Government Revival of Lending Uses Taxpayers’ Money to Recreate “The Shadow Banking System”

 

In the world of the Establishment, the greatest transgression was not failure but betrayal.

How could valuations be false?  If they were create by a certain percentage of false appraials, false financing,  had values dropped enough?  Have the fundamentals really changed much over the last 3 months.    

Warren Buffett said many years ago: “You don’t know who’s swimming naked until the tide goes out.”  There are a lot of people in the water wearing something who were trained in the day of program traders, as Bill Gross said, to buy on dips. 

William McChesney Martin was the Fed’s chairman from 1951 through 1970. Martin said his job as central-bank chief was “to take away the punchbowl just as the party gets going” to keep the economy from overheating.   Paul McCulley said that the government’s efforts to aid financial firms in effect are reversing this well-known quip.  “Now they are actually creating ‘punchbowl banks’ where you have the equity coming in from the Treasury,” McCulley said. “They are de facto banks owned by the Treasury and funded by the Fed.  If the U.S. is putting its ‘full faith and credit’ behind the liabilities of the various financial institutions, then I want to be a co-investor with Uncle Sam, which is another way of saying I want to invest with the American taxpayer.  It sounds a little like socialism only because it is.” The government’s attempts to revive lending have led policy makers to use taxpayer money to recreate “the shadow banking system,” he said.

Bill Gross writes, “The past era can best be described as a more than half-century build up in credit extension and levered finance.  Uranium-238 has something like 92 electrons circling its nucleus, sort of like the diagram you see in Figure 1. And, importantly, uranium-238 is metaphorically quite similar to the global financial system of the past half century. At its nucleus was the overnight Fed Funds rate which, when priced low enough, led to an ever-increasing circle of productive financial electrons. The overnight policy rate led to cheap commercial paper borrowing and then leapfrogged outward and across the oceans to become LIBOR. In turn, government notes and bonds as well as markets for corporate obligations were created, leading to their use as collateral (repos), which fostered additional credit and additional growth. Levering has turned into deleveraging; uranium-238 has morphed into uranium-239 and we’ve had a nuclear implosion – destructive fusion not controllable fission.”

Daniel Altman writes, “Just how much money is $7 trillion? Well, it’s enough to buy half of what the United States produces in a year, or two years’ worth of China’s output. It is also, as Edmund Andrews writes, the amount of money the United States is committing to various injections of capital, loan guarantees and mortgage subsidies. Is it enough… or too much?  It’s not really a fair question, since the probability is close to zero that the Treasury and the Federal Reserve have guessed exactly the right figure their ever-changing financial bailout. (Think of it as cooking exactly the right amount of food for a dinner party – an almost impossible task!) “

From the International Herald Tribune: “Germany, with the largest economy in Europe, appears unconvinced so far, or is at least reluctant to follow the rest of the pack into a spending splurge after years devoted to bringing its public finances back into balance.  The fact that the European Central Bank is expected to cut interest rates heavily again Thursday, as is the Bank of England, demonstrates the seriousness of the deterioration in the economic climate. Chancellor Angela Merkel of Germany has said she does not want to get into a ‘race for billions,’ a stance that is worrying some other governments in Europe, according to officials in other capitals. And it is troubling economists, too.”

On November 26, 2008, Pimm Fox and Daniel Kruger at Bloomberg.com quoted Pacific Investment Management Co.’s Paul McCulley, that U.S. policy makers “have finally recognized the enormity of the problem” afflicting the financial system and are sparing no effort to address it. 

William McChesney Martin was the Fed’s chairman from 1951 through 1970. Martin said his job as central-bank chief was “to take away the punchbowl just as the party gets going” to keep the economy from overheating.   McCulley said that the government’s efforts to aid financial firms in effect are reversing this well-known quip.  “Now they are actually creating ‘punchbowl banks’ where you have the equity coming in from the Treasury,” McCulley said. “They are de facto banks owned by the Treasury and funded by the Fed.  If the U.S. is putting its ‘full faith and credit’ behind the liabilities of the various financial institutions, then I want to be a co-investor with Uncle Sam, which is another way of saying I want to invest with the American taxpayer.  It sounds a little like socialism only because it is.”

According to Pimm Fox and Daniel Kruger, “So far, that has included expanding the Fed’s assets to $2.2 trillion, promising to buy $600 billion in mortgage securities related to government-sponsored enterprises and injecting $270 billion of capital into what Paul McCulley called ‘punchbowl banks.’”  The government’s attempts to revive lending have led policy makers to use taxpayer money to recreate “the shadow banking system,” he said. Before the start of the financial crisis in August 2007, that comprised institutions which lacked access to the Fed’s discount window and whose customer accounts were not insured by the Federal Deposit Insurance Corp.  

According to its Website where Bill Gross and Paul McCulley work, Pimco’s Total Return Fund, the world’s largest bond fund with $129.6 billion in assets, had 79 percent of its holdings in mortgage securities. 

Todd Harrison wrote on October 1, 2008, “Pretending socioeconomic situation doesn’t exist won’t make an already fragile socioeconomic situation go away or avoid a downside spiral that sucks the global capital market structure into an abyss.  The U.S government did change the rules of engagement, but it ain’t over yet.  The credit crisis has already infected the economy, starting with the home builders, spreading to the financials, engulfing financials in drag such as General Electric, GM, Ford, and will eventually phase through retail, technology, credit card companies and commodities.  This is a stair-step process through industries until debt is destroyed and a more sustainable economic foundation takes root. It’s akin to credit cancer and once it spreads through our entire financial body, we’ll be in a position to enjoy the globalization-themed “outside-in” recovery which awaits.” 

  

Timothy Geithner believes the U.S. government allowed the creation of a massive shadow banking system run by investment banks, hedge funds and brokerage firms over the last 30 years that rivaled the traditional system in size but lacked every one of the stabilizing pillars that had been erected beneath it after the Great Depression: deposit insurance, access to a lender of last resort, a system for orderly failure, and reasonable constraints on risk and leverage.   -Time

 

Past performance continues to be no guarantee of future results.  The fat lady has not sung yet. 

Spiritual Bouquet

 

A newly released Minneapolis-based Search Institute benchmark survey of 6,853 young people ages 12 to 25 indicates that 55 percent of the respondents are spiritual, not at all religious.  If you ever read match.com, you could have arrived at that conclusion without the cost.  Miriam Cameron, a University of Minnesota’s Center for Spirituality & Healing professor, said the results confirm what she has observed in her classes.  Nearly one-third of these young people said they don’t trust organized religion. 

In the age of abundance, with an abundance of ideas, in the ongoing age of ideology, near the last week of the liturgical year with readings about the Final Judgment, we read about a survey by the Search Institute –an organization that foster in “all sectors of society a healthy development and thriving among children and adolescents,” –of a group of young people who are “spiritual,” who are not at all religious.

“Spirituality is bigger than religion,” said co-director of the institute’s Center for Spiritual Development in Childhood and Adolescence, Peter Benson.  “One of the things we have to focus now is disentangling spiritual development from religious development.”  According to the website, Dr. Benson became Search Institute’s president in 1985.  Prior to 1978, he was chair of the psychology department and chair of the program in human development and social relations at Earlham College in Richmond, Indiana. He hold a Masters in the psychology of religion from Yale University.  In an age of ideology,  I wonder the reason it is, the basis that Yale offers a Master’s program in the psychology of religion, so that years later we can get these survey results.  It sounds like Dr. Benson’s focus is funding his own program, and creating a need along the way, with the help of corporate sponsors.      

Most students pay tuition to listen, read, and study what the experts have to say.  Except those on scholarship.  “We’re not paying enough attention to what our kids are saying,” Gene Roehlkepartain, co-director of the institute’s Center for Spiritual Development in Childhood and Adolescence said. “We need to listen more and talk less.”  Yeah, Gene Roehlkepartain.  Buy you kid another Ipod. You were not supposed to worship your kids, Gene.  Why are kids, ages 12 to 25, being asked this nonsense?  Your kids might not like taking physics or calculus either.  These are the years you are supposed to have passed on a tradition that they had to learn.  My 2 ½ year old niece does not like to eat vegetables.  Or potatoes.  She has to anyway.  Yeah Gene!  How can we disentangle God and His history, from religious development, from spiritual development?  Can we hold class outside? 

Nearly one-third of these young people said they don’t trust organized religion.  Do they provide locks at their church?  What did they lose?  Was it another kid or organized religion that stole their cellphone?  What else did they not trust?  Were any other questions ever asked?

If you ever were looking for an arsonist, you started focusing on 3 factors:  Motive.  Opportunity.  Accelerants.  In this case the Search Institute, Center for Spiritual Development in Childhood and Adolescence who funded the study, hopes to profit from their own survey, based upon their website.  This was not exactly the Gallup Poll, where surveyors had disinterest.  Search Institute mission statement is collaborating with partners (foundations, corporations, schools, communities, faith-based organizations, and other systems) to broaden and deepen commitments, capacity, and effectiveness in fostering healthy development and thriving among children and adolescents.  Search Institute would seem to aim at a secular society, to add to the divison between religions, serving “all sectors of society, including K–12 and higher education, faith communities, youth-serving organizations, social-service organizations, families, businesses, and the public sector.”

According to the news article, “The disconnect between spirituality and religion” was clear in the comments from young people.  Drawing a line between spirituality and religion, University of Minnesota senior David Horn said, spirituality ‘doesn’t make distinctions, and religion is all about making distinctions.’”  It sounds like the issue once again is relativism.  Religion was providing an absolute moral authority.  Distinguishing right from wrong.  And this did not seem fair. 

Or maybe the young, educated in secular schools without any religious training, are ignorant about specific belief, and the history of a belief.  Even by the time they get to college and are thought to be the best and the brightest.  Serving “all sectors of society,” the survey either shows the need in society for more teaching of theology and philosophy, or the need to encourage ignorance.  Most Doctors of Divinity spend time actually studying theology and philosophy before they are allowed to teach and preach.    

Speaking as the daughter of a minister, Miriam Cameron said she doesn’t think religions needs to feel threatened by the growth of spirituality. “Not at all.  Many of my students equate religion with dogma and spirituality with harmony.  Spirituality works well with most religions. The only ones it doesn’t work with are the angry people who say that everyone else’s image of God is wrong. … The spiritual view of God is much more inclusive.”  Dr. Cameron’s viewpoint seems to include an American culture bias and fails to see the dimension of spirituality that is fueling the growth of Islamic fundamentalism.  From my reading, Islamic dogma was not responsible for the growth of Islamic fundamentalism in Iran, as one example.  Dr. Cameron seemingly does not believe there can be anger among those of the New Age “spiritual,” not religious.   Dissecting her comment, she mixes apples with people and oranges, when she begins to discuss angry people in the midst of th discussion of spirituality and religions.

Few religious professionals would equate dogma with theology. 

One of the things I came away with studying history, was that the human condition remains unchanged.  Two hundred years ago there were slaves in this country.  Actually in a lot of places.  A lot of people never really asked the “why” question.  My conclusion is that the basic human condition involves a degree of laziness.  There were slaves because landowners were lazy.  That laziness, to one degree or another, was still around. 

“If that’s the way they really feel,” said the director of youth ministry for the Lutheran Church-Missouri Synod, Terry Dittmer, said, “it means that we have some serious questions that we need to ask ourselves.”  It is the Missouri synod’s fault?   Or maybe Mr. Ditmer is looking for a new response in the growing secular world. 

Imagine there’s no countries, it isn’t hard to do, nothing to kill for or die for, and no religion too. Mr. Lennon, I don’t have to imagine much any more. 

The Center for Spiritual Development concluded its report with a suggestion that the place to start is with conversations, asking young people open-ended questions such as, “What is most important in your life?” and “What does being spiritual mean to you?”  I actually would start with the basics.  Like asking about God before asking what spiritual meant.  Like asking about the Greatest Commandment.  Do you know God?  Do you want to know God?  Do you want to make an academic commitment to study God?  You might have to buy a book and actually spend some time. 

In other news, according to Josephson Institute, a Los Angeles-based ethics institute, which surveyed 29,760 students over the past year at 100 random high schools nationwide, 30 percent of U.S. high school students have stolen from a store and 64 percent have cheated on a test.   That is a lot of stealing.  I wonder if this was by the same nearly one-third of the young people who said they don’t trust organized religion.  

These surveys give me pause to quote a high school biology teacher:  “If ignorance is bliss, tis folly to be wise.”