Canadain Political Turmoil Eh?

I don't comment often on Canadian politics, because we have very boring politicians and political system here in Canada. But the recent turmoil in parliament is just impossible not to comment on.

In a nutshell, Harper's Conservatives won a strengthened minority in an election on October 14 but are now hanging on for dear life. They had been facing a confidence vote in Parliament on Monday that they would almost certainly have lost. Please see my post on the election for more information. [Canadian Election Post]

The constitutional battle erupted on Friday last week, after Harpers Conservatives tried to eliminate direct subsidies of political parties. Seeing as everyone but the Conservatives has been completely worn down financially by the recent elections, the Conservatives stood to gain by being the wealthiest party in Canada at the moment.

The Liberals, NDP and Bloc then decided to form a coalition and try to topple Harpers government, at which point Harper begged the Canadian Governor General Michaelle Jean for a suspension of government, so that he can put forward his proposed "economic stimulus package", which will surely benefit the wealthy more than thos who really need it.

"Today's decision will give us an opportunity - I'm talking about all the parties - to focus on the economy and work together," said Harper, after his meeting with Michaelle Jean. If the request had been rejected, he would have had to step down or face a confidence vote he was sure to lose.

Harper's request for suspension was unprecedented. Historically, no prime minister has ever asked for Parliament to be suspended to avoid a confidence vote in the House of Commons.

For those who do not follow Canadian politics, getting two political parties in Canada to agree on an issue is as likely as having a 2 month winter. So the fact that the Liberals and NDP were able to form a coalition with the support of the Bloc Quebecois, should indicate that Harper has taken a big piss into his own pool. And there obviously isn't enough chlorine to dilute it.

I have made no secret of the fact that I think Harper is Satan. I don't really like any of the other party leaders either, but my despisal of Harper overshadows my dislike of any of the others. Harper is just plain old evil, and he needs to go ASAP. He is destroying this country, and I might have even considered voting Conservative in the last election (for the lack of a better choice) if they would have had a new, young and charismatic leader.

Everyone and their grandmother have an opinion on this issue, and I think that what the NDP, Liberals and Bloc Quebecois did was show unity. They definitely showed that they were more bi-partisan than Harper, who unilaterally decided to do something which benefits only the Conservatives by trying to cut off public funding for political parties.

So what if the NDP and Liberals are allying with the separatists? Do you think they are actually going to vote in favor of separation after all is said and done? 100% not. They are doing what cornered people do: looking for options outside of the box. For this, I commend them. At least they can sit down and agree on something for a change.

What really disturbs me in this whole mess is not the coalition, or the Conservatives unilateral move. It is the fact that Harper has to go get permission from the Governor General to make any major changes in the House of Commons. So who is really the leader of this country, the elected Harper, or the un-elected Michaelle Jean? Think about this for a second.

The Governor General

The Governor General has the power to suspend or dissolve Parliament, and many other powers which supersede those of the elected prime minister. And who is the Governor General of Canada?

According to the Government of Canada website: “Sworn in on September 27, 2005, the Right Honourable Michaëlle Jean, 27th Governor General since Confederation, represents the Crown in Canada and carries out the duties of head of State.” [source]

Moreover, according to the Governor Generals website: [source]:
- The Governor General is appointed by the Queen on the advice of the Prime Minister.
- The Governor General presides over the swearing-in of the prime minister, the Chief Justice of Canada and cabinet ministers.
- The Governor General is Commander-in-Chief of the Canadian Forces.
- The Governor General receives Royal visitors, heads of State and other prominent guests.
- The Governor General accepts the credentials of new ambassadors who represent their respective countries in Canada.

On an interesting side-note, she is listed higher on the CIA's website than the Prime Minister. [link]

So to conclude, Harper, Martin or Chretien might run it on a day-to-day basis, but who has the final say? At the end of the day, people will say that Canada is a constitutional monarchy, but the current situation in the country would indicate that this system is not so democratic after all...


Further Readings:

Globe and Mail - Harper Blunder a Blow to Credibility

Globe and Mail - Parliament Shut Down until January 26th

Globe and Mail - After The Storm

CTV - Governor General Approves PM's Request to Suspend Parliament

CTV - Canadians Regionally Split on Political Storm

Reuters - Canada PM Wins Suspension of Parliament

BBC - Canada Halts Parliament Amid Row

Citigroup Bailout: $20B, Total Cost So Far: $3.5T

Another One Bites the Dust

The news came out late on Sunday that Citigroup is getting a bailout from the Federal Reserve, amounting to $20 billion dollars. The $20 billion of new cash comes on top of a $25 billion infusion the bank received last month under the Troubled Asset Relief Program (TARP).

Citigroup's stock has lost about 80% of its value since the beginning of the year, and has dropped below 5$ last week for the first time since the mid-1990s. At the time of writing, the Federal Reserve just announced “it is to inject another $800bn into the US economy in a further effort to stabilize the financial system.” [article]

Even as most stocks rallied on the news that President-elect Obama had selected Timothy Geithner to be the next Treasury chief, Citigroup continued its fall. My gut tells me short-selling of Citigroups stock had something to do with this.

As discussed in my previous post [Secret $2T Fed Program], we must look at whose interests are best served by all of this. The reason Citigroup was not an attractive acquisition target to any of its competitors is because of its heavy baggage of about $306 billion in “risky assets” that it had on its books.

So if you’re J.P. Morgan for instance, and you buy up Citigroup for $20.5 billion (Citigroups market capitalization on Friday Nov. 21st, 2008), you are still taking a big risk with the $306 billion Citigroup has on its books. Even though Citigroup has $2 trillion in total assets [article], it is not liquid. This means that it would be very difficult to get cash for the $2 trillion in assets in the event that you need to start writing off the rotten ones. How do you get around this annoying $306 billion?

Pass it on to the Taxpayers

If I was a billionaire banker who owned stock in Federal Reserve and who was receiving a piece of the $3.5 trillion from my company (The Fed), this is what I would do:

1) I would short-sell the stock of Citigroup to the point that the company loses 60% of its market capitalization in 3 days: Citigroup was worth $51.8 billion on Friday Nov 14th, 2008. One week later, it was worth $20.5 billion. At the beginning of 2008, Citigroup was worth $160.4 billion. [Source: Google Finance]

2) I would then get my company, the Federal Reserve, to step in and lend Citigroup (who is also an owner of the Fed) $20 billion.

3) I would also get the Federal Reserve to “step in to protect Citigroup from losses on $306 billion of troubled U.S. home loans, commercial mortgages, subprime bonds and low-grade corporate loans.”

4) Now Citigroup is a much more attractive candidate for a merger or acquisition because the Federal Reserve is guaranteeing all of its “toxic assets” through taxpayer dollars.

“There will surely be ongoing chatter about a breakup of Citi once the dust settles,” analysts at Royal Bank of Scotland Group Plc. [article] Which one of the remaining banks will be the one doing the acquisition after the next “big one” falls?

A Little Perspective Please

So let’s start thinking about everything that’s been happening for the last few weeks:

Size of Citigroup bailout (so far & that we know of) = $45B
GDP of Sudan = $46.2B
GDP of Slovenia = $46.1B
GDP of Ecuador = $45.8B
Source: [wikipedia]

The reason I say "that we know of" is because of the secret $2 trillion Federal Reserve program which I covered in my last post. Since we do not know how much each bank got through that program, we are left with a minimum of $45B for Citigroup.

What's really disturbing is Citigroup’s bailout is roughly the same as the GDP of each of these three countries. Pause. Take a minute to think about and process this information. It is staggering to say the least.

Here is something else for you to pause and think about: $2 trillion, then $700 billion and now $800 billion. People are tossing around these huge numbers for bailing out banks and corporations, but I don’t think anyone has stopped for a second to realize how big the figures we are talking about really are.

99% of which is for banks

Do you have any idea how much money that is and what you could do with this amount of money?

As of 2008, half of the worlds population lives off less than 2$ per day. The world population as of 2008 is 6.72 billion. [wikipedia] So at 2$ per day, to feed half of the world for one day it costs $6.72 billion (50% x 6.72 billion people x 2$ per day). For one year, it costs $2.5 trillion. This still leaves about $1 trillion. Assuming it costs $500,000 to build a school, and $1 million to build a hospital, you could build over 650,000 schools and hospitals around the world.

To recap: $3,500,000,000,000 could be used to feed half the world for one full year AND build 650,000 hospitals and schools. Instead, all of this is going to the people who caused this whole financial crisis to begin with. And the taxpayers will be left with the bill at the end of the day.

What is Happening in our World?

When did banks become more important than the well being of society and human beings? More importantly, when did people stop thinking about these kinds of things and asking themselves important questions about the kind of society we live in?

All the information is right in front of us; all we need to do is wake up and start paying attention. Don’t let the system feed your mind, use your mind to think for yourself.

My hats off to the rulers of the banking establishments, you have pulled off the biggest heist anyone could ever have imagined in their wildest dreams...


Further readings:

Reuters - Citigroup Gets Massive Government Bailout

International Herald Tribune - U.S. approves plan to help Citigroup deal with losses

Bloomberg - Citigroup Gets U.S. Rescue From Losses, Cash Infusion

What Secret $2T Federal Reserve Program?

The Lawsuit

After having read an article on Bloomberg about the Fed running a secret $2 trillion program of lending to banks and corporations, a program which is unrelated to the $700 billion TARP project, I thought it was important to bring this little known fact to life [Bloomberg article, Bloomberg TV]. In fact, I have had difficulty finding any major press outlet covering this except Bloomberg, who has requested details of the Fed lending under the U.S. Freedom of Information Act and has filed a lawsuit against the Fed. Thank god for the wonderful world of blogging, because this story has mostly been ignored by the mainstream media. Bloomberg is suing because The Fed has so far refused to divulge any information about the program, except to acknowledge its existence.

I suspect however that the Fed will win this lawsuit under the pretext that it is for the 'public interest' not to reveal exact figures of loan amounts, and who these loans went to. An interesting point raised by BestSyndication is that: "When the Fed was created there were worries that the central bank would be used to provide funds to member banks, like JPMorgan Chase, to purchase assets during economic busts.”


Maximize Profits for Shareholders

When you think about it, it makes sense that the Fed let Lehman Brothers sink on September 15th. It was acting in its own best interest, namely the interests of 51% or over of its investors. This is in line with any other corporation or bank in the capitalist system. The major stockholders of the Fed are the major banking institutions of America.

You can check on the Feds website, the owners of the Federal Reserve is not the government, but the “member banks” [Overview of Federal Reserve, p.12]. The member banks receive a 6% annual dividend for being stock owners. The government merely appoints its board of directors and the chairman (Bernanke). Exactly who owns how much of the Fed is kept secret, but if we assume that its workings are in line with the rest of the banking world, the likely scenario is that ownership is based on market capitalization or the net worth of member banks. So the story goes something like this:

1- The Fed secretly starts lending $2 trillion to its owners.
2- The Fed lets Lehman Brothers and thus the markets collapse.
3- The Fed owners go bargain hunting by buying up competitors for pennies on the dollar and thus consolidating their positions in the market (using the $2 trillion + $700 billion provided by the Fed).

This intuitively makes perfect sense, because that is how our markets work. Lesson number one in business and economics is that a company exists in order to maximize the profits of its shareholders. They are just doing what any other bank or corporation would do to maximize profits. And when you think about it, you can’t really blame the Fed or its stockholders (i.e. the banks) for the financial catastrophe that is currently happening. It is happening and it will pass when the best interests of those who control the money supply are served.


Who Will be Next?

As I mentioned in the previous post, everyone knows that GM has been severely struggling in the past few weeks and is basically begging the Fed and the government for money to continue operations. No money has been committed just yet. But GM posted a $15.5 billion third quarter loss [article]. In one quarter! How much money does the Fed need to lend them to stay afloat if they are burning money at that rate? And is GM going to be able to repay the Fed these huge sums of money with interest? Unlikely.

Again, here we see that the best interests of the shareholders of the Fed are served by letting GM go bankrupt. One of two scenarios will then happen. GM will either be allowed to restructure under bankruptcy protection, essentially allowing the company to annul most of its debt obligations, and start new ones with the Fed; or it will be seized by the government like Washington Mutual and Lehman, and its pieces sold off.

The Fed would of course lend Ford and Chrysler money to buy up pieces of GM at bargain prices. If GM collapses, it will act as a second Lehman, collapsing the already fragile markets further. The major banks will then again step in and start buying up companies and competitors for discount prices. Even Paulson said that “bank mergers may be best for the economy.” [article]


Bank Acquisitions and Failures so Far

To put things into perspective, here is a list of bank acquisitions in the US since the beginning of 2008:

04-01-2008 – Bear Sterns acquired by J.P. Morgan Chase - $2.2B
09-01-2008 – Countrywide Financial acquired by Bank of America - $4B
09-14-2008 – Merrill Lynch acquired by Bank of America - $44B
09-16-2008 – American International Group acquired by the Federal Reserve $85B
09-17-2008 & 09-26-2008 – Parts of Lehman Brothers sold off to Barcklays plc and Nomura Holdings
09-26-2008 – Washington Mutual acquired by J.P. Morgan Chase - $1.9B
10-03-2008 – Wachovia acquired by Wells Fargo - $15B
10-13-2008 – Sovereign Bank is acquired by Banco Santander SA (Spain) - $1.9B
10-24-2008 – National City Bank is acquired by PNC Financial Services - $5.58B
10-24-2008 – Commerce Bancorp is acquired by TD Bank (Canada) - $8.5B

Full list of global acquisitions and failures [wikipedia]

We might soon have to add CitiGroup to this list [article]. The company’s stock has lost 50% of its value in the last three days, and Bloomberg reports that Citigroup may get a government rescue. Or the Fed might allow the Bank of America or J.P. Morgan to buy it. Goldman Sachs has already refused [article], so we’ll have to wait and see.

I might be wrong about which company will be left to go bankrupt, but the idea is there. Whether its GM, Lehman, Chrysler, Citigroup or GE it makes no difference. The end result is what matters, and that is expansion of profits for the stakeholders.


So What Now?

The root of the problem is not the banks or the Federal Reserve, but rather the system which has allowed and even promoted this kind of activity. And I think that we are unlikely to emerge through financial crisis unless some fundamental problems within this system are resolved.

There is so much debt out there right now, that I am worried for when the interest payments on all of the outstanding debt becomes so big that the majority of borrowers entire income is spent just for the interest portion of the loan, and nothing for the principal portion. This is kind of what is happening now, but I expect that a lifeline might be thrown to the global markets to sustain it through one more bubble.

The only solution to this problem from a banks perspective is if paper money is eliminated altogether, and digital currencies become the standard for payment. Then the reserve requirements would become meaningless because money would be created through computers and backed by nothing, not even cotton paper.

The people already have very little control over money, but if this were to happen, we would have no control over our money what-so-ever. And the people with the power to push a few keys on their computer and give you a loan or issue you a payment will also be your masters. It will take a crisis of some sort for the people to accept removal of paper currency and a move to digital currency, and I really hope that the current financial crisis isn’t it…

Please see this video: Bloomberg TV - Transparency at the Fed

Further readings:

Bloomberg - Fed Defies Transparency Aim in Refusal to Disclose

Bailout Sleuth
(Good Blog which discusses some alternative apsects to the financial crisis)

Best Syndication - Bloomberg Sues Fed Under Freedom of Information Act

Russia Today - Fed refuses to disclose who got loans

LA Times Blog - Bloomberg sues to get list of banks borrowing from the Fed

Bloomberg - Citigroup May Get Government Rescue, Investors Say

Reuters -Goldman Cool to Citi Deal Even With Government Aid

GM Bailout? A Little Bit Too Late

GM, Chrysler and Ford are drowning. This is not really news, as it has been in the works since last year. GM has frantically been trying to re-organize its business to move towards more 'fuel efficient' models and reduce production of the gas-guzzling SUVs.

How ironic then that it was actually GM which came up with the first major breakthrough in the electric car technology, but decided to scrap the idea because it was afraid for its long-term profit potential. In my view, GM should be allowed to suffer for being in bed with the oil industry, and looking at its long term profit potential instead of thinking about the well being of the planet and its customers. I am not going to say any more here, except go watch Who Killed the Electric Car on Google Video and see for yourself. Narrated by: Martin Sheen.

More on the following topic in the next post: I think GM will be allowed to collapse and its remaining parts will be sold off to Ford and Chrysler for bargain prices. This will occur because it is the only possible way to save at least a good portion of the US auto-industry. The government will have to choose between a lame bailout program for all three major US auto manufacturers, or letting the biggest sink allowing its competitors to buy up assets at firesale prices. This will increase their own market capitalization and growth, and during the up-cycle of the economy, the true value of the assets acquired through inexpensive acquisitions will increase Ford's and Chrysler's net worth. Ultimately almost all, if not all of GM's 'lost value' will be re-distributed into the market.

This just makes economic sense all around, and anyone arguing saving GM to save the US economy does not understand the fundamental principle of capitalism: maximize profits for the shareholders. In this case, the shareholders of the US Government (the majority of the people), of the Fed (the banks) and of Ford and Chrysler. When the overall 'benefit' is weighed for all the shareholders, versus the benefits for GMs shareholders, I think it is quite clear that "for the greater good", GM will be allowed to fall. Yes, there is a lot of jobs which will directly and indirectly be affected by this, but once the industry completes its consolidation (much like the banking industry), most of these jobs will come back during the "growth" stage of the economic cycle.


You know, it amazes me how often people forget that our economy is a "cyclical" one, whether by design or by nature. Even though the economy is currently grinding to a halt, it always ends up making a comeback and even surpassing its previous value. And the reason is that those who run the economy (i.e. the banks and the corporations) have the most to lose should the system collapse. And they will NOT allow it to collapse. Granted the current crisis is more grave than any previous one since the Great Depression, but again, the people with the wealth have the most to lose by a total systemic collapse of the markets. Their assets, bonds, stocks, paper and digital money would be worthless, so they will not allow this to happen.

The big banks are aware of everything I am discussing here, and they are prepared to play ball. Reuters reported this week that both Goldman Sachs and J.P. Morgan downgraded their ratings for GM. They are getting ready for the collapse and so should you. It will trigger many job-losses and an overall sell-off of stocks from all industries. I really hope that I am wrong about it being GM, and that a smaller company will be chosen to go bankrupt, but I think that they may not have much of a choice...

Readings:

Time - Is General Motors Worth Saving?

Bloomberg - Obama Pushes for $50 Billion for Automakers, Oversight Czar

NYTimes - G.M.’s Troubles Stir Question of Bankruptcy vs. a Bailout

Reuters - RESEARCH ALERT-JP Morgan Downgrades GM

Reuters - Goldman Suspends GM Rating, Sees $22 billion Bailout

Obama, Are You Asking For a Critique Already?

It didn't take very long to start critiquing Obama but after having read a Reuters article about his potential picks for the next Treasury Secretary, I felt I needed to comment. This is not to say that Obama yet deserves to be criticized, but I am already seeing the Washington bureaucracy and established order at work in his potential Treasury Secretaries.

Indeed, Obama's selection for this and other important roles in his administration will speak volumes about the approach he will take as president, and will give us a clue as to the man behind the 'cult figure.' Realistically speaking, how much decision making can one man (the president) really make? He will be relying on his inner circle to help him run the country, so his inner circle had better be up to par.

With the Treasury Secretary receiving all these new powers through the passage of the $700B bailout package, it was always obvious to me that it was not going to be Paulson excercising them, but his successor. So we should closely be watching who Obama is going to appoint in this crucial and increasingly important position. In my opinion, this should be someone with little ties to banks and corporations.

In fact, it should be a proven consumer advocate (i.e. someone who has consistently fought for the little guys) but that also has somewhat of a banking background, so that he can understand the mess and complexity of the issues that the banks and corporations have gotten us into. That way he would at least be in a position to propose intelligent and socially beneficial solutions to some of the problems facing the financial world today and tomorrow. I know I am probably being unrealistic in this expectation, but I try to be an optimist!

Lets take a look at the potential Trasury Secretaries one at a time:

1) Timothy Geithner, President of the Federal Reserve Bank of New York [profile]. A small amount of research into the US central banking system, i.e. the Federal Reserve, will show you that the most powerful, and essentially decision making branch, is the New York Fed. So my money is on Geithner taking the position for several reasons (please see the Muckety article below). This is not good news though. If you understand anything about how this system has been structured since 1913, you will realize that putting Geithner is just a continuation of the old debt-for-money scam and will do little to help 'Main Street', as the political elite have started calling it lately.

Greithner is closely affiliated to the Council on Foreign Relations and is chairman of the G-10’s Committee on Payment and Settlement Systems of the Bank for International Settlements. See his profile on the NY Fed website.

There is a great article about Tim Greither and some of his connections at news.muckety.com.


2) Former Treasury Secretary Lawrence Summers [profile]. Do I really need to say anything here? An old Treasury Secretary from the Clinton era, he has worked extensively in the Treasury. I very much doubt this will be Obama's pick so lets move to the next candidate on the list.


3) Former Federal Reserve Chairman Paul Volcker [profile]. Another member of the 'boys club.' He already served as Fed Chairman before Alan Greenspan. He has worked at both the New York Federal Reserve and the US Treasury, and is a powerhouse when it comes to political/corporate/banking connections. Definitely the second most likely candidate. The only reason I think he is unlikely to be chosen is because he flies in the face of Obamas 'Change' philosophy seeing as he is a well-established player in the game. Geithner is a lot more likely because he is young and is equivalently connected to the same crowd.

So in these three main choices, Obama is already starting to show his true colors, albeit wrapped in a much more politically attractive package. At the end of the day, will he be more loyal to the people who bankrolled him to the White House, or those that voted for him?

The following image illustrates who Obamas top campaign contributors were in the 2008 election campaign. I imagine a few people from these organizations will be filling positions in his new cabinet, especially from Goldman. Click on the image for more information.

I don't have an intelligent alternative suggestion, but I am open to hearing other people's ideas for who the next Treasury Secretary should be. Any ideas?


More readings:

Reuters - Obama considers Geithner, Summers for Treasury

Bloomberg - Summers, Emanuel Candidates for Obama Administration

International Herald Tribune - Obama Prepares to Name Key Team

Financial Post - Obama Must Pick Economic A-team

Obama Leads Democrats to Impressive Victory

I know that I am a fierce critic of everything government and corporation oriented. But even I have moments where I stop to admire people who have achieved something, even if they are sitting on the other side of the fence, or playing for the opposite side.

I must say that Obama's victory and subsequent speech inspired even me who is a total opponent of the American two-party system. Obama almost made me into a believer, so I can only imagine how he has moved and inspired all those who have been fighting for his presidency for the past 21 months. What a speech! Very powerful words and full of promises; it was the climax of a brilliantly organized and well fought campaign. Even McCain was admiring Obama in his concession speech.

Obama Victory Speech on You Tube

McCain Victory Speech on You Tube

In this post, I will say nothing critical or insulting about Obama or the US government. I really want to believe that Obama is not just blowing steam, but that he will really change the US and consequently the world in a good way. From foreign policy to corporatocracy, he has made a lot of big promises, and I really hope, for all of us, that he will deliver on these campaign promises.

Obama was absolutely right about one thing in his speech last night - The work does not stop here. The work never stops! Those people who worked so hard at bringing him to the White House, are now going to have to work twice as hard to make sure he is not corrupted by the system which he is about to enter. The position of president has been marginalized, and it will be very tough for Obama to break through all the Washington bureacracy and red-tape to get any major accomplishments. But I'll stay optimistic; expect the worst, but wish for the best.

The old Chinese curse had it right: "May you live in interesting times..."

Result Recaps, click on the image to see it in big (Images courtesy of CNN):

Election victory in the News:

NYTimes - After a Decisive Victory, Obama Chooses Transition Team as Challenges Loom

Reuters - After Historic Win, Obama Looks to Future

CNN - Obama's Victory Caps Struggles of Previous Generations

BBC - World Leaders Hail Obama Triumph

International Herald Tribune - Campaign Done, Obama Pulls His Team Together

NewsWeek - Hey, Mr. President-Elect, Got a Minute ... or 10?

MSNBC - Obama turns to building his administration

Election Excitement is Contagious In 2008

I have to say that this US Election-Mania is contagious. I have been glued to the BBC webcast ever since I got back from work. Although I know Obama is going to win, the mass excitement and hysteria surrounding this election has finally reached its zenith. So I am doing a quick post to show where the candidates stand in terms of states, just for future reference purposes.

I must admire the media for doing such a fine job of hyping this event up to the point where I almost believe that people actually have a choice here. Here is the electoral map with its projected winners. The yellow states are the ones which will likely determine this election.

Go Ron Paul!

Obama Will Take The Prize

It's the night before the election. And the pollsters have already dug a grave for John McCain. If you take a look at the most recent polls, you will see that Obama is leading McCain with a minimum of 6 points and a maximum of 13 points, depending on who you believe. But the commentators are trying to throw a monkey wrench into the equation by saying that people are 'unpredictable' and that they might change their mind once they get to voting. Please click on the following image to see the pre-election poll results from three major pollsters. Images courtesy of the BBC.

I don't think these people have stopped for a moment to admire the brilliant campaign Obama has been running. Ever since the primaries of the Democratic Party, Obama's campaign machine has been exceptionally well greased and has been pushing forward through all sorts of obstacles. They have made Obama into a cult figure, and have actually managed to convince a lot of people that he will bring about the "Change you can believe in."

As much as I would like to believe that, the fact that Obama's major political contributors are a who's who of the important banks and corporations, I find it very hard to believe that Obama is looking out for the people. In fact, there has been chatter of an "event" that the next US president is going to have to face as he enters the White House. Both Joe Biden and Colin Powell have mentioned this event, and Powell is an Obama supporter, while Biden is Obama's running mate. For more information on this, please check out this You Tube Video.

Obama is a perfect symbol of change, evolution; out with old, in with the new. He has to win, if the American people are to "have a hope for a better future." At least that's the image being created for Obama by the mainstream media.

So on that note I leave you. I am only going to recommend one article today, but an article that I definitely think is worth reading...

Global Research - A Second 9/11: An Integral Part of US Military Doctrine

Fractional Reserve Banking or Money Counterfeiting?

This week, I have decided to take apart yesterdays post into fractions, and elaborate on the several assumptions and statements that I make in it. This first of a few, in which will be taking a slightly deeper look into some issues I think people need to think about which relate to the ongoing global financial meltdown.

So the first issue I would like to discuss in detail is that of Fractional Reserve Banking. The following definition is courtesy of Art Branch Inc:

Fractional Reserve Banking refers to a banking system which requires the commercial banks to keep only portion of the money deposited with them as reserves (i.e. the reserve requirement). The bank pays interest on all deposits made by its customers and uses the deposited money to make new loans. In order to understand how fractional reserve banking works, let's look at the following example.

Somebody deposits $1,000 with Bank A. Bank A is obligated by law to keep 10% of the deposited money as a reserve, that's why the bank keeps $100 and lends out $900. Somewhere down the road the $900 loan is deposited in another chequing account (it might or might not be with the same bank). This second bank also wants to make money by giving out loans, that's why it keeps the required $90 and lends $810. Fast forward to a deposit with a fourth bank and you'll get the following:

As you can see from the table above, the banks created $2,439 based on the first $1,000 deposited. This in essence is a license to print money. The fractional reserve banking works for now, because the total amount of withdrawals is offset by deposits made at the same time. While the depositors are confident at the fractional-reserve banking system, a very small part of all deposits is withdrawn at the same time allowing the banks to handle the withdrawals through the 10% reserves. However when people's confidence in the banks is shaken, bank runs are possible, and the entire banking and financial system can collapse.

So, based on the reserve ratio principle, you can see that banks are essentially allowed to create money 'out of thin air' by keeping a small reserve on hand, and lending out the remainder of their deposits. But there is an even bigger catch at play. A lot of people wonder how banks can make so much money charging such low interest rates (in the 4% to 5% range recently). Well the answer is simple. As an example, imagine you deposit $100 in the bank, and then the bank turns around and lends out $900 based on your $100. For simplicity lets assume the interest rate is 5%. The banks earnings in this case are $45 (5% x $900). When you think about the fact that it took $100 to make $45, you realize that the banks actually earn 45% ($45/$100) on your $100 deposit, and not the advertised 5%.

The following diagram illustrates the amount of money in circulation as measured by various bank reserve requirements. As you can clearly see, the lower the reserve ratio, the higher the amount of money in circulation. Based on the previous example, you can logically deduce that lower reserve requirements result in higher bank earnings on the same $100 deposit.

As the amount of money in circulation increases, so does inflation. As such, the hidden 'tax' on everyone is in the form of increased prices (or decreased currency value). The following diagram illustrates the inverse relationship between the money supply in circulation and value of the money itself.

Getting back to the main topic of this post: through fractional reserve banking, western countries have sustained growth in their economies through booms and busts, which were arguably created by the central banks and the fractional reserve banking model. If you look at the following list, you will notice that the countries with the lowest or non-existent reserve ratios are mostly western countries. You will also notice that the countries with the highest reserve ratios are mostly developing countries. During these tough financial times, those suffering the least are the countries at the bottom of this list because of their reduced dependence on debt to finance economic growth.

In summary, I think it is quite clear that fractional reserve banking is designed by definition to be a debt-based system. The paper currencies of most if not all countries do not hold an intrinsic value based on a reserve in gold, silver or any other commodity. Instead, the currency's value is determined by the amount of money in circulation and the governments order that it must be accepted as a means of payment.

As a closing remark, now that you understand the basics of how banks 'create' money, do you really think that creating more debt and adding it to the existing mountain will really solve the problem on a long-term basis, or is it just a quick fix until one day we wake up and the banks start repossessing everything we own...


Sources and further readings:

http://www.centralbanksguide.com/fractional+reserve+banking/
(Definition and explanation of Fractional Reserve Banking)


PRO-FRACTIONAL RESERVE:
http://blog.paulmckeever.ca/2008/05/28/inflation-the-gold-standard-and-fractional-reserve-banking/
(Paul McKeever - Inflation, the Gold Standard, and Fractional Reserve Banking)

http://www.freebuck.com/articles/afekete/040420afekete.htm
(Fractional Reserve Banking Revisited)


ANTI-FRACTIONAL RESERVE:
http://www.marketoracle.co.uk/Article6989.html
(The Market Oracle - How the Fed Creates Bull and Bear Markets)

http://www.islamic-finance.com/item113_f.htm
(Don't Mention the Reserve Ratio)

http://westernstandard.ca/website/article.php?id=2884
(Banking and Morality: 100% Reserve versus “Fractional” Reserve)

Another Dose of Global Interest Rate Cuts

This is a quick post to note that today, the Federal Reserve cut rates by 0.5%, which brings the all-in rate down to 1%. The Fed followed a move by the Chinese Central Bank which itself cut its rate to 6.66% from 6.93%.

Several other countries are expected to follow, with Norway already announcing a 0.5% cut down to 4.75%.

Stock markets around the world rallied yesterday on the expectation that central banks were planning these moves.

Not much more to say here, the upcoming post on fractional reserve banking will be much more thorough and in-depth, and will address the issue which I will leave off on:

The world is debt-strained, countries are drowning in debt (think Iceland and Pakistan) and corporations cannot borrow any more because they are over-leveraged as is. Investors are having a hard time trusting corporations and banks, and now the central banks walk in and offer more debt to solve the problem.

The good news here is that debt in the US now costs 1% (to banks and corporations of course). The bad news is, if things get worse from here, how many more rate cuts can the Federal Reserve support?


More readings:

Bloomberg - Fed Cuts Rate to 1% to Avert Prolonged Recession

Reuters - U.S., China Kick Off Global Round of Rate Cuts

BBC - US Interest Rates Slashed to 1%

Wall Street Journal - Fed Cuts Rates by Half Point Amid Economic Deterioration

The Banking Establishment: Crooks or Geniouses?

The stock markets took a real beating last week. As my predictive power has been proven to be 0, I will not be trying to make any guesses as to the direction the markets will take this week.

Suffice to say, things are not looking good. Even after all of the cash injections world governments have committed to, investors are still weary of putting their money into investments which they are not sure about. And rightly so. After all, the past few weeks have shown how over-leveraged (i.e. debt straddled) our corporations and banking institutions really are.

I think its about high time we got a bit more into the technical aspects of the financial meltdown. First, I think we are all aware of the fact that the US and 'industrialized' world economies are based on debt. Through fractional reserve banking, the US and its allies have run up tremendous amounts of debt growing their economies since the establishment of banking.

In order to understand how the process of making money works, i suggest that you view one of the two recommended documentaries at the end of this post. In a nutshell, the government gives the Federal Reserve bonds in exchange for the paper currency. The Fed then controls the money supply (and inflation) through the buying and selling of bonds on the open market. But all new money starts off as an exchange for bonds, so money itself is always 'owed' with interest. Therefore the debt is always increasing regardless of the governments budgetary surpluses or deficits.

However, that's not the end of the story. The paper money in use today is what is referred to as fiat money. For a period between Bretton Woods and 1971, the worlds currencies were pegged to gold (the gold standard), meaning, the paper money at least had some sort of intrinsic value. At that time, each currency was pegged to the dollar, and the dollar was re-deemable for gold. Please click on the pre-1971 $100 dollar image below and note that in the top left corner, it is written 'redeemable in gold'. As of 1971, Nixon unilaterally cancelled the Bretton Woods system and US dollars were no longer convertible to gold. The US dollar then became the defacto 'safe' currency. The IMF and World Bank function in US dollars and base their loans on fractional reserve banking.

So from 1971 forward, the US dollars value was based on the amount of money in circulation. Put in another way, the 'legal tender' value was determined by the physical amount of paper currency that was available. In essence, when more of the money was printed, the money already in circulation by definition had to decrease in value. An alternate way to look at this is that the price of goods HAD to increase due to the increased amount of money. So instead of looking at inflation as an increase in the price of goods, you should look at it instead as a decrease in the value of the dollar.

In simple economic terms, the law of supply and demand states that as supply increases (and demand remains steady), the price must inevitably decrease. Alternately, if supply is steady and demand increases, the price inevitably increases. Pick which way you choose to look at it, but either way, inflation is a tax that has been worked into the monetary system. It is inflation which lowers the value of our money. And if there was some sort of peg on which to base the value of the currency, inflation would be almost if not completely eliminated.

Given that the current market situation is the result of huge amounts of debt, it is extremely unlikely that the powers that be would decide at this point to peg the currency to gold again. I think they simply don't have the gold reserves necessary to accomplish something of this magnitude. However, the proposed solution is to fix the debt problem by issuing more debt. Well, I think that anyone can understand that this simply will not work. Giving a drug addict more drugs to get rid of the 'fix' is not really solving the problem, it is only delaying the solution. I think that it is inevitable that this house of cards will crumble at some point if a serious solution is not proposed.

Now, I know I am not the smartest guy in the world. In fact I only have a bachelors degree in finance, no masters and no doctorate. Therefore, I know that the establishment knows all of this as well as I do, and probably a lot more. So the question that arises is: why sustain this system which will surely result in economic catastrophe? Ultimately, this will end up costing those who have money the most, as their money will be worthless. So why?

Great video about the banking industry and the Federal Reserve: Money, Banking and the Federal Reserve.

Another great video: Money as Debt


Other interesting readings:

Global Research - Financial Meltdown: The Greatest Transfer of Wealth in History
(Amazing article which discusses several of the aspects I mention in this post)

Wall Street Journal - Moody's CEO Warned Profit Push Posed a Risk to Quality of Ratings

Reuters - U.S. Has Plundered World Wealth With Dollar: China Paper

International Herald Tribune - G-7 Warns Against Strengthening Yen as Financial Turmoil Deepens

The World Economic Forum Fails to Stem Crisis

There is a very interesting article on Bloomberg today about the World Economic Forum (WEF), which meets annually in Davos, Switzerland. The article discusses why the forum did not predict that the worlds debt was going to collapse on itself.

The WEF is composed and funded by 1000 global member corporations with revenues exceeding $5B. Naturally, a who's who of important global bank and corporate leaders, alongside their political front men and celebrity ego strokers, have been meeting every year for the past 27 years to discuss global issues and attempt to propose solutions.

There is something discomforting about the fact that these 'important' people meet every year to discuss our future under the pretense of solving 'global' problems. If that was truly the case, and the WEF was an effective forum for solving global issues, then why was this financial catastrophe currently gripping the world (an several others before it) not identified and dealt with at the appropriate time?

It seems to me these meetings are more about the attendees getting together and stroking their own egos (after all, they are the top global leaders, politicians and celebrities) than it is about helping people like you and me.

The World Economic Forums slogan is "committed to improving the State of the World". Quite clearly though, they are doing a lousy job as there have been multiple crises' and wars since the forum began in 1971.

On a positive note, at least the WEF identified Canadian banks as the soundest in the world. So at least my money is somewhat safe, even though our banks here in Canada have already started a push to pay their way out of the crisis through more debt. I and several of my friends have already received calls from our banks offering us lines of credit and increased credit card limits. I am still making the same amount of money as I was 3 months ago RBC!

Official World Economic Forum Website: http://www.weforum.org/


More Readings:

Bloomberg - Out of Control' Wall Street Chiefs Spurned Warnings at Davos

Business Week - Top Countries in Global Competitiveness

CTV - Canadian Banks the Soundest in the World: Report

Iraqis Hit Back at US Military Commanders

As I have largely ignored Iraq in my blog thus far in favour of issues more widely covered by the mainstream media, I have decided today to write a critique of recent US behaviour towards the Iraqi government.

The US Government is about to sign a pact (Status of Forces Agreement) with the Iraqi government to extend their troop presence in the country until June 30th 2011.

The US is doing its usual bullying job by attempting to intimidate the Iraqi Parliament into submission. Admiral Mullen, the US Chairman of the Joint Chiefs of Staff, warned that Iraq risked security losses of "significant consequence" unless it approved the deal to keep American forces in Iraq beyond the end of the year.

US Defence Secretary Robert Gates added a warning of "dramatic consequences," saying the US would have to "basically stop doing anything" if there were no Status of Forces Agreement.

At least the agreement will make US soldiers somewhat liable to the Iraqi government if they commit any serious crimes. As honorable as this seems, it will only occur in extreme cases of abuse of power, which will probably 'never' occur as US soldiers are known to be so well behaved in their operations around the world. (Please note the extreme sarcasm in my tone)


The Iraqis want to handle security in their own country (understandably so) and want the Americans to get out as fast as possible. Iraq's military spokesman Brigadier General Qassim Atta said Iraqi forces were ready to handle security across the country, noting that they already control 11 of Iraq's provinces.

But the Americans of course know best, and insist that if they leave, total chaos would reign in Iraq. Of course, with the brilliant way they handled the whole invasion, I tend to believe that the Iraqis know better about the security in their own country.

There is a great documentary on the American invasion of Iraq available on You Tube: No End in Sight. Definitely worth taking a look at.

The Long Winded Conclusion: After the US destroyed Iraq and its sovereignty, and lent it enough money to repair all the damage (at interest of course!), now they want to stay on for another 3 years to steal one of the most valuable resources the Iraqis have left: oil. Some might argue that this is the reason they went into Iraq to begin with, but be weary of mainstream media instilled ideas. The Iraq war was about much more than just oil (albeit oil was an important factor in the equation). The Iraq War was more about the next step in globalization and expansion of the global capitalist empire. It is a war designed to be sustained so that extreme government defense spending can be justified. Most of the profiteers in the war are western corporations anyway. Watch No End in Sight for more on this...

A great independent media source which covers Iraq quite often is: http://www.indymedia.org/


More readings on the subject:

Reuters - Pentagon Seeks to Calm Concerns Over Iraq Troop Pact

Reuters - Door Nearly Closed on Iraq Troop Deal, Gates Says

BBC - Iraqis Hit Back at US Commander

Al Jazeera - US Gives Warning on Iraq Troop Pact

Bloomberg - Iraq Says Mullen's Push for U.S. Security Accord `Not Welcomed'

AFP - 'Dramatic' Consequences Without US-Iraq Troop Accord: Gates

Don't Mind the Economy, Obama is Beating McCain

Obama opened a 10 point lead today over rival John McCain according to a Journal/NBC poll. This could be interpreted as people thinking that he is a better politician. I instead choose to interpret like this: Obama has raised $150 million in campaign contributions for the month of September. This broke all election financing records and dwarfed McCains allowed $84 million budget.

So While Obama is grossly outspending McCain and his ads are running at a 4-to-1 ratio compared to McCains, its no wonder that the American public has taken a liking to the Illinois Senator. The fact that McCain keeps putting his 72-year-old foot in his mouth regularly, and that Colin Powell endorsed Obama over the weekend, might just have put the last nail in McCains political coffin. Does anyone still think he has a chance to win?

I do prefer Obama to McCain, but the American people need an honest politician in office. Please see yesterdays post for campaign contributions to see who 'owns' the two candidates. Obviously, even though Obama looks and acts a lot better than Bush and McCain, and assuming he genuinely wants to help the American people, he will be VERY limited in what he will be able to do. His political backers own Washington anyway, and will be expecting a return of favors. Besides, look at the article at the bottom about fake Obama contributions. Very interesting read.

So go out and get informed about the banks and the financial crisis, because in the end, unless you are making over $100k per year, you will inevitably suffer because of the current financial situation. You don't own any stock you say? You work for the government so your job is safe? Well the several Trillion dollars about to be spent to bail out the banks and give them a free lunch after they screwed all of us through interest rates and bank fees, will lead to a VERY high inflation rate.

So when you are paying 10% more for everything from bread, butter and milk, to gas, cars and insurance, remember who got the short end of the stick during the bailout of the American economy.

There is a man who is trying to do something about this (and running for President of the US in 2008). You might have heard about him, his name is Ron Paul. Check out his Campaign for Liberty Website for more information about how you can participate.

At least watch this You Tube Video with a Ron Paul interview to get an idea of what he is about. You can see that at least he is trying to solve the real problem, and not worrying about getting elected or keeping his backers happy...

More Readings:

Reuters - Obama Opens Double Digit Lead Over McCain

Reuters - Obama Raises Record $150M in September

Washington Post- Questions About Online Controls Follow News of Fake Obama Donors

New York Times - Fictitious Donors Found on Obama Finance Records
(Very good article, indicating America's new darling politician isn't so squeaky clean after all. Please don't insult my or your own intelligence by suggesting he had nothing to do with this.)

Does Goldman Sachs own the US Government?

Today I decided to do a little research on Goldman Sachs, because I have been noticing the company’s name popping up all over the place during my readings of the financial crisis. So, here is a list of interesting Goldman Sachs facts, with links to their corresponding articles:

1) In September of this year, Warren Buffet invested $5Billion into Goldman Sachs non-voting preferred shares through his company Berkshire Hathaway. This by itself means absolutely nothing, but the significance will be made clear by reading the rest of the post. See Article.

2) Henry Paulson started working at Goldman Sachs in 1974, becoming CEO of the company in 1999. He remained as CEO of Goldman until his appointment as Treasury Secretary in 2006. Profile 1 (US Treasury) - Profile 2 (Wikipedia).

3) Of course Paulson had to take care of his old buddies at Goldman while disbursing a part of the $700B package. He has set aside a $10B cash injection for the company he used to run! See Article.

4) The man responsible for Henry Paulson becoming the US Treasury Secretary is a man by the name of Joshua Bolten. He worked in Goldman Sachs for 5 years from 1994 to 1999 and currently serves as George W. Bush’s Chief of Staff. Profile 1 (White House) - Profile 2
(Wikipedia)

5) The new Interim Assistant Secretary of the Treasury for Financial Stability and the man in charge of the Troubled Assets Relief Program (TARP) Neel Kashkari, who will be responsible for overseeing the $700B bailout package, is another Goldman Sachs alumni. He was actually already working at the Treasury as an Assistant Secretary of the Treasury for International Economics and Development, and will now play a dual role in the Treasury. Profile 1 (US Treasury) - Profile 2 (Wikipedia)

6) Kashkari in turn has tapped Reuben Jeffrey, an 18-year veteran Goldman Sachs executive, to serve as interim Chief Investment Officer for TARP. Reuben was already Under Secretary of Economic, Energy and Agricultural Affairs since June of 2007 and advises the Secretary of State on international economic policy. Profile 1 (State Department) - Article (Chron.com)

7) In September, after the $85 million US government bail-out of the American International Group (AIG), the world’s largest insurer, Henry Paulson pushed for a fellow Goldman Sachs-er to be appointed as the new director and CEO of the company: Edward M. Liddy. Board Member List (AIG) - Profile (Wikipedia)

8) The current Director of the National Economic Council is Stephen Friedman. He spent most of his career in Goldman Sachs, part of it as the chairman of the company, before taking on this role and a few others. PAY ATTENTION HERE: He is also the chairman of the President’s Foreign Intelligence Advisory Board (a banker in this position?) AND, is a class "C" director AND Chairman of the Board of the New York Federal Reserve (meaning he is elected to represent the public!). Profile 1 (Whitehouse) - Profile 2 (Wikipedia) - Profile 3 (New York Fed)

9) Robert Zoellick, the current head of the World Bank and former US Deputy Secretary of State, is a former Goldman Sachs managing director. Profile 1 (World Bank) - Profile 2

10) I saved the best for last of course. Lets take a look at who the top contributors are for the incoming president (Wikipedia)Barack Obama and his sure-to-lose opponent John McCain. Source: OpenSecrets.org

Obama 2008 Campaign Contributions

What do you know, Goldman Sachs is the top contributor to Obama's campaign this year. But don’t let this $739,521 fool you, they’ve actually donated quite a bit more to the Democrats, click here for the exact numbers.Let’s think about this for a second. Obama is always saying how he will support any measure that helps the average American (i.e. the little guys). However, 5 of his top 10 contributors (50%) in the 2008 election campaign are banks. His 10^th top contributor is Lehman Brothers, the institution which collapsed on the first black Monday, September 15^th, and arguably caused the ensuing meltdown. So would it be safe to say that Obama is thinking more about the banks (particularly Goldman Sachs) interests rather than the average Americans?

We Already knew McCain is a corrupt old fart that's owned by the banks and corporations, so its no surprise to find out that 4 of his top 5 contributors (80%) are banks. Note McCains third top contributor is Goldman. Click on the picture to go to OpenSecrets.org for more information.

McCain 2008 Campaign Contributions

I realize this is a long post, but it makes up for the fact I did not post all weekend. I encourage everyone to look all these people up for yourselves if you don’t believe me. Also, if I have missed someone over, please send me a note and I will verify and then add them. I will be continually expanding this post as I uncover more "Goldmanners" in government positions. Here is a link to the NY Times article which gave me the idea, and some additional readings on Goldman:

NY Times - The Guys From 'Government Sachs'
(They go too easy on Goldman in my opinion. Obviously there are huge conflicts of interest here but NY Times tries to play these down.)

Bloomberg - Goldman Sachs Paydays Suffer on Lost Leverage With Fed Scrutiny
(Bloomberg tries to make it seem like the poor Goldman executives will suffer pay cuts! Yeah right! One set of crooks standing up for antoher...)

Bloomberg - Obama Faults Bankers, Takes Cash

Other prominent people who were employed first by Goldman Sachs, and then by the US government include:

• Former treasury secretary Robert Rubin.
  

• Former President of the Export-Import Bank of the US Kenneth D. Brody.
  

• Goldman Sachs' graduate James Johnson served as president and CEO of quasi-government housing lender Fannie Mae.
  

• Dan Jester has been involved in most of Treasury’s recent initiatives, especially the government takeover of the mortgage giants Fannie Mae and Freddie Mac.
  

• Steve Shafran, who is currently involved in the Treasury's initiative to guarantee money market funds.
  

• Other prominent Goldman executives currently employed by the Treasury include Kendrick R. Wilson III, Edward C. Frost and Robert K. Steel.