Hank Paulson: Another Financial Crisis Is 'a Certainty'

The crisis that brought the world to the brink of financial collapse five years ago could be repeated.

That was the message from former Treasury Secretary Henry Paulson when he appeared before economists and bankers at the meeting of the Economic Club of New York this week. He played a crucial role in attempts to save the financial system following the bankruptcy of Lehman Brothers on Sept. 15, 2008.

Paulson explained that he made mistakes during the crisis. "Almost every mistake was a communications issue," he said, adding that he is frustrated that Main Street doesn’t understand what he did "wasn’t for Wall Street; it was for them."

Editor’s Note: Opinion: Retirees to Be Hit With Social Security Cuts

Paulson listed reasons another crisis is a possibility, according to Bloomberg Businessweek.

First, mortgage finance behemoths Freddie Mac and Fannie Mae remain government entities and it's politically problematic for the government to shrink them to a manageable size since they're making considerable money.

Second, the shadow banking system is still a problem and "more needs to be done" to fix repo securitized lending. Moreover, Paulson wants more disclosure regarding the holdings of money market mutual funds.

Third, he noted that there are too many financial regulators and they tend to engage in "dysfunctional" competition, which he described as "a big problem."

Paulson added that Congress has tied the hands of the Federal Reserve and the Treasury Department in dealing with a future crisis. Bloomberg Businessweek reported that Paulson's Treasury in 2008 used its exchange stabilization fund to guarantee the assets of money market mutual funds, "a measure that prevented a run on those funds that would have crippled the financial system." The Treasury would not be permitted to do that today.

In a look back at the crisis published in the Sept. 16-22 issue of Bloomberg Businessweek, Paulson discussed the Troubled Asset Relief Program (TARP).

"The way I read the polls, TARP was more unpopular than torture. We don’t like bailouts in this country. If you take a risk and make money? That's good. But if you take a risk and the government has to come in and save you? Well, I understand the anger," he stated.

"I was never able to convince the American people that what we did with TARP was not for the banks. It was for them. It was to save Main Street. It was to save our economy from a catastrophe."

Paulson believes there will be another financial crisis.

"It’s a certainty. As long as we have markets, as long as we have banks, no matter what the regulatory system is, there will be flawed government policies. Those policies will create bubbles. They will manifest themselves in a financial system no matter how it’s structured and how it's regulated. But the key thing is to have the tools and the political will to act forcefully to limit a crisis," he explained.

"The capital program we designed to get out [of the crisis] and put capital into hundreds of banks very, very quickly and recapitalized the U.S. financial system, is a huge success. That money has come back, all that, plus $32 billion," Paulson told CNBC.

"I am a believer in the Ben Bernanke stimulus programs [that followed]. Even though we have low growth, this economy has been growing at 2 percent since 2009, while we've undergone this sort of massive and necessary deleveraging."

Paulson did not offer up who he believes President Obama should nominate to replace Bernanke as chairman of the Fed. "If he [Obama] wants my advice, he'll ask me. So far he hasn’t, strangely enough," he said at the meeting in New York.

Paulson told CNBC he knows former Treasury Secretary and Obama economic adviser Larry Summers a lot better than that he does Fed Vice Chair Janet Yellen.

"I like Larry," Paulson stated. "He's a very capable guy. I'm a friend of Larry."

He said he's not entering into the debate because he's been "distressed at the extent to which it has been politicized. I don’t know how this happened, but it shouldn’t be. It's too important a job.

Editor’s Note: Opinion: Retirees to Be Hit With Social Security Cuts

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'US Hides Real Debt, In Worse Shape Than Greece' Economic Economy Collapse is HERE

Globalist Empire Collapsing: Dr. Paul Craig Roberts

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U.S. SEC Chair Calls For Stock Market Kill Switch

Financial regulator wants a kill switch for the stock market

NEW YORK, NY – Designer Vera Wang and Coty CEO Michele Scannavini stand amoungst a sea of traders at the New York Stock Exchange Coty goes public on the New York Stock Exchange on June 13, 2013 in New York City. Global beauty company Coty made its public debut today. (Photo by Jemal Countess/Getty Images)

By JG Vibes
Intellihub.com
September 14, 2013

On Thursday, Mary Jo White, the U.S. Securities and Exchange Commission Chair said that there will be a new series of financial regulations, including a stock market kill switch to shut down trading.
The regulations are apparently in response a software glitch that led to a three-hour lapse in trading on August 22nd.
Reuters reported that  “White issued a statement discussing a series of reforms she hopes to see completed after meeting privately earlier this morning with the chief executives of the major exchanges, including Nasdaq OMX, New York Stock Exchange Operator NYSE Euronext, BATS Global Markets, Direct Edge and the Chicago Board Options Exchange.”
In theory, the stock market is a medium through which businesses can connect with investors, but because it is so heavily controlled by the government and banking system, it has become nothing more than a casino.  Regulatory agencies like the SEC, who are government entities closely tied to banking, actually make this problem a lot worse.
Mary Jo White said that this would just be one of many regulations that the SEC will be attempting to pass in the coming months.


Sources:
[1] U.S. SEC Chair calls for kill switch, other reforms for exchanges – Reuters

Writer Bio:

JG Vibes is an Intellihub.com investigative journalist, staff writer and editor. He is also the author of “Alchemy of the Modern Renaissance”, an 87 chapter e-book and is an artist with an established record label.

For media inquires, interviews, questions or suggestions for this author, email: vibes@intellihub.com or telephone: (347) 759-6075.

Read more articles by this author here.

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Too Big Has Failed: 3-Minute Video On Wall Street

MIT economist Simon Johnson talks about how Citigroup’s $2 trillion in total assets qualifies as being too big to manage. Video from http://www.zocalopublicsquare.org/.

WEB EXCLUSIVE: Iceland’s Recovery Continues Despite Dithering Politicians

By The Staff at AFP

In 2008, the economy of Iceland, population 320,000, nearly collapsed due to massive fraud and mismanagement by three of its leading banks. In the ensuing years, rather than bail out banks, the country’s people forced their government to arrest the banksters and move toward a more fiscally responsible, nationalistic approach to the economy. Since that time, Iceland has experienced economic growth and improvement of people’s lives. AMERICAN FREE PRESS was pleased to report that story and decided it is time to revisit the situation and learn what has become of the economic miracle.

In reality, it has not been all happy times for the island country. The Icelandic people have suffered, but the country continues to show progress despite taking a path that the international bankers claimed would lead to ruin for all.

Inflation in Iceland had been as high as almost 20% and is now around 4%. Unemployment has been halved, below 5%. Some debt relief was provided to the financial sector, but nothing like it was in the U.S. and Europe. Currency controls were put in place, which have somewhat stabilized Iceland’s currency, the krona, by forbidding foreign investment by Icelandic companies and preventing foreigners from removing their money from the island nation. Government spending was reduced.

Unfortunately, the krona has lost as much as 60% of its value, resulting in massively higher costs of goods and services, and taxes are punishingly high. The economy has shown growth, but inflation is still in the country.

In addition, because capital has been locked into the country for over four years, a real estate bubble has developed, fueled primarily by the captive foreign assets.

As for debt relief, mortgages in Iceland can be a homeowner’s nightmare and a usurer’s dream. Icelanders are faced with the Hobson’s choice of taking out property loans which are indexed to either the rate of currency exchange or the rate of inflation. In both cases, it is not the interest rate that changes, but the amount of the principal itself. If someone borrows 100,000 kroner under the second, saner scenario, and inflation is 10%, he will owe 110,000 kroner at the end of the year. This makes it very difficult to pay off mortgage debt and own property but is a boon to the bankers.

According to Baldur Bjarnason, who has collected a vast amount of research on conditions in Iceland, not only has that country not expelled the IMF, the IMF offered a limited bail out to the nation whose government then “went further along the libertarian axis than the IMF recommended.”

One of the highlights of the Iceland story has always been the country’s alleged willingness to punish and imprison the wrongdoers who bankrupted the country. Certainly, the people demand it, but the facts are disappointing. Some of the bankers were put on trial, as was the former prime minister, Geir Haarde. Some were convicted, and then served only a fraction of their sentences. Haarde was found guilty of a technical charge, but be received no fine or prison sentence. Two CEO’s and 14 other bank employees were indicted in March, so hope for progress remains.

It is true that Iceland nationalized the banks. But then it privatized them again. End result: two out of three of the collapsed institutions now belong to the creditors. The creditors then sold out to “foreign hedge and vulture funds,” says Bjarnason, so the banking system is no longer controlled by Icelanders. By re-privatizing the banks so quickly, the Icelandic government may have destroyed its chance for true banking reform and punishment of the criminal perpetrators of the financial collapse.

The good news is the Icelandic people don’t seem to be taking any of this lying down. Voters in Iceland’s national elections in April tossed out the center-left Social Democrat government coalition, even though it had successfully stabilized the economy to some degree. The center-right Independence and Progressive parties took over 60% of seats in the Icelandic Parliament, promising to “forgive or renegotiate [many mortgages] and to put an end to four years of austerity by lowering taxes, ending capital controls and stimulating foreign investment,” according to a New York Times report.

In light of the ups and downs in Iceland, the financial vision of Hungary, which AFP recently reported, must remain uppermost in our minds. It is a beacon beckoning toward freedom and a model for all nations.

Readers can be assured that AFP will keep them informed of developments there, as well.

DoD office can't process FOIAs because fax machine broken, no money for new one

Source: Boing Boing

MuckRock News reports that Freedom of Information Act requests faxed to the Office of the Secretary of Defense (OSD) started coming back as undeliverable a couple weeks ago. The OSD confirms their fax machine is down, possibly for another few months, because there's no money in their tens of billions of dollars a year budget for a new one, and they can't switch to email as a request method. "The office that oversees the most powerful military in history (not to mention the best-funded) is unable to project when its single fax machine will once again be operational." 

Rationale For Owning Gold In The Coming Deflationary Bust

People mostly think that gold protects purchasing power during periods of inflation. While that is true, it is not the only truth. The investment narrative does not consider gold’s value during deflationary periods.
Why should anyone be concerned about deflation when the monetary base of key Western economies is inflating like never before in history of mankind? The short answer is that deflationary and inflationary forces are currently working simulataneously in our economy. At the basis of this phenomenon are boom-and-bust cycles, which are driven by central banks (prohibiting the proper working of free market forces). Loose monetary policies of central banks do not allow a recession to clean out the inefficient resources and investments in the economy, resulting in intensifying deflationary forces.
Jim Rickards recently has explained deflation and inflation this way:

“You have deflation which is perfectly natural and what you would expect in a depression. A depression means among other things that people are deleveraging; when you deleverage you sell assets; selling assets pushes prices down; that makes things worse and prices go down more. Against that, we have inflation from the Fed money printing. These two forces are pushing against each other: deflation and inflation at the same time. It hasn’t been possible to estimate precisely, but in rough numbers we might have 4% deflation and 5% inflation at the same time which net out to about 1% inflation in the CPI.”

Investor and economic scholar Marc Faber takes the deflationary idea one step further. In a recent interview (see video below) he appears convinced that a deflationary bust is inevitable. The only uncertaintly appears to be timing. In his own words: “It could happen tomorrow, in five or ten years time.”

“In a collapse, over time, everything goes down but some assets go down more [in price] than others. Traditionally, it is best to hold cash. The key question is: what kind of cash and in which form? For instance, one could hold its cash in bank deposits, but not all cash will be repaid. Cyprus is a good example. You will get your cash on a bank deposit back in some sovereign countries but not in others, depending on the quality of banking system (although in a collapse, most likely, all banks would suffer). Moreover, one needs to make a choice of the currency. The dollar could look good for the time being, but eventually it could become the worse currency (which is what I expect). The question here is the meaning of “weakness” … a currency is weak against what exactly? As all central banks are printing money, their value all go down simultaneously. In such an environment, gold is a good solution. This is the rationale to hold some money in the form of [physical] gold. Cash is not necessary the best investment.

There you have the rationale on owning gold and even accumulate it when the signs of a deflationary collapse would pop up.
Although  Faber did not mention it explicitly, it is interesting to see how his view is in line with Exeter’s inverted pyramid (also, Exeter’s golden pyramid). The pyramid visualizes the organization of financial asset classes in terms of risk and size. Gold forms the small base of most reliable value, and asset classes on progressively higher levels are more risky. Wikipedia notes that while Exter’s original pyramid placed Third World debt at the top, today derivatives hold this dubious honor.
Professor Fekete provided an explanatory note back in 2007:

“The grand old man of the New York Federal Reserve bank’s gold department, the last Mohican, John Exter explained the devolution of money using the model of an inverted pyramid, delicately balanced on its apex at the bottom consisting of pure gold. The pyramid has many other layers of asset classes graded according to safety, from the safest and least prolific at bottom to the least safe and most prolific asset layer, electronic dollar credits on top. (When Exter developed his model, electronic dollars had not yet existed; he talked about FR deposits.) In between you find, in decreasing order of safety, as you pass from the lower to the higher layer: silver, FR notes, T-bills, T-bonds, agency paper, other loans and liabilities denominated in dollars. In times of financial crisis people scramble downwards in the pyramid trying to get to the next and nearest safer and less prolific layer underneath. But down there the pyramid gets narrower. There is not enough of the safer and less prolific kind of assets to accommodate all who want to devolve. Devolution is also called flight to safety.”

The scramble for safety in the form of physical (!) gold is not new, although people in the West mostly do not recognize gold’s monetary value. Sound money expert Claudio Grass from Global Gold Switzerland points out that throughout monetary history the investment focus has always shifted from capital growth to capital preservation during periods of profound deflation. “Deflation thus always comes with falling confidence in the (perceived) root cause of the crisis (governments, banks, speculators, etc.) and their rating. Therefore the purchasing power of Gold gains also within a deflationary scenario.”