How Money Corrupts the US Congress- "Republic Lost"

Lawrence Lessig talks about how money corrupts the United States Congress and how big money blocks reform in politics. He deals with this comlpex subject in "Republic Lost" and offers some suggestions.



Lawrence Lessig on How We Lost Our Democracy. Read More

Is US Social Security a Ponzi Scheme?

Republican presidential hopeful Texas Governor Rick Perry who was taking part in a Republican primary debate says, Yes, it is..

Rick Perry said: “It is a Ponzi scheme to tell our kids that are 25 or 30 years old today, you’re paying into a program that’s going to be there,” Perry said during a Sept. 7 debate of the Republican presidential candidates, reprising a theme from his 2010 book “Fed Up.”

Experts on both Ponzi schemes and Social Security say Perry is wrong. “Ponzi schemes are, by definition, fraud,” said Mitchell Zuckoff, author of “Ponzi’s Scheme: The True Story of a Financial Legend.”

“Social Security is above board,” he added. “We can argue about whether it’s a good system. But you can’t call it a fraud.”

More of this article on Bloomberg

Fears of Another Financial Meltdown

Financial markets across the globe have taken a battering this week with a 500-point plunge on Wall Street overnight- its worst drop since 2008. The markets took a similar panic sell off when the US investment bank Lehman Brothers filed for the largest bankruptcy in Sept. 2008. Lehman went under when the US housing bubble burst due to the sub-prime mortgage crisis. It was reported to be the onset of the Great recession very much compared to the 1932 depression. A repeat of that scenario is being played out by the mayhem in the financial markets again. Fear and uncertainty are the prevailing market sentiments.

Nobel prize winning US economist Paul Krugman writing on New York Times:

"In case you had any doubts, Thursday’s more than 500-point plunge in the Dow Jones industrial average and the drop in interest rates to near-record lows confirmed it: The economy isn’t recovering, and Washington has been worrying about the wrong things.

It’s not just that the threat of a double-dip recession has become very real. It’s now impossible to deny the obvious, which is that we are not now and have never been on the road to recovery."

The gridlock between the two main political parties in Washington that we saw on the extension of the US debt limit demonstrates the difficulty in achieving any meaningful reform to deal with very complex problems.

Standard and Poors (S&P) one of the three rating agencies has down graded the US from the AAA status to AA+. S&P is not satisfied with the US debt reduction plan.

The fallout of this downgrade will be known next week. This could well lead to the perfect financial storm unless politicians rise up to the challenge.

FT's Outlook for 2011

Thatcher's Think Tank Calls for Total Financial Overhaul

The UK politics has risen up to fever pitch, after Prime Minister Gordon Brown announced Wednesday that he is calling the election on May 06.

While politicians contesting for the parliament are promising hope and change, former conservative prime minister Mrs. Thatcher's think tank, Institue for Economic Affairs(IEA) says a total financial overhaul is required and that the deficit can be slashed without raising tax burden.

Keynesian economists in UK want to return to the principles of John Maynard Keynes, the guru of government intervention. They are urging the UK government to spend its way out of the recession. A commentary on Business Week by Mattew Lyn "Deathbed of Keynesian Economics Will Be in U.K" gives both sides of the economic argument.

"So who is right, and who is wrong? It’s a debate that matters to the rest of the world. After all, if demand management doesn’t work here, it won’t work anywhere.

The U.K. has some experience of mass letter writing from Keynes’s devotees. In 1981, a group of 364 economists wrote an open letter ripping into the policies of then Prime Minister Margaret Thatcher. They turned out to be totally wrong, of course. With hindsight, no one can now dispute that her policies led to a long and durable economic revival."

The End of the Free Market: Who Wins the War Between States and Corporations?

Amazon.com's editorial of this book by Ian Bremmer, President of Eurasia Group reads:

"Understanding the rise of state capitalism and its threat to global free markets

The End of the Free Market details the growing phenomenon of state capitalism, a system in which governments drive local economies through ownership of market-dominant companies and large pools of excess capital, using them for political gain. This trend threatens America's competitive edge and the conduct of free markets everywhere.

An expert on the intersection of economics and politics, Ian Bremmer has followed the rise of state-owned firms in China, Russia, the Arab states of the Persian Gulf, Iran, Venezuela, and elsewhere. He demonstrates the growing challenge that state capitalism will pose for the entire global economy.

Among the questions addressed: Are we on the brink of a new kind of Cold War, one that pits competing economic systems in a battle for dominance? Can free market countries compete with state capitalist powerhouses over relations with countries that have elements of both systems-like India, Brazil, and Mexico? Does state capitalism have staying power?

This guide to the next big global economic trend includes useful insights for investors, business leaders, policymakers, and anyone who wants to understand important emerging changes in international politics and the global economy. "

Another global meltdown!

The unfolding debt drama of Greece could be the script for another Greek tragedy. As written in the Wall Street Journal, it begins, "The Greek Tragedy That Changed Europe"- Plutus, the Greek god of wealth, did not have an easy life. As the myth goes, Plutus wanted to grant riches only to the "the just, the wise, the men of ordered life." Zeus blinded him out of jealousy of mankind (and envy of the good), leaving Plutus to indiscriminately distribute his favors.

Modern-day Greece may be just and wise, but it certainly has not had an ordered life. As a result, the great opportunity and wealth bestowed by European integration has been largely squandered. And lower interest rates over the past decade—brought down to German levels through Greece being allowed, rather generously, into the euro zone—led to little more than further deficits and a dangerous buildup of government debt.

Now Plutus wants his money back. Europe is entering unprepared into a serious economic crisis—and the nascent global recovery could easily collapse due to the unsustainable and Ponzi-like buildup of government debt in weaker countries."

Now Greece is teetering on the brink of bankruptcy. The European Union has formally announced that a bailout for Greece will be available if needed. EU economic leaders Germany and France and the European Central Bank have backed the bailout plan. Portugal, Spain and Italy have their problems of national debt and the Greece bailout could give the template they need to queue at EU headquarters in Brussels. Herman Van Rompuy, the EU's new president, has already called for the creation of an "economic government" that shifts responsibility for economic planning from national authorities to the "EU level".

In a parallel move, European Commission chief Jose Barroso said Brussels has treaty powers allowing it to take the reins of economic management. "This is a time for boldness. I believe that our economic and social situation demands a radical shift from the status quo. And the new Lisbon Treaty allows this," he said. "Economic policy isn't a national, but a European matter. No modern economy is an island. When a member state doesn't make reforms, others suffer because of that."

The headline of an article in the British paper The Telegraph reads, "Failure to save East Europe will lead to worldwide meltdown- The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point."

Greece is one of 16 countries that have so far adopted the 10-year-old euro currency, and these are nervous times for the EU Commission and the financial markets.

The Future of the Global Financial System 2009

A Pro-Free-Market Program for Economic Recovery

Nervous Nations on a Gold Buying Spree

It is a trend that is catching on. First China bought gold from the International Monetary Fund, then it was the turn of India. Now, Sri Lanka has jumped onto the bandwagon.

Countries are buying gold like there is no tomorrow.

Sri Lanka’s central bank said it had been buying gold to diversify its reserves amid volatile currency markets, days after India announced it had purchased 200 tonnes of the precious metal, by doling out hard cash. (Link)


Dennis Gartman, founder of The Gartman Letter, told CNBC Monday that the price of gold will “continue to go up until it stops.”

“It is a gold bubble and to say otherwise it’d be naive,” Gartman said. He called the trade on the precious metal: “mind boggling and unbelievably crowded,” but also said he is currently long — or betting gold will go higher.

According to Gartman, gold’s Friday low of $1,102/oz is the floor. If it breaks that support, he suggests investors should “head to the sidelines.”

When asked for a proper place where to put money as a hedge against inflation if it’s not gold, Gartman tipped Canadian and Australian currencies.

“If you’re going to be any place, be there,” Gartman said.

Australia’s central bank has already raised interest rates twice in the last couple of months and Canada is preparing to hike its key lending rate, he said.

The Great Depression Ahead

Harry Dent- the longtime investor and author predicted a severe downturn in Japan and a great boom in the United States in the 1990s and has made quite a name for himself. He was right on those two counts and since then he has been churning out an endless stream of books filled with predictions.

His current bestseller "The Great Depression Ahead," predicts a new Great Depression right around the corner.

According to the description on Simon and Schuster:

"The first and last economic depression that you will experience in your lifetime is just ahead. The year 2009 will be the beginning of the next long-term winter season and the initial end of prosperity in almost every market, ushering in a downturn like most of us have not experienced before. Are you aware that we have seen long-term peaks in our stock market and economy very close to every 40 years due to generational spending trends: as in 1929, 1968, and next around 2009? Are you aware that oil and commodity prices have peaked nearly every 30 years, as in 1920, 1951, 1980 -- and next likely around late 2009 to mid-2010? The three massive bubbles that have been booming for the last few decades -- stocks, real estate, and commodities --have all reached their peak and are deflating simultaneously."

Among Dent's predictions are the following:

• The economy appears to recover from the subprime crisis and minor recession by mid-2009 -- "the calm before the real storm."

• Stock prices start to crash again between mid- and late 2009 into late 2010, and likely finally bottom around mid-2012 -- between Dow 3,800 and 7,200.

Although it may be possible to identify demographic and economic trends through long term cycle analysis, to forecast the stock market is too far fetched. Nevertheless, the book makes for an iteresting read at a time when the world is teetering on economic meltdown.

China rises to a Global Power with Market Socialism

China Thursday celebrated the 60th anniversary of the Communist Party's rise to power with a spectacular military parade that is billed as the largest ever in Chinese history. It also underlines China's new status as a global power, and throughout the gala celebration "Socialism with Chinese characteristics," a concept developed by the late Deng Xiaoping in 1984, was the phrase heard most often in the official commentary.

“The 60 years of new China have proved that only socialism can save China,” Hu Jintao, the president of China said in his key note address.

“We will unswervingly follow socialism with Chinese characteristics and comprehensively implement the ruling party’s basic theory, basic line and basic programme.”

Economic reforms under a market socialist model began in China in 1979, which has allowed for astonishing economic growth of more than 8 per cent for over two decades. This has induced profound social migration from rural to urban cities and caused major environmental challenges.

Despite the global economic downturn that started in early 2008, the Chinese economy has come out earlier than most of the western economies.

Link.

Looming 'Age of Austerity'

Global leaders may be saddled with the weakest recovery since World War II if they are to pay off the $9 trillion tab they ran up rescuing the world economy from the deepest financial slump in seven decades.

U.S. President Barack Obama and his counterparts from the Group of 20 nations meet in Pittsburgh today warning that the recovery is still too weak to start reversing lifelines to banks and the broader economy. Their next challenge will be to reduce the resulting debt before it sparks higher bond yields and erodes their governments’ creditworthiness.

“There’s no question that the most significant vulnerability as we emerge from recession is the soaring government debt,” said Harvard University Professor Kenneth Rogoff who is a co-author of a new history on financial crises. “It’s very likely that will trigger the next crisis as governments have been stretched so wide.”

Unwinding the borrowing will probably require leaders to raise taxes and cut spending, ushering in what HSBC Holdings Plc Chief Economist Stephen King calls an “age of austerity” that saps growth prospects for years to come even amid recovery.

The Organization for Economic Cooperation and Development predicts the world economy’s potential growth rate will fall to 1.1 percent next year, compared with 2.4 percent in the decade before the crisis. The International Monetary Fund says G-20 debt will reach 82.1 percent of gross domestic product in 2010, almost 20 percentage points more than two years ago and the equivalent of about $37 trillion. (Link Bloomberg)


Carmen Reinhart, Professor of Economics at University of Maryland has provided a synopsis of the paper she did with Professor Kenneth Rogoff titled "Eight hundred years of financial folly" that is referred to in the above article. This paper which predicts the next likely financial crisis is available on VoxEU. The two professors have also written another sobering paper, "Is the 2007 US Sub-Prime Financial Crisis so Different? An International Historical Comparison."

Most of the major governments around the world have cast a vast safety net by propping their economies with millions of taxpayer dollars and in the process are running massive deficits. Now the world waits for the next financial crisis as has happened for the last eight hundred years and more.

Income Inequality and Middle Class by Paul Krugman

Jobless economic recovery in the US

The Federal Reserve Board's Chairman has to go to Congress and report about the nation's economic health every six months.

As usual, the Fed chairman Ben Bernanke presented the same testimony to both the House Financial Service Committee and the Senate Banking Committee on July 18-19th, a ritual required in legislation written by the late lawmakers Hubert Humphrey and Augustus Hawkins, the Humphrey-hawkins Act (27th October 1977).

The Humphrey Hawkins Law intended to implement the Employment Act's (1946) assumption of Federal responsibility for achieving full employment and price stability.

Bernanke who has extensively studied the Great Depression knows the risk of braking too soon. That's what happened in 1937, which fiscal and monetary policies both tightened, in part of misplaced fear of inflation. That set the stage of the second leg of the Great Depression that followed growth from 1933 to 1936 that averaged over 9%, but still left unemployment well in double digits.

With the US unemployment expected to range between 9.8% and 10.1% in 2010, up from the current 9.5% jobless rate, the world's largest economy appears to have turned the corner but only to a path of tepid recovery.

Link.

Looking for alternative models- Compassionate Capitalism

Some economic pundits are now predicting that there are eery similarities between the Great Depression of 1932 and the current economic meltdown that started in the Wall street with the burst of the US housing bubble and quickly spread across the Atlantic to Europe and around the world to Japan and Asia.

For the last three decades, the leading economic power and the only super power in the world, the United States of America has seen a strong dominance of political leadership by the Republican party starting with President Ronald Reagan in 1981, interrupted only by the two terms that Bill Clinton served as president. Successive administrations have championed the growth of commerce unfettered by government regulation. Even Clinton, a political centrist who abandoned many of the progressive legacies of Democratic presidents such as Roosevelt and Lyndon B Johnson, did little to control the excesses of Wall Street.

In the 1920s, as now, political leaders created the conditions that precipitated economic crisis. In both instances, a lack of effective regulatory oversight fostered a climate of reckless speculation on the stock market. And just like the federal government in 1929, the outgoing Bush administration failed to see the emergency coming.

In 1929, the US president Herbert Hoover, who presided over the worst depression in history that sent millions into unemployment believed that the economy will fix itself and no government intervention was necessary.

At his inaugral speech in 1929 Hoover is reported to have said, "I have no fears for the future of our country. It is bright with hope. We shall soon be in sight of the day when, God willing, poverty will be banished from this nation." Seven months later, the stock market crash precipitated an economic crisis unprecedented in US history.

In a speech in November 2008 , George Bush, also a Republican president echoed the same sentiments that were heard in 1929 that the fundamentals of the American economy were strong. To President Bush's credit, he subsequently moved his Treasury department to intervene agressively and rescue the ailing financial institutions.

Although America is used to have depressions, the magnitude of the current meltdown in a globalised world has revived the memory of the horrors of the Great Depression in 1929, causing some experts to worry whether the current economic crisis could lead to suffering on a similar scale.

With the world's money markets in turmoil, international banks failing and stock markets crashing, the anti-globalisation movement is stepping up their opposition to liberal principles that allows the unregulated use of capital to operate markets with minimum interference from national governments.

One book, "The Anti-Globalization Breakfast Club: Manifesto for a Peaceful Revolution" brings together the views of many of the world's leading thinkers in alternative policy studies. Their collective views represent a fascinating insight into a growing movement that is slowly but surely affecting the way the world does business.

Here is part of Amazon's editorial review of this book.

Alternative models for grass roots economic development such as micro-financing are now being widely adopted in Bangladesh, India, Pakistan and elsewhere. New views on measuring development such as GDH (gross domestic happiness) have been adopted by Bhutan rather than GDP, and China's own hybrid approach combining market and planned policy to achieve economic transformation offer new choices for developing countries. All of these are representative of a new wave of thinking that rejects the increasingly discredited policies of the IMF and World Bank.

Fascinating Year 2008

China hosted the Beijing 2008 Olympic Games from August 8-24, 2008. A total of an estimated US$42 billion was spent, making it the most expensive games ever. The Olympic games showed the world that China has finally come of age. The Communist China dazzled it's economic might causing some angst in the West. The western world who always saw that democracy and free enterprise exist hand in hand are forced to accept the emergence of Communist China as an economic and military super power.

According to a USNews report, China is teaching the West something new. Its economy, growing at 9 percent per year, will most likely become the second largest in the world by 2020, behind only the United States.

Americans continue to spend billions more on Chinese goods than the Chinese spent on U.S. products. And that gap has been growing by more than 25 percent per year, as China moves from building toys into more-sophisticated appliances, auto parts, and semiconductors. China's consumer class, meanwhile, is spending like lottery winners on everything from bagels to Bentleys--and will soon outnumber the entire U.S. population. China's explosive growth "could be the dominant event of this century," says Stapleton Roy, former U.S. ambassador to China. "Never before has a country risen as fast as China is doing."

The year 2008 has shown the policy makers and countries of the world that everyone lives in a truly global community. The startling financial crisis that started in US due to the subprime lending has quickly spread to other economies. Lehman Brothers, a global investment bank became the largest bankruptcy filing in the US history totalling over $600 billion in assets.

The American economy is built on credit. Credit is a great tool when used wisely. For instance, credit can be used to start or expand a business, which can create jobs. It can also be used to purchase large ticket items such as houses or cars. Again, more jobs are created and people’s needs are satisfied. But in the last decade, credit went unchecked, and it got out of control.

Mortgage brokers, acting only as middle men, determined who got loans, then passed on the responsibility for those loans on to others in the form of mortgage backed assets (after taking a fee for themselves originating the loan). Exotic and risky mortgages became commonplace and the brokers who approved these loans absolved themselves of responsibility by packaging these bad mortgages with other mortgages and reselling them as “investments.”

The United States treasury has committed US $700 billion as a rescue fund to prop up financial lenders. While the Treasury Secretary Mr Paul Hanson, a respected Wall Street veteran was criticised on the collapse of Lehman Brothers, the Treasury secretary’s supporters point to failures that were averted – including Bear Stearns, Fannie and Freddie, and AIG, the insurance giant.

As markets around the world felt the impact of the financial crisis, the FTSE Asia Pacific index dropped by more than 43 per cent in value – its worst annual loss since the benchmark started in the 1980s.

Students of the markets say the only recent parallel with the current turmoil is Japan in the 1990s, but other than that they have had to study the 1930s, the Great Depression.

Ben Bernanke, chairman of the Fed, spent years as an academic studying the Great Depression and his actions over the past six months have been interpreted as a sign that he is determined the lessons from the past should be understood.

America and the world are looking upon US president-elect Barack Obama, the first black president to create the jobs, spur economic growth and make the world a more peaceful place.

US mortgage crisis affects bond markets

The recapitalization of U.S. bond insurers hit by the subprime crisis may occur soon, but if it fails, insurers can be forced to separate riskier activities from their municipal bonds business, New York state officials said on Thursday.
"The clear preference is a recapitalization of the companies, something that could happen at some point. We would hope shortly," Gov. Eliot Spitzer told reporters after testifying before a U.S. House Financial Services subcommittee about the state of the bond insurance industry.

Lawmakers have said government intervention may be needed to ease financial strains in the bond industry that are unsettling other areas of the economy.

While one major U.S. bond insurer cautioned members of a House subcommittee against stricter government rules or a bailout, another saw its credit rating cut over worries it may lack the reserve cash to cover surging defaults.

An offshoot of the mortgage crisis, the dislocation in the bond insurance industry is spreading beyond Wall Street, threatening the cost of financing everything from student loans to public works projects, officials say.

Credit-rating agency Moody's Investors Service on Thursday downgraded from "AAA" to "A3" securities of Financial Guaranty Insurance Co., saying it does not have enough capital in reserve to cover a potential spike in claims. Bond insurers essentially need a "AAA" rating to continue writing new business.

Hong Kong takes aim at thriving Islamic finance

Hong Kong's market watchdog has cleared the way for the territory's first Islamic fund, as the financial centre tries to compete with Singapore and Malaysia as a hub for Muslim investment.

“To further consolidate Hong Kong’s position as a global financial center, we should actively leverage on this new trend by developing an Islamic financial platform in Hong Kong,” Donald Tsang, the Chief Executive told legislators in his annual policy address this year.

“Apart from stepping up our efforts to promote Hong Kong’s financial services to major Islamic countries and regions, we will focus on developing an Islamic bond market," he said.

Islamic finance fuses principles of sharia or Islamic law and modern banking. Funds are banned from investing in companies associated with tobacco, alcohol or gambling, considered taboo by Muslims.

The system also bans the earning of interest.

A report earlier this year valued Islamic financial assets currently under management at more than 400 billion US dollars worldwide, with the industry growing at double digits annually.

Malaysia has "effectively established itself as the regional, if not global, hub for Islamic finance," said the report by Financial Insights, a company under market research and analysis firm International Data Corp (IDC).

Indonesia, Pakistan, Thailand and Singapore are also promoting Islamic finance.

Greenspan's Memoir critical of Bush

Alan Greenspan who retired in early 2006 after 18 years as chairman of the Federal Reserve has some harsh words for his fellow republicans especially the Bush White House in his memoir 'The Age of Turbulence.' He had served under six presidents as either Fed chairman or adviser. He now runs a private consulting company; his only formal public role is adviser to British Prime Minister Gordon Brown.

From the 1980s stock market crash to the bursting of the tech bubble – he used a deft hand in managing the US economy. But some economists have begun to question his wisdom of cutting short-term interest rates to 1% in mid-2003 and keeping them there for a year, the cause that they attribute helped foster a housing bubble that is now bursting.

In his book, Greenspan defends the policy. "We wanted to shut down the possibility of corrosive deflation," he writes. "We were willing to chance that by cutting rates we might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address....It was a decision done right."

Greenspan, who was the leading Republican economist for the past three decades, levels unusually harsh criticism at President Bush and the Republican Party in his new book, arguing that Bush abandoned the central conservative principle of fiscal restraint.

While condemning Democrats, too, for rampant federal spending, he offers Bill Clinton an exemption. The former president emerges as the political hero of "The Age of Turbulence: Adventures in a New World," Greenspan's 531-page memoir, which is being published Monday. He describes Bill Clinton as "a fellow information hound" with "a consistent, disciplined focus on long-term economic growth."