Financial Powerhour

2008 all over again?

2010-08-14T22:38:00.000-04:00

As the fall approaches, we seem to be returning into the murky waters of the 2008 market. All summer, volumes in the market have been very low, probably mostly generated from a few computers trading amongst themselves. The Baltic freight rate has plummeted to a low of $1700 U.S., a symptom of reduced economic activity around the world. The Chinese economy is now slowing as their government pulls on the monetary reins. To top all of this off, the risk of sovereign debt crisis seems to be hiding under the surface, waiting to pop-up again, giving investors a nasty surprise.

What does this all mean? Well, the fall has the potential to be a repeat of fall 2008. If liquidity begins drying up, we could experience very strong selling pressures. Unfortunately, the only haven will be cash once again… making it king!

Precious Metal Market Manipulation

2010-03-31T21:59:00.003-04:00

The cat is officially out of the bank (I mean bag), listen to this interview on Kings News World.

Andrew Maguire & Adrian Douglas: Discuss What Could Be the Largest Fraud in History - Andrew is an independent metals trader turned whistleblower at the center of a storm for exposing what could be the largest fraud in history involving countries, banks and government leaders. Adrian Douglas Board of Director from GATA, the man who Andrew reached out to joins in this interview where they discuss a fraud so extraordinary and so unimaginable that it is the kind of thing that only happens in hollywood thrillers. They also discuss the CFTC sponsored meeting on metals which was an unmitigated disaster because it additionally exposed the fraud on a grander scale.

This will probably be one of the largest fraud in years and the mainstream media has not even touched it.

March 26, 2010

2010-03-30T09:52:00.003-04:00

This weeks interview
Thomas Woods
Author of

This week's article
The central bankers simply didn't do their jobs
Canada.com

Blair's fight to keep his oil cash secret: Former PM's deals are revealed as his earnings since 2007 reach £20million
Mail Online

JGB yield curve steepens as big buyers' faith dented
Reuters

Canadians not saving enough: Dodge
Globe and Mail

In Prior Week Money Markets Recorded Biggest Outflow Since Collapse Of Lehman At $60 Billion, Or 2.2% Of Assets
Zero Hedge

Latvia government collapses amid economic crisis
Telegraph

Buy-to-let: 58pc rise in tenants defaulting on rent

Telegraph

Moody's Warns Of Upcoming Bank Downgrades If Dodd Bill Passes, BofA, Citi And Wells At Greatest Risk
Zero Hedge

Broke? Buy a few warships, France tells Greece
Reuters

States Are the Canary In the Fiscal Coal Mine
RealClearMarkets.com

10 Year Swap Spreads Turns Negative
Zero Hedge

New Home Sales Plunge To New All Time Record Low, 308K SAAR Is 2.2% Frop From Revised 315K In January
Zero Hedge

Higher interest rates could be coming sooner, says Bank of Canada governor
Canadabubble.com

Canadians worried about home prices, mortgage rates: Surveys
Canadabubble.com

Links for Friday, March 19, 2010

2010-03-19T11:06:00.003-04:00

Links for today's show

Marc Faber: Don't Expect Another Crash ... Bernanke Won't Allow it
Yahoo Finance

Lehman bosses used accountancy gimmick to cover up debt
Times Online

Shipping Indices Highlight a Potential Commodities Sell Off
OilPrice.com

The $2 Trillion Hole
Barron's

Can Ottawa tame its deficit beast?
Canadabubble.com

House prices on verge of double dip
Telegraph

Bank of England warns of 'considerable uncertainty' over jobs
Telegraph

Dylan Ratigan Show
MSNBC

Lehman Bankruptcy Report: Top Officials Manipulated Balance Sheets, JPMorgan And Citi Contributed To Collapse
Huffington Post

Why the sun looks poised to set on Japan's era of cheap government debt
Telegraph

New from the 1930's
http://newsfrom1930.blogspot.com/

Selling Of Treasuries Continues By China And Japan As UK, Oil Exporter, Hedge Fund Holdings Jump
Zero Hedge

Michael Lewis Discusses Wall Street's Neverending Mass Delusions
Zero Hedge

Former President Of Just Failed Park Avenue Bank Arrested On Bank Bribery, Embezzlement And Fraud Charges
Zero Hedge

More Empty Posturing Out Of Moody's - Rating Agency Once Again Threatens With US Downgrade
Zero Hedge

NAHB Builder Confidence Drops To June 2009 Levels, Winter Snowfall Blamed As Usual
Zero Hedge

Still no money for Prichard pensioners
Fox

Europe's banks brace for UK debt crisis
Telegraph

German bloc plays tough on Greece
Telegraph

Britain warns China against protectionism
Telegraph

SocGen: There Is No Way Out Of This Mess But Continued Massive Deleveraging
Business Insider

David Rosenberg: You Think Housing Is Recovering? Check Out These Charts
Business Insider

There's Deep Fraud On Wall Street, And Goldman's Behavior In Greece Is Just The Tip
Business Insider

NJ Seeks to Skip $3 Billion Pension Payment

Pension Pulse

China in Midst of ‘Greatest Bubble in History,’ Rickards Says
Bloombeg

The proposed EU Greek bail-out cannot simply bypass German law
Telegraph

ECB's Juergen Stark Warns Of "Clear Risk Of Sovereign Debt Crisis," Cautions Recovery Largely Due To Massive Support By Governments And Central Banks
Zero Hedge

Strategic Defaults Are Soaring In California, And Now They Might Really Explode

Business Insider

Lehman’s Desperate Housewives
Vanity Fair

Guest Post: More Evidence that Banks Create Credit Out of Thin Air
Naked Capitalism

Deutsche Bank, JPMorgan, UBS Are Charged With Fraud
Bloomberg

Shipping Market Worst Since World War II, Fisher Says
Bloomberg

Now Bernanke Wants To Eliminate Reserve Requirements Completely
Business Insider

Greece Gives Germany And European Union One Week Ultimatum (No, You Are Not Dyslexic)
Zero Hedge

Marc Faber: We Have a New Gold Standard
CNBC

Links for March 12th

2010-03-14T13:05:00.006-04:00

From 20 Minutes with Mark and the Markets
Germany: The Unnamed Co-Conspirator
ZeroHedge

Scenarios: Euro zone faces two-class future after Greece
Reurers

Dubai World to Seek Loan Delay in Talks, Bankers Say
Bloomberg

Europe may consider IMF-style institution to avoid next Greek crisis
Telegragh

Fitch Announces Another Record In CMBS Delinquencies
Zerohedge

I am not a criminal, insists billionaire behind Icesave
Telegrah

I am not a criminal, insists billionaire behind Icesave
Telegraph

China will be prudent in buying gold: official
Reuters

Washington Must Ban U.S. Credit Derivatives as Traders Demand Gold
Huffington Post

Greek Crisis Is Over, Rest of Region Safe, Prodi Says
Bloomberg

China hits at currency ‘protectionism’
Financial Times

Moody's Warns Of Pain Ahead For Financials, Profitability Concerns Due To Record Charge-Offs
Zerohedge

Greece brought to a halt by austerity protest strike
Times Online

Greeks Strike Over Budget Cuts, Bonds, Stocks Decline
Bloomberg

PIMCO's El-Erian: You Fools Don't Realize That The Sovereign Debt Crisis Goes WAY Beyond Greece
Business Insider

Muni Bond Market Begins To Burst With Defaults
Business Insider

Rick Bookstaber: Hedge Funds Are Pumping The Gold Bubble And Luring Investors Off A Cliff
Business Insider

Forget Greece: Italy derivatives bomb also ticking
Reuters

Detroit Sells $250 Million Without Recent Disclosure Filings
Bloomberg

It's Going To Implode: Buy Physical Gold - NOW
Zerohedge

Big ax looming at the FDNY: Threat of 1,000 layoffs, closing of 62 fire companies
NY Daily News

List of banks under stress keeps growing
MSNBC

Fed Shoulders AIG Loan Losses to Ease Sale to MetLife
Bloomberg

Last Friday's Show Material

2010-03-08T11:59:00.009-05:00

Interview with Tim Carney

Here is the link to purchase his book.

Articles from 20 Minutes with Mark and the Market

Greek, Portuguese Workers Strike, Protest Against Deficit Cuts
Bloomberg

What problem?

Oops.
Gath Turner's blog

Governor Christie: "Time to Hold Hands and Jump Off the Cliff" - Chris Christie For President?

Rep. Suzie Bassi: "Illinois in Utter Crisis, Next to Bankruptcy, $13bn Hole in a $28bn Budget"; Ambrose Evans Pritchard Inflicted with FIV
Mish's blog

Ken Rogoff On Japan's Slow Motion Crisis

Marc Faber: "I Would Recommend People Buy Every Month Some Gold For Ever"

Moody's Downgrades Deutsche Bank From Aa1/B To Aa3/C+
Zero Hedge

Is the Sprott Physical Gold Trust in the Market Trying to Buy 10 Tonnes of Gold?
jessescrossroadscafe.blogspot.com

Quebec living off the rest of Canada?

2010-03-02T09:45:00.004-05:00

An intresting study was published by the Frontier Centre for Public Policy about equalizations payments in Canada. The paper is called The Real Have-Nots in Confederation: Ontario, Alberta and British Columbia.

Here is a small summary:

''Equalization is a $14.2 billion federal program which transfers federal tax dollars to provincial governments. In 2009/10, Quebec will take the lion’s share of the money at almost $8.4 billion, while the other major recipients include Manitoba at just over $2-billion, New Brunswick at almost $1.7 billion, and Nova Scotia at almost $1.4 billion.

This study takes the “long view” of equalization. Thus, while Ontario will receive equalization payments of $347 million this year, this is an anomaly; most years, Ontario is a “have” province on equalization and is counted as such in this study. In addition, Ontario is still a net contributor to confederation and federal coffers when other transfer programs are included.

Equalization is described in the following manner Subsection 36(2) of the Constitution Act, 1982:

“Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.”

Findings:

In fact, far from “comparable levels of services,” British Columbia, Alberta and Ontario have lesser levels of services. For example:

· Nova Scotia and Quebec have more doctors per 100,000 people than do B.C., Alberta and Ontario;
· New Brunswick, Prince Edwards Island, Nova Scotia, Manitoba, and Quebec have more nurses per 100,000 people than do Ontario, Alberta and British Columbia;
· Prince Edwards Island, New Brunswick, Manitoba, and Nova Scotia have more long-term residential care beds per 100,000 people than do Ontario, Alberta and British Columbia;
· On social service spending, Quebec spends more per capita than any other province, at $2,342, while British Columbia is second at $1,702; the other two have provinces, Alberta and Ontario, spend $1,592 and $1,398 respectively;
· In terms of provincial public servants per 100,000 people, PEI, Manitoba, New Brunswick, Nova Scotia and Quebec all have more provincial civil servants than do Ontario, Alberta and British Columbia; perhaps more than any other indicator, this measurement reveals how have provinces subsidize large governments in the have-not provinces through the federal equalization program.

“The real have-nots in Confederation are those provinces that have, through their federal tax dollars, historically contributed massive amounts to equalization,” write authors Eisen and Milke. “British Columbia, Alberta and Ontario now find their benefits from taxation are demonstrably fewer than those available in the provinces to which they have contributed so much, the so-called have-nots.” ''

These issues really comes out in tough economic times. The Have provinces will really begin looking at these issues in the futur as times get tough and will demand changes. This will leave Quebec in a tough situation. The solution for Quebec is to move towards encouraging entrepreneurship and not dependance on state programs.

Articles from February 12 show

2010-02-13T15:21:00.002-05:00

Jumbo Mortgage ‘Serious Delinquencies’ Rise to 9.6%

Greek Ouzo crisis escalates into global margin call as confidence ebbs

Five warning signs of a bubble

Germany backs Greek bail-out as EU creates 'economic government'

SCENARIOS-What the EU and IMF could do to help Greece

WORLD FOREX: Euro Declines; Investors Await Greek Aid Clarity

Greece's 2009 Budget Deficit Was Just Revised From 12.2% To 16% Of GDP

PIGS’ in Rescue Lipstick Are Uglier Than Default: Mark Gilbert

Danske Market European Perspectives: Debt On A Dangerous Path

Greece: How the Bond Vigilantes Left It in Ruins

Articles from 20 Minutes with Mark and the Markets

2010-02-08T11:57:00.004-05:00

Links to news articles

Recession prompts suburban gold rush as women trade in old jewellery

Copper Market Set for ‘Catastrophe,’ Threlkeld Says

Fund charges exposed as fees outstrip returns

Moody's Sees US Rating Under Pressure After $3.8 Trillion Budget

ABC Consumer Index Drops To Lowest Reading Since Fall, Divergence From UMich Propaganda Reading At Record

Portugal Bund Spreads Even Wider Following Substantially Reduced Bill Auction And Much Higher Auction Yield, CDS Hits Record

Andrew Cuomo To File Civil Securities Fraud Charges Against Ken Lewis and BofA CFO Joe Price Even As The SEC Proves Its Incompetence Yet Again

US Default Protection Surges To Widest Levels Since March

Greater Vancouver sales 23.5 per cent decline in January 2010

Awash in a sea of debt

B.C. leads nation in personal debt concerns: surveys

.....you will never be punished for being wrong!

2010-02-03T16:24:00.006-05:00

That includes Time too.

On February 15th 1999, Alan Greenspan, Larry Summers, and Robert Rubin made the cover of Time also. These men planted the seed for the meltdown in the fall 2008. In 10 years from now, it will be someone else who will lead us to a crisis.

Canada's Housing Bubble

2010-02-03T09:47:00.005-05:00

Last week, a very interesting report called 6th Annual Demographia International Housing Affordability Survey was released by Demographia. If you have been listening to the show, you know that I believe the Canadian real estate market is in a bubble. This report points out that on average, median house price of 3.0 time median household income.

Here is a chart I found on Mish's blog:

Notice that cities in BC make up the top of the list, Vancouver actually tops it. Toronto is further down the list at 5.1 (anything over 5.1 is considered severely unaffordable).

Canadians have made the same mistakes as the Americans have. First, low-interest rates(under what the market would have set) have created the fuel for the bubble. Second, CMHC has been buying low-grade mortgages, Canadian version of the GSEs (Government sponsored entities) Fannie Mae and Freddie Mac, packaging them up and selling them on the market as guaranteed MBS (mortgage backed securities). This allows the banks to have fresh capital to lend more money, without the risk of past loans.

A perfect storm is now about to hit the Canadian housing market:

the Olympics will be over in a few weeks and that will, I believe, burst the bubble in BC with supply pouring onto the market,
Canadians are at 145% debt for income, and they are beginning to get worried,
and long-term interest rates will probably start moving up because of long-term concerns over Canada's total debt vs GDP.

Unfortunately, we have painted ourselves into a corner and some pain is the only way out.

The Curious Race to the Bottom

2010-01-31T23:53:00.006-05:00

The continued uncertainty surrounding Greece and their out-of-control fiscal situation may be what the EU has been wishing for. My suspicion (it is only a suspicion) is that the the EU, lead by France and Germany, want this uncertainty to continue. If we look at the statements coming out of the EU, it becomes clear that something is up. For example Bloomberg's article Germany’s Bruederle Rules Out Bailout for Greece :

“I don’t think that a bailout is the right way because German and French taxpayers can’t pay for Greece,” Bruederle said in an English-language interview in Davos, Switzerland today. “Maybe they will give certain help, but first it’s for the Greeks to solve their problems.” When asked what kind of help he’d consider, he said “it’s too early to discuss.”
...

The comments came a day after EU Monetary Affairs Commissioner Joaquin Almunia said policy makers have no “plan B” to help Greece.

Usually, if you want to limit a crisis, you don't want to come out with vague statements. You want to reassure the public and investors that a comprehensive plan is being worked out.

From the same article:

Prime Minister George Papandreou said on Jan. 28 that Greece is being victimized by rumors in financial markets and he denied seeking to borrow from European partners.

Really, victimized, Greece is not part of the PIIGS countries because of their fiscal responsibility.

The reason they would want this uncertainty to continue, to devalue the Euro. In an economic recession where governments want to create employment, a weak currency means that your exports are cheap i.e. more potential exports, more jobs.

With unemployment at 10% in the Eurozone, any means to slow or reverse the trend becomes attractive. The crisis has proven quite effective in weakening the Euro.

Euro Value

With the American dollar strengthening and Obama's State of Union address focusing on jobs creation, the Americans are probably not happy with the current situation....

Book of the week

2010-01-30T08:44:00.004-05:00

The current crisis has been given a myriad causes and reasons, many of them are just simply wrong. Most ideological explanations, when pressed against the reality of the situation shatter into no more than ideological voodoo.

Thomas Woods' book Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and the Government Bailout Will Make Things Worse is by far the most rational explanation of the current crisis. The Austrian Business Cycle, which Woods uses in this book has withstood the test of the historical application. From 14th century Venice to the current economic problems, Austrian Business Cycle (ABC) fits.

As most view the bust as the problem, it limits their analyse of the situation. ABC looks at not only the bust but what preceded it, the boom. The real problem resides in the boom as malinvestment increases because of manipulations of the interest rates under the market rate. The bust, is the market trying to recalibrate the economy and wash away the malinvestment.

Woods' book makes a logical and convincing case and uses historical event to further justify his explanation of the current crisis. It is without a doubt, a must read that will change your outlook on the business cycle forever.

GDP Growth in US 5,7%?????

2010-01-29T15:14:00.004-05:00

The new GDP numbers are out in the US, 5.7 percent increase in gross domestic product at an annual rate. The Bloomberg article U.S. Economy: Growth Jumps 5.7%, Fastest Pace in Six Years states:
The U.S. economy expanded in the fourth quarter at the fastest pace in six years as factories cranked up assembly lines, indicating the recovery may be strong enough to be weaned from government support.
...
Consumer spending, which comprises about 70 percent of the economy, rose at a 2 percent pace following a 2.8 percent increase in the previous three months. Economists projected a 1.8 percent gain, according to the survey median. Efforts to rebuild depleted inventories contributed 3.4 percentage points to GDP, the most in two decades.

Unfortunately, growth may not be as robust as first report. It has become an interesting game of cat and mouse with the numbers. The numbers are often reassessed later, when they do not make headlines, on the downside. Also many private economist who do the number often disagree with some of the shake and bake accounting and have very different results when compiling the numbers. For example, Shadow Stats assessment of GDP:

Courtesy of ShadowStats.com

It is clear that the numbers from Shadow Stats reflect the disconnect between government number and what is probably really going on. The fact remains that the US consumer, that is responsible for 70% of GDP, is going through a deleveraging period and will be limited in his spending for a couple more years. On top on deleveraging, unemployment rates remain extremely high.

Courtesy of ShadowStats.com

The U6 measure of unemployment probably better reflect the state of the American worker. Without significant change in employment numbers and leverage, the American consumer may have a driven a little gain now (the stated 2%), but cannot drive any sustainable recovery. Exporting goods and service will have to become a more important part of the American economy if they wish to see significant growth return in any sustainable fashion.

Interview with Dr. Walter Block from November 2009

2010-01-28T19:20:00.004-05:00

Here it is. Dr. Block is one of the leading economist of the Austrian school of Economics.

No, I'm not a Nascar driver.......

2010-01-28T17:59:00.005-05:00

I will let everyone judge for themselves..... Happy to live in Canada after seeing this.

Found this on Mish's blog.

Will "PIIGS" fly or only the spreads

2010-01-28T15:42:00.002-05:00

Today, most markets have been slaughtered and if your wondering why markets are down, you only have to look as far as the G in PIIGS (Portugal, Italy, Ireland, Greece and Spain). Today, for the third day in a row, spreads have been flying for the PIIGS and especially for Greece. It reached an astonishing 405 bps but lowered to 390 by the time I was writing this post. With the lowering spread a rally seems to be forming before the close in markets around the world (probably on bail-out news).

The Germans and the IMF seem to have a lot of pressure to bail-out poor Greece and in the end, probably will. But until then, the safety trade of US treasuries will be an attractive trade as credit concerns drive investors to safety. The 1-month t-bill even went negative.

Once a bail-out will come, markets will seems to resume "growth" only until the next crisis arrives. Japan, any of the PIIGS (maybe not Ireland yet), England, Dubai are only a few place where the next crisis could come...... will we see a sovereign default this year, it is possible, anything seems possible now.

Haiti and Domino's

2010-01-28T01:25:00.004-05:00

On Monday January 25, 2010, Domino's Sherbrooke raised around 10 000$ to donate to the red cross for Haiti. I will be interviewing the owner of Domino's for Friday's show. I would like to congratulate him on the wonderful endeavour he accomplished and encourage more to follow in his footsteps.

Earthquakes are natural catastrophe that cannot be controlled and can affect anyone. Understanding the reason behind the massive devastation is primordial in preventing such a lost of life in the future.

Unfortunately, in the past weeks has many have had misguided conclusions about the causes of the massive devastation in Haiti. Northern California's 1989 Loma Prieta earthquake was more violent, measuring 7.1 on the Richter scale, resulting in 63 deaths and 3,757 injuries. The 1906 San Francisco earthquake measured 7.8 on the Richter scale, about eight times more violent than Haiti's, and cost 3,000 lives. The difference that many have pointed out in the MSM (main stream media) is that more stringent building codes would have saved many lives.

That in itself is missing the greater picture. I am not very aware of the building codes in San Francisco in 1906 but I would believe that they would be still quite rudimentary. The excessive poverty in Haiti has more to do with the devastation than the building code.

Haiti people do not have the economic liberty that is needed to build a prosperous society. For example, Haiti takes an average of 195 days to get a business licence, compared with the world average of 38 days. Haiti ranks 177th out of 179 countries in the 2007 Transparency International's Corruption Perceptions Index. Its reputation as one of the world's most corrupt countries is a major impediment to doing business.

So if stringent building codes are applied, most will not be able to afford the extra cost that the codes will impose, pushing more people to shacks and less than par living standards. The true solution for Haiti is economic freedom for their citizens, so they can afford the better and safer buildings and houses.

http://economics.gmu.edu/wew/articles/10/Haiti%27sAvoidableDeathToll.htm

Fear the Boom and Bust video

2010-01-27T18:33:00.002-05:00

I love this video..... go Hayek

Turmoil Continued

2010-01-14T05:34:00.001-05:00

Originally published October 8th, 2008 in The Campus Issue

The latest financial turmoil in the U.S. has seen many companies bailed-out by the American government. The trend has been criticized as an ever growing threat to so-called free-market policies. The $700bn bail-out could be the beginning of a long tumble down the rabbit hole.
When the housing bubble started to collapse, companies like Fannie Mae and Freddie Mac suffered greatly. They had backed money to “high risk” clients and many of these high risk loans went into foreclosure. Deemed too-big-to-fail, they were bailed out by the government, fearing their collapse could bring down the whole economy.
Fannie and Freddie were not the only institutions involved in this risky lending, many other institutions were involved. For example, Lehman Brothers closed the sub-prime lender, BNC Mortgage, in August 2007. But their involvement in the sub prime and lower rated mortgages lending continued. They were underwriting these mortgages with mortgage backed securities and collateralized debt obligations (CDOs.)
Mortgage backed securities and CDOs, in short, bundle the mortgages from the lenders into bonds. They are sold out on the bond market the same way government bonds are.
As more and more mortgages went into foreclosure, these underwritten assets started to loose value and Lehman Brothers could no longer sell them. Since Underwriting entails Lehman taking on the risk of distributing the assets, they suffered billions of dollars in losses. What followed was the failure of many deals to save Lehman Brothers and finally their bankruptcy.
The real danger of this crisis is not the housing bubble but credit default swaps (CDS), a kind of derivative. CDSs are insurance on financial instruments, in this case on CDOs and mortgage backed securities, that guarantees the debt.
When an insurance company insures cars, they calculate that only a few will have accidents and pay out a smaller amount than the money received from the insurance contracts.
The bond market is different. One big failure can scare off investors of all the other bonds preventing borrowers from finding capital to stay solvent. It creates a domino effect.
As these companies fail, so do their bonds and the CDS contracts have to be fulfilled. This is what happened to AIG Insurance when Lehman Brothers failed. They had to cover the failing bonds they had insured.
What is truly scary about CDSs is how complicated they are. Few people really understand them and it is unclear who has them and where they come from. The scariest figure is that the derivative market is estimated to be somewhere north of $500tn dollars. No one really knows what would happen if it collapsed and this is why Warren Buffet calls CDSs the “weapon of financial mass destruction.”
As the U.S. financial credit crisis plays out, many offer different views and opinions on how to rectify the issue. The traditional Keynesian response calls for government intervention, free-market advocates conversely support laissez-faire solutions but most have no idea what to do.
The plan that the house of representatives passed on Friday, was designed largely by the U.S. treasury secretary, Hank Paulson, and the Federal Reserve chairman, Ben Bernanke.
The plan, which is backed by the Bush administration, offers a $700bn dollar bail-out of the fragile financial system. The plan gives Paulson the power to buy risky assets from the financial institutions in an attempt to stabilize the system.
There are major problems with this plan. First, the government does not have $700bn available with which it can purchase those risky assets. The money will come fresh off the printing press of the Federal Reserve. Paulson will then buy the precarious asset with the new treasury bills. Bernanke and Paulson both argue that the purchase of these assets will allow the bank to begin loaning money at an increasing rate and help support housing prices.
By stabilizing the housing market, they will keep housing prices, already at record lows, from slipping further and minimize foreclosure. At the same time, keeping further situations like Lehman brothers and other government bail-outs to a minimum.
$700bn is a breath taking number, just to offer some comparisons: It is more the $2000 per person in the United States. It is approximately equal to was has been declared to have been spent on the Iraq War. It is more than the pentagon’s yearly budget.
The time frame surrounding the design, ratification and implementation of this legislation is even more impressive. This legislation was written and presented to Congress for a vote within two weeks of the initial realisation of the crisis. The breakneck pace of its design reaffirms the urgent call for action.
Throughout history, when governments have printed money, they have devalued their currency, decreasing how many goods money can buy. The Romans did it near the end of their empire, the Germans did it in the 1920’s and many other governments have done it in the past to finance their state endeavours at the expense of their populations.
A question that some in the financial sector are asking is: “should an increase in liquidity be the solution?”
Many argue that easy credit got us into this situation and that this solution would simply act as a band aid for a bullet wound, temporary gain and long term pain.
What will happen in the next couple weeks will probably seal the fate of the American economy and in turn, at least temporarily, the world economy. Unfortunately, the results of the bail-out will only become evident after the crisis has run it’s course.

Originally publisher in The Campus, student newspaper at Bishop's University
Available on-line at www.thebucampus.ca/

An Oil Game: The Future of American Resources

2010-01-14T05:27:00.001-05:00

Originally published November 6th in The Campus

On July 11, 2008, the price of a barrel of oil reached a high of $147.27 U.S. Consumers were all feeling the pain of high prices at the pump, at the grocery store, and in almost every aspect of the daily life that depends upon oil.
Since July there has been more than a 50% correction in the price of a barrel to just under $70.00 U.S. Consumers have been rejoicing- they can now enjoy a few more dollars in their pockets- but the long term consequences could be dire.
Currently, the world produces 85 million barrels/day and the world itself consumes about the same amount produced. The U.S. consumes 20 million barrels a day and has to import 12 million of those, 2 million of which are from Canada, 4 million from various other countries and the majority comes from OPEC countries (6 million barrels/day)
Last week the Financial Times reported that the International Energy Agency (EIA) is going to report that, without an increase of investment in exploration and production, there will be a 9.1 percent decrease in world oil. This problem of depletion compounded with other factors could be devastating for the U.S.
One of biggest challenges for the U.S. is the control of the Iranian-Russian coalition over the flow of oil originating from Middle-Eastern OPEC countries. If one controls the flow of oil originating in the in the Middle-East, they have the ability to set the world price.
Iran has a strategic position when it comes to the flow of oil that is shipped out of the Persian Gulf. The narrow Strait of Hormuz, an area in the southern part of Iran and at mouth of the Persian gulf, allows Iran to heavily disrupt the shipping of oil leaving the region.
Russia itself exports 5 million barrels daily and can decide to limit exports to increase price. Another card that Russia has in her hands is the Baku- Tsilisi-Ceyhan pipeline.
One of the goals of the Russian invasion of Georgia would seem to be for the purpose of gaining control of this pipeline. The pipeline was one of the only routes leaving the Middle East towards the West free of Russian or Iranian obstruction.The control of the Baku pipeline gives Russia control of another million barrels a day that flow to the West. These factors seem to have made Russia a big player in world geopolitical system for the first time since the fall of the U.S.S.R.
Increased demand for oil in the emerging markets is another problem that cannot be overlooked. For the first time in 2008, Russia, China and the Middle East are expected to consume more oil collectively than the U.S. In the last year, demand in these countries has increased by about 4 percent collectively and is expected to continue and speed up in coming years.
The current financial crisis may dampen the levels of demand but the long-term demand for oil will probably continue strong with China leading the pack.
Back in America, President elect Barack Obama’s energy platform does not seem reassuring. Obama plans to place a windfall profit tax on oil companies. If the electoral promise is followed through it will cause a further reduction of oil exploration and production.
Oil companies will not be enticed to exploit a valuable resource at a minimal profit margin.
This will further cut domestic supply and increase dependence on foreign oil. A further challenge for oil companies is the limited amount of money available for development of these projects because of the current worldwide credit crisis.
Obama supports further research of green technologies, which are part of the solution but not a panacea. Most of the oil consumed in the United States is used for transportation, almost 70 percent. Even with a significant decrease in consumption, through increase public transit, more rail transport, locally farmed foods, we are years away from the technological developments with personal transportation vehicles, for now man cannot live on Sun and Wind alone.
Further more Obama does not support a lift on the ban of foreign ethanol. This is limiting a significant decrease in the price of ethanol. Many foreign countries like Brazil, produce ethanol at a much lower cost, because sugar cane is a cheaper and more efficient product to produce than corn based ethanol. Obama will be limiting the market’s natural movement to ethanol.
Many other sources should be looked at like nuclear, geothermal, tidal, coal. Increasingly diverse solutions significantly improve the outlook for U.S. economic sustainability. These solutions must be discussed and decided in the public discourse at record speeds. All of these solutions take years to develop and to build the infrastructture necessary.
We cannot just turn a switch and change entirely to alternative sources of energy. If concrete action is not taken immediately, once the credit crisis comes to an end and oil demand begins ramping up once again, the U.S. could find themselves in a situation were they are scrambling to deal with a new risis.
Low oil prices may put a short term smile on some consumers faces but the long-term may reveal expressions of frustration as drivers wait in line at gas stations with their oil ration coupons.

Originally publisher in The Campus, student newspaper at Bishop's University
Available on-line at www.thebucampus.ca/