"Private prisons, the largest among them being GEO and the Corrections Corporation of America, profit by taking over a state’s prison population for a fee. Many states, under contract with these private prisons, agree to keep the prisons full, which in turn results in more Americans being arrested, found guilty and jailed for nonviolent “crimes” such as holding Bible studies in their back yard. As the Washington Post points out, “With the growing influence of the prison lobby, the nation is, in effect, commoditizing human bodies for an industry in militant pursuit of profit… The influence of private prisons creates a system that trades money for human freedom, often at the expense of the nation’s most vulnerable populations: children, immigrants and the poor.”
"Oil is now nearly 20% lower, and as goes the price oil, so go the inflows into the fund. Which means that any month now, if not already, Norway will shift from net buyer of global financial assets to a net seller, in the process joining the Emerging Markets and, of course, China in soaking up even more liquidity, mostly USD-denominated, out of the market, in the process removing much of the liquidity injected by the Fed and its peer central banks. "
Authored by John Kay, originally posted at Project Syndicate,
More than a half-century ago, John Kenneth Galbraith presented a definitive depiction of the Wall Street Crash of 1929 in a slim, elegantly written volume. Embezzlement, Galbraith observed, has the property that “weeks, months, or years elapse between the commission of the crime and its discovery. This is the period, incidentally, when the embezzler has his gain and the man who has been embezzled feels no loss. There is a net increase in psychic wealth.” Galbraith described that increase in wealth as “the bezzle.”
In a delightful essay, Warren Buffett’s business partner, Charlie Munger, pointed out that the concept can be extended much more widely. This psychic wealth can be created without illegality: mistake or self-delusion is enough. Munger coined the term “febezzle,” or “functionally equivalent bezzle,” to describe the wealth that exists in the interval between the creation and the destruction of the illusion.
From this perspective, the critic who exposes a fake Rembrandt does the world no favor: The owner of the picture suffers a loss, as perhaps do potential viewers, and the owners of genuine Rembrandts gain little. The finance sector did not look kindly on those who pointed out that the New Economy bubble of the late 1990s, or the credit expansion that preceded the 2008 global financial crisis, had created a large febezzle.
It is easier for both regulators and market participants to follow the crowd. Only a brave person would stand in the way of those expecting to become rich by trading Internet stocks with one another, or would deny people the opportunity to own their own homes because they could not afford them.
The joy of the bezzle is that two people – each ignorant of the other’s existence and role – can enjoy the same wealth. The champagne that Enron’s Jeff Skilling drank when the US Securities and Exchange Commission allowed him to mark long-term energy contracts to market was paid for by the company’s shareholders and creditors, but they would not know that until ten years later. Households in US cities received mortgages in 2006 that they could never hope to repay, while taxpayers never dreamed that they would be called on to bail out the lenders. Shareholders in banks could not have understood that the dividends they received before 2007 were actually money that they had borrowed from themselves.
Investors congratulated themselves on the profits they had earned from their vertiginously priced Internet stocks. They did not realize that the money they had made would melt away like snow in a warm spring. The stores of transitory wealth that were created seemed real enough to everyone at the time – real enough to spend, and real enough to hurt those who were obliged to pay them back.
Fair value accounting has multiplied opportunities for imaginary earnings, such as Skilling’s profits on gas trading. If you measure profit by marking to market, then profit is what the market thinks it will be. The information contained in the accounts of the business – the information that should shape the market’s views – is to be derived from the market itself.
And the market is prone to temporary fits of shared enthusiasm – for emerging-market debt, for Internet stocks, for residential mortgage-backed securities, for Greek government debt. Traders need not wait to see when or whether the profits materialize. IBGYBG, they say – I’ll be gone, you’ll be gone.
There are numerous routes to bezzle and febezzle.
In a Ponzi scheme, early investors are handsomely rewarded at the expense of latecomers until the supply of participants is exhausted. Such practices, illegal as practiced by Bernard Madoff, are functionally equivalent to what happens during an asset-price bubble.
Tailgating, or picking up dimes in front of a steamroller, is another source of febezzle. Investors search for regular small gains punctuated by occasional large losses, an approach exemplified by the carry trade by which investors borrowed euros in Germany and France to lend in Greece and Portugal.
The “martingale” doubles up on losing bets until the trader wins – or the money runs out. The “rogue traders” escorted from their desks by security guards are typically unsuccessful exponents of the martingale. And the opportunity to switch between the trading book and the banking book creates ready opportunities for financial institutions to realize gains and park losses.
Even worse, however, was Goldman's own prop book (yes, the FDIC-insured hedge fund still has a prop trading operation despite the Volcker Rule, only it calls it Investing and Lending now instead of by its old name "Prop trading"), which plummeted by a whopping 60% from $1.7 billion a year ago to a paltry $670 million. This was the lowest revenue Goldman's prop trading group has generated since Q2 2012 and bodes very badly for the future of not only banks but hedge funds. Because if Goldman, which has spawned more central bankers than any other bank, can't make money trading its own book in this environment, nobody else can.
The European Commission is taking legal action against six European countries, including the Netherlands and Luxembourg, after they failed to implement rules that would allow for depositors to have their cash confiscated.
Six countries will be referred to the European Court of Justice (ECJ) for their continued failure to transpose the EU's "bail-in" laws into national legislation, the European Commission said last Thursday, according to The Telegraph.
Taxpayers bailed out banks in the first global financial crisis. Depositors will be in the firing line the next time. Photo: AFP
Most EU countries, UK, the U.S., Canada, Australia and New Zealand all have plans for bail-ins in the event of banks and other large financial institutions getting into difficulty. It is now the case that in the event of bank failure, personal and corporate deposits could be confiscated.
The referral comes after the EU issued a warning against Poland, the Netherlands, Luxembourg, Sweden, Romania and the Czech Republic for their non-compliance earlier this year.
The rules - known as the Bank Recovery and Resolution Directive (BRRD) - are designed to stop governments from having to foot the bill for saving banks from going bust by instead forcing savers and deposit holders to foot the bill in an attempt to further protect banks from insolvency.
Brussels will refer six countries to the European Court of Justice over their failure to apply the new, very radical “bail-in” rules. Deposits of less than €100,000 should be protected under the new regime but in reality these limits are arbitrary and would likely be reduced to lower levels in the event of banks being insolvent again in another European and global financial crisis.
In the event of a systemic European banking crisis, however, laws could be changed at the stroke of a pen and “bail-in” mechanisms could become fully operational. Also, the comforting guarantee of €100,000 ($100,000 or £80,000) would likely be reduced in such a crisis.
The era of depositor bail-ins is coming and preparations are in place by the international monetary and financial authorities for bank bail ins. Financial interests of banks are once again being placed over those of small and medium businesses and taxpayers in general. The majority of the public is unaware of these developments, the risks and ramifications, and how they can protect their money.
Back in March, we reported that "Global Trade Volume Tumbles Most Since 2011; Biggest Value Plunge Since Lehman."
Then in August when we first pointed out a dramatic slowdown in the Baltic Dry index which had peaked just a few weeks earlier and we said that "should the dead cat bounce in shipping rates indeed be over, and if the accelerate slide continues at the current pace, not only will shippers mothball key transit lanes, but the biggest concern for global economy, the unprecedented slowdown in world trade volumes, which we flagged a week ago, will be not only confirmed but is likely to unleash yet another global recession."
Three weeks later, we we got confirmation that the BDIY has indeed become a lagging indicator to actual demand, when Reuters reported in its latest weekly update using data from the Shanghai Containerized Freight Index, that key shipping freight rates for transporting containers from ports in Asia to Northern Europe fell by 26.7 percent to $469 per 20-foot container (TEU) in the week ended on Friday.The collapse in rates is nothing short of a bloodbath: "it was the third consecutive week of falling freight rates on the world’s busiest route and rates are now nearly 60 percent lower than three weeks ago.