S&P Junks Puerto Rico On Liquidity Concerns, Warns About $1 Billion Collateral Call – Full Note | Zero Hedge
Following the evaluation of liquidity needs (and availability) for the Commonwealth of Puerto Rico, S&P has decided that “it doesn’t warrant an investment-grade rating”:
- PUERTO RICO GO RATING CUT TO JUNK BY S&P, MAY BE CUT FURTHER
- GOVT. DEVELOPMENT BANK FOR PUERTO RICO CUT TO BB FROM BBB-:S&P
- PUERTO RICO GO RATING LOWERED TO ‘BB+’: S&P
- PUERTO RICO REMAINS ON WATCH NEGATIVE FROM S&P
Both the G.O.s and the Development Bank have been cut. Note that 70% of muni mutual funds own this – and it is unclear if a junk rating forces (by mandate) funds to cover. Worst of all, S&P warns Puerto Rico could now face a $1 billion collateral call on short-term debt – the same waterfall collateral cascade that took down AIG.
Full note:
Puerto Rico GO Rating Lowered To ‘BB+’; Remains On Watch Negative
NEW YORK (Standard & Poor’s) Feb. 4, 2014–Standard & Poor’s Ratings Services has lowered its rating on the Commonwealth of Puerto Rico’s general obligation (GO) debt to ‘BB+’ from ‘BBB-‘. At the same time, we have downgraded Commonwealth appropriation secured debt and Employee Retirement System (ERS) debt to ‘BB’. All of our ratings remain on CreditWatch with negative implications.
The downgrades follow our evaluation of liquidity for the Commonwealth, including what we believe is a reduced capacity to access liquidity from the Government Development Bank (GDB) of Puerto Rico. In a related action, we downgraded the GDB to ‘BB’, and the rating remains on CreditWatch with negative implications. We also believe that the Commonwealth’s access to liquidity either through GDB or other means will remain constrained in the medium term, even in the event of a potential issuance of debt planned next month. We believe that these liquidity constraints do not warrant an investment-grade rating.
The negative CreditWatch reflects uncertainties relating to the Commonwealth’s constrained access to the market, as well as our assessment of the size and timing of potential additional contingent liquidity needs.
That the rating is not lower is due to the progress the current administration has made in reducing operating deficits, and what we view as recent success with reform of the public employee and teacher pension systems, which had been elusive in recent years. We view the reform as significant and could contribute to a sustainable path to fiscal stability. We view the current administration’s recently announced intent to further reduce appropriations in fiscal 2014 by $170 million and budget for balanced operations in fiscal 2015 as potentially leading to credit improvement in the long run, but subject to near-term implementation risk that could lead to further liquidity pressure to the extent deficits continued. We also note the sustained commitment through a range of financial and economic cycles to funding debt obligations and providing what we view as strong bondholder security provisions.
In our view, Puerto Rico has limited liquidity without access to the debt market by either GDB or directly by the Commonwealth for sizeable amounts of debt, and may also need further market access to finance a potential fiscal 2015 operating deficit, notwithstanding current efforts to close the deficit. The planned near-term sale of sizeable Commonwealth tax-backed debt will refinance existing GDB loans into long term debt at potentially high interest costs, adding to an already high debt service burden.While we believe such a sale would provide temporary liquidity into fiscal 2015 and could be an important stabilizing factor, we believe there remain implementation risks over the next year in light of continued economic weakness. In our view, there is little margin for error over the next two years in its plan to reduce operating deficits, and potential difficulty financing future deficits larger than currently projected by the Commonwealth. Pending legislation would also raise the authorization of GDB to sell debt with a Commonwealth GO guarantee to $2.0 billion from $500 million, although the GDB has said that it plans to make only limited use of this option.
We have lowered the appropriation and ERS-secured bond ratings further than the GO rating to reflect our view that liquidity and market access risk have been heightened following our downgrade of the Commonwealth, making it less likely that the Commonwealth would prioritize appropriation debt payments in order to preserve market access for GO debt.
We have also lowered various ratings on the Puerto Rico Highways and Transportation Authority (HTA) to the same rating as the Commonwealth GO at ‘BB+’, and kept it on CreditWatch with negative implications, to reflect the potential diversion of gas tax-derived revenue to pay GO debt service under the Puerto Rico constitution. We have not taken a rating action on sales tax-secured debt of the Puerto Rico Sales Tax Financing Corp. (COFINA), but have retained our negative outlook on our COFINA ratings reflecting our view of the economic outlook and that COFINA sales tax is not subject to the prior diversion of revenue for GO debt service payments.
In our view, contingent liquidity risks totaling $940 million in the event of a downgrade include $257 million of potential GO variable rate demand obligation (VRDO) debt acceleration, $39 million of additional GO interest rate swap collateral posting, $575 million of HTA debt acceleration, and $69 million of additional swap collateral posting. Puerto Rico calculates that $375 million of HTA bond anticipation notes currently outstanding in the amount of $400 million would remain outstanding following a 180-day acceleration provision, while the remaining debt accelerations would need to be paid within 30 days of a downgrade. We understand that the GDB is currently negotiating to have certain debt holders waive acceleration provisions and arranging for new multi-year external bank credit lines that could mitigate near-term liquidity risks. The $940 million total includes only the current additional capital requirements in the event of a one-notch downgrade.
Also not included in the $940 million total is the need to finance the remaining portion of the fiscal 2014 Commonwealth operating deficit not already financed by GDB, or a potential 2015 deficit, if one were to develop. We believe the Puerto Rico Electric Power Authority would not have to post additional collateral in the event of a one-notch downgrade. The Commonwealth has reported that general fund revenues and expenses are performing better than originally budgeted in the first half of fiscal 2014, with revenues $93 million better than budgeted through December 2013, and expenses $19 million under budget through November. However, we believe this may not fully reflect sales taxes that are under budget, since sales taxes do not flow into the general fund in the first part of the year until COFINA annual debt service is fully paid.
The Commonwealth may also potentially need monthly cash flow financing in fiscal 2015, following use of $1.2 billion of credit line draws for cash flow purposes in fiscal 2014. We could see some inflows of public-sector deposits to GDB in the coming months as a result of a proposed bill authorizing GDB to require certain public-sector entities to transfer their deposits, which are currently held at private local banks, to GDB.
The Commonwealth GO rating is also based on our view of:
- The Commonwealth’s substantial economy of 3.62 million people, whose gross product is centered on manufacturing, and the government sector contributing to significant employment. Tourism is a growing sector, although still a modest part of the overall economy, which we see as having weak economic trends that began in fiscal 2007, including population declines and economic contraction in real terms in every year except one since 2006;
- Puerto Rico’s strong ties to the U.S. economy, resulting in a significant flow of trade and income transfers;
- Structural deficits in the Commonwealth’s general fund for more than a decade;
- Recent willingness to tackle long-term structural issues, as indicated by enactment of substantial pension reform, elimination of subsidies for the water and sewer authority, and large recent tax increases. The current administration just announced an intention to take additional mid-year actions to reduce the current-year deficit and to introduce a balanced budget in April for fiscal 2015, which would be the first balanced budget in many years;
- The high level of debt and retirement liabilities; and
- A governmental framework that constitutionally places repayment of GO debt ahead of other expenses, and broad legal authority to adjust revenues and expenditures.
We understand that the Commonwealth has sharply reduced its estimate of its fiscal 2013 budget operating deficit from an initial $2.2 billion. The Commonwealth has budgeted for an $820 million operating deficit in fiscal 2014, or about 8% of budgetary expenses. However, the current administration has just announced an intention to take additional budget actions which would reduce the 2014 budget deficit by an additional $170 million, to a $650 million deficit, and also to pass a balanced budget for fiscal 2015. The 2014 operating deficit follows a long string of operating deficits for over a decade.
ECONOMIC PROFILE
We believe the economy is moderately diverse in terms of employment. While manufacturing represented 45.6% of GDP in 2012, it was only 9.0% of nonfarm employment. The largest nonfarm employment sector was government at 27.8%, followed by education and health at 12.6%. Net payments abroad accounted for approximately $31.6 billion (31.2% of GNP) in 2012, on a preliminary basis. According to the GDB, income transfers from the U.S. government to the Commonwealth total about 25% of Puerto Rico income. Non-farm wage and salary employment was down 4.2% as of November 2013 from a year earlier.
Recent economic news is mixed. The U.S. Bureau of Labor Statistics released preliminary data showing December 2013 total employment was down slightly, nonfarm wage and salary employment was up slightly, and the preliminary December unemployment rate had risen to 15.4%. The GDB economic activity index was up for three consecutive months through November 2013, although down year over year. On a yearly basis, the Commonwealth has suffered economic contraction for every year except one since 2006. Income levels are well below U.S. state averages, although good compared to some Caribbean island nations.
DEBT AND LIABILITIES
Deficit financing has been the primary reason for the recent increase in Puerto Rico’s tax-supported debt levels in our view. We calculate that since 2009, the Commonwealth’s tax-supported debt has risen by $12.7 billion, or 49.2% at fiscal end 2013. Our calculation of tax-supported debt includes $10.6 billion of GO debt, $4.0 billion of appropriation and tax-supported debt, $2.9 billion of pension bonds, $15.2 billion COFINA sales tax debt, and $5.6 billion of guaranteed debt, totaling $38.4 billion of total tax-supported debt at June 30, 2013. The majority of this increase ($8.9 billion) is attributable to debt issued by COFINA, whose corporate purpose was to fund the identified accumulated deficits through fiscal 2012, but whose authority to issue debt has just been expanded for fiscal 2014.
Our calculation of the Commonwealth’s current tax-supported debt level of approximately $38.4 billion at fiscal year end June 30, 2013, or $10,635 per capita and 38% of GDP, are significantly higher than the median for the states of $1,036 per capita and 2.3% of gross state product. Total public sector debt is much larger, and includes $25.6 billion of revenue debt issued by the Commonwealth’s public corporations and agencies (some of which previously received support from the general fund). This debt calculation does not include the potential for additional tax-backed debt expected to be sold shortly, or the pending expansion of a Commonwealth GO guarantee to GDB debt to $2.0 billion from $500 million.
Puerto Rico recently enacted various reforms to the Teachers Retirement System similar to the ERS reforms. This sparked a two-day teacher strike and a court stay of implementation while union litigation is resolved. Puerto Rico expects the Teachers Retirement System litigation to be resolved by the end of February, well before implementation of the important part of the legislation on July 1, which would be positive from a credit standpoint. The ERS reform significantly reduced future benefit disbursements, but requires a $140 million higher general fund contribution in fiscal 2014 and afterward to forestall much higher contributions that were projected by 2020 when the pension system would otherwise have exhausted its cash and reverted to a pay-as-you-go system. All active employees are now in a defined contribution retirement system
Combined, the employees, teachers, and judicial pension systems had what we consider a large unfunded actuarial liability of $37.0 billion, and a combined funded ratio of 8.4% at their June 30, 2012, actuarial valuation date. The ERS alone had a 4.5% funded ratio. The unfunded pension liability amounts to about $10,240 per capita. The Commonwealth’s unfunded other postemployment liability is not as large, but also significant in our opinion at $2.9 billion, or about $809 per capita.
Based on the analytical factors we evaluate for U.S. states and territories, on a scale of ‘1.0’ (strongest) to ‘4.0’ (weakest), we have assigned a composite score of ‘3.2’. Based on our criteria, an overall score of ‘3.2’ is associated with an indicative credit level in the ‘BBB’ category. Our criteria also specify overriding factors that may result in a rating different from the indicative credit level. In the case of the Commonwealth, we view the system support score, level of unfunded pension liabilities, liquidity, and market access as overriding factors that result in a rating below the indicative credit level.
CREDITWATCH
The ratings remain on CreditWatch with negative implications. The current pressures on funding access heighten our concern about the Commonwealth’s overall liquidity profile and the timing and magnitude of potential contingent liquidity requirements that may develop. Our ratings reflect an expectation that either the Commonwealth or GDB will access the market in the near future, while the CreditWatch reflects the risk Puerto Rico may not be able to access the market in a manner to maintain sufficient liquidity on a timely basis. We would view a debt placement by either GDB or the Commonwealth sufficient to cover potential near-term liquidity and contingent risks, currently estimated around $1 billion or more, as an important credit stabilizing factor—the Commonwealth is currently contemplating a sizeable bond sale in the near future. The ratings could be further lowered if there is an inability to raise funding in the next few months or to otherwise improve cash flows. We expect to resolve or address the CreditWatch within the next couple of months.
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Is Keystone in the National Interest? Of Canada, That Is? | DeSmog Canada
Is Keystone in the National Interest? Of Canada, That Is? | DeSmog Canada.
It’s up to the U.S. President to decide whether the cross-border leg of the Keystone XL pipeline is in the national interest of his country. Ultimately, his criteria are less scientific than political. Does he stand to lose more by alienating those who support or oppose the project?
With midterm elections coming up in November, Obama doesn’t have time to worry about Canada’s hurt feelings. Our economy, environment and opinion are very low on his list of priorities.
But the strongest pro-Keystone arguments on the American side raise an uncomfortable question: if the pipeline is approved, who benefits a little bit — and who benefits a lot? In other words, who gets the short end of the stick?
Houston-based Forbes contributor Loren Steffy lays out the business logic behind Keystone XLwith a clarity you’d be hard-pressed to find on our side of the border:
“[In 2011], for the first time in six decades, the U.S. exported more gasoline and diesel than it imported. The bulk of the exports went to Mexico, Canada and Brazil. Mexico and Canada, even without Keystone, are two of our biggest suppliers of crude (Canada is No. 1; Mexico is No. 4 behind Saudi Arabia and Venezuela). Gasoline, of course, is more expensive than crude, so we are in effect importing raw materials, adding value, and selling it back at a higher price – and maintaining U.S. jobs in the process.”
Catch that? It sounds a lot like the old story about exporting logs and buying back the furniture. Our domestic politicians tell us we’re an “energy superpower,” but to hear U.S. analysts describe it, we’re more of a convenient resource colony.
Canada is a rare duck indeed: a developed nation that is also a net exporter of crude oil. But the U.S. is catching up, thanks to a different kind of oil. The crude coming out of North Dakota’s Bakken shale is light and sweet. Canada’s is higher in sulphur and carbon content, while lower in energy and therefore value.
We produce light crude too, but not enough to match domestic consumption. And we don’t have the refineries to handle our own heavy oil. So we import light crude and gasoline to make up the difference, and send our low-grade stuff to the U.S.
We’re producing so much oil sands crude that we’ve overwhelmed cross-border pipeline capacity. Now the industry is stuck in a Catch-22. Profit margins have dropped dramatically. To reassure investors, bitumen miners talk about dramatically expanding production. But the more we produce, the more we exacerbate the supply glut.
The industry’s best hope right now lies in pipelines like the Keystone XL.
Back to Barack Obama. He doesn’t care about the woes of Canadian oil sands producers. His job is to calculate the U.S. national interest — or at least a version he can sell to voters. Last week’s State Department environmental impact report gave him more political cover on the question of increased carbon emissions.
Yes, operating the pipeline would be like adding 300,000 cars to the road. Yes, Canadian crude is worse for the atmosphere than the other heavy grades it would displace. But, the reportargues, without Keystone much of the same oil would find its way to the same refineries by rail — creating even more emissions than the pipeline, and significantly increasing the risk of accidents.
Rejecting Keystone, the report finds, won’t stop Canadian producers from digging up oil. The question is how they get it to customers.
“Keystone is important to the U.S. because it amounts to an energy insurance policy,” wrote Loren Steffy in Forbes. “Keystone gives us improved access to Canadian crude, which, with or without Keystone, is likely to remain some of the cheapest in the world.”
Is it smart for the president to lock in a stable supply of cheap oil from an eager neighbour? Yes. Is it smart to provide short-term jobs for U.S. construction and refinery workers? Yes. Will the political benefits outweigh the backlash? It’s a good bet Obama will decide yes.
The voters who will be most upset are probably the Nebraska ranchers whose lands will be expropriated. But they’re already Republicans.
Many backs will be slapped and victory cigars chomped in Calgary and Ottawa, the day Keystone XL is approved. Stephen Harper and his cabinet ministers will, no doubt, claim full credit.
Who will be the real winners? Oil companies, certainly. The Government of Alberta, which badly needs the royalties.
On a more modest level, perhaps the Canadian treasury. More than half the federal government’s revenue now comes from personal income tax. So the bean counters will be happy at the prospect of higher wages in the oil patch, so long as wages don’t drop in other parts of the economy.
But remember, oil and gas together make up less than 7% of Canada’s GDP. The entire sector pays 4.2% of total corporate taxes. And it provides only 3% of the jobs in the country. What’s good for oil sands companies is not necessarily the same as what’s good for the nation.
How about ordinary Canadians? Perhaps we’ll feel a fleeting sense of pride that our low-grade crude has found a loving home in the big Gulf Coast refineries. Then we’ll go fill up our gas tanks.
Image credit: www.keystone-xl.com
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CSEC and Harper Government Assert Right to Spy on Canadians | Global Research
CSEC and Harper Government Assert Right to Spy on Canadians | Global Research.
With the government’s full support, the Communication Security Establishment Canada (CSEC)—the Canadian partner and counterpart of the US National Security Agency (NSA)—has illegally arrogated the power to spy on Canadians.
Responding Friday to the latest revelations from NSA whistleblower Edward Snowden, CSEC baldly declared that it has the unfettered right to systematically collect and analyze the metadata from Canadians’ electronic communications—that is from their telephone calls, texts, e-mail messages, and Internet use.
Like the NSA, CSEC is advancing a pseudo-legal argument to justify its flagrant violation of Canadians’ privacy rights. This argument revolves around a spurious distinction between the “content” of a communication and the metadata generated by it. The latter, claims CSEC, is not constitutionally protected because it is merely a “wrapping” or “envelope.” Metadata can, therefore, be accessed, preserved and analyzed by the state at will. That is, in the absence of any reasonable suspicion of wrongdoing and without CSEC needing to obtain a judicial warrant.
CSEC “is legally authorized to collect and analyze metadata,” declared a terse press release issued by Canada’s eavesdropping agency Friday. “In simple terms, metadata is technical information used to route communications, and not the contents of a communication.”
Based on this antidemocratic assertion, the CSEC statement goes on to claim that a pilot NSA-CSEC program that involved the collection and analysis of the metadata of all Wi-Fi traffic at a Canadian airport during a two-week period in 2012 was completely in accordance with the blanket legal ban on CSEC spying on the communications of people in Canada, unless authorized by a court-issued warrant.
“No Canadian or foreign travellers were tracked,” claimed CSEC. “No Canadian communications were, or are, targeted, collected or used.”
This is doublespeak. Since at least 2004, CSEC has been spying on Canadians’ communications through the systematic collection and analysis of metadata.
In the case of the NSA-CSEC pilot project, the 27-slide CSEC PowerPoint presentation leaked by Snowden to the Canadian Broadcasting Corporation (CBC) boasts that the new program the spy agencies were testing enabled them to trace the subsequent Wi-Fi communications of those swept up in their surveillance of an unnamed “mid-size” Canadian airport for up to two weeks. The metadata from their communications was collected and their movements reconstructed as they accessed Wi-Fi’s at hotels, cafes, libraries and other airports in Canada and the US.
What is this if not spying?
The CSEC statement went on to make various claims as to the legality of its metadata mining operations. Such spying, it contended, is authorized under the National Defence Act and by ministerial directives and has been approved by the CSEC Commissioner, an ostensible “watchdog” who works hand-in-glove with CSEC and reports to the Defence Minister.
The reality is that CSEC’s operations are shrouded in complete secrecy—an antidemocratic framework conducive to illegal assertions of executive power. It functions on the basis of directives issued by the Minister of Defence. The contents of these directives and even their subjects are known only to a handful of cabinet ministers and a cabal of national security officials
The ministerial directives that authorize CSEC’s metadata mining programs have never been publicly released, let alone approved by parliament and their legality tested in the courts.
We do know, thanks to a series of reports published by the Globe and Mailsince last June, that CSEC has been metadata mining Canadians’ communications for at least a decade. The initial Globe report was largely based on a secret 2009 ministerial directive that gave CSEC continued authorization for at least one of its metadata mining programs and sought to provide legal cover for this by invoking the claim that metadata is not constitutionally protected communication.
In response to this and other revelations—many of them coming from documents leaked by Snowden and showing that CSEC functions as a veritable arm and subcontractor of the NSA in its global spying operations—CSEC and the Conservative government have made numerous pro forma declarations affirming CSEC’s adherence to the law. Canadians have been repeatedly told that CSEC’s operations target “foreign threats” and that it cannot and does not scrutinize Canadians’ communications without court authorization.
The World Socialist Web Site repeatedly warned that these statements were disinformation and lies. In particular, we pointed to the evidence that CSEC was seeking to circumvent the legal and constitutional restrictions on it spying on Canadians by asserting that metadata is not part of an electronic “communication.”
The significance of Friday’s statement is that never before has CSEC so forthrightly admitted to the Canadian public that it is collecting and analyzing the metadata of their communications and asserted—in flagrant contradiction with the privacy rights guaranteed in the country’s constitution—that it has the power to do so.
While the CSEC statement did not repeat this argument, the spy agency and the Conservative government have repeatedly suggested that metadata is innocuous technical information—which begs the question as to why massive state resources are being expended to collect and analyze it and to perfect dragnet surveillance programs.
Through metadata mining the state can develop intimate profiles of individuals and groups. Metadata is “way more powerful than the content of communications,” University of Toronto professor and cyber-security specialist Ron Deibert told the CBC. “You can tell a lot more about people, their habits, their relationships, their friendships, even their political beliefs.”
CSEC’s metadata spying was first authorized by the Liberal government of Jean Chretien and Paul Martin and has been expanded under its successor, Stephen Harper’s Conservative government.
On Friday, Defence Minister Rob Nicholson stuck to the government script, insisting that CSEC’s operations are lawful and repeating its tendentious claims that metadata mining doesn’t constitute spying on Canadians’ communications. CSEC, declared Nicholson, “made it clear to CBC that nothing in the documents that they had obtained showed that Canadian communications were targeted, collected, or used, nor that travellers’ movements were tracked.”
Canada’s opposition parties have aided and abetted the government’s attempt to cover up the illegal spying being conducted by CSEC. In the seven months prior to last Friday, they had asked only a handful of questions in parliament about the revelations concerning CSEC and refused to either alert Canadians to the significance of CSEC’s metadata mining or its pivotal role in the NSA’s illegal global spying network.
On Friday, some MPs from the trade union-supported New Democratic Party and the Liberals did characterize CSEC’s spying as illegal. But as defenders of big business and the capitalist state, they will not mount any serious effort to expose the illegal operations of CSEC, let alone demonstrate the connection between the emergence of police state spying, ever widening social inequality, and the drive of all sections of the elite to make the working class pay for the capitalist crisis through wage and job cuts and the dismantling of public services.
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Bernanke’s Legacy: A Weak and Mediocre Economy – John P. Cochran – Mises Daily
Bernanke’s Legacy: A Weak and Mediocre Economy – John P. Cochran – Mises Daily.
As Chairman Bernanke’s reign at the Fed comes to an end, the Wall Street Journal provides its assessment of “The Bernanke Legacy.” Overall the Journaldoes a reasonable job on both Greenspan and Bernanke, especially compared to the “effusive praise from the usual suspects; supporters ofmonetary central planning. The Journalargues when accessing Bernanke’s performance it is appropriate to review Bernanke’s performance “before, during, and after the financial panic.”
While most assessments of Bernanke’s performance as a central banker focus on the “during” and “after” financial-crisis phases with much of the praise based on the “during” phase, the Journaljoins the Austrians and John Taylor in unfavorable assessment of the more critical “before” period. It was this period when the Fed generated its second boom-bust cycle in the Greenspan-Bernanke era. In the Journal’s assessment, Bernanke, Greenspan, and the Fed deserve an “F.” While this pre-crisis period mostly fell under the leadership of Alan Greenspan, the Journal highlights that Bernanke was the “leading intellectual force” behind the pre-crisis policies. As a result of these too loose, too long policies, just as the leadership of the Fed passed from Greenspan to Bernanke, the credit boom the Fed “did so much to create turned to mania, which turned to panic, which became a deep recession.” The Journal’s description of Bernanke’s role should be highlighted in any serious analysis of the Bernanke era:
His [Bernanke’s] role goes back to 2002 when as a Fed Governor he gave a famous speech warning about deflation that didn’t exist [and if it did exist should not have been feared].[1] He and Mr. Greenspan nonetheless followed the advice of Paul Krugman to promote a housing bubble to offset the dot-com crash.
As Fed transcripts show, Mr. Bernanke was the board’s intellectual leader in its decision to cut the fed-funds rate to 1% in June 2003 and keep it there for a year. This was despite a rapidly accelerating economy (3.8% growth in 2004) and soaring commodity and real-estate prices. The Fed’s multiyear policy of negative real interest rates produced a credit mania that led to the housing bubble and bust.
For some of the best analysis of the Fed’s pre-crisis culpability one should turn to Roger Garrison’s excellent analysis. In a 2009 Cato Journal paper, Garrison (2009, p. 187) characterizes Fed policy during the “Great Moderation as a “learning by doing policy” which, based on events post-2003, would be better classified as “so far so good” or “whistling in the dark.” The actual result of this “learning by doing policy” is described by Garrison in “Natural Rates of Interest and Sustainable Growth”:
In the earlier episode [dot.com boom-bust], the Federal Reserve moved to counter the upward pressure of interest rates, causing actual interest rates not to deviate greatly from the historical norm. In the later episode [housingbubble/boom-bust], the Federal Reserve moved to reinforce the downward pressure on interest rates, causing the actual interest rates to be exceedingly low relative to the historical norm. Although the judgment, made retrospectively by economists of virtually all stripes, that the Fed funds target rate was “too low for too long” between mid-2003 and mid-2004, it was almost surely too low for too long relative to the natural rate in both episodes. (p. 433)
Given this and other strong evidence of the Fed’s role in creating the credit driven boom, theJournal faults “Mr. Bernanke’s refusal to acknowledge that the Fed made any mistake in the mania years.”
On the response to the crisis, the Journal refrains from the accolades of many who credit the Fed led by the leading scholar of the Great Depression from acting strongly to prevent another such calamity. According to the Fed worshipers, things might not be good, but without the unprecedented actions and bailouts things would have been catastrophic. The Journal’s more measured assessment:
Once the crisis hit, Mr. Bernanke and the Fed deserve the benefit of the doubt. From the safe distance of hindsight, it’s easy to forget how rapid and widespread the financial panic was. The Fed had to offset the collapse in the velocity of money with an increase in its supply, and it did so with force and dispatch. One can disagree with the Fed’s special guarantee programs, but we weren’t sitting in the financial polar vortex at the time. It’s hard to see how others would have done much better.
But discerning readers of Vern McKinley’s Financing Failure: A Century of Bailouts might disagree. Fed actions, even when not verging on the illegal, were counter-productive, unnecessary, and contributed to action freezing policy uncertainty which contributed to the collapse of the velocity of money. McKinley describes much of what was done as “seat-of-the-pants decision-making” (pp. 305-306):
“Seat of the pants” is not a flattering description of the methods of the regulators, but its use is justified to describe the panic-driven actions during the 2000s crisis. It is only natural that under the deadline of time pressure judgment will be flawed, mistakes will be made and taxpayer exposure will be magnified, and that has clearly been the case. With the possible exception of the Lehman Brothers decision … all of the major bailout decisions during the 2000s crisis were made under duress of panic over a very short period of time with very limited information at hand and with input of a limited number of objective parties involved in the decision making. Not surprisingly, these seat-of–the-pants responses did not instill confidence, and there was no clear evidence collected that the expected negative fallout would truly have occurred.
While a defense of some Fed action could be found in Hayek’s 1970s discussion of “best” policy under bad institutions (a central bank) where he argued that during a crisis a central bank should act to prevent a secondary deflation, the Fed actions went clearly beyond such a recommendation. Better would have been an immediate policy to end the credit expansion in its tracks. The Fed’s special guarantee programs and movement toward a mondustrial policy should be a great worry to anyone concerned about long-term prosperity and liberty. Whether any human running a central bank could have done better is an open question, but other monetary arrangements could clearly have led to better outcomes.
The Journal’s analysis of post-crisis policy, while not as harsh as it should be,[2] is critical. Despite an unprecedented expansion of the Fed’s balance sheet, the “recovery is historically weak.” At some point “a Fed chairman has to take some responsibility for the mediocre growth — and lack of real income growth — on his watch.” Bernanke’s policy is also rightly criticized because “The other great cost of these post-crisis policies is the intrusion of the Fed into politics and fiscal policy.”
Because the ultimate outcome of this monetary cycle hinges on how, when, or if the Fed can unwind its unwieldy balance sheet, without further damage to the economy; most likely continuing stagnation or a return to stagflation, or less likely, but possible hyper-inflation or even a deflationary depression, the Bernanke legacy will ultimately depend on a Bernanke-Yellen legacy. Given, as the Journal points out, “Politicians — and even some conservative pundits — have adopted the Bernanke standard that the Fed’s duty is to reduce unemployment and manage the business cycle,” the prospect that this legacy will be viewed favorably is less and less likely. Perhaps if the editors joined Paul Krugman in reading and fully digesting Joe Salerno’s “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,” they would correctly fail Bernanke and Fed policy before, during, and after the crisis.
But what should be the main lesson of a Greenspan-Bernanke legacy? Clearly, if there was no pre-crisis credit boom, there would have been no large financial crisis and thus no need for Bernanke or other human to have done better during and after. While Austrian analysis has often been criticized, incorrectly,[3] for not having policy recommendations on what to do during the crisis and recovery, it should be noted that if Austrian recommendations for eliminating central banks and allowing banking freedom had been followed, no such devastating crisis would have occurred and no heroic policy response would have been necessary in the resulting free and prosperous commonwealth.
Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.
Comment on this article. When commenting, please post a concise, civil, and informative comment.
John P. Cochran is emeritus dean of the Business School and emeritus professor of economics at Metropolitan State University of Denver and coauthor with Fred R. Glahe of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research. He is also a senior scholar for the Mises Institute and serves on the editorial board of the Quarterly Journal of Austrian Economics. Send him mail. See John P. Cochran’s article archives.
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Notes
[1] See Joseph T. Salerno, “An Austrian Taxonomy of Deflation — With Applications to the U.S.” Quarterly Journal of Austrian Economics 6, no. 4 (2001).
[2] See John P. Cochran’s, Bernanke: The Good Engineer? Mises Daily Article, 21 March 2013 and Bernanke: A Tenure of Failure, Mises Daily Article, 31, July 2013.
[3] See John P. Cochran, Recessions: The Don’t Do List, Mises Daily Article, 17 February 2013.
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Fighting Egypt’s crackdown on press freedom – Features – Al Jazeera English
Fighting Egypt’s crackdown on press freedom – Features – Al Jazeera English.
International journalists make a stand in solidarity with imprisoned Al Jazeera staff.Jessica Hatcher Last updated: 04 Feb 2014 19:31
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Gagged by the flag: East Africa journalists protest against Egypt’s crackdown on journalists [Phil Moore]
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Nairobi, Kenya – “Journalists are never supposed to become the story,” wrote Al Jazeera journalist Peter Greste in a letter that was smuggled out of Tora Prison in Cairo, where he is currently being detained. “Apart from the print reporter’s byline or the broadcaster’s sign-off, we are supposed to remain in the background as witnesses to, or agents for, the news; never as its subject.” At 10am on February 4 in Greste’s home city, Nairobi, co-workers, rival broadcasters, photographers and journalists made no apology for breaking this rule by staging a peaceful protest in solidarity with him. Almost a hundred people, many wearing Greste’s face on T-shirts and carrying banners and placards, marched to the Egyptian embassy and planted themselves outside its gates. They stayed there for three hours, overlooked by the baking sun and several divisions of the Kenyan police. Meanwhile, a parallel social media campaign went viraland reached millions. “What if all journalists were gagged?”tweeted Channel Four News’ International Editor, Lindsey Hilsum. Like many, Hilsum posted an accompanyingpicture of her with her mouth taped up. “The whole worldwide campaign has gone beyond what we had imagined,” said Peter’s brother, Andrew Greste. “Our view is that we have to keep going to continue to build pressure on the Egyptian government until they release them. This is what Peter also wants.” Egypt’s secret police arrested the award-winning Australian journalist Greste and two of his Egyptian colleagues, Mohamed Fahmy and Baher Mohamed, in Cairo on December 29.
“It’s almost 40 days now since their incarceration began,” said Al Jazeera correspondent Mohamed Adow, addressing the media outside the Egyptian embassy in Nairobi. “We believe they’ve done no wrong. They’ve just been doing their work in the best way they could.” The United Nations, international rights bodies, and media personalities have all called on the Egyptian government to release the journalists, Adow said. Journalism does not equal terrorism At the embassy gates, broadcaster and head of the regional Foreign Correspondents’ Association, Robyn Kriel, read aloud from an open letter to Greste: “Those of us who are journalists stand as you. ‘We are all Peter Greste’ is one of the slogans we are bearing aloft. Others among us stand here today for the tenets of truth, freedom of the press, and democracy. Journalism does not equal terrorism; you have committed no crime… We respect and applaud your honesty and bravery, and we say, as one, that this is our battle, too.”
The Committee to Protect Journalists confirms that at least ten journalists are currently incarcerated in Egypt. “There’s more likely around twenty to twenty-five actually in prison at the moment, one of the largest crackdowns on journalists we have seen in a long time,” said Tom Rhodes, the organisation’s East Africa representative. Rhodes said that press freedom in Egypt today is in some ways no better, and in some maybe worse, than under longtime dictator Hosni Mubarak, ousted in the 2011 uprising. Last week, Egyptian prosecutors announced their intention to place criminal charges on 20 people working for the Al Jazeera network. Rhodes said that the CPJ fears that a crackdown on an international media organisation at such an unprecedented level bodes even worse for the treatment of local journalists. “It’s so tragic, especially when you consider the struggle and the blood, sweat and tears that the Egyptian people undertook to develop these freedoms – such as press freedom,” said Rhodes. “And now that space is being diminished once again. When we’re sitting here fighting for the release of our friend Peter Greste, we’re really sitting here trying to fight for the freedom of the country as well.” Boniface Mwangi, an award-winning documentary photographer and one of Kenya’s most prolific young activists, turned out in support of his friend and fellow journalist. But like most of the protesters here, he also has a vested interest in fighting for a free press. “So far, this has happened in Egypt. But who knows where Kenya’s going to go? I’m not just here for Peter, I’m here for myself.” While the inexperienced yet determined picket waited in the driveway of the Egyptian embassy, two representatives from the protest group went inside to meet the deputy ambassador and deliver their open letter to Greste. The deputy ambassador said that the embassy would notify the Egyptian state of their concerns but emphasised that the state cannot intervene in the Egyptian courts – as is the case around the world. Robyn Kriel, chairperson of the Foreign Correspondents’ Association of East Africa, relayed the consulate’s message to the waiting crowds. “We mean business,” she said. Photographer Phil Moore is shooting a series of photographs depicting members of the press and public gagged by an Egyptian flag. “As journalists, it’s imperative that we have the right to work freely and so when our colleagues are detained, it’s essential that we remind the world what that detention means. In this case, the flag represents the silencing of journalists in Egypt, and I hope that by documenting people’s disdain, these images will in some way help to maintain a spotlight on the Egyptian crackdown.” According to Al Jazeera’s Mohamed Adow, the network has not yet been supplied with any information by the Egyptian government, and nor have they been formally notified of any charges against Greste and his colleagues. “If he’s not released, we’ll be back,” was the message left behind by protesters after they packed up their placards. A determined Robyn Kriel concluded: “We are not going to rest until we see Greste.” Follow Jessica Hatcher on Twitter: @jessiehatcher Editor’s note: The Egyptian prosecutor has accused Al Jazeera of producing “false news” in the country. We have collated all of the TV reports produced by Al Jazeera teams from the field between July 2013 and the arrest of our journalists. We make no apologies for telling all sides of the story, and we stand by our journalism. Judge for yourself on our special coverage page: Journalism under fire: Where is the “false news”? To take part in the viral social media campaign, tweet a photo of yourself using the hashtag: #freeAJstaff |
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Marc Faber Fears “A Vicious Circle To The Downside” Is Just Beginning | Zero Hedge
Marc Faber Fears “A Vicious Circle To The Downside” Is Just Beginning | Zero Hedge.
“It’s not just tapering that is putting pressure on markets,” Marc Faber warns in thie brief clip. “Emerging economies have practically no growth and we have a slowdown in China that is more meaningful than strategists are willing to believe,” he adds and this is “causing a vicious circle to the downside” in inflated asset markets as most of the growth in the world over the last five years has come from emerging markets. Faber suggests Treasuries as a safe haven in the short-term; but is nervous of their value in the long-term as “debt is becoming burdensome on the system.”
“A lot of economic growth was driven by soaring asset prices”
On Treasuries:
“For the next three to six months probably they are a better place to be than equities,”
“I don’t like [10-year Treasurys] for the long-term because the maximum you can earn is something like 2.65 percent per annum for the next 10 years, but Treasurys are expected to rally because of economic weakness and a stock market decline. In the last few years at least there was a flight into quality – that is, a flight into Treasurys.”
On China and shadow banking defaults:
“China can handle it by printing money but it will again have unintended negative consequences… but the
problem is real… but it’s not just in China…”
Faber warned of the risks of the present global credit bubble and said another slowdown could follow on the back of rising consumer debt levels – which had previously helped to create growth.
“Total credit as a percent of the global economy is now 30 percent higher than it was at the start of the economic crisis in 2007, we have had rapidly escalating household debt especially in emerging economies and resource economies like Canada and Australia and we have come to a point where household debt has become burdensome on the system—that is, where an economic slowdown follows.”
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Why Canada Needs To Stop Embracing Corporatocracy | Mark Taliano
Why Canada Needs To Stop Embracing Corporatocracy | Mark Taliano.
Mark Taliano
Writer, Activist, Retired Teacher
Why Canada Needs To Stop Embracing Corporatocracy
Canada is in denial of her true self. We have been co-opted by a globalized corporatocracy.
This chosen self-negation is exacting a heavy toll. We have arguably lost our democracy, and our much of our sovereignty, in addition to cultural pluralism, biodiversity, and economic self-determination.
The facilitator of this “corporate coup” is a toxic mental landscape.
Transnational corporations and their political lobbyists wilfully co-opt the language of human rights as a subterfuge for retrograde supranational agreements that deny democracy, as well as economic and cultural self-determination. We are daily bombarded with false terms such as “free trade” and “private sector” to the point where we internalize (subliminally?) incorrect meanings.
Ubiquitous “free trade” rhetoric infers freedom and prosperity even as it delivers the opposite. Protectionist agreements such as the North American Free Trade Agreement (NAFTA) enable the outsourcing of labour to authoritarian regimes where human and labour rights are much lower. The movement of capital is protected and deregulated as jobs, public health, environmental, cultural, and human rights disappear.
Investor-state laws effectively subordinate a country’s economic and political self-determination when international and domestic laws or regulations are perceived to be an impediment to corporate profits. Unelected supranational arbitrators make decisions and the public is often left paying the bill. Stuart Trew, trade campaigner with Council Of Canadians, explains in John Bonnar’s article, “Toronto activists oppose Trans-Pacific Partnership and corporate globalization” : “Within all these trade deals there is an investor rights chapter that lets companies sue countries when they feel their profits have been harmed, … giving corporations more rights than anyone else in this country and any other country.” Trew cites Calgary’s Lone Pine Resource’s lawsuit against Canada as an example:
“(Lone Pine Resources) first disclosed last week that it intends to sue the Canadian government for at least $250-million under NAFTA’s Chapter 11, which allows investors from the U.S. and Mexico to take government policies or actions that hurt their interests before a panel of arbitrators, (Globe and Mail, Nov. 22, 2012.)
In its notice of intent, Lone Pine charges that the government’s move, ‘without a penny of compensation,’ violates NAFTA’s provision that companies facing expropriation should be reimbursed. Lone Pine also charges that Quebec’s move unfairly pre-empts the conclusion of the province’s ongoing study on the safety of fracking.
The Quebec government’s move to cancel a natural-gas exploration permit for deposits beneath the St. Lawrence River last year was “arbitrary, capricious and illegal,” according to the U.S. energy company challenging the move under the North American free-trade agreement.”
(Lone Pine Resources is incorporated in Delaware, U.S, a known tax haven, but has its headquarters in Calgary.)
The “private sector” rhetoric infers independence and freedom, yet it is highly socialized — the 2008/09 bailouts would be a case in point — by the public sector. Additionally, as public funds flow into the “private” sector, corporations return the favour by capturing legislatures and engineering self-serving laws and regulations — or the absence thereof — to entrench their monopolies and their anti-public behaviours. Bruce Livesy explains in “Tax Dodge: Gildan Activewear” how Canada’s Gildan corporation avoids paying taxes: “By moving its factories overseas, Gildan managed to cut its Canadian tax rate down to nothing in the past four years, despite earning profits of $95 million in 2009, $196 million in 2010, $224 million in 2011 and $144 million last year.”
Currently there is a host of anti-democratic corporate-power agreements being negotiated behind closed doors, including the Trans Pacific Partnership (TPP), the Foreign Investment Protection Agreement (FIPA) with China , the CETA, as well as agreements with India, Japan, Honduras, and South Korea. Each of these (largely secret) deals promises to enrich and empower foreign investors to the detriment of local economies and public spheres. Outcomes, such as those resulting from the 20 year old North American Free Trade Agreement (NAFTA) will likely include and exacerbate some of NAFTA’s symptoms,
which are:
* increased inequality between rich and poor nations
* increased inequality within rich and poor nations
* an exodus of good-paying manufacturing jobs
* collapsing small farm incomes
Corporate globalization entrenches parasitical monopoly capitalism. In agriculture, for example, large agribusiness monopolies, often funded by international banking institutions, push out smallholders — thereby reducing economic diversity — so that they can grow monoculture cash crops for export. Consequently, people are displaced, and nation states lose their food sovereignty. Mexico now imports most of its food.
Globalized monopoly capitalism also reduces biodiversity. Ahmed Djoghlaf,
secretary-general of the UN Convention on Biological Diversity, explains that if the continued accelerated trajectories towards biodiversity losses continue, we can expect “total disaster”, and the disaster includes the economic realm. Djoghlaf explains that “in immediate danger”, are the 300 million people who depend on forests for their livelihoods and the more than 1 billion who depend on sea fishing for their livelihoods.
Of equal importance is cultural diversity and the respect for international and national laws that enshrine rights of indigenous peoples throughout the world. Anthony James Hall, author of The American Empire And The Fourth World, argues that we need to recognize and affirm aboriginal and treaty rights throughout the world to build what George Manuel referred to as the Fourth World. Such a world would value unity in pluralism, and be a counterbalance to the totalitarianism of globalized neoliberal capitalism, sometimes referred to as the corporatocracy.
Hall poses the question, “Will we grapple with the substance of our inheritances from history or will we continue to retreat into the black hole of memory loss, the willed amnesia that facilitates the on-going neo-liberal revolution of the New World Order?”
Canada is currently grappling with this question as it continues to deny and negate aboriginal and treaty rights at home and abroad.
Activists of Fourth World pluralism from countries such as Honduras are pushing back, at great cost, against the international reach of Canada’s neo-liberal agenda that denies and negates aboriginal and treaty rights. In this video, Alfredo Lopez of the Honduran Garifuna Collective describes the shackles that we are imposing on his community.
The oppression of the Garifuna is an outward expression of Canada’s wilful amnesia that denies its own pluralism, and its unmitigated embrace of the monoculture of globalized neoliberal corporatism.
There are steps that can (and must) be taken to push back against these converging totalitarian trajectories. A paper entitled “Towards an Alternate Trade Mandate for the E.U — an invitation to participate” offers a comprehensive list of ideas.
All steps should be considered. Listed below are two of the most salient ones :
1) ensure a transition to a low-carbon economy
2) stop pushing for the deregulation of financial services and the privatisation and deregulation of public goods like water, health and education, but improve the quality of and access to these goods, for example, through partnerships among public authorities.
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Alberta Oilsands Environmental Health Risks Probably Underestimated: Study
Alberta Oilsands Environmental Health Risks Probably Underestimated: Study.
CP | By John Cotter, The Canadian PressPosted: 02/03/2014 3:05 pm EST | Updated: 02/03/2014 10:59 pm EST
EDMONTON – A new study suggests the environmental health risks of oilsands operations in Alberta’s Athabasca region have probably been underestimated.
Researchers say emissions of potentially hazardous air pollution that were used in environmental reviews done before approving some projects did not include evaporation from tailings ponds or other sources, such as dust from mining sites.
The study, by the University of Toronto’s environmental chemistry research group, looked at reported levels of polycyclic aromatic hydrocarbons (PAH) — chemicals which can be released into the air, water and soil when bitumen-rich oilsands are mined and processed.
“Our study shows that emissions of PAH estimated in environmental impact assessments conducted to approve developments in the Athabasca oilsands region are likely too low,” reads the study published Monday in the U.S. journal Proceedings of the National Academy of Sciences.
“The potential therefore exists that estimation of future risk to humans and wildlife because of surface mining in the Athabasca oilsands region has been underestimated.”
Professor Frank Wania, one of the study’s authors, said the results highlight the need for improved accounting of PAH emissions from oilsands operations, especially when more projects are being built or planned in the region.
Using computer models, researchers studied emissions estimates from environmental reports to predict chemical concentrations from direct oilsands industrial activity such as mining, processing and vehicle traffic.
They found the levels were lower than actually measured levels of chemicals in the air recorded in other scientific studies.
Researchers then modified the computer model to factor in estimates of evaporation from oilsands tailing ponds. Predicted concentrations were then much closer to the recorded levels.
They used a third model using concentrations of PAH levels measured by Environment Canada in the region between November 2010 and February 2011.
The results suggest emissions may be two to three times higher than the estimates recorded in project environmental reviews.
Wania said some chemicals pose a potential cancer risk, but nothing imminent.
The concentrations that have been measured in the air in the oilsands region are comparable to a big city such as Toronto.
“It is not that I am raising the red flag here, that we should be very concerned, because we live with these concentrations day in and day out,” he said.
“All we are saying is that the basis for the human health risk assessment is flawed.”
Environment Canada issued a statement saying it is reviewing the study and can’t yet comment on its contents.
Spokesman Mark Johnson said the department considers responsible resource development a priority, adding it has establish extensive monitoring activities in the oilsands and has made progress in studying impacts on air, water, land and wildlife.
Simon Dyer of the Pembina Institute, an environmental policy think-tank, said the study raises questions about tailings ponds and oilsands monitoring.
He said industry has never demonstrated that it is able to effectively deal with tailings waste and the government is not enforcing existing cleanup rules.
“This study provides further evidence that rules need to be enforced and the growth of tailings waste halted,” he wrote in an email.
Dyer said governments and regulators need to take the study’s findings into account when determining if it is appropriate to approve new projects.
He also said oilsands monitoring needs to be expanded.
The Canadian Association of Petroleum Producers said scientific monitoring, transparency and reporting processes are crucial to understanding industrial impacts and balancing the need for environmental protection, economic growth and secure reliable energy supplies.
Geraldine Anderson, an association spokeswoman, noted the federal and Alberta governments are working together to improve oilsands monitoring.
“This U of T study takes existing data and uses computer modeling to make suggestions,” Anderson wrote in an email.
“As the study notes, there are major efforts under way through JOSM (joint oil sands monitoring) to develop improved models, a better understanding of pathways, and a better understanding of the limits of existing data.
“Science-based research is in everybody’s best interest because it helps achieve the goal of long-term, responsible resource development.”
Wania said the team’s research was funded by the university. He said Environment Canada is now providing money for more research to follow up on the findings.
A report published last year in the same journal found that oilsands development is polluting surrounding lakes in northern Alberta.
The federally funded research by some of Canada’s top scientists found levels of toxic hydrocarbons in six lakes between 2 1/2 and 23 times what they were before the mines were built.
The paper said while overall toxin levels remain low, trends aren’t good and some lakes are already approaching warning levels.
It said the timing of the contamination and its chemical makeup point to industrial sources.
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» Japanese government seeks approval to dump Fukushima groundwater into sea Alex Jones’ Infowars: There’s a war on for your mind!
kyodonews.jp
February 4, 2014
The government on Monday sought approval of a nationwide fisheries federation to dump groundwater at the crippled Fukushima Daiichi nuclear complex into the sea on condition that the water’s contamination level is far below the legal limit.
During talks with the head of the National Federation of Fisheries Co-operative Associations, industry ministry officials explained that they plan to set “strict” operational procedures for the pump system to allay the concerns of fishermen who think the move could deal a blow to their business.
Groundwater will be pumped out before it gets mixed with highly radioactive water accumulating at the basement of reactor buildings, and will be directed to the adjacent Pacific Ocean.
This article was posted: Tuesday, February 4, 2014 at 7:20 am
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Olduvaiblog: Musings on the coming collapse 