Former Federal Reserve Official Apologizes for Quantative Easing

CNBC:

“My argument is not that QE was not at all useful,” he said on CNBC’s “Fast Money.”

“I believe that at the time, it was just one more tool that the Fed introduced to try to help the economy,” he said. “My point, ultimately, is the idea that very quickly into QE, it started becoming obvious that it wasn’t working in the way that it was supposed to.”

The article quotes someone from Rutgers Business School, who wonders what the end game for QE is going to be. The stock market – particularly the banks buying stock – is addicted to the easy money of QE. When can the Fed withdraw the money without crashing the markets?

One other point from the article – the rise in the stock market mostly benefited the already wealthy, including the banks. That was the indirect transfer of wealth.

Other transfers were more direct. The Fed bought up hundreds of billions in the banks’ bad mortgages (as opposed to underwater mortgages from the little guy). The Fed loaned money to banks at a low rate and banks used the money to buy Treasuries that paid a higher rate of interest. Some of that may have been by design, to repair the damage done by years of bad lending, but the net result was moral hazard and a massive transfer of wealth to the wealthiest.

This Is Your Train on Drugs – Sydney and Minnesota Zoos Mothball Monorails

WiredAnother ‘Outdated’ Monorail Bites the Dust:

First, the pylons of Sydney’s monorail came tumbling down. Now, the Minnesota Zoo in Apple Valley, MN has shuttered its aging monorail for good.

The troubled traincars took their last loop around the zoo campus on September 2, and now the zoo has announced the line won’t run ever again.

“It was an outdated system that had reached the end of its useful life,” spokeswoman Kelly Lessard told the Minneapolis Star-Tribune. Back in 2011, the train stalled, leaving passengers stranded 18 feet above ground. Firefighters rescued them with ladders when they couldn’t get the monorail running again.

Maintenance on a 34-year-old system was certainly an issue. But the biggest problem with the zoo monorail was that it didn’t have any stops along its route. Instead, it looped around the zoo, and those on board could only catch glimpses of animals as it drove past.

That’s the problem with trains. They stop at a fixed number of places which are set in stone when the train is built.

Meanwhile, buses can stop at any number of places and their routes and stops can be changed as demands change. Buses good. Trains bad.

Poland Seizes Half of Private Pensions

Zero HedgePoland Confiscates Half Of Private Pension Funds To “Cut” Sovereign Debt Load:

While the world was glued to the developments in the Mediterranean in the past week, Poland took a page straight out of Rahm Emanuel’s playbook and in order to not let a crisis go to waste, announced quietly that it would transfer to the state – i.e., confiscate – the bulk of assets owned by the country’s private pension funds (many of them owned by such foreign firms as PIMCO parent Allianz, AXA, Generali, ING and Aviva), without offering any compensation. In effect, the state just nationalized roughly half of the private sector pension fund assets, although it had a more politically correct name for it: pension overhaul.

Venezula seized pensions, but Poland is a member of the European Union. It’s one thing for a small country with a shaky political history to do this. You expect EU countries to have better finances and more respect for private property.

This is Your Train on Drugs, UK and Detroit Editions

High speed rail scheme cost to double to £80bn, economists warn:

HS1, the high-speed rail line that connects the Channel Tunnel with London, was initially expected to cost £1billion. The final bill was around £11billion.

The London Underground’s Jubilee Line extension, the biggest rail project before HS1, came in at four times the original estimate in real terms.

And unlike buses, trains require the destruction of everything along their route:

Even though the first train is not due to run along the new line until 2026, values of homes close to the route have already fallen by as much as 40 per cent. Estate agents have said that properties up to a mile from the route are being blighted by the proposed line, with some close to the proposed line failing to sell at any price.

Apparently the UK wants to be Springfield to Detroit’s North Haverbrook.

Everyone’s heard about Detroit’s financial problems. One of the many failed attempts to revitalize their downtown (and to funnel taxpayer money to political cronies) was a train system, the Detroit People Mover:

The Mover costs $12 million annually in city and state subsidies to run.[9] The cost-effectiveness of the Mover has drawn criticism.[10] In every year between 1997 and 2006, the cost per passenger mile exceeded $3, and was $4.26 in 2009,[11] compared with Detroit bus routes that operate at $0.82[11] (the New York City Subway operates at $0.30 per passenger mile). The Mackinac Center for Public Policy also charges that the system does not benefit locals, pointing out that fewer than 30% of the riders are Detroit residents and that Saturday ridership (likely out-of-towners) dwarfs that of weekday usage.[12] The system was designed to move up to 15 million riders a year. In 2008 it served approximately 2 million riders. In fiscal year 1999-2000 the city was spending $3 for every $0.50 rider fare, according to The Detroit News. In 2006, the Mover filled less than 10 percent of its seats.[12]

Among the busiest periods was the five days around the 2006 Super Bowl XL, when 215,910 patrons used the service.[13] In 2008, the system moved about 7,500 people per day, about 2.5 percent of its daily peak capacity of 288,000.[14][15]

Under-utilized and overbudget is a pretty good summary of recent urban trains.

PreviouslyThis is Your Train on Drugs: CA Train Versus Endangered Species, Asthmatic Children

Good and Evil, and Commerce and Capitalism as a Way to Cure Poverty

“In fact, Bono, C. S. Lewis has a great quote which I love: ‘When a man is getting better, he understands more and more clearly the evil that’s left in him. When a man is getting worse, he understands his own badness less and less.”
Jim Daly, interviewing Bono

That was in the context of interviewing Bono, who recently said “Aid is just a stopgap. Commerce [and] entrepreneurial capitalism take more people out of poverty than aid. We need Africa to become an economic powerhouse.”

A crazy new idea for Africa and most third world nations is to observe the rule of law, recognize constitutional rights, engage in democracy, bring women and minorities equal rights, and engage in free market capitalism. Historically, that’s a hell of a winning formula. It worked for most first world countries.

India and China have improved their lot just by practicing that last part, free market capitalism. Both of them – but especially China – have a long way to go on the other parts that have to do with human rights, but the little bit they’ve done so far has improved the lifes of several billion people. Foreign aid and economic redistribution could never have done what capitalism has done for those people.

PreviouslyBreaking News: Bono and Matt Yglesias Mugged by Economic Reality

Detroit Files for Bankruptcy

Trying to pay for stuff you can’t afford will do that to you:

It’s the largest municipal bankruptcy in U.S. history, dwarfing Jefferson County, Ala.’s $3.1 billion sewage district restructuring.

In June 2012, the City of Stockton became the largest-ever city to file for bankruptcy, at the time.

The Motor City faces $20 billion of long-term liabilities. The Wall Street Journal’s Matt Dillon says those holding onto $11 billion in unsecured debt are basically staring into the abyss, facing the prospect of getting next to nothing from the city’s obligations.

The pension funds want to block Orr’s attempt to drastically reduce the amount of benefits owed to current and former city workers.

Pension funds for unionized city employees are one of the reasons Stockton went bankrupt.

Rio Tinto Mine Landslide – US Just Lost 17% of Copper, 10% of Silver Production

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A billion ton landslide at Utah’s Rio Tinto mine has shut down mining. Rio Tinto is the world’s biggest copper mine and produces 17% of US copper. Tam points out that ammo, already hard to get, will just get that much harder to find and more expensive.

Along with copper, Rio Tinto digs up lots of other metals. They’re responsible for 10% of US silver production and half a million ounces of gold every year. Eventually, that should effect silver prices, even if a little, but the landslide happened at the same time silver collapsed from 28 dollars to 23.

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The photos of the mine and the landslide are amazing for the sheer scale of the mine and the amazing color of the earth.

Gold and Silver Hit Multi-year Lows

Massive $20 Billion Paper Gold Sell Orders Trigger Stop Loss Selling And Unfounded Panic

I had staggered stop loss orders in place that sold almost all of holdings on the way down, so I’m still in the black, but it’s been ugly for people who bought in the last year or two.

Stockton, CA Declares Bankruptcy

Stockton bankruptcy can move forward, judge rules:

The $900 million Stockton owes to the California Public Employees Retirement System to cover pensions is its biggest debt -– as is the case with many cities in California.

Stockton slashed its police and fire departments, halted bond payments, cut employee benefits and adopted an emergency spending plan that cut many city services. But the city continues to pay into the state pension.

CalPERS – California’s retirement system for government employees – has a long history of problems itself. Some of it is due to ridiculously over-generous pensions, with some state retirees pulling down more than $100,000 every year in retirement. CalPERS let’s employees retire as early as 55, so those retirement payments can stretch out for decades. CalPERS’s own actuary says the pension costs are “unsustainable.”

State auditor: California’s net worth at negative $127.2 billion:

Were California’s state government a business, it would be a candidate for insolvency with a negative net worth of $127.2 billion, according to an annual financial report issued by State Auditor Elaine Howle and the Bureau of State Audits.

The report listed the state’s long-term obligations at $167.9 billion, nearly half of which ($79.9 billion) were in general obligation bonds, with another $30.8 billion in revenue bonds, many of which were issued to build state prisons, whose “revenue” is lease payments from the state general fund.

The list of long-term obligations did not include the much-disputed unfunded liabilities for state employees’ future pensions, nor the $60-plus billion in unfunded liabilities for retiree health care. The Governmental Accounting Standards Board and Moody’s, a major bond credit rating house, have been pushing states and localities to include unfunded retiree obligations in their balance sheets and were they to be added to California’s, it could push its negative net worth down by several hundred billion dollars.

So that $127 billion doesn’t even include the underfunded liability for CalPERS and other government employee retirement and healthcare. This report lists the underfunded liabilities for just three programs – CalPERS, CalSTRS, and the University of California Retirement Plan – at $137 billion. This is what happens when politicians operate on the “buy votes now, pay debts after you’ve left office” plan.

Infographic: All the World’s Gold

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“Why Most Rappers are Broke”

Some of it is bling. Some of it is the lifestyle. Some of it is that most artists in any genre don’t make money off of their records, due to record companies being pretty much pure evil.

Part 1:

Part 2:

See also: the famous article about how record companies rip off artists. It’s published under Courtney Love’s name. Me, I don’t believe she could have ever strung together that many coherent sentences.

Central Banks Buy Most Gold Since 1964

But remember, gold is a barbarous relic with no function in the modern world of finance:

Worldwide gold demand in 2012 was another record high of $236.4 billion in the World Gold Council’s latest report. This was up 6% in value terms in the fourth quarter to $66.2 billion, the highest fourth quarter on record. Global gold demand in the fourth quarter of 2012 was up 4% to 1,195.9 tonnes.

Central bank buying for 2012 rose by 17% over 2011 to some 534.6 tonnes. As far as central bank gold buying, this was the highest level since 1964. Central bank purchases stood at 145 tonnes in the fourth quarter. That is up 9% from the fourth quarter of 2011, and the eighth consecutive quarter in which central banks were net purchasers of gold.

Quote of the Day

“Preposterous Keynesian fallacy at work. It presupposes that money allocated to some project via the political process is more likely to create a ‘multiplier’ than market driven uses of that money… and it assumes that the money taken by the state by force would not have been invested in something more worthwhile in aggregate if the decisions were left to its original owners before it was confiscated by the state.”
–  Perry De Havilland

Russia Biggest Gold Buyer in Past Decade, China #2

Not only has Putin made Russia the world’s largest oil producer, he’s also made it the biggest gold buyer. His central bank has added 570 metric tons of the metal in the past decade, a quarter more than runner-up China, according to IMF data compiled by Bloomberg. The added gold is also almost triple the weight of the Statue of Liberty.

“The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” Evgeny Fedorov, a lawmaker for Putin’s United Russia party in the lower house of parliament, said in a telephone interview in Moscow.

In 1998, the year Russia defaulted on $40 billion of domestic debt, it took as many as 28 barrels of crude to buy an ounce of gold, Bloomberg data show. That ratio tumbled to 11.5 by the time Putin first came to power a year later and in 2005, after it touched 6.5 — less than half what it is now — the president told the central bank to buy.

Matt Yglesias’s Very Bad, No Good Idea for Perpetual Government Bonds

Matt Yglesias in SlateDon’t Repay the National Debt – It’s time to revive a British financial innovation from the 18th century: perpetual bonds.

In 1752, Prime Minister Henry Pelham converted the entire outstanding stock of British debt into consolidated annuities that would become known as consols. The consols paid interest on an annual basis just like regular bonds, but with no requirement that the government ever redeem them by repaying the face value. Pelham created the bonds in order to reduce the government’s annual debt service costs. That isn’t our problem today. Instead, a modern-day consol would target another problem: political reluctance to take advantage of record-low interest rates.

As of Friday, the inflation-adjusted yield on 10-year Treasury bonds was negative 0.56 percent. Savers, in other words, want to pay the American government for the privilege of safeguarding their money. For the longest-dated bonds we sell, the 30-year Treasury bond, rates were 0.51 percent. That’s higher than zero, but far below the long-term average economic growth level. A sensible country would be taking advantage of that fact to finance some valuable public undertakings. Alternatively, if we think there’s nothing worth spending money on we could enact a big temporary tax cut aimed at reducing the unemployment rate and boosting the population’s skill level. Prolonged long-term unemployment, after all, has lasting effects that reduce the efficiency of the labor market and make it much harder to grow in the long term.

The first reason problem with Yglesias’s idea is that he thinks we should borrow money. We’ve been borrowing over a trillion dollars a year and the economy is still in the basement. We just had a quarter with negative GDP. If borrowing and spending worked it would have worked by now. As it is, we’re getting a negative return on government spending and the ratings agencies have already downgraded our credit rating once.

Then there’s the finance issue. There’s a yield curve on Treasuries. You can buy Treasuries in durations ranging from short term (1 month, 2 month, etc.) to long term (10 and 30 years). Treasuries with longer durations pay higher interest rates.

Yglesias glosses over that by expressing 10 and 30 year Treasury prices in terms of real interest rates – interest rates minus inflation. While real interest rates are a meaningful number, they also obscure the difference in interest rates. Currently the 10 year pays 2.03% and the 30 year pays 3.18%, or about 50 percent higher. If the yield curve went to infinity, investors would expect returns much, much higher than on the 30 year.

Third, does Yglesias think he’s the first person to notice that yields are at historic lows? Investors are still buying short- and medium duration Treasuries at low interest rates because they’re a safe haven. They’re not enthusiastic about long-dated Treasuries with pitiful returns. In fact, it’s the Federal Reserve buying those long-dated Treasuries as part of Operation Twist to mop up the excess in long-dated Treasuries and drive down interest rates.

Finally, there’s a huge, huge difference that Yglesias overlooks. If investors aren’t getting their original principal back, they will have to charge much, much higher interest rates.

Here’s why. Imagine I borrow $1,000 from you. If I promise to pay back the money in a year you might charge me 5% interest. Within one year you’ll get the original $1,000 principal back plus the $50 in interest. Now imagine I say I’ll never pay back the principal, but will just pay interest perpetually. Under the first plan you’ll get $1,050 from me in 1 year. Under the second plan with interest only it will be 21 years before I repay the same $1,050.

It’s pretty darned obvious that under the second plan you’ll have to charge a lot more vig. Besides the time value of money, you have to factor in the erosion of the real value of payments due to inflation over 21 years. Too, the longer I keep your money the greater the risk I’ll duck out on the payments. The fact that banks don’t offer interest-only loans for the life of the loan (as opposed to a brief introductory period) is a clue that interest-only loans are a bad idea for investors.

A consul-like debt instrument would also incentivize the government to foster inflation, which would make the government’s debt payments easier while diminishing the investor’s real returns.