Does Goldman Sachs Run the World?

Not completely, but it doesn't mean they aren't trying. It seems that, literally, only flesh eating bacteria can stop these guys.

The Canadian dollar breaks above parity and, lo and behold, last Thursday, a Goldman managing director, Mark Carney is named governor of the Bank of Canada.

Mario Draghi, governor of the Bank of Italy, is also a former Goldman managing director.

Then, of course, there is U.S. Treasury Secretary, Hank Paulson, who was Chairman and Chief Executive Officer of Goldman.

Goldman did have a man at the Bank of England, but their presence there has gone astray for the time being. Goldman man David Walton was on the Bank of England's Monetary Policy Committee from July 2005 until June 2006 when he died at the age of 43 from necrotizing fasciitis, i.e., flesh eating bacteria.

Unimpeded here by flesh eating bacteria, Goldman's presence in United States government financial power circles remains very strong. Prior to Paulson, during Bill Clinton's second administration, Robert Rubin served as Treasury Secretary. Rubin was Vice Chairman and Co-Chief Operating Officer at Goldman from 1987 to 1990. From the end of 1990 to 1992, Rubin served as Co-Chairman and Co-Senior Partner at Goldman. And, Robert Zoellick, new head of the World Bank after Paul Wolfowitz was booted, was a managing director and chairman of the Goldman's International Advisors department.

How do they use these positions? Who knows all the details? But, at a regularly scheduled Fed monetary policy meeting on August 7, the Fed failed to cut interest rates. Records, obtained through a Freedom of Information Act request by Kenneth H. Thomas, a lecturer at the University of Pennsylvania's Wharton School, show that the next day Rubin called Fed chairman Bernanke. Bernanke cut the discount rate 10 days later. Rubin says he called Bernanke to tell him he was doing a good job.

With the sub-prime crisis making markets extremely volatile, it was a difficult period for most investment banking firms, but not for Goldman.

On September 20, Goldman reported much better than expected 3rd quarter results. Analyst Glenn Schorr at UBS AG writes the earnings demonstrate Goldman's "ability to not only navigate choppy waters, but make a ton of money doing so." Better at navigating choppy waters? Do you think your local investment club would show a better performance if your club members managed to get positions running the U.S.Treasury, the central bank of Canada, the central bank of Italy and the World Bank? And if this isn't enough, wouldn't it be great to get Ben Bernanke to take your call in the middle of the sub-prime crisis?

So what are the Goldman boys up to now? Columnist and political insider, Robert Novak is reporting that the Goldman boys are getting ready for Hillary to move into the White House. Despite Treasury Secretary Paulson working for a Republican Administration, Novak reports:

Eyebrows at the Treasury were raised last Tuesday when Secretary Henry M. Paulson Jr. named a major Democratic fundraiser to an important advisory role. The next day, eyebrows were still elevated when Undersecretary Robert K. Steel participated in an event spearheaded by Bill Clinton's two Treasury secretaries.

Oh yeah, Steel also happens to be a retired Goldman Sachs vice chairman who worked at the firm with Rubin and Paulson.

Here's more from Novak, obviously scratching his head at Paulson's moves:

A longtime Republican officeholder now in the Bush administration noted these developments and e-mailed a fellow Republican outside the government: "This leads some to wonder whether this Treasury has become the pre-placed Hillary Clinton team." ...the former Goldman Sachs chief executive does not act or sound much like a conservative Republican to the GOP remnant at the Treasury. "It's not in Hank Paulson's DNA," one official told me. Is he loyal to Bush? "Hank is for Hank," the official replied.

UPDATE 7-2-08: Hillary Clinton is slipping in the polls, will this be a problem for Goldman? What do you think? Here's an update on Goldman Sachs and their latest power move, the infiltration of the Barack Obama campaign.

The infiltration is led, of course, by Robert Rubin, former Co-Chairman of Goldman Sachs, and who is now advising Obama.

Further, Obama has named Jason Furman, his top economic adviser. Furman was an aide in the Clinton White House, and worked there directly under Rubin. He is also a close associate of Rubin through their work together on the Hamilton Project.

Which doesn't mean that current Goldman employees aren't paying attention to Obama. David Brooks of NYT reports that:

When you break it out by individual companies, you find that employees of Goldman Sachs gave more to Obama than workers of any other employer...Over the past few years, people from Goldman Sachs have assumed control over large parts of the federal government. Over the next few they might just take over the whole darn thing.

UPDATE 7-21-08 Goldman's most senior financial-institutions banker, Ken Wilson, is temporarily leaving the firm to advise Treasury Secretary Henry Paulson on how to resolve the country's banking crisis...Also, I just became aware this weekend via an NYT profile of CNBC's Erin Burnett that she worked for Goldman for a year.

UPDATE 9-22-08 Goldman is going to become a bank holding company and former Goldman CEO Paulson is about to become an American oligarch. Details here.

UPDATE 10-2008 Goldman Sachs becomes bank holding company on September 21. On October 6, Treasury Secretary and former Goldman head signs tax rule changes giving huge tax benefits to bank holding companies.

UPDATE 10-2008-Neel Kashkari named Treasury Interim Assistant Secretary for Financial Stability is a former Goldman Sachs man.

UPDATE 12-04-2008-Word has leaked that Gerald Corriagan, the former head of the Federal Reserve Bank of New York, is being tapped by Goldman Sachs as chairman of its newly created bank holding company.

UPDATE 1-18-2009 President-elect Barack Obama announces that his choice the head the CFTC is former Goldman exec. Gary Gensler.

---
Robert Wenzel is Editor & Publisher of EconomicPolicyJournal.com and author of The Fed Flunks: My Speech at the New York Federal Reserve Bank.

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Gordon Gekko Is Back

Rupert Murdoch's 20th Century Fox plans to prodouce a sequel to the movie "Wall Street".

According to the New York Times, "Edward R. Pressman, who produced the original movie...reached an agreement with Fox this week to develop a sequel in which Mr. Douglas will resume his machinations on a global scale in the hedge-fund era. Mr. Pressman declined to say more about the plot. But the title, he said, will be Money Never Sleeps, after one of Gekko’s guiding principles in the first film, written by Stanley Weiser and Mr. Stone."

G100: The Ultimate Insider Group

You just never know who you are going to run into at the Milken Institute Global Conference.
We had a good conversation with Daniel Casse there. Casse is president of G100.

Talk about under the radar, prior to meeting Casse we had never heard of the G100, and except for its web site, a google search of G100 brings up zero information on the group.

But, the group is probably the most powerful, most exclusive, regularly-meeting group in the world. The Council on Foreign Relations, the Trilateral Commission? Forget about it. These groups are too big and unwieldy. The G100 is where you want to be, and if you aren't one of a very select few, this post is about as much as you will ever know about them.

According to Casse and its web site, the G100 is a private group of chairmen and chief executive officers of the world’s most significant companies. Capped at 100, membership is by invitation only. Among all the CEO organizations, the G100 is unique. Established in 2000, the group meets twice a year at the Pratt Mansion in New York City for a Thursday night dinner, followed by a half day of "robust, off-the-record discussion" on Friday. Jack Welch regularly chairs the sessions, which he has called “the best meeting out there for CEOs.”

Casse told us, the press is not allowed at meetings. The assistants and aides of the CEO's are not allowed. It is just the CEO's. No one records anything. "The CEO's can let their hair down," he told us.

Casse said the meetings are fascinating and gave us an example of how Chuck Prince, the Chairman and Chief Executive Officer of Citi (formerly CitiGroup) came in and gave a detailed explanation of how he dealt with Citi's regulatory crisis in Japan when in September 2004, Japan's Financial Services Agency (FSA) , the banking and financial services regulatory body of Japan, announced that it had revoked the licenses of the four Citigroup offices in Japan.

Aside from the CEO's, only "top representatives" of certain advisory firms are allowed to come in and make presentations. They include Accenture, Deloitte, Evercore Partners, McKinsey & Co., Merrill Lynch, PricewaterhouseCoopers, Six Sigma Academy ,Skadden, Arps, Slate, Meagher & Flom, Spencer Stuart, The Parthenon Group and Vedder Price.

'Father' of Securitized Mortgage Market: First Time in History Median Home Price is Likely to Decline

Lewis Ranieri, generally regarded as the "father" of the securitized mortgage market, told an audience at the Milken Institute Global Conference that, in 2007, for the first time in history the median home price in the United States is likely to decline.

He also added that there will be many technical problems in working out problem mortgages, He said the vast majority of problem loans are securitized and that, in the past, problem loans were in individual portfolios. This time around, because of securitization, there are many, many holders of the securities with an interest in a mortgage. This will mean there will be many more parties that will have to agree to everything. In addition, he added, there are more lawyers and accountants in the picture to complicate matters.

He used as an example from the past: when he restructured mortgages with homeowners, he would never send out a 1099 tax form. In current situations, he said, lawyers and accountants want him to send out 1099 tax forms to homeowners who have restructured their mortgages. He asked rhetorically, "You have just restructured a mortgage for people who haven't been able to make their former payments and now you want to send them a tax bill for restructuring?"

He further stated there will be a "political reaction" and he feared that bad legislation could create problems for the entire mortgage sector that are now just limited to the sub-prime area. He fears, for example, that any legislation creating a moratorium on foreclosures would have a chilling effect on the issuance of home mortgages throughout the industry.

Carlyle Group Insider Sees Giuliani as Potential "Protector in Chief"

The ultimate insider, David Rubenstein, Managing Director and co-Founder of The Carlyle Group, told the Milken Institute Global Conference that a terrorist attack before the elections would have a dramatic impact on the elections and that it would result in Rudy Giuliani winning the election.

He told the conference that following another attack Giuliani would be viewed by voters as the "Protector in Chief".

At the conference, both Forbes Magazine president Steve Forbes and billionaire oil trader, Boone Pickens, strongly endorsed Giuliani.

World Bank to Wolfowitz Lawyer: Save It

A special committee looking into whether World Bank President Paul Wolfowitz breached rules by approving a promotion for his girlfriend has declined to meet with his lawyer.

"I have heard indirectly they will not meet with me..." the lawyer, Robert Bennett, told Reuters.

42 Former World Bankers Call for Wolfowitz to Resign

Pressure on Paul Wolfowitz to resign continues to escalate. On Monday 42 of the World Bank's senior former executives called on him to step down in an open letter published in the FT. “There is only one way for Mr Wolfowitz to further the mission of the bank: he must resign,” the letter said.

Below is the entire text of the letter:


To the Editor of the Financial Times,

For the good of the World Bank, Paul Wolfowitz should resign

Sir,

We are a group of ex-World Bank Group staff who occupied senior positions in the institution (MDs, Senior VPs, VPs, Directors), and write in our personal capacities. Some of us have worked under Paul Wolfowitz, some of us have not, but all of us are watching with great concern the ongoing events at the Bank because of their impact on development and the interests of the poor. At a time when fighting poverty remains crucial in building a more hopeful, more balanced, and more secure world, the World Bank must remain credible if it is to speak with the moral authority necessary to move the poverty agenda forward.

For the Bank to succeed, it must be effective, especially on matters of good governance which Mr. Wolfowitz rightly emphasized as crucial to poverty reduction. What staff objected to was not the principle -- which they applauded. Rather it was that the policy was implemented with no consultation, and little transparency or apparent consistency. Now, as a result of a process of broad consultation that he was forced to undertake by the Board, Mr. Wolfowitz has been able to forge a consensus on how to raise the bar on corruption in a practical way. It is this that can serve as a lasting legacy at the Bank.

Mr. Wolfowitz says he believes in the mission of the Bank and wishes to continue. We believe that he can no longer be an effective leader. He has lost the trust and respect of Bank staff at all levels, provoked a rift among senior managers, developed tense relations with the Board, damaged his own credibility on good governance –his flagship issue, and alienated some key shareholders at a time when their support is essential for a successful replenishment of the resources needed to help the poorest countries, especially in Africa.

We have taken note of the fact that the ministers who met last weekend in Washington took the unusual step of expressing publicly their great concern about the situation in the Bank. And staff and some of our senior colleagues within the Bank have advised Mr. Wolfowitz that the best course of action for the future of the Bank would be for him to step down. This painful, unprecedented action was not a rash conclusion. We support it and salute the courage of our colleagues. Like them, we believe this is a regrettable but essential step to prevent the Bank’s effectiveness as a development institution, and its credibility as the international community’s trustee of resources for fighting poverty, from being fatally compromised. There is only one way for Mr. Wolfowitz to further the mission of the Bank: he should resign.

Gautam Kaji, former Managing Director

Peter Woicke, former Managing Director and EVP

Shengman Zhang, former Managing Director

Roberto Danino, former senior VP and general counsel

Gary Perlin, former Senior VP and CFO

Jean-Louis Sarbib, former senior VP

Shahid Javed Burki, former VP

Cesare Calari, former VP

David de Ferranti, former VP

Ian Goldin, former VP

Ian Johnson, former VP

Geoffrey Lamb, former VP

Johannes Linn, former VP

Callisto Madavo, former VP

Gobind Nankani, former VP

Christiaan Poortman, former VP

Jean-François Rischard, former VP

Jo Ritzen, former VP

Richard Stern, former VP

John Wilton, former VP

Michael Barth, former Director

Amar Bhattacharya, former Senior Adviser

Gerard Caprio, former Director

Michael Carter, former Director

Dennis de Tray, former Director

Paula Donovan, former Director

Marisa Fernandez-Palacios, former Director

Charles Griffin, former Director

Jean-Philippe Halphen, former Director

Ann Hamilton, former Director

Paul Isenman, former Director

Homi Kharas, former Regional chief economist

Harinder Kohli, former Director

Olivier Lafourcade, former Director

Philippe Liétard, former Director

Serge Michailof, former Direector

Bernard Pasquier, former Director

Manuel Penalver Quesada, former Director

Enrique Rueda-Sabater, former Director

Alexander Shakow, former Director

Karl Voltaire, former Director

Blumenthal Unloads on Wolfowitz

Sidney Blumenthal has the latest episode in the Riza-Wolfowitz Affair, which results in Blumenthal calling for even more investigations. This time with national security clearance questions:

...Wolfowitz's World Bank scandal over his girlfriend reveals many of the same qualities that created the wreckage he left in his wake in Iraq: grandiosity, cronyism, self-dealing and lying -- followed by an energetic campaign to deflect accountability. As with the war, he has retreated behind his fervent profession of good intentions to excuse himself. The ginning up of the conservative propaganda mill that once disseminated Wolfowitz's disinformation on WMD to defend him as the innocent victim of a political smear only underlines his tried-and-true methods of operation. The hollowness of his defense echoes in the thunderous absurdity of Monday's Wall Street Journal editorial: "Paul Wolfowitz, meet the Duke lacrosse team." ...

The World Bank continued to pay ...[Riza's] salary, which was raised by $60,000 to $193,590 annually, more than the $183,500 paid to Secretary of State Condoleezza Rice, and all of it tax-free. Moreover, Wolfowitz got the State Department to agree that the ratings of her performance would automatically be "outstanding." ..

[At her new job at the ]State Department officials familiar with the details of this matter confirmed to me that Shaha Ali Riza was detailed to the State Department and had unescorted access while working for Elizabeth Cheney. Access to the building requires a national security clearance or permanent escort by a person with such a clearance. But the State Department has no record of having issued a national security clearance to Riza...

...officials stress that the department would never issue a clearance to a non-U.S. citizen as part of a contractual requisition. Issuing a national security clearance to a foreign national under instructions from a Pentagon official would constitute a violation of the executive orders governing clearances, they say.

Given these circumstances, the inspector general of the Defense Department should be ordered to investigate how Shaha Ali Riza was issued a Pentagon security clearance. And the inspector general of the State Department should investigate who ordered Riza's building pass and whether there was a Pentagon credentials transmittal letter.

$5 Billion in Funny Money Movements Before 9-11

William Bergman worked at the Federal Reserve Bank of Chicago as an analyst. In late 2003, he was asked to consider an assignment in the money laundering area. Bergman accepted the assignment, underwent a background check, received credentials affording him access to confidential banking information, and began working in the area. He was told that he was “part of the fight against terrorism” and that he “had been asking good questions.”

Bergman noticed supicious increases in the August 2001 currency componet of M1 money supply numbers. He tried to determine what caused the currency escalation. In his own words:

The currency component of M1 (Federal Reserve Notes circulating outside of banks) rose especially rapidly in July and August 2001. In fact, up to and including August 2001, that month (August 2001) was one of the three fastest growing months for the currency component of M1 since 1947, on a seasonally adjusted basis, even on the heels of significantly above-average growth in July 2001. Much of the July-August surge (over $5 billion above-average) seems to have been in the $100 denomination. Among other explanations, persons aware of any imminent terrorist attacks and concerned about possible asset seizures such as those that arose after the 1979 Iranian hostage crisis and the 1998 embassy bombings could have been trying to liquidate their bank accounts in July and August 2001. The money trail could provide important clues about people aware of, if not responsible for, the attacks. I looked at some internal data bearing on this issue that was available to anyone within the Federal Reserve’s internal computer network; after going back to look at this important data again a week or two later, it was no longer freely available, but password protected.

Bergman had worked at the Chicago Fed since July 1990, Approximately one month after his money laundering work was terminated for what was described at the time as an egregious breach of protocol attributed to his contacting the staff of the Board of Governors, Bergman’s department was absorbed into another department, and his 14-year employment with the Federal Reserve ended. Bergman was told that the elimination of his position at the Federal Reserve had nothing to do with him personally – that it was an organizational matter. He was offered and accepted a severance package, and left the Chicago Federal Reserve Bank in March 2004.

The Mucraker Report has the full story.

The Truth About Alan Greenspan and the Real Estate

Alan Greenspan continues to warn about problems in the real estate markets and other parts of the economy. But with every warning, Greenspan paints a picture that suggests the problems have nothing to do with his irresponsible money management during his reign at the Fed. In truth, if one man can be blamed for today's problems in the real estate markets, it is Greenspan. He flooded the home mortgage market with trillions of dollars during his watch.

Here are the cold hard facts:

When Greenspan took over at the Fed in 1987, total outstanding US home
mortgages stood at only $1.82 trillion.

By 1999, total outstanding mortgages in the US stood at $4.45 trillion.

By 2004, US home mortgages stood at $7.56 trillion.

In 2005, Greenspan's final full year as Fed chairman, home mortgage debt
outstanding amounted to $9.1 trillion.

Here is some of the jawboning Greenspan conducted while he was Fed
Chairman.

In 2003, he called the refinancing of housing, "support" for the economy:

The outsized dollar volume of these refinancings--by our estimates, $1-3/4 trillion net of cash-outs--was an all-time record and represented almost
one-third of the value of all regular home mortgages outstanding at the
beginning of last year...An even greater support to the economy than cash-
outs last year was the extraction of home equity associated with a record
6.4 million existing home sales, including condos, at record prices.

And he basically advised not to worry about a housing bubble:

...any bubbles that might emerge would tend to be local, not national, in scope... In evaluating the possible prevalence of housing price bubbles, it is
important to keep in mind that home prices tend to consistently rise relative
to the general price level in this country...A sharp decline, the consequences of a bursting bubble, however, seems most unlikely...Here is Greenspan spinning things now, as though he had nothing to do with the problem.

On March 15 of this year, he said:

You can't take 10 percent out of mortgage originations without some
impact...

In October 2006, he blamed the entire thing on the Berlin Wall coming down:

I dont think that the boom came from a 1 per cent Fed funds rate or from
the Fed’s easing. It came from the collapse of the Berlin Wall.

The Berlin Wall??

In 2003, while discussing refinancings, he came closer to the truth:

Owing largely to the lowest mortgage interest rates in more than three
decades and rising home prices, close to 10 million regular home mortgages were refinanced.

There are massive distortions in the economy right now, caused by
Greenspan's low interest rate monetary policies when he ruled the Fed.
Many different sectors could implode: further problems in real estate, the
carry trade, the hedge fund industry, etc. Greenspan knows this. He sees
that the economic tsunami wave is about to hit. His warnings should not be
taken lightly. He created the mess ahead. He knows it and understands how
bad things can get.

On Phil Gramm

Of late, we have been reading a couple books where the name Phil Gramm keeps appearing. The former United States Senator from Texas once sought the presidential nomination of the Republican Party.

The Irrepressible Rothbard, edited by Llewellyn Rockwell, contains a 1995 commentary (pgs 137-8) by Murray Rothbard where he analyzes Gramm as a presidential candidate:

Gramm is first of all the brightest of the candidates: unlike Gingrich, he is an intelligent academic, having taught economics at the Distinguished Friedmanite economics department of Texas A&M.

Unlike other candidates, when Gramm sells out principle, which he will do often, he knows he is selling out and why, which I guess is a virtue...Since he bends to the political winds...he is the likeliest of all the major candidates to be an opportunist [in favor of free markets and small government, when he
can].

More recently, and from real world dealings, former Citigroup chairman, Sandy Weill, in his autobiography, The Real Deal, writes of his experience with Gramm, whiich seems to backup Rothbard's take:

...Phil Gramm..appeared uninterested in serious reform and never missed a chance to remind me that there were no important banks, brokers or insurance companies domiciled in his state of Texas. In other words, financial services companies were far from his natural constituency...Just as we were about to cross the goal line, one last obstacle arose. Senator Gramm, ever the savvy horse trader, took exception to a provision of the bill which forced banks to invest in poor areas, a long-running political football in Washington. One afternoon he called and threatened, "Call your friend Clinton and get him to change the provision or else I'll fire my rockets and blow your bill apart."...Gramm called again the next day to
repeat his demand, and this time the president and Texas senator found some way to compromise.

On November 12, President Clinton signed into law the Gramm-Leach-Bliley Act, and in a stroke, modernized the structure of financial services.

On Tuesday of this week in an op-ed piece for WSJ, Gramm endorsed John McCain for president. Wrote Gramm, "He might not be the right president for all times, but he is the right president for these times."

Edmund "Three Card Monte" Phelps

On the streets of New York City, you can occasionally run into card sharks who make it appear damn easy to win money off them by picking the red card out of three cards-where the other two cards are black cards.

Our advice, if you happen to pass by these scammers, is to just keep walking. You won't win. They have shills in the crowd to rope you in and the card dealer is a card shark.

In the world of economics, there are also sharks. They have mad schemes to "improve" the economy, and they occasionally have shills to rope you in and entice you to pay attention to the madness. The Royal Swedish Academy of Sciences has got to be one of the better washed, most refined shill operations the world has ever seen. They don't play at street level. They are far above it all. They award Nobel Prizes. In the field of economics this year, they awarded the Prize in economics to Edmund C. Phelps. And, yes, it did rope us in to check Phelps out.

Since he was named a Nobel recipient, we have published below two other blog posts about Phelps. But what really got us to pay attention to Professor Phelps, with additional caution, are his comments today in the Wall Street Journal. They would make any Three Card Monte dealer jealous with envy.

In fact, to keep our Three Card Monte analogy going, Phelps is only dealing with two cards--two black ones, but he tries to convince you that you can pick the red card from his lot of two black cards. Smooth man, smooth.

But let's take a closer look at his double dealing.

Phelps wants to raise taxes on low income earners. This is how he puts it inthe WSJ interview:

Over the last couple decades, the federal government has virtually abolished taxation of a wide swath of people with smallish incomes. This was a mistake, because we need all the tax revenue we can get. It's inefficient to have low marginal tax rates on low incomes, because people with upper middle incomes and high incomes get the same breaks, but they don't get any incentive to work harder. What you want to do is give tax breaks that give people an incentive to earn income that would not otherwise be earned. So in my view, President Bush should have restored the taxes on the low-income people rather than lowering the taxes on the
high-income people.

And what does Phelps want to do with this new tax revenue? He wants to give it to low income earners. From WSJ again:

I think economic justice is all about pay rates at the low end relative to those in the middle. So the government needs a lot of tax revenue to meet the problem of low-wage workers. Too many people in America suffer joblessness, and when they are employed they can't earn a decent living. I've been advocating a solution: subsidies that would be paid to companies for the ongoing employment of low-wage workers.

Are you seeing the double dealing here, tax low-incomes and use the money to subsidize low incomes? Of course, it runs through the government bureaucracy where who knows how much is siphoned off. Smooth, very smooth--that is if you love big government shell games and double dealings.

Phelps also thinks there is too much wealth in the economy, and he wants you to give it to the government:

I have the eccentric view that there's too much wealth sloshing around the American economy. This wealth has bad incentive effects on the supply of labor, employee performance and maybe even innovation. We have become wealthy thanks in part to unsustainably low tax rates. From that point of view, it would be a good thing for the federal government to raise taxes and run big surpluses until we have retired the public debt. In the short run the higher tax rates might be unpleasant.

Notice the card he isn't showing here. What about cutting the size of government, instead of raising taxes, to reduce the deficit?

And just exactly who has stopped working today because taxes are too low?

Don't get in a card game with this character.

The Flaw in the Economic Freedom Report

The Fraser Institute is out with their latest "Economic Freedom" rankings. In the report, Economic Freedom of the World: 2006 Annual Report, countries are ranked by their so-called economic freedom.

The problem with this report is that no country deserves a passing grade,yet many are given impressive scores.

The report completely ignores the destructive nature of money manipulation (Particularly money supply inflation) , especially the long-term destructive consequences of such.

Why are we up in arms about this?

The United States, for example, receives an overall rating of 8.2 (out of 10)and generally gets a rank of 9 plus for money soundness. This categorization occurs despite the fact that the money supply (M2NSA) in the United States has grown over the last 10 years from $3,754 billion [August 1996] to $6,868 billion [August 2006].

This money supply growth suggests tremendous mis-allocations in the economy--that
wll ultimately lead to a severe economic downturn.

Thus it makes no sense to give a passing grade, i.e. above 6, when a country has a money supply controlled and manipulated by the state. When the ultimate business cycle collapse occurs, won't socialist's of every stripe point to the high freedom ranking as an indication that freedom is a failure?

In fact, the failure will not be because of freedom, but because there simply is no money freedom and free banking in the world.

Who Owns All the Mortgage-Backed Securities?

As signs of real estate collapse become all the more obvious, the big question has to be "Who owns all the mortgage-backed securities?".

Total market value of all outstanding U.S. MBS at the end of the first quarter of 2006 was approximately $ 6.1 trillion, according to The Bond Market Association.

Think about that, a $6.1 trillion debt sector where the underlying collateral is declining in price. Wall Street has sold these securities to every nook and cranny of the investment world. There are going to be huge MBS portfolios that will be underwater once the foreclosures start. It is going to damage retirement plans and much more. We trust you don't own any of this stuff.

Reckless Real Estate Loans

This note is about the wacky loans being made in the real estate market. But first, we wish to emphasize that the ultimate cause of the real estate slowdown is not wacky loans, but the micro-managing of the economy by Federal Reserve money manipulations. First they pump huge amounts of money into the economy, then they raise rates and cut the money flow. The loans are a byproduct of the Federal Reserve money pumping activity.

But, the types of loans being created for the housing market will result in the real estate crash coming sooner than would otherwise be the case, and also deeper. WaPo reports that loans that are being made "include interest-only mortgages and 'option' mortgages, in which borrowers decide each month how much to repay."

WaPo goes on to state:


Many borrowers are paying as little as possible. About 70 percent of the people who take out an option adjustable-rate mortgage, which lets the buyer avoid paying even the full interest on the loan, end up paying the lowest permissible amount each month, according to the Federal Deposit Insurance Corp... The amount unpaid is added to the mortgage balance, so borrowers end up owing more than when they started. Having no equity in a home increases the risk of foreclosure, especially when housing values fall and houses are hard to sell...

In 2000, just 1 percent of American homeowners who got new loans had these types of loans, but by May 2005, about a third of all borrowers did -- about the same percentage as in May 2006, according to new data from First American LoanPerformance, which tracks the statistics.

It's an open secret these loans are a problem. WaPo again:


"We are deeply concerned about the potential contagion effect from poorly underwritten or unsuitable mortgages and home equity loans," Suzanne C. Hutchinson, executive vice president of the Mortgage Insurance Companies of America, wrote in a recent letter to regulators. ". . . The most recent market trends show alarming signs of undue risk-taking that puts both lenders and consumers at risk."

We have speculated on these pages that the Federal Reserve will at some point open the floodgates and pour enormous amounts of money into the system, when some type of financial or economic panic occurs. We have not speculated as to where in the financial system or the economy such a panic will occur. There are many, many possibilities. But looking at the current structure of the real estate market, one can not rule out a major panic or problem by those holding all these mortgages where foreclosures are almost a foregone conclusion.

One question that remains is who is holding this high-risk mortgage paper. Banks are to a large degree making these loans, but they are then securitizing the mortgages and selling them off. But someone is ultimately holding this wacky paper. Is it pension funds? Hedge funds? Unfortunately, in time, it is likely we will learn when the entire structure collapses.

Reckless Real Estate Loans

This note is about the wacky loans being made in the real estate market. But first, we wish to emphasize that the ultimate cause of the real estate slowdown is not wacky loans, but the micro-managing of the economy by Federal Reserve money manipulations. First they pump huge amounts of money into the economy, then they raise rates and cut the money flow. The loans are a byproduct of the Federal Reserve money pumping activity.

But, the types of loans being created for the housing market will result in the real estate crash coming sooner than would otherwise be the case, and also deeper. WaPo reports that loans that are being made "include interest-only mortgages and 'option' mortgages, in which borrowers decide each month how much to repay."

WaPo goes on to state:


Many borrowers are paying as little as possible. About 70 percent of the people who take out an option adjustable-rate mortgage, which lets the buyer avoid paying even the full interest on the loan, end up paying the lowest permissible amount each month, according to the Federal Deposit Insurance Corp... The amount unpaid is added to the mortgage balance, so borrowers end up owing more than when they started. Having no equity in a home increases the risk of foreclosure, especially when housing values fall and houses are hard to sell...

In 2000, just 1 percent of American homeowners who got new loans had these types of loans, but by May 2005, about a third of all borrowers did -- about the same percentage as in May 2006, according to new data from First American LoanPerformance, which tracks the statistics.

It's an open secret these loans are a problem. WaPo again:


"We are deeply concerned about the potential contagion effect from poorly underwritten or unsuitable mortgages and home equity loans," Suzanne C. Hutchinson, executive vice president of the Mortgage Insurance Companies of America, wrote in a recent letter to regulators. ". . . The most recent market trends show alarming signs of undue risk-taking that puts both lenders and consumers at risk."

We have speculated on these pages that the Federal Reserve will at some point open the floodgates and pour enormous amounts of money into the system, when some type of financial or economic panic occurs. We have not speculated as to where in the financial system or the economy such a panic will occur. There are many, many possibilities. But looking at the current structure of the real estate market, one can not rule out a major panic or problem by those holding all these mortgages where foreclosures are almost a foregone conclusion.

One question that remains is who is holding this high-risk mortgage paper. Banks are to a large degree making these loans, but they are then securitizing the mortgages and selling them off. But someone is ultimately holding this wacky paper. Is it pension funds? Hedge funds? Unfortunately, in time, it is likely we will learn when the entire structure collapses.

Reckless Real Estate Loans

This note is about the wacky loans being made in the real estate market. But first, we wish to emphasize that the ultimate cause of the real estate slowdown is not wacky loans, but the micro-managing of the economy by Federal Reserve money manipulations. First they pump huge amounts of money into the economy, then they raise rates and cut the money flow. The loans are a byproduct of the Federal Reserve money pumping activity.

But, the types of loans being created for the housing market will result in the real estate crash coming sooner than would otherwise be the case, and also deeper. WaPo reports that loans that are being made "include interest-only mortgages and 'option' mortgages, in which borrowers decide each month how much to repay."

WaPo goes on to state:

Many borrowers are paying as little as possible. About 70 percent of the people who take out an option adjustable-rate mortgage, which lets the buyer avoid paying even the full interest on the loan, end up paying the lowest permissible amount each month, according to the Federal Deposit Insurance Corp... The amount unpaid is added to the mortgage balance, so borrowers end up owing more than when they started. Having no equity in a home increases the risk of foreclosure, especially when housing values fall and houses are hard to sell...

In 2000, just 1 percent of American homeowners who got new loans had these types of loans, but by May 2005, about a third of all borrowers did -- about the same percentage as in May 2006, according to new data from First American LoanPerformance, which tracks the statistics.

It's an open secret these loans are a problem. WaPo again:

"We are deeply concerned about the potential contagion effect from poorly underwritten or unsuitable mortgages and home equity loans," Suzanne C. Hutchinson, executive vice president of the Mortgage Insurance Companies of America, wrote in a recent letter to regulators. ". . . The most recent market trends show alarming signs of undue risk-taking that puts both lenders and consumers at risk."

We have speculated on these pages that the Federal Reserve will at some point open the floodgates and pour enormous amounts of money into the system, when some type of financial or economic panic occurs. We have not speculated as to where in the financial system or the economy such a panic will occur. There are many, many possibilities. But looking at the current structure of the real estate market, one can not rule out a major panic or problem by those holding all these mortgages where foreclosures are almost a foregone conclusion.

One question that remains is who is holding this high-risk mortgage paper. Banks are to a large degree making these loans, but they are then securitizing the mortgages and selling them off. But someone is ultimately holding this wacky paper. Is it pension funds? Hedge funds? Unfortunately, in time, it is likely we will learn when the entire structure collapses.