privileges could not withstand proper "public scrutiny".

Money that doesn’t want to be found or known finds a home in this tiny enclave:

Although there is no agreed definition of a tax haven, many authors have accused the City of London of being one.  The Tax Justice Network, goes further and accuses the City of London as being “the biggest tax haven in the world” as well as ‘a state within a state’.

Ian Doyle and Jem Bendell, summarise these claims with the following statement:

…the City “is the most powerful lobby in Britain and possibly the world, and as a result . . . exerts enormous political influence to resist regulation and extract tax exemption. It has fostered criminality by ensuring that the City ranks amongst the least accountable of financial centres on the face of the Earth”.

In other words, when one thinks of global-elite money-power, operating independent of and above government, this is a pretty good description.