Eurozone Banks Have Inadequate Stress Testing Methods

Saturday, November 29, 2008

A new report published by the European Central Bank (ECB) arrives at the conclusion that the stress testing methods of Eurozone banks are inadequate and have been introduced in some cases only after the beginning of the credit crisis in August 2007.
The report on "EU Banks' Liquidity Stress Testing and Contingency Funding Plans" carried out by the ECB's Banking Supervision Committee arrives at the sour conclusion,
that there is substantial room for improvement in both areas.
Surveying 84 Eurozone banks the ECB said that there was no common standard for the stress testing methods which were insufficient for the majority of banks.
The most common scenarios in liquidity stress tests are idiosyncratic scenarios and market scenarios, although not all banks run both types of scenario. Only a sizeable minority run integrated market and idiosyncratic scenarios.
Highlighting the shortcomings of most banks' stress tests the report points to a lack of different time frames.
Most banks run stress test scenarios that cover either short-term (e.g. four-week) or longer- term (e.g. 12-month) horizons, but only a few test market scenarios with both short and longer-term horizons. The BSC highlights the need for scenarios to be tested for all time horizons which are relevant to banks’ maturity proļ¬les and vulnerabilities.
Another major point for the ECB is the fact that almost all banks disregard cross-border flow problems. Admitting more than a year after beginning of the credit crisis that we are in a crisis situation, the ECB warns that such risks are particularly prevalent in these times.
... Banks do not always include potential barriers to the cross-border flow of liquidity in their stress tests, even though these can be particularly prevalent in crisis situations. In the face of potential barriers to the cross-border flow of liquidity and collateral, the BSC regards running stress tests at both the group and the entity level and accounting for these potential barriers in liquidity stress tests and contingency funding plans (CFPs) as improvements on current practice.
Shareholders Rights Are Secondary
Secretiveness on behalf of the banks is another problem that impedes a comparison of stress tests and their outcomes. The ECB proposes concerted stress tests for Eurozone banks. Proper information policy is not encouraged, though. The ECB recognizes the fact that early publication of banks' liquidity problems may aggravate the survival chances of a bank while paying only lip-service to shareholders information rights.
Banks are reluctant to disclose the results of their liquidity stress tests (apart from to supervisors, rating agencies and some key counterparties) because the results cannot be interpreted without a detailed understanding of the scenarios and the considerations underlying them. The results are therefore not comparable across banks. In addition, public disclosure could have negative repercussions on the liquidity situation of some banks under certain circumstances. While more disclosure, in particular on banks’ liquidity risk management, is generally to be encouraged, the BSC considers that, in the case of liquidity stress test results, the detrimental effects of mandatory public disclosure are likely to outweigh the benefits. Nevertheless, a majority of banks also regard public disclosure in this area as a tool for enhancing market discipline, subject to certain preconditions. In this respect, concerted rounds of common liquidity stress tests – which are conducted, for example, for supervisory/financial stability purposes without affecting banks’ routine liquidity stress tests for internal purposes – would help to increase the comparability of the output of internal models across banks.
The ECB did not find more encouraging practices concerning contingency fund plans (CFP.) As with stress tests there is no ideal CFP that would be applicable to all banks. But there is a lot of room for improvement, it noted.
The typology of EU banks’ CFPs is highly diverse, both in terms of their level of detail and their exact components. The typical CFP consists of a set of liquidity measures, internal procedures, responsibilities and lines of authority to be activated under liquidity stress. CFPs exist at the group level and/or the entity level, but many CFPs seem to cover only parts of the organisation, both in terms of geographic exposure and business areas.
... Given the diversity and complexity of practices, supervisors and central banks need to enhance their understanding of individual CFPs.
With banks being more equal than other corporations the ECB signals political willingness to support money centre banks in case of seizing money markets. This still leaves some other risks, though.
In the BSC’s opinion, it is also important that CFPs take into account potentially destabilising second-round effects on markets from liquidity-saving measures and/or asset sales, particularly in the case of large institutions.
No Quick Fix
Summarizing its survey results the ECB sees no quick fix although exactly that would be needed to mitigate the current crisis that is still on a steep downward path.
Although recent events indicate that CFPs have proved useful in establishing chains of command, a large number of banks failed to activate their CFPs. In some cases, this was blamed on the reputational costs of doing so.
The BSC considers it important that potential reputational challenges associated with the activation of CFPs be overcome, as otherwise they substantially reduce the usefulness of an important liquidity crisis management tool.
While most of the areas in need of improvement identified by the BSC could be addressed in the short term, it is likely that improvements addressing best-practice model developments (such as the inclusion of second-round effects or more integrated views of liquidity, credit and market risk) or the adoption of guidelines can be addressed only in the medium term.

Plans for contingency funding revolve around the all too well known phenomenon of creating more debt. While asset sales lead the list of instruments in an emergency all other options are debt based. I am not very confident that this will work in credit markets that are essentially seized up and show no sign of improvement.
While it is nice to read that the ECB finally acknowledges the sad reality that the crisis has not eased since its beginning 15 months earlier the spotlight is on the banks' inadequate preparedness for a major credit default that must be waiting around the corner given the continuing nervousness and distrust among lenders in the interbank market.

Eurozone Inflation Plummets to 2.1% - M3 Growth Unchanged at 8.7%

Friday, November 28, 2008

According to a flash estimate of Eurostat statistics office Eurozone inflation plummeted to 2.1% in November after 3.2% in October. While the flash estimate delivers no details on the price changes in the goods basket it can be safely assumed that plunging oil prices and receding commodity prices in general will have contributed prominently to the dramatic decline.
Eurozone inflation last held at this level in September 2007, piercing the ECB target rate of 2% for the first time in history and has since reached a record high of 3.7% in May 2008.
Find a table of long term Euro inflation here.
Money supply is still way above the reference rate of 4.5% with an unchanged reading of 8.7% in October. The three-month average of the annual growth rates of M3 over the period August 2008 - October 2008 declined to 8.7%, from 8.9% in the period July 2008 - September 2008, the ECB reported on Thursday.
Unemployment is on the way up, probably due to the contraction in the building industry. Eurostat records show a slight rise to 7.7% in October, compared to 7.6% in September. It was 7.3% in October 2007.
The EU27 unemployment rate was 7.1% in October 2008, compared with 7.0% in September. It was 6.9% in October 2007.
This data comes on the heels of declines in industrial orders a few days earlier.
In September 2008 compared with August 2008, the euro area1 (EA15) industrial new orders index fell by 3.9%.
In August the index decreased by 1.5%. In the EU27 new orders declined by 4.6% in September 2008, after dropping by 1.7% in August. Excluding ships, railway & aerospace equipment4, for which changes tend to be more volatile, industrial new orders decreased by 2.2% in the euro area and by 2.7% in the EU27.
With sentiment in the basement this data set delivers a mixed outlook for the European economy at best.

I Wanna Be a Bank

Thursday, November 27, 2008

Flirting with the Hindu theory of reincarnation I have decided to do my utmost that may give me a chance to be reborn as a bank.
Just imagine what life must be like. Compare it maybe to a video game where the drunk driver can crash into a wedding party, killing most attendees and wrecking the car. At that point Uncle Sam comes around, saying "no problem boy, never mind all the mangled corpses around you. Here's a bundle of cash so you can get a new car and mess around again."
No. Let's get serious. When being a bank, one does not need to draw on outdated analogies. Reality is already a paradise and this is a true story from cloud nine.
Let's begin with working hours. As the only industry in the world retaining a 5-day workweek, banks have an easy life. In contrast to all other businesses that have to stay open to fill the till banks have an enormous advantage. The money they lend out collects interest for at least 360 and in most cases 365 days. Not bad for working only 250 days. That's as close as one can get to "money for nothing and chicks for free," at least for the first part of this former Dire Straits hit.
Does a bad credit score hike your borrowing costs in real life? Again, better become a bank eligible for central bank refinancing. No matter what crap spoils a bank's asset portfolio, your central bank will be a most reliable buddy, lending you as much money as you want at negative real interest rates and far below what they charge for the risk associated with a client.
As a bank you are basically getting paid for borrowing.
Doesn't that sound like paradise? No, it is not paradise, this the very real world of banks these days, almost entirely free from any consequences for all its acting participants.

Are Banks Except From Common Sense Thinking?
This does not apply to the clerical workers level of course. A bank just needs to fire a couple of hundred secretaries etc. in order to keep its masters of the universe happy with gazillion bonuses. Sssshhhh, nobody wants to be reminded that the suipposed masters of the universe did nothing else than a herd of sheep: Staying together while stampeding in the same direction most times.
While mere mortal humans are told to save up for a nest-egg in case times turn to the worse, banks are again exempted from such profane common sense thinking.
Skimming the profits off shareholder's dividends in order to pay themselves bonuses in the good years banks apparently felt themselves expected from the need to create reserves for loans going bad. OK, they were not the first ones but only followed examples set by companies in many other industries where the aim to create shareholder value led to a short term oriented strategy that was dominated by the desire to raise the share price and not the strength of the company in the long term. Call the game by its true name: CEO compensation roulette.
The years in the casino with freely flowing champagne that came from selling increasingly risky products to clueless customers have created a resistance to change in the banking industry. While other drunks are thrown into the locker cell to sober up, a bank can instead stumble into its concerned parliament and tell a few horror stories about the importance of the credit industry. 
Incompetent politicians may feel like heroes when they throw billions after the banks they do not have in the first place. But this recipe for hyper inflation is so old that it has been long forgotten by today's caste of international leaders. They will find out together with revolting populations when Europe and the USA follow the nasty path of monetizing the debt that has reduced Zimbabwe from Africa's bread basket into a lawless impoverished society depending on food aid from abroad.
The common man meanwhile is told that banks deliver an important function to the public by guaranteeing the smooth and efficient flow of funds. What the public is not told is the sour reality that it will be them who will pick up the bailout bill of the banks with its future tax payments.
Decling property prices, the prime driver behind the global debt boom of this millennium, will chip away more of the prosperity the West has become used to in the past 2 decades of surging home values that have financed many luxuries people probably would not have bought had they had to use their savings.
A shrinking business base at least on the consumer level where a sudden change to frugality out of necessity means fewer loans may bring what politicians are so far eager to avoid with their donations to the banking sector: A resizing of the industry to the level needed to service other industries and consumers without dominating them. After all banks profits have seen a higher growth rate in the past 4 decades than all industries. 
All attempts to rein banks under stronger regulatory umbrellas were squashed in the past by them. Voicing their commitment to free market ideology it was argued that only self-regulation was sufficient and the state's hands would only hamper business. As the world now finds out that this was not the case, to be polite, banks have turned into super socialists at the same speed they saw their business model of taking on too much risk for lavish profits disappear because we cannot all get rich at the same time.
After all, it may still be most comfortable to be reborn as a bank in the near future. History shows a repeating pattern after bank crises. The bigger the excesses of the banks were the stronger the regulation they were relegated to.
It will not be different this time and for a while banking may become what it was for most of the time: A 3-6-3 business. Borrow at 3%, lend at 6% and be on the golf course at 3 PM. Life could be worse.

ECB Adopts New Collateral Guidelines, Leaves Public In Dark

Friday, November 21, 2008

The European Central Bank (ECB) has adopted new guidelines for collateral eligible in its refinancing operations. Having warned of a sinking quality of the ECB's balance sheet in January that were followed by an update of collateral guidelines in September, this move signals another milestone on the road to monetary hyper inflation.
According to the ECB,
"On 21 November 2008 the Governing Council adopted a Guideline on temporary changes to the rules relating to eligibility of collateral (ECB/2008/18). The Guideline will be published shortly in the Official Journal of the EU and on the ECB’s website."
This sparse bit of information may have added to today's explosive $50 move in gold. So far the public is left in the dark what kind of illiquid crap, ahem collateral, the ECB will "temporarily" accept. It certainly does not instill confidence in a crumbling financial system that is hollering along with more than one TRILLION Euros in bank credit while credit markets have essentially been ceasing to work for 15 months by now.
The monetary inflation, now aimed to salvage Eurozone cross-border banks, will soon begin to trickle into the real economy, creating a situation that will resemble the Weimar Republic or Zimbabwe if everything goes wrong, politically as economically. Give it a delay of 6 to 12 months until the effects will be felt.
Leaving the world in the dark about the changes in the collateral guidelines, one is left to speculations. Maybe the upcoming financial stability review will offer more clues on the real state of affairs within the Eurozone.
On 20 November 2008 the Governing Council authorised the publication of the “Financial Stability Review – December 2008”. The review provides a comprehensive assessment of the capacity of the euro area financial system to absorb adverse disturbances and examines the main sources of risks and vulnerability to financial system stability. The review will be published on the ECB’s website on 15 December 2008.
The sudden move on collateral guidelines may be the canary in the coal mine.
Given the dire outlook for overleveraged European banks still bleeding from gigantic derivatives losses I am most pessimistic that this financial crisis will find a happy end with a strong Euro.
The ECB has tripled its balance sheet since the inception of the common currency, leaving economic growth far behind.
A decade of monetary expansion will most likely end as it did in all comparable periods of panic before. Hyper inflation will help sovereigns to escape a default of nations, but all savings and investments will still be wiped out.
There will be no other cover than gold for what was last experienced by the now deceased generation of my grand parents. The system of floating currencies gets unmasked for what it truly is: A system of fiat currencies sinking at different speeds.
UPDATE: Find the new guidelines here.

Google Will Build Server Farm in Austria

Thursday, November 20, 2008

Internet giant Google will build a new server farm in Austria. According to Austrian media reports Google finalized the purchase of a 75 hectares (=185 acres) property in Kronstorf, Upper Austria. It is expected to build one of its 36 estimated data centres here. The server farm will need an investment upwards of €100 million and Google will employ roughly 100 people after two years of construction.
According to Austrian daily "Kurier" the property is ideally located, close to several hydropower plants that ensure power supply and the river Enns whose water can be used to cool the hardware. Kurier listed a link to, citing it as a source for its estimate that Google operates 36 server farms worldwide. The link was dead as of today.
Google has come under criticism in Europe for its attitude towards privacy laws while being secretive about its own data collection, gained from offering free services, like its famous search engine and Blogger, to users. Its critics say that Google evades local privacy laws by storing data out of reach of the respective jurisdictions.

China Considers US Treasuries Still the Best Option

A surprising change of course - that contradicts semi-official statements from only two months ago - in Chinese forex policy may bolster US treasury debt for a while. According to a front page report of Chinese economists recognize the dire state of US financial affairs that root in the reckless spending spree during the reign of George Bush.
But having become the biggest holder of US debt as of September 2008 China apparently also accepts the fact that a premature exit out of its $585 billion stash of Treasury paper would unsettle the shaken financial world to a degree nobody wants to ponder about. The report hints that China will remain a good bidder in future Treasury auctions, at these times certainly a more stabilizing act than what is coming from the US Treasury itself.
From Chinadaily:
China is likely to continue increasing holdings of US treasury bonds even after becoming the No 1 holder because it is the best way to deploy its $1.9 trillion foreign exchange reserves, economists say...
With a $43.6 billion increase in holdings of US treasury securities in September, China's overall holdings amounted to $585 billion. Japan cut its holdings to $573 billion from $586 billion in August.
Net foreign purchases of long-term US securities totaled $66.2 billion in September, up from $21 billion in August and $18.4 billion in July.
Treasury data suggests that foreign investors still regard the US as a relatively better place to invest when markets worldwide are crumbling, analysts said.
"That's why China has increased its holdings," said Dong Yuping, senior economist at the Institute of Finance and Banking affiliated to the Chinese Academy of Social Sciences.
Tough Times Ahead - But Not Many Options
Not all economists are of the opinion that China should help to blow up the US debt bubble. For the past decade China has increasingly bought US debt that helped finance its own Wirtschaftswunder based on enormous export growth that made it the biggest contributor to the US trade and current account deficit.
Once more in history the phrase "Federal Reserve Notes (FRNs) are the US currency, but a problem for the rest of the world" can be applied as the dollar still manages to hold on to its image of too big to fail. Still, China seems to be willing to lend the new president-elect Barack Obama a helping hand when he has the manage the biggest task of all politicians ever: To clean up the mess that Bush made. After all, the most populous country in the world and the so far most prosperous nation will share a fate that depends on each other,
As the US financial crisis worsens, Washington is in dire need of capital to fund its massive market rescue plan; but some domestic economists argue that China should not use its foreign exchange reserves to purchase US bonds for fear that it may incur huge losses.
"But China may not have many options," Dong said.
The US economy, though hemorrhaging from the crisis, remains the largest and strongest; and the EU and Japan are not yet a serious challenge to US pre-eminence. Investment in dollar assets, therefore, carries the least risk, he said.
If China reduces its holdings of US debt, others may follow suit, which will lead to a weakening of the dollar and depreciation of dollar-denominated assets, thus severely hurting China's interests.
"China and the US are in the same boat," he said.
"You may not like it, but China has to move along this path," said Yan Qifa, senior economist with the Export-Import Bank of China.
And now that many countries are increasing holdings of US treasury bonds, China's potential returns from the bonds will increase, said Chen Gong, chief economist and chairman of Anbound Group, a Beijing-based consulting firm.
"So China may continue to increase its holdings," he said.
However, some experts argue that Beijing use its considerable financial leverage to set conditions such as the US opening its financial markets more to Chinese funds, and allowing exports of high-tech products to China.
China faces the same problem every holder of US debt has: As the Bush regime has roughly doubled US debt to more than $11 TRILLION in a mere 8 years, more than all 42 previous presidents before in 224 years, the value of FRNs depends increasingly on the belief that America will somehow manage to escape a serious depression that is boldly written on the wall.
Right now the relative strength of FRNs stems to a good dose from even worse conditions for the Euro and the Pound. I think it is safe to say that all 3 will fail as all unbacked fiat currencies before. It is only a matter of time, as it has always been.
UPDATE: Find all current developments in the bond market over at Across The Curve.

Technical Problems Converge With a Berlin Trip

Thursday, November 13, 2008

Due to lasting technical problems with both my computers that converge with a trip to Berlin blogging will cease for a week. The situation again strengthens my belief that Microsoft is a long term short play.
After my MacBook - which survived the Indian monsoon, a crossing of the Sahara and my suicidal style of mountainbiking in Vancouver - suddenly went dead I turned on my Windows Vista equipped HP Pavilion for the first time in almost a year. It took me 14 hours to install all the Vista updates that had accumulated since. After this tiring job I was at least able to surf the web again, turned off the machine and went to sleep. Next morning I had a classical deja vu. Surfing the web, probably the most required task on any PC these days, again did not work although I had religiously followed all procedures to shut it down correctly.
Windows help is more or less useless in solving problems. One keyword leads to many others and in the end one is always advised "to contact the system administrator."
Haha, what a lousy joke. Thanks to a good friend who did not flee the scene when I told him my anger about this piece of crap called Windows Vista but took the laptop and said it would take him at least a day to set up the system again. So I can enjoy the 7 days a week party life while pondering whether to short Microsoft because its products always need a system expert just to keep it running.
The PC was always an unloved option for me, needed only to run some trading software while everything else is done on the Mac.
Turning the Mac in for repair became an entirely different experience. The power problem was solved for free and the replacement of the cracked top and bottom covers will be for free as well although the warranty haslong expired again.
Another indication that Apple computers are the future came up when I simultaneously ordered a new MacBook Pro. These laptops are selling like hot cake and even Vienna's biggest Apple shop had none in stock. They only took an order with an downpayment and were not able to guarantee a delivery date for 5 days.
I am actually relieved.Could I have a better excuse for not blogging a few days?

Fed Money Machine Gears Up - More Fed News - Short Microsoft

Tuesday, November 11, 2008

In its effort to alleviate the credit crunch the Fed today unloaded a few more $100 billion on money markets and therefore ultimately on the tax bills of generations to come.
At 6 AM local time the Fed came out with a statement on a restructuring of AIG's debt that will inject $40 billion in share capital. The sweet deal for AIG is the rate cur from Libor + 800 basis points to Libor + 300 basis points. Altogether the help was almost doubled to $150 billion. As the government is determined to keep AIG afloat the Fed will still make good money on it.
New money, money, money was the directive for the whole morning. At 10 AM the Fed money machine revved up. Looking forward to the new year the Fed will offer $150 in a 17-day repo that matures on January 8. 2009 and sports a minimum bid 0.528%. If one could only get that rate on credit cards.

It's a MMIFF Costing $600 Billion As Of Now
The Fed NY meanhwhile updated its information on the Money Market Investor Funding Facility (MMIFF). This new facility - that consists as all other liquidity facilities of nothing but new debt - has a current volume of $600 billion and I consider it a safe bet that we will see a TRILLION and more to come here soon as well.
After all, there appears to be not other strategy than to give away close to free. Aslong as you are a bank, GSE, or any other entity that has a good lobbyist at the Treasury. With Hank Paulson basically running the show by himself, chairman Ben Bernanke is degraded to an engineer who has to tune up the printing presses for the next couple of TRILLIONS we will see in the next few months only.

Bloomberg Presses Fed for More Transparency
Information provider Bloomberg, the only critical force among the major newswires, presses ahead in its crusade for more transparency of the Fed. Quoting several protagonists Bloomberg did not miss out that Treasury secretary Paulson said only 2 months earlier he too wanted more transparency. Check out the right sidebar of the link below for proof on video. Bernanke had pledged for more transparency on September 24, another video shows.
Here is the full article:

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

"The collateral is not being adequately disclosed, and that's a big problem," said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. "In a liquid market, this wouldn't matter, but we're not. The market is very nervous and very thin."

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

"It's your money; it's not the Fed's money,"
said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. "Of course there should be transparency."

Treasury, Fed Remain Silent
Federal Reserve spokeswoman Michelle Smith declined to comment on the loans or the Bloomberg lawsuit. Treasury spokeswoman Michele Davis didn't respond to a phone call and an e-mail seeking comment.

President-elect Barack Obama's economic adviser, Jason Furman, also didn't respond to an e-mail and a phone call seeking comment from Obama. In a Sept. 22 campaign speech, Obama promised to "make our government open and transparent so that anyone can ensure that our business is the people's business."

The Fed's lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan -- without safeguards put into the TARP legislation by Congress.

Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds.

September 14 Decision
Before Sept. 14, the Fed accepted mostly top-rated government and asset-backed securities as collateral. After that date, the central bank widened standards to accept other kinds of securities, some with lower ratings. The Fed collects interest on all its loans.

The plan to purchase distressed securities through TARP called for buying at the "lowest price that the secretary (of the Treasury) determines to be consistent with the purposes of this Act," according to the Emergency Economic Stabilization Act of 2008, the law that covers TARP.

The legislation didn't require any specific method for the purchases beyond saying mechanisms such as auctions or reverse auctions should be used "when appropriate." In a reverse auction, bidders offer to sell securities at successively lower prices, helping to ensure that the Fed would pay less. The measure also included a five-member oversight board that includes Paulson and Bernanke.

At a Sept. 23 Senate Banking Committee hearing in Washington, Paulson called for transparency in the purchase of distressed assets under the TARP program.

Paulson on September 23, "We Need Transparency"
"We need oversight," Paulson told lawmakers. "We need protection. We need transparency. I want it. We all want it."
At a joint House-Senate hearing the next day, Bernanke also stressed the importance of openness in the program. "Transparency is a big issue," he said.

The Fed lent cash and government bonds to banks, which gave the Fed collateral in the form of equities and debt, including subprime and structured securities such as collateralized debt obligations, according to the Fed Web site. The borrowers have included the now-bankrupt Lehman Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

"You have to balance the need for transparency with protecting the public interest," Talbott said. "Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system."

The nation's biggest banks, Citigroup, Bank of America Corp., JPMorgan Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, declined to comment on whether they have borrowed money from the Fed. They received $120 billion in capital from the TARP, which was signed into law Oct. 3.

In an interview Nov. 6, House Financial Services Committee Chairman Barney Frank said the Fed's disclosure is sufficient and that the risk the central bank is taking on is appropriate in the current economic climate. Frank said he has discussed the program with Timothy F. Geithner, president and chief executive officer of the Federal Reserve Bank of New York and a possible candidate to succeed Paulson as Treasury secretary.

"I talk to Geithner and he was pretty sure that they're OK," said Frank, a Massachusetts Democrat. "If the risk is that the Fed takes a little bit of a haircut, well that's regrettable." Such losses would be acceptable, he said, if the program helps revive the economy.

`Unclog the Market'
Frank said the Fed shouldn't reveal the assets it holds or how it values them because of "delicacy with respect to pricing." He said such disclosure would "give people clues to what your pricing is and what they might be able to sell us and what your estimates are." He wouldn't say why he thought that information would be problematic.

Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D'Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc.

"I'd love to hear the methodology, how the Fed priced the assets," D'Vari said. "That would unclog the market very quickly."

TARP's $700 billion so far is being used to buy preferred shares in banks to shore up their capital. The program was originally intended to hold banks' troubled assets while markets were frozen.

AIG Lending
The Bloomberg lawsuit argues that the collateral lists "are central to understanding and assessing the government's response to the most cataclysmic financial crisis in America since the Great Depression."
The Fed has lent at least $81 billion to American International Group Inc., the world's largest insurer, so that it can pay obligations to banks. AIG today said it received an expanded government rescue package valued at more than $150 billion.
The central bank is also responsible for losses on a $26.8 billion portfolio guaranteed after Bear Stearns Cos. was bought by JPMorgan.
"As a taxpayer, it is absolutely important that we know how they're lending money and who they're lending it to," said Lucy Dalglish, executive director of the Arlington, Virginia- based Reporters Committee for Freedom of the Press.

Ratings Cuts
Ultimately, the Fed will have to remove some securities held as collateral from some programs because the central bank's rules call for instruments rated below investment grade to be taken back by the borrower and marked down in value. Losses on those assets could then be written off, partly through the capital recently injected into those banks by the Treasury.
Moody's Investors Service alone has cut its ratings on 926 mortgage-backed securities worth $42 billion to junk from investment grade since Sept. 14, making them ineligible for collateral on some Fed loans.
The Fed's collateral "absolutely should be made public," said Mark Cuban, an activist investor, the owner of the Dallas Mavericks professional basketball team and the creator of the Web site, which focuses on the secrecy shrouding the Fed's moves.
The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

When Will the $ Default?
Seeing that all dams have broken and the Fed is creating more money in a month than it did before in several years I am left with no other conclusion that Federal Reserve Notes - backed by nothing - will default in the future. The $100 trillion question is only when, not if.

Short Microsoft - What a Shoddy Product
Posting from a Windows Vista equipped notebook which has not been in use for several months it today took me 12 hours only to get Windows running at least the browser. I saw at least 3 dozen times the blue window of death, displaying some nerd gibberish that only a certified Windows developer may be able to encode in plain language. I had to upload at least 1 Gigabyte in updates only to get it to the point where it did not crash every 15 minutes, taking 3 more minutes to reboot every time.
Usually working on a Mac and having been forced to work with Windows in the last millennium in my perception nothing has changed. The whole thing is illogic, the help content only directs one to other computer jargon until it gives up and tells you to the contact the system administrator. What world is Microsoft living in? I am confident their next system will still lack the elegance of use that a Mac delivers. Currently the US automakers are on the way to the cemetery, Microsoft may follow in a couple of years.

Bloomberg Picks a Fight With the Federal Reserve

Sunday, November 09, 2008

Information provider Bloomberg has started a fight with the Federal Reserve that may turn some stones in the secretive private organisation that has never been audited.
Bloomberg had asked the Fed to see documents concerning the collateral the Fed accepts in exchange for freshly digitized credit in its bailouts. The Federal Reserve first insisted a Freedom Of Information Act (FOIA) request and then said the data required is from the Fed New York which does not fall under the FOIA.
A 9-shot salute goes to nakedcapitalism which was the first blog to break this important story. In a sarcastic lead Yves Smith (or Ed Wright) write up the most important points:
In case you somehow managed to miss it, our friendly pawnbroker of last resort (central bank) has been taking lots of crap (collateral) in return for loans under its alphabet soup of facilities. As we are learaning in our housing meltdown, collateral may not prove to be worth as much as it was said to be at the time the loan was made. Inquiring minds are curious as to what, exactly the Fed has taken, particularly as the numbers are becoming stratospheric.
Bloomberg has asked nicely for some of this information, and is now being forced to sue under to the Freedom of Information Act, and the Fed intends to fight! This ought to be a scandal, but after the TARP, the electorate is seems resigned to taxpayer money being thrown at floundering financial enterprises with little in the way of checks or prudence. If the Fed indeed was taking conservatively valued collateral as it has always claimed it was, there would be no reason for it to attempt to squash this request. The Fed's argument, as I infer, is the loans were made by the Federal Reserve Bank of New York, which isn't a federal agency and thus not subject to the FOIA.
David Merkel's Aleph Blog was quick to come up with five reasons for the Fed's secrecy, all of them most alarming for believers in a free market system. Headlining "What Do You Have To Hide" he lists the following:
  1. The Fed is breaking its own rules, and lending on collateral that it publicly said that it wouldn’t lend against.
  2. They are playing favorites with institutions, and don’t want that to be revealed.
  3. The assets in question are technically in compliance with the rules of the Fed, but are worth far less than the amount loaned against them.
  4. Certain banks would be embarrassed by revealing what they own.
  5. It’s just a power game, and the Fed thinks it is above the law, particularly during a crisis (that it helped to cause).
The reporters committee for freedom of the press has some technical details on the lawsuit Bloomberg has filed.
Bloomberg News filed a Freedom of Information Act lawsuit against the Federal Reserve system Friday, seeking documents related to the financial services crisis, the news service reported.
The suit, filed in federal court in New York, asks for documents the government says are held by the Federal Reserve Bank of New York. The bank, one of a dozen in the Federal Reserve system, has not complied with FOIA because it has not been considered a government agency.
In contrast, the Federal Reserve Board of Governors in Washington is subject to FOIA. However, the bulk of the documents Bloomberg wants are housed at the New York bank, the Fed told Bloomberg.
According to Bloomberg, the Fed has made loans totalling $1.5 trillion to banks, not including the $700 billion bailout package. Bloomberg is seeking information on the collateral the banks posted for the loans. The news service’s FOIA requests have gone unanswered.
Creditwritedowns joins the team of Fed bashers, publishing the Bloomberg story on the topic and peppering it with criticism on the Fed's overly secretive style that should be a thing of the past.
For those of you concerned about the Fed's risky behavior, its ballooning balance sheet, and its acceptance of dodgy collateral, well you may be about to see whether the American democracy can allow this unchecked power to continue without oversight. Bloomberg News has sued the Federal Reserve to force them to reveal what kind of collateral they are accepting in loaning out trillions of dollars to U.S. banks.
The Federal Reserve, a quasi-government body (which strictly speaking is a private corporation in that it is owned by member banks), has been accepting assets of ever more dubious quality in a bid to liquify the U.S. banking system. Moreover, their efforts should be considered highly inflationary and a long-term threat to the value of the U.S. dollar and to the American economy.
The Fed balance sheet is expected to balloon to $3 trillion by the end of the year, up from $900 billion in August -- a rise in the Fed’s balance sheet from 6% of GDP to more than 20% of GDP in four months. In Japan, which was known for quantitative easing during its own deflationary crisis, the central bank’s balance sheet rose progressively from 9% of GDP to 29% of GDP. But this was over ten years from 1994 to 2004. At the current pace, the Fed might do in six months what it took ten years to do in Japan. Amazing.
Bloomberg had published this story last Friday:
Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.
The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn't seek money damages.
"The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry,'' said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.
The Fed has lent $1.5 trillion to banks, including Citigroup Inc. and Goldman Sachs Group Inc., through programs such as its discount window, the Primary Dealer Credit Facility and the Term Securities Lending Facility. Collateral is an asset pledged to a lender in the event that a loan payment isn't made.
The Fed made the loans under 11 programs in response to the biggest financial crisis since the Great Depression. The total doesn't include an additional $700 billion approved by Congress in a bailout package.
Fed's Position
Bloomberg News on May 21 asked the Fed to provide data on the collateral posted between April 4 and May 20. The central bank said on June 19 that it needed until July 3 to search out the documents and determine whether it would make them public.
Bloomberg never received a formal response that would enable it to file an appeal. On Oct. 25, Bloomberg filed another request and has yet to receive a reply.
The Fed staff planned to recommend that Bloomberg's request be denied under an exemption protecting "confidential commercial information,'' according to Alison Thro, the Fed's FOIA Service Center senior counsel. The Fed in Washington has about 30 pages pertaining to the request, Thro said today before the filing of the suit. The bulk of the documents Bloomberg sought are at the Federal Reserve Bank of New York, which she said isn't subject to the freedom of information law.
"This type of information is considered highly sensitive, and it would remain so for some time in the future,'' Thro said.
The Fed didn't give Bloomberg a formal response because "it got caught in the vortex of the things going on here,'' said Michael O'Rourke, another member of the Fed's FOIA staff.
The case is Bloomberg LP v. Federal Reserve, U.S. District Court, Southern District of New York (Manhattan).
While this story is in itself highly interesting as it contradicts chairman Ben Bernanke's earlier vows to lead a more transparent Fed it could be the beginning of the dismantling of the Fed's untouchable aura.
In his book "Secrets of the Temple" - the most extensive work about the Fed - William H. Greider highlights the opaque legal status of the Federal Reserve that is neither federal nor has any reserves (besides unlimited fiat currency) but takes the best from both worlds to keep ist doors closed to the public. Being the biggest fiat money creator in the world the Fed has never been audited, controls itself and does not even publish a balance sheet that would fulfill the expected norms.
Republican congressman Ron Paul has repeatedly called for an audit of the Fed and the abolition of the USA's third central bank. As the Fed's most important tool is to set the price of money via interest rates and recalling all its blunders it is most interesting that the constituionality of the Fed has never been challenged in court although the constitution says in Article 1, section 10:
No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts....
Story developing...follow this link.

UPDATE December 18: Follow the story here.

ECB Will Print More Money at Cheaper Prices, Cuts Rates

Thursday, November 06, 2008

Taking advantage of lower commodity and energy prices while facing economic headwinds from a contraction in retail sales the European Central Bank (ECB) lowered its key refinancing rate another 50 basis points to 3.25%, meeting market expectations. The deposit facility rate was brought down accordingly to 2.75% and the discount rate to 3.75%.
In the UK the Bank of England cut its key interest rate a massive 150 basis points to 3% despite headline inflation of 5.2%.
Alas, the moves did not help to calm capital markets. European stock exchanges barely came off their day's lows. Gold surged $20 to $760 while Federal Reserve Notes experienced a light boost after the ECB's announcement.
The ECB decision reflects a continuation of the strategy to provide banks with all the liquidity needed and will comfort European policymakers who are fearful of a recession in 2009. The easy credit may accelerate inflation again, though.
In his introductory statement ECB president Jean-Claude Trichet said first that inflation, now at 3.2%, is expected to continue on a slow downward path to the target rate of 2% in 2009.
The outlook for price stability has improved further. Inflation rates are expected to continue to decline in the coming months, reaching a level in line with price stability during the course of 2009. The intensification and broadening of the financial market turmoil is likely to dampen global and euro area demand for a rather protracted period of time. In such an environment, taking into account the strong fall in commodity prices over recent months, price, cost and wage pressures in the euro area should also moderate. At the same time, the underlying pace of monetary expansion has remained strong but has continued to show further signs of deceleration. All in all, the information available and our current analysis indicate a further alleviation of upside risks to price stability at the policy-relevant medium-term horizon, even though they have not disappeared completely.
He later retracted a bit, saying that a resurgence of commodity prices poses an upside risk to price expectations.
Looking forward, recent sharp falls in commodity prices, as well as the ongoing weakening in demand, suggest that the annual HICP inflation rate will continue to decline in the coming months and reach a level in line with price stability during the course of 2009. Depending, in particular, on the future path of oil and other commodity prices, some even stronger downside movements in HICP inflation cannot be excluded around the middle of next year, particularly due to base effects. These movements would be short-lived and therefore not relevant from a monetary policy perspective. Looking through such volatility, however, upside risks to price stability at the policy-relevant horizon are alleviating. The remaining upside risks relate to an unexpected increase in commodity prices, as well as in indirect taxes and administered prices, and the emergence of broad-based second-round effects in price and wage-setting behaviour, particularly in economies where nominal wages are indexed to consumer prices.
Robust growth in money supply, although decelerating, does not correlate to the economic slowdown, which could be longer than expected, said Trichet.
The intensification and broadening of the financial market turmoil is likely to dampen global and euro area demand for a rather protracted period of time.
Trichet mentioned however that outflows from money market funds wound up in overnight deposits due to sustaining strains in financial markets, creating shifts in the monetary base.
The annual growth rates of broad money and credit aggregates, while still remaining strong, continued to decline in September. Taking the appropriate medium-term perspective, monetary data up to September confirm that upside risks to price stability are diminishing but that they have not disappeared completely.
A closer examination of the money and credit data indicates that the recent intensification of financial tensions has already had an identifiable impact, particularly in the form of outflows from money market funds and greater inflows into overnight deposits. However, the full impact of investors’ uncertainty on their portfolio allocation behaviour is still to be seen in the coming months. Both portfolio shifts between non–monetary and monetary assets and shifts between different types of monetary assets can therefore not be ruled out in the period ahead. Hence, such effects will need to be taken into account when assessing monetary growth and its implications for price stability over the medium term.
In plain language, expect more "asset" classes, especially Eurozone government bonds, to deflate overnight in the future when a panicky investing crowd will stampede to the exit.
Widening yield spreads between German bunds and Italian and Spanish government bonds as well as Austria's retraction of a bond offering last week clearly signal that all is not well in the Eurozone financial markets. Read more about it at Ed Hugh's Eurowatch blog.

The World Looks Forward to the New US President

Wednesday, November 05, 2008

The world is full of hope again, now that a charismatic Barack Obama has secured his ticket to the White House. Mr. Obama certainly has the energy and brains to become one of the most popular US presidents at home and abroad. His election shows that America does not care about colour anymore, so long as it brings a substantial change in policy after the 8-year long Bush disaster.
Bush leaves about the worst legacy any president can saddle his successor with. Bush's presidency was marked by two unjustified wars in Iraq and Afghanistan, irresponsible fiscal policy, brutal force against opponents and the reversal of America's prior image as a force for liberty and democracy into a bully on the global stage, playing its muscles.
Mr. Obama inherits a load of pressing problems. At home he has to extinguish the biggest financial crisis in a century, reintroduce human rights as a code of conduct and America's diminishing role in global politics where China and India will demand bigger influence.
The new president finds empty coffers in the Treasury, looted by his predecessor to the tune of more than $5 TRILLION, bringing national debt to more than $11 TRILLION by the time Bush packs up in the oval office.
If Obama succeeds in steering the USA through the current perfect storm while managing a redistribution of wealth to the benefit for all he will make history. The world is on a crucial point as we witness a break-down of the Western capitalist system that has passed the point of no return in Bush's presidency.
Mr. Obama, the world keeps the fingers crossed for you.

ECB Balance Sheet Hits 2,€€€,€€€,€€€,€€€,€€€ (that's TRILLIONS)

Tuesday, November 04, 2008

Record lending to troubled Eurozone banks has ballooned the European Central Bank's (ECB) weekly financial statement, a pro forma balance sheet for Europe's biggest fiat money creator, to a never seen before €2.031 trillion as of October 31.
To put this mind-boggling figure into a context: In 1999 the ECB started out with an initial consolidated balance sheet that totalled a mere €697 billion. So within 9 years the Eurozone has been showered with almost three times the money it started out with while long term GDP growth rates helped grow the Eurozone economy only some 20% in the same 9 years.
In comparison to the end of 2007 the ECB balance sheet grew a hefty 33% year-to-date.
Two culprits are responsible for this unprecedented bout of monetary inflation: Banks who lent their funds to high-risk debtors and the ECB itself as it never hesitated to fuel runaway monetary supply in order to prevent a systemic banking crash.
Drilling down the latest figures has a blood-chilling effect: More than 60% of the ECB's "assets" are lent to banks, roughly 10% is gold and then there is the trashcan of so called "other assets" that stands currently at €381 billion or almost five times the initial amount from 1999.
Growth rates are appalling: Only last week the ECB expanded its balance sheet with a new special refinancing operation to the tune of €103 billion, bringing the amount of money borrowed to alleviate the credit crunch to a hot €500 billion.
Money supply M3 has receded a bit and I wonder how to interpret ECB president Jean-Claude Trichet's statement that M3 figures would understate the effects of the credit crunch. Does he mean on the upside or on the downside?
According to the ECB's figures money supply M3 growth declined in September 2008 to an annual rate of 8.6% after 8.8% a month earlier.

Inflation in OECD Countries Remains Fairly High

Lower commodity and energy prices led to a light decline of consumer prices in the 30 country strong Organisation for Economic Cooperation and Development (OECD) in September. A headline figure of 4.5% (August 4.7%) is overshadowed by hefty raises for food and energy, said the OECD on Tuesday.
  • Consumer prices in the OECD area rose by 4.5% in the year to September 2008, compared with 4.7% in the year to August 2008. Month-on-month, the price level remained stable in September, compared with a decrease of 0.1% in August. 
  • Consumer prices for energy were up by 18.9% in the year to September, compared with 20.9% in August. 
  • Consumer prices for food were up by 6.8% compared with 7.1% in August. 
  • Excluding food and energy, consumer prices rose by 2.4% in the year to September, compared with 2.3% in August.

TABLE: The latest inflation figures for all OECD countries. Click the table for a larger image. Source: OECD
In the euro area, the Harmonised Index of Consumer Prices (HICP) was up by 3.6% in the year to September, compared with 3.8% in the year to August. Month-on-month, the HICP in the euro area increased by 0.2% in September, following a decrease of 0.1% in August. Excluding food and energy, the year-on-year rise in the HICP in the euro area amounted to 1.9% in September, unchanged from August.
In the United States, the Consumer Price Index (CPI) increased by 4.9% over the year to September, compared with 5.4% in the year to August.
In Japan, consumer prices were up by 2.1% year-on-year in September, unchanged from August.
Over the year to September, consumer prices rose by 5.2% in the United Kingdom, 3.8% in Italy, 3.4% in Canada, 3.0% in France and 2.9% in Germany.

No Candidate Will Stop Government Growth

Monday, November 03, 2008

Presuming that all investors in the world are playing it cool until after the US presidential election, here is one topic on which both candidates are as likely to fail as did their predecessors in the #1 job of the world. Despite all lip service for free markets and as little intervention as possible the US government's share of US GDP has grown continually since 1930. 
This chart series pasted from the Grandfather Economic Report are as dramatic as the ballooning US public debt. When George Bush will leave office on January 20, he will have run up more debts alone than all US presidents before him.
When he came into office US debt stood at $5.7 trillion. Now the debt ceiling, which gets raised by Congress as necessary, is $11 trillion. Bush spent the new debts mostly on wars and a strongly growing government's share in the US economy.
"Starving the government beast to death" was always a popular slogan with politicians from all camps. But reality is a stark contrast to policymakers actual behaviour.
As the first chart shows, only 12% of the US economy depended on the government. This left 88% of the economy to the productive private sector in the pre-1930 era.
Some 3 decades later, in 1947, government's share of GDP had almost doubled to 22%. That 10 point swing was mostly attributed to government getting into the 'socialized spending business', starting with the 'New Deal'
Another 60 years later, paradoxically in the capitalist era, big government has gotten even bigger. Its share of US GDP has again almost doubled to 43%, leaving only 57% to the private sector,
There was a time when big government was called by its correct name: Socialism

This Property Crisis Is Far From Over And The Fed Is Helpless

Saturday, November 01, 2008

Halloween started early this year with a televised speech by the Fed's bearded chairmen Ben Bernanke. Recognizing that the problems in the biggest debt bubble of all times are far from over, Bernanke appeared helpless when offering several options for the future of the government sponsored entities (GSE) Fannie Mae and Freddie Mac.
The reorganization of the two mortgage giants, saddled with so many debts in default that no one can quantify reliably due to a lack of proper accounting, can take several ways.
Obviously addressing US policymakers, Bernanke presented four possibilities for the future role and organization of Frannie. The first one is rather wishful thinking: Returning the two GSEs to their pre-conservatorship status quo.
According to a Reuters dispatch from Friday, one in five homeowners sits on negative equity and it is going to get worse:
Nearly one in five U.S. mortgage borrowers owe more to lenders than their homes are worth, and the rate may soon approach one in four as housing prices fall and the economy weakens, a report on Friday shows.
About 7.63 million properties, or 18 percent, had negative equity in September, and another 2.1 million will follow if home prices fall another 5 percent, according to a report by First American CoreLogic.
The data, covering 43 states and Washington, D.C., includes borrowers nationwide, even those who took out mortgages before housing prices began to soar early this decade.
Seven hard-hit states -- Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio -- had 64 percent of all "underwater" borrowers, but just 41 percent of U.S. mortgages.
As if this was not enough, Marketwatch raised concerns that nothing influences people's investments more than the change of value of their house.
Consumers react more to changes in their home values than changes in their investment portfolios, according to a recent study.
In fact, real estate economists at UCLA and the University of Southern California found that a 10% decline in housing wealth from the 2005 highs would result in a $105 billion, or 1.2%, drop in personal consumption expenditures. That 10% decline in home values translates to roughly a 1 percentage-point reduction in real GDP growth, researchers said. Read the report.
One of Bernanke's other options looks DOA when checking the state of markets. A true privatization is simply not in the cards after a 99% decline in the share price of Fannie and Freddie.
Elaborations about copycatting the European system of covered mortgage bonds may bring its problems too at a time when trust between lenders has reached an all-time low as it is demonstrated by the essential seize-up of interbank markets for more than a year by now.
This leaves Bernanke's last option: Bringing the GSEs under Uncle Sams rule, with or without additional shareholders. Taking it from the recent past where the former champion of free market ideology has made a bizarre U-turn with several acts of Fedization I would not wonder if this will also be the future of Frannie.
Seeing that Bernanke offers options without favoring one of them I am afraid that it is not Bernanke who will solve the mess that Greenspan made. Thinking about Treasury secretary Hank Paulson's recent moves that cost the taxpayers basically another $70 billion in bonuses for his friends on Wall Street and had them pay almost double the price for some bank shares it is most likely we will see another round of more government in everything.
Somehow the American economy reminds me of the twists in the life of Joseph A. Schumpeter, an economist who coined the term "creative destruction" 90 years ago, favoring a laissez-faire capitalism over any government intervention. Schumpeter did not fail to recognize the signs of his times. In a speech held in Tokyo in 1932 Schumpeter had already shifted his perception towards permissible protectionism.
10 years later, in 1942, Schumpeter had morphed into a socialist. In his late work "Capitalism, Socialism and Democracy" Schumpeter declared that capitalism had no chance of survival, praising Karl Marx' theory on socialism which offered a more flexible approach to the headwinds any system will encounter. Will the same happen to the USA?

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