Bank fraud, Japanese and Australian economic woes and other sad tales
I have a panoply of links today. There is no one over-riding theme though I do want to address the Japan question in more depth at some point. I have seen some commentary from Kyle Bass and Jeffrey Gundlach on the dire straits Japan finds itself in and the general view there is that Japan is doomed. I am less pessimistic. While I believe Japan has erred tremendously in following the Richard Koo script of allowing government deficits to run up in an attempt to bail out the private sector, I don’t think this is fatal. As I have written repeatedly, the UK had a higher debt to GDP and a crushing loss of productive capacity after World War 2 and they did not hyperinflate. There was serious currency depreciation and an erosion of wealth due to inflation, but this took decades to play out.
The real problem in Japan is that the Japanese have allowed zombie companies to extract wealth from the economy at the expense of better-positioned companies or at the expense of new capital formation. Basically, the Japanese have misallocated capital on a grand scale by propping up their economy artificially with deficit spending. Deficits certainly can help deleverage but they are no panacea because government cannot control how those deficits affect private sector capital allocation. And deficits will always tend to give a helping hand to the least profitable institutions even without active intervention on government’s part in picking winners and losers.
There’s another piece in here about Australia as well. Apparently the government there has finally wised up and figured out that it cannot try to move to a net surplus position since its economy is sliding and the Australian housing bubble could unwind in a nasty way. It’s early days yet. But the fact that the government has backtracked on this pledge seems less like good news and more like a harbinger of worse to come in my view. The commodities boom is coming off the boil and that will mea trouble for overleveraged Canadian and Australian households.
Then there’s the fraud thing. I like Cathy O’Neill’s piece at Naked Capitalism because she takes Nate Silver to task for carrying water for those who want to ‘fix’ the problems via bailouts and gifts from government, the Japanese solution. And we see where this got Japan from the first two paragraphs. My view has always been that bailouts COULD work if you can socialise enough losses and deleverage enough for it to have a meaningful impact. Bailouts are not good policy, but they do work. The problem in the US and other places like Ireland, the UK, and SPain is that the leverage in the household sector is too large. And the bad debt in the banking sector is also too large. That means you can’t socialise losses across one business cycle and get back to healthy growth rates. What happens then is that it takes at least one or two more business cycles to get through this. And that means you have to look at policy space. While a sovereign government like the ones in the US and the UK have the policy space in principal, given fiat currency. In practice, they do not because deficit spending on a large scale cannot go on for 5-10 years to accommodate deleveraging. When the next business downturn hits, the bank fraud problem will hit home because these institutions will need to be propped up again and the public will not allow it.
That’s it for me. I am going to be on a light posting schedule. I will not post tomorrow or at the weekend and I may not post next week. When I return to a normal schedule, I will not be posting daily posts in the same regularity and will be concentrating more on gold level posts. I will keep you updated on next steps on this front when I come back to normal posting.
HAPPY HOLIDAYS.
The Vida Vibe – Mayan Calendar – 21 December 2012
“Started in 31 BC, the Mayan calendar has lasted for more than 5,000 years and will come to an end this year on December 21st. Their calendar is divided into bak’tuns, which contain 144,000 days. This Friday, the current and 13th bak’tun will end and we will cycle into the 14th bak’tun. New Age believers think we will enter a new era filled with peace and tranquility.”
Notable posts
BBC News – Bank of Japan boosts stimulus to help revive growth
“It has extended its asset purchase programme, aimed at keeping borrowing costs down, by 10 trillion yen ($119bn; £73bn).
The central bank also left interest rates unchanged between zero and 0.1%.”
Australia abandons budget plans as tax take tumbles | South China Morning Post
“Australia’s government abandoned a long-held pledge to return its budget to surplus, blaming a painfully high local currency, lower export earnings and lower company profits for blowing a massive hole in tax takings.
Treasurer Wayne Swan said cutting spending further to achieve its pledge of a small surplus in the fiscal year to end June 2013 would threaten economic growth and be ”self-defeating”.”
Counterparties: 2012 — The year of bank fraud | Felix Salmon
“It’s been a relatively decent year for financial stocks: they’ve had their best performance since 2003. It’s truly been a boom year, though, in investigations, lawsuits, fines, and settlements at the world’s biggest and most important banks. There are 28 banks on the FSB’s list of systemically important financial institutions, and as Felix writes, “pretty much the whole financial sector is still trading at less than book value”.”
“It turns out that even with extensive examinations, it’s hard to find smoking guns to pin bad activity on top level managers. Remember, the nitty gritty falls to lower-level (although often handsomely paid) professional who communicate with sufficient frequency that it’s possible to find e-mail footprints. And to the extent any of this ground was covered in meetings, PowerPoint only gives the high points; it’s far from a complete record. Senior managers tend to be recipients rather than generators of information, and much of what they convey is verbal: reactions when people come to their desk or office, comments on more formal presentation. And by the time Libor manipulation became an official concern, they’s be sure to be particularly circumspect in any written remarks.
Based on the FSA notice, Felix Salmon is finally convinced of the widespread nature of bank abuses:”
Cathy O’Neil: Why Nate Silver is Not Just Wrong, but Maliciously Wrong « naked capitalism
“Silver confuses cause and effect. We didn’t have a financial crisis because of a bad model or a few bad models. We had bad models because of a corrupt and criminally fraudulent financial system.
That’s an important distinction, because we could fix a few bad models with a few good mathematicians, but we can’t fix the entire system so easily. There’s no math band-aid that will cure these boo-boos.”
Major banks convicted in Milan fraud case | South China Morning Post
“Deutsche Bank, JP Morgan Chase, UBS and Depfa Bank have been convicted by a judge in Milan for their role in overseeing fraud by their bankers in the sale of derivatives to the city.
Judge Oscar Magi yesterday ordered that about €90 million (HK$926 million) of assets be seized from the banks and that the firms pay sanctions of €1 million each. He also convicted nine bankers of fraud.”
2,000 requests by UBS to fix Japanese yen Libor were documented | Business | The Guardian
“Extent of the rigging shows it wasn’t a mad moment, it went on for years to cover up UBS’s financial problems”
ECB criticizes Monte Paschi bailout terms | Reuters
“The terms of a state bailout scheme for Banca Monte dei Paschi di Siena (BMPS.MI), Italy’s third biggest lender, could pose more challenges to the bank’s performance, the European Central Bank said.”
Other Links
The Capital-Gains Tax: A Tragedy in Two Acts – Bloomberg
“Critics of the capital-gains tax are absolutely correct when they say that a tax on capital hurts our economy by reducing the incentive to save and invest. They say the same thing about the tax on investment interest, and they’re right about that, too.
Unfortunately, this is true of every method of taxing capital, just as any tax on labor reduces everybody’s incentive to get up in the morning and go to work. When you tax something, you discourage whatever it is you’re taxing. That is the tragic nature of taxation.”
Why I Quit Instagram | Gadget Lab | Wired.com
“Why did I quit Instagram? It’s the thoughtlessness, stupid.
Instagram was built not by a team of ten in San Francisco’s South Park – but by tens of millions and then hundreds of millions of people all over the world. With all due respect to the work that Kevin Systrom and Mike Krieger put into building a wonderful app that scaled to meet unprecedented growth, Instagram succeeded because of network effects.
Which makes it remarkable that the company has shown such utter disrespect for that very network of people.”
Highest-Paid California Trooper Is Chief Banking $484,000 – Bloomberg
“Union-negotiated benefits, coupled with overtime that can exceed regular pay and lax enforcement of limits on accumulating unused vacation, allow some troopers to double their annual earnings and retire as young as age 50. The payments they get are unmatched by those elsewhere, according to data compiled by Bloomberg on 1.4 million employees of the 12 states. Some, like Talbott, go on to second careers.”
Is it time for nominal GDP targets? | Jeffrey Frankel | Business | guardian.co.uk
“the commitment to the 2% target need not be abandoned. The practical solution is to phase in a nominal GDP target gradually. Monetary authorities should start by omitting public projections for near-term real growth and inflation, while keeping longer-run projections and the inflation setting where it is. But they should add a longer-run projection for nominal GDP growth. This would be around 4-4.5% for the US, implying a long-run real growth rate of 2-2.5%, the same as now. For Japan, lower targets would be needed – perhaps 3% nominal GDP growth, as the LDP recently proposed – owing largely to the absence of population growth. No one could call such moves inflationary.
Shortly thereafter, projections for nominal GDP growth in the coming three years should be added – higher than 4% for the US, UK, and eurozone (perhaps 5% in the first year, rising to 5.5% after that, but with the long-run projection unchanged at 4-4.5%). This would trigger much public speculation about how the 5.5% breaks down between real growth and inflation. The truth is that central banks have no control over that – monetary policy determines the total of real growth and inflation, but not the relative magnitude of each.”
State Department Faulted in Libya Attack – WSJ.com
“The State Department suffered from “systemic failures” in its response to the terrorist threat in Benghazi, Libya, and had insufficient numbers of security on the ground, according to an independent panel investigating the Sept. 11 attack on the U.S. consulate there.
The report confirms that intelligence agencies and the White House erred in initial accounts that the assault in Libya sprang from public outrage against a U.S.-made anti-Islamic video, and is likely to rekindle Republican criticism about the administration’s handling of the attack, which was a key issue in the weeks leading into the Nov. 6 presidential election.”
Twitter Blog: Your Twitter archive
“Go to Settings and scroll down to the bottom to check for the option to request your Twitter archive. If you do see it, go ahead and click the button. You’ll receive an email with instructions on how to access your archive when it’s ready for you to download. “
HTC Reportedly Cutting New Smartphone Models, Shipment Volumes | TechCrunch
“HTC may be making some of the best smartphones (including the HTC One X series and Windows Phone 8X devices) but that isn’t stopping it from facing some fiscal trouble, according to a new report. Asian supply chain watcher Digitimes (via BGR) says that HTC is cutting back on new models and Q1 shipments of existing devices as it tightens its purse strings.”
Robert Bork, Whose Failed Nomination Made History, Dies | TIME.com
“Bork was accused of being a partisan hatchet man for Nixon when, as the third-ranking official at the Justice Department he fired Watergate special prosecutor Archibald Cox in the Saturday Night Massacre of 1973. Attorney General Elliot Richardson resigned rather than fire Cox. The next in line, William Ruckelshaus, refused to fire Cox and was himself fired.
Bork’s drubbing during the 1987 Senate nomination hearings made him a hero to the right and a rallying cry for younger conservatives.”
Facebook Could Now Advertise To Children, Thanks To Updated Federal Privacy Rules | TechCrunch
“So-called “contextual advertisements” would permit Facebook to monetize children’s activity without violating rules about collecting their private information.”
Dropbox acquires photo storage company and fellow YC alum Snapjoy — Tech News and Analysis
“Dropbox announced Wednesday that it’s acquired photo-storage startup Snapjoy, another Y Combinator alum, to join the company in providing photo options to its cloud storage customers.”
FedEx Results Still Reflect Weak U.S. Economy – MarketBeat – WSJ
“But excluding Sandy impacts, the company’s fiscal second-quarter EPS topped September’s downbeat forecast, though FedEx delivered another downbeat outlook for the third quarter even while backing September’s reduced target for the year.”
Kodak to Sell Patents for $525 Million – WSJ.com
“Under the deal, Kodak is selling around 1,100 patents to patent buyer Intellectual Ventures LLC, which will then license them to the technology companies in the group. A small number of patents are being bought directly by Apple, a person familiar with the matter said.”
Apple ‘pinch-to-zoom’ patent invalidated by USPTO
“An Apple v. Samsung court filing on Wednesday reveals that the U.S. Patent and Trademark Office invalidated Apple’s “pinch-to-zoom” patent, a property key to the trial as its claims were the basis of some of the $1.05 billion in damages won by the Cupertino company.”
Guns Sold Out at Wal-Mart as Ammo Surge on E-Bay – Bloomberg
“With President Barack Obama endorsing sweeping gun restrictions in the wake of the school shootings in Newtown, Connecticut, prices for handgun magazines are surging on EBay (EBAY) and semi-automatic rifles are sold out at many Wal-Mart Stores Inc. (WMT) locations.
Wal-Mart, the world’s largest retailer, said yesterday that it would continue to sell guns, including rifles like the one used at Newtown, where 26 people, most of them children, were killed on Dec. 14. By contrast, Dick’s Sporting Goods Inc. (DKS) suspended sales of similar guns at its more than 500 stores.”
Beyond The Fiscal Cliff: My Budget Crystal Ball For 2013 | Stan Collender’s Capital Gains and Games
“From my column in today’s Roll Call, here are my predictions for what’s ahead next year after we deal (or possibly don’t deal) with the fiscal cliff.”
Conservation Not Technology will be our Saviour – Chris Martenson (Part 2)
“In part 2 of our exclusive interview with Chris Martenson economist and editor of the popular financial website Peak Prosperity Chris talks about:
• How tight oil is being oversold
• An idea for solving the storage and Battery problem
• How price, not technology, has unlocked boom reserves
• Why it’s about conservation now, not new technology
• Why we should be concerned about another financial meltdown
• Future opportunities for investors
• Why exporting natural gas is a terrible idea
• Why Governments should help renewable Energy innovation
• Why net energy returns are the MOST important thing”
U.S. fiscal cliff talks turn sour, Obama threatens veto | Reuters
“Talks to avoid a U.S. fiscal crisis stalled on Wednesday as President Barack Obama accused opponents of holding a personal grudge against him while the top Republican negotiator called the president “irrational.””
Google sells Motorola’s set-top box biz for $2.35 billion to Arris — Online Video News
“Google is offloading Motorola’s set-top-box business to Arris, a fellow TV box maker that will pay a total of $2.35 billion for the Motorola Mobility division. Which brings up the question: Did it really make sense for Google to spend $12.5 billion on Motorola Mobility?”
Dropbox Acquires Snapjoy And Puts Photos Into Its Focus | TechCrunch
“Less than one week after Dropbox aqui-hired Audiogalaxy to beef up its cloud music ambitions, today comes news of another acquisition, this time focused on another form of media, photos: the cloud-storage giant is buying Snapjoy – like Dropbox, a Y Combinator-alum — which lets users aggregate, archive and view all of their digital photos from their cameras, phones and popular apps like Flickr, Instagram and Picasa, and then view them online or via an iOS app.”
Greek Bonds Rally After S&P Upgrade – WSJ.com
“Greek bonds climbed sharply. The country’s 2023 bond—the closest Greece has to a 10-year benchmark following the restructuring of Greece’s publicly traded debt in March—traded at 50.9% of face value, the highest level since being issued. The 2023 yield was down nearly 1.28 percentage points on the day at 11.39%, according to Tradeweb.”
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