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Saturday, March 30, 2013

Financialization Explained: Why you are being Robbed by the Big Box Stores?

Financialization is taking money out of your wallet and putting it into the hands of the banks and the financial industry.  How does this happen?

It is done by the process of financialization which works to the benefits of banks and the financial industry while killing the economic recovery and growth.

What is Financialization?

Tough question. But here is an example.

You purchase a new lawnmower or expensive clothinig in a large store.  The store tells you they will give you a 10% discount if you sign up for their credit card. You agree to the new credit card.  

The store believes that you will use their credit card for future purchases, but you will not pay off the full balance every month. Therefore, they will make money off you through the 18% to 28% interest rates on that card. Your 10% savings disappears rapidly as you pay these high interest rates.  
Smile! You were just financialized. This is now common throughout many business models.

In simple terms, the store is no longer operating on a capitalist model as it tries to sell you services and products which are better than its competitors. Instead, it is using a financialist model whereby they take your money over a longer period of time by driving you into debt . You are now working for them through the interest payments.  It is a legalized form of debt slavery.

Financialization as a Business Model – Why is this a Bad Thing?

This model hurts the overall economy. By putting more and more money into the hands of the banks and financial industry, less money goes into productive industries that create real employment and growth for everyone. In economic terms, it can be said that financialization is distorting the economy through the misallocation of capital into non-productive sectors. 

The Killer
Bankers formerly served the economy by assisting the flow and allocation of capital.  Now, the banking and financial industry has become so powerful that the economy and polity are serving it.  And it hurts everyone.

What can be Done?

Most politicians and regulators are unwilling to challenge the financial industry as the banks are so powerful that elected officials fear them.  (See )

As a consumer, you can choose to simply avoid using these systems.  Don’t get that new credit card from the hardware store or clothing store.  Pay cash or walk away. Buy from a locally owned store rather than a large franchise chain.  You will likely get better products and service and enjoy better value over the long term.  With food products, you are also safer and will remain healthier if you buy local. (See )

If you cannot afford to pay off the credit card each month, then do not buy more stuff. Wait until you can pay cash.  Look at your credit card statements and see how much you are paying in interest. Then figure out how much that is per year. You will be shocked at how much it costs you to have been financialized.  When you do buy something from a local store, use cash if you can. The credit card companies are charging three percent or more on every sale –so that is money leaving your community.

The next major financial crisis may cause a reset in the way we do business. When this happens is not clear, but the next crisis will be worse than the events of 2007 and 2008.  When the crisis does occur, there may be a new model put in place that removes the banks and financial institutes from their place at the top of the power hierarchy. 
Capitalism 2.0 anyone?  This is economics for the rest of us.


(To see fanancialization as described by the US Federal Reserve: ) 

Financialization is a process whereby financial markets, financial institutions and financial elites gain greater influence over economic policy and economic outcomes. Financialization transforms the functioning of economic system at both the macro and micro levels. Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector; (2) transfer income from the real sector to the financial sector; and (3) increase income inequality and contribute to wage stagnation. There are reasons to believe that financialization may render the economy prone to risk of debt-deflation and prolonged recession. Financialization operates through three different conduits: changes in the structure and operation of financial markets; changes in the behavior of non-financial corporations, and changes in economic policy. Countering financialization calls for a multi-faceted agenda that (1) restores policy control over financial markets, (2) challenges the neo-liberal economic policy paradigm encouraged by financialization, (3) makes corporations responsive to interests of stakeholders other than just financial markets, and (4) reforms the political process so as to diminish the influence of corporations and wealthy elites.

Wednesday, March 27, 2013

Canada Plans for its own Cyprus Scenario

Savers around the world have been watching the Cyprus scenario unfold as depositors money is quite suddenly up in the air. Canadian savers may want to know that the government there is making its own plans for a Cyprus style scenario.  Talk about a Canadian Economic Action Plan! 
Canadian Government Action Plan Logo

In the event that a “to big to fail” bank were to approach collapse in Canada, it would appear that the money deposited in the banks could be taken and then used to keep the bank viable.  The following words can be found on pages 144 and 145 of Jobs Growth and Long Term Prosperity – Economic Action Plan 2012 as tabled in the House of Commons  by the Hon. James Flaherty, Minister of Finance on 21 March 2013.  This is otherwise known as the budget.

Systemically important banks will continue to be subject to existing risk management requirements, including enhanced supervision and recovery and resolution plans.

The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation time lines will allow for a smooth transition for affected institutions, investors and other market participants.

Before drawing conclusions, what do these words say?

First – “systemically important banks”. This means banks that are perceived as being too-big-to-fail (TBTF). The Office of the Superintendent of Financial Institutions (OFSI) identified six banks in Canada as being systemically important within the last week.  They are the Royal Bank of Canada, the Toronto-Dominion Bank,  the Bank of Nova Scotia, the Bank of Montreal, the Canadian Imperial Bank of Commerce and the National Bank of Canada.

This was a bit of a surprise to some observers, as it had been thought that only the RBC was TBTF.

Second – there is discussion of  a “bail-in regime.”  You should start getting nervous here.  A bail out is when an outsider gives the institution in trouble more money so it can keep going. A bail-in is when money from within the institution is used for the bail out and then those whose money was taken are given something in return.  Typically, those who have their money taken are offered shares in the institution in the hope that the institution will prosper again in the future and the shareholders can still have value. This was just done over the last few years in Spain. It did not work out too well.  See

Third – we see the words in the unlikely event that a systemically important bank depletes its capital.   In other words, if a bank suddenly goes broke.  This could be due to unforeseen loses such as a complex derivative contract that failed.  See a simple explanation of derivatives at
Fourth – there is the phrase the very rapid conversion of certain bank liabilities into regulatory capital.  The words “certain bank liabilities” is a fancy way of saying deposits. When you deposit a hundred dollars in a bank, this shows up on their spread sheet as a liability.  So what this phrase says is that bank deposits could be taken up and used by the bank and it could be converted into regulatory capital.  Regulatory capital is another way of saying banks must keep a certain amount of money on hand for meeting daily requirements such as withdrawals for deposits. The minimum amount that must be kept on hand is determined by the regulator. In this case the regulator is OFSI. 

So what does this all mean?

In short, it says that if a Canadian bank suddenly finds itself in financial trouble, money from depositors can be taken  in a “bail in” and used to keep the bank solvent.  Those who had their money taken would be given shares in the bank or some other form of compensation such as bonds.

Should you be worried?  

The document does not say so, but in such desperate circumstances, it might  be assumed that the deposits taken would be those that have more than $100,000.  Account below $100,000 dollars are guaranteed by the Canadian Deposit Insurance Corporation. So, small account holders should be OK.

Canada is not alone in doing this. The UK and the USA have a similar plan they discussed in December of 2012.   See
This is economics for the rest of us!  Enjoy the ride in the new economy.

Derivatives as Weapons of Mass Destruction: An Explanation for non-Economists

Weapons of mass destruction exist in the financial sector. They are called derivatives.  Here is a simple explanation of what they are written by ex-central bankers.  You should care, as they may destroy the financial system as we know it and all of us will be hurt. 

No one really knows how much damage could be done by an unwinding in the derivatives market, but the total exposure (potential losses) may be as high as 700 Trillion dollars (yes that is with a T).  JP Morgan alone may have as much as $90 trillion exposure.  Other financial institutions such as Goldman Sachs, Citigroup, RBS , UBS and RBC all have large exposures.

What the Heck is a Derivative? 

Tough question to explain, but here is a simple example.  

Farmers are planting wheat in the spring. They do not know what success they will have this year. Next to them is a flour mill which will grind their wheat.  Down the road is an investor, and he would like to make money off the wheat crop without doing work, but he is willing to take some financial risk.
The investor tells the flour mill the owner “It is only the spring, but I will give you money now in exchange for letting me control who uses your mill in the fall.”

The owner of the mill accepts the money, reasoning that he can make an average year’s profit for his mill off just this one investor, even if the crop fails completely. 

The crop is successful and the farmers arrive at the mill. The investor charges them to gain access to the mill and the mill grinds the wheat into flour.

The investor makes money by charging the farmers more than they would have paid the mill owner, but the investor now controls access to the mill for the season, so the farmers have no choice.

The investor made money not through his labour (the farmer) or by offering a service (the mill owner).   The investor derived his money (i.e. a derivative) by essentially betting that the price of wheat would stay high and the crop would be good.  If the crop had failed completely, the investor’s derivative would have failed and he would have lost all his money.

So, in economic terms, a derivative is a contract whose value is derived from the performance of underlying market factors, such as market securities, indices, interest rates or equity prices.  In this case, the underlying factor was the amount of wheat to be produced and its price which was not known in the spring of the year.

Can Derivatives be a Good Thing?

Yes.  Consider a medium sized trucking company that has just received a major contract for two years of shipping.  They are worried that they could lose money on the contract if the price of diesel fuel goes up suddenly. They approach an investor for a derivative.  The investor agrees to guarantee the price of fuel to the trucking company for the next two years. The price of the fuel will be higher than the current market price, but the trucking company believes they can still make a profit, even at the higher price, so this is good for them. The investor believes that the various rises and falls in diesel prices will allow him a profit. 
In this case, the trucking company has been able to outsource its risk (fuel price) to an investor in order to sign the contract with confidence.

Why did Derivatives Turned out to be Dangerous?

The key issue lies in the outsourcing of risk. An intelligent use of derivative can allow a business to outsource its risk. Unfortunately, the folks on Wall Street and in The City have found increasingly complex methods of using derivatives to outsource risk.  They believe that they can be almost risk free by covering all their investment risks with derivatives.

They have done this so much, there is now believed to be some 700 trillion dollars worth of derivative contracts out there – most of which are beyond the understanding of those who supposedly regulate finance markets. The risk involved is also beyond the understanding of the financial institutes involved.

The Killer

The financial institutes such as JP Morgan, UBS and CITI believe they have outsourced risk. But here is the killer. Everyone one of them is busy outsourcing risk by selling derivatives to other financial institutes. In other words, they are all outsourcing their risk to each other.  This is a closed loop with a finite amount of players. If everyone thinks they have outsourced their risk to everyone else, then they are collectively holding all the risk.  They are all vulnerable.
The end result is that the financial institutes that thought they were outsourcing risk may find they have to make payouts on the derivatives they bought and sold. The amount will exceed their resource levels and therefore they will go bust.  If there is another financial shock like the 2008 crisis, then the entire derivatives bubble may pop and the process will unwind on itself.

And then there are synthetic derivatives and synthetic derivatives combined with options trading, but might might be a story for another day.

Once again, we may  see the financial institutes lining up for more bailouts if this market unwinds.

This is economics for the rest of us. Financial derivatives should be seen as a weapon of mass destruction. 


The Predatory Eye on your Savings: Savers and Takers

Recent events in Cyprus, Spain and in the EU have shown that the previously taboo practice of taking your savings money has been broken.  Governments and banks, driven by the need for cash are exploring all possibilities. Like sharks, they must constantly move ahead to continue their intake of prey.

He is hungry and he is looking for your savings!
Consider the statement of Mr Jeroen Dijsselbloem (pronounced Diesel Boom?), the former Dutch Finance Minister who is now President of the Eurogroup Council.  He stated that what happened in Cyprus is a template for what can happen next. He adds:
“If there is a risk in a bank,” he said, “our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?’ If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders.”  

In other words, shareholders and bond holders can expect a major haircut.

Then consider what the Bank of England and the American Federal Deposit Insurance Corporation (FDIC) have been jointly considering how savings deposits which are said to be guaranteed for the average saver or depositor will instead be used to bail out failing banks.  Hard to believe. (See more on this at )  In other words, savers who thought their deposits were guaranteed for up to the first 100,000 may want to rethink that position.

In Spain, the Finance Minister has said that the Spanish government will put a levy (read tax) on banks based on the total amount of savings they hold.  Bank account holders in Spain can expect to pay this indirect tax through higher fees and lower service levels.  (See more at:

To reduce this to its most basic, the logic and math of the economists says: 

Banks and governments need more money to sustain their debt and overleveraged risks.
They cannot raise more through taxing a declining economy.
They are running out of accounting tricks to kick the can down the road.
Printing money is not working.
Savers have money.
The banks and the governments will change the rules so they can get the money.

Seen collectively, the economists who work for the banks and the government know where your money is and they need it. They are casting a predatory eye on your savings.

Unfortunately, the politicians will not stop this. Their own positions are closely aligned to the banks so they will assist the process. (See

This is economics for the rest of us.  Savers beware.

Tuesday, March 26, 2013

Savers and Takers: Where Your Savings Money Will Go Expained in Plain Language by Two Ex-Central Bankers

***Feel free to ask questions or leave comments below.  We will reply.***

Being a saver will be punished by the takers. 

The Savers:  Those with a savings account, a personal retirement fund, a pension fund holder, equity in their homes or other cash assets.

The Takers: Governments with unseasonably high debt levels, supra-international institutions such as the EU, bankers, and financial institutions.

Clip art by Ron Leishman -
Reduced to its most basic, the financial crisis that started in 2008 and what we now see in Cyprus occurred because of debt.  Governments in general have been on a spending spree since the mid-1980s. They are running out of tax money and have used up almost all the accounting tricks which allow them to kick the debt can down the road.  At the same time, the banks allowed themselves to  become “overleveraged.”  This is a polite way of saying they took a series of incredibly high risks with saver’s money and now those risks are blowing up.  They also have huge exposure or potential loses through derivatives as well.

Stripped of all the economic, financial and governmental jargon, here is the issue and why you should be afraid if you are a saver.

1. Governments are holding massive debt and unfunded liabilities  and they need more money.

2. Banks are often over leveraged and they need/want more money to prop up their risks.

3. Savers have cash and other assets.

4. Governments and banks will change the rules so they can take this money.

5. Savers will lose their money and debtors will gain from this. 

How are they taking your money?  Sometimes it is quite clear how they take your money, other times it is difficult to appreciate what they are doing to you.  However, here are the main ways it is happening:

1. Tax or levy:  The government can simply impose a direct tax or levy on your individual savings account. This is what just happened in Cyprus.

2.  Indirect tax or levy:  The government can take an indirect tax by taking money from the banks based on their total holdings of savers money. Then the banks have to make this back from the savers. This is what Spain is doing.  See

3.  Taking depositor’s insurance money:  The government can plan to take deposit insurance money in a time of crisis. Instead of this money going to the depositors as it was planned, it will instead go to bailing out the bank itself. See for what the UK and USA have been thinking in this area.
4.  Long term low interest rates. By keeping interest rates artificially low, the central banks are helping debtors incur more debt through lower costs.  However, this means those with savings accounts are getting paid virtually nothing for their savings. Those with investments for retirement are getting little as well, meaning their retirement years will be poorer than they thought.

5.  Lines of credit based on home equity.  If you have equity (value) in your home, banks are often pushing you to take on more debt by getting a line of credit against your house. So they arrange a home equity line of credit and drive you into debt. You lose some of your equity and you pay them interest for the privilege of doing that!

6. Inflation. Governments and economists claim that inflation rates are around two percent per year. In your own world it may seem that prices are increasing faster than two percent per year and you are right.  Government figures often do not include expense such as fuel and housing! By allowing real world inflation to run around five percent and then by paying you nothing on your savings, your own purchasing power and real value is decreasing while the cost of the debt for government and banks goes down. Inflation is a silent but effect thief!

The confiscation of money in private bank accounts was generally thought of as being an illegal and unacceptable practice. Now, as governments become desperate, is becoming a matter of national policy, overturning years of protection for savers.

Do the government and the bankers actually have the power to do this? For more on this see:   or

In the 2012 American election, both candidates and pundits tried to frame the election as being between the “makers” who work and the “takers” who live off government benefits.  
The current financial crisis may turn this into a struggle between the “savers” and the “takers.”

This is economics for the rest of us.  Savers beware!

Sunday, March 24, 2013

Spain Plans Small Raid on Saver's Deposits

***Please feel free to leave comments or ask questions at the bottom of the article. We will reply or will write a special article to answer your questions.***

With the negative publicity and real risks being generated by the raid on savings in Cyprus, you would almost think that policy leaders would see the danger in even talking about more raids on savers.

Minister Cristobal Montoro (right)
seen in this photo with an American industrialist
 - Photo from
Not in Spain.  Believe it or not, the Spanish government is planning a depositors levy that will take some 0.1% to 0.2% from the banks based on their total level of deposits.  The difference appears to be that it will be the banks that have to pay the levy, rather than the money being taken from individual accounts.  The new measures will take effect in a matter of weeks. 

According to Treasury Minister Cristóbal Montoro, this levy will raise some 1.5 to 3 billion Euros.  This will help “impose order in the Spanish banking system” says the Minister without explaining how this will help.
We will only take this much - at least the first time! 
Photo by
Like any good politician, Mr Montoro says this is not his idea, but rather he is doing this to remain compliant with the wishes of the European Commission.  Again, no explanation of how this will keep the EC happy.

QUESTION:  Where will the banks get the 3 billion Euros to pay this new tax which will be based on deposits? 

ANSWER:  Depositors?  Stand by for more fees and lower service levels in Spanish banks as the banks find a way to pay this new tax. 

One thing is clear.  If you are a saver and you have money, the highly indebted governments and banks will find a way of getting it.

This is economics for the rest of us.  Savers beware everywhere!


(For more on what the Brits and the Americans are planning for their depositors, see ) 

(For more on what is happening to Cyprus savers, see

Saturday, March 23, 2013

Social Unrest and Recovery in Europe: The Exarchia District of Athens and the New Face of Urban Europe?

***Please feel free to leave comments or ask questions at the bottom of the article. We will reply or will write a special article to answer your questions.***

When people are in their own community, they can be quite peaceful. But when they are disenfranchised by the central government and placed in the context of 
their national existence, they can suddenly turn rather violent.  There
is a lesson in this for all the governments in Europe. 

The face and nature of the new urban  Europe may be forming now in the Exarchia District of Athens. 

How do we know what social unrest will look like in Europe as the downwardly mobile economy continues to disappoint?  How will masses of  the unemployed rebuild after years of turmoil?  What will the youth of Europe do when faced with unemployment running to 50% or more?  
Syntagma Square, Athens showing a
minor police vs crowd confrontation 
on the 2012 national day. All photos by the author.
Surprisingly, the Exarchia District may hold some clues as to what the future of Europe holds. Being among the first areas to be hit by the economic downturn in Europe, it has the most experience in how you live through an economic collapse.  

Last year, I spent a few days in Athens, with most of the time spent in the Exarchia District.  This area is known to be the “home” of the rioters who occasionally attack Syntagma Square (Constitution Square) and other iconic symbols of the Greek central government.
I have a strong interest in economic matters and considerable experience in social unrest movements.  I had read the usual warnings from foreign embassies to stay away from the dangerous areas of Athens such as the Exarchia District. I was also informed that the Exarchia District is so bad that even the police will not go there, except in riot squads. Worst of all – OMG! – you are warned about violent anarchists.
Mural in the Exarchia District
Lacking as I do the proper amount of reverence for authority, the adventure path headed into the district. However, I did consider myself properly warned and ready to bolt should I run into hostile locals.  Much to my surprise, the next two days in the district were spent without so much as a hostile glance from the locals – even though it was clear I was a foreigner.

What can we learn from this experience?  Why might this be important for analysing the new future of Greece and Europe? 

1.  Despite the warnings from embassies about the danger, there was not a single incident of violence nor was I threatened in any way.  And this was on the day before the Greek national day and military parade in Syntagma Square.
2.  The streets were relatively clean and free of litter.  Every available wall space, however, was plastered with protest protesters and murals of every imaginable subject.

3.  I did not see a single credit or debit card reader on a counter for a Visa, American Express  or Master Card.  All transactions were in cash.

4.  Unlike the area around Omonia Square, it was noticed that there is a vibrant trade occurring in food, electronic goods, services, clothing etc.  Very few store fronts were closed, unlike much of the rest of Athens.  In Omonia Square, I was approached by local hawkers to buy anything from an I-phone to cocaine. The square and the streets around Omonia Square were filled with destitute people begging for food or money.  Much to my shock, I saw few people like that in the district. 

5. There was not a single sign or shop relating to a major international franchise such as Starbucks, Costa, or McDonald's, unlike the rest of Athens.
6.  Service at the sidewalk cafes on Exarchia Square was friendly and efficient despite language barriers.  The food (and beer) was good and under half the cost of the downtown areas.
Public parking lot reclaimed by anarchist
group in the Exarchia District now
used as a meeting area, playground and flower garden.
7.  Not a single police officer was seen for  the entire time. It is not clear to me what happens when something does go wrong. 


A new and vibrant sub-culture is being formed in the Exarchia District from the wreckage of the Greek economy.  Little solid information exists about what is really happening there beyond anecdotal views such as my own.  Clearly, an economy exists, but my best guess is that little of what happens there is captured in the official Greek statistics (which are known to be poor anyway).  The cash only economy appears to functioning well based on the number of shops open and the high rate of foot traffic in the restaurants, bars and other businesses.

Urban density in Athens.
Despite its fearsome reputation as the home turf of violent anarchists, there was no visible stress or hostility to foreigners such as myself.  This is really difficult to reconcile to the riots in Syntagma Square which can be quite violent.   


In much of urban Europe, it is probable that self forming community structures will emerge which are only loosely politically linked to the central authority.  This linkage will be primarily though infrastructure such as water and electricity rather than social services and law enforcement. Even the infrastructure links will likely be less centralized than in the past as technology will allows for more efficient localized power production.   Less money will be spent on smart phones and more invested in local enterprises.  

The population in the urban areas will be less accepting and trusting of central authority and will seek to avoid it.  At the same time, the new urban population youth will have lower expectations of the central government and will place less demands on it.  Local councils will have more self-awarded powers and will defer less to large city mayors.

The urban community will be able to maintain a standard of living with fewer resources as it will seek to build value in the local community.  Products will be bought from local suppliers rather than international ones (i.e. no frozen French fries imported but local potatoes instead).  Businesses will be locally owned with no franchises – especially international ones.  International franchises such as Starbucks mean that a larger share of every purchase leaves the community.  Menus will feature more local, fresh and inexpensive products obtained from shorter supply chains which will mean safer and healthier food.  (For a humorous look at this issue see:  Waiter, there is a horse in my soup” at ) 

A cash economy means more value stays in the local community. Every time a credit card or debit card is used, value leaves the local community and goes to large, centralized and international banks. Less money will be kept in banks.

Youth in the traditional 16-29 category will continue to be hard hit. They will have to create their own opportunities in the local area or head to a more rural existence.   This will be the toughest part of adapting to the new economy, especially given that the youth now are better educated in academic skills, but less competent in the technical skills of running a small business or managing a food producing property. 
And perhaps most importanlty, the behaviour of people may become increasinly contextual. When they are in their own community, they can be quite peaceful.  But when they are disenfranchised by the central government and placed in the context of their national existence, they may suddenly turn rather violent.  Somewhere in here is a lesson for most of the governments of Europe (and maybe everywhere).


This is the future of what economics may look like for the rest of us.  Time to start paying closer attention.

Austerity Risk and the Financialization of the Economy – Student Arrests in Montreal

Austerity risk in Montreal may spread as hard times begin

Montreal police arrested 200 people on Friday, 22 March 2013 as part of a student protest designed to “celebrate” the anniversary of a major student protest last year. 

A small gathering of Anarcho-Primivitissts at an April 2012 protst.
 Most of the violence came from small groups such as this, not the
 main student groups. All photos in this article by the author.
The popular perception of the current events in Montreal is that students are protesting against an increase in tuition fees.  While fee hikes are one issue, a deeper series of problems is playing out in the background. Included in this are concerns about upcoming austerity measures and the nature of education itself.  Unnoticed by many Canadians, this protest movement was in fact driven by a combination of austerity measures and the financialization of the economy.   

The former Quebec Education Minister (Liberal) Line Beauchamp had stated that the fee increases were part of an overall reform program. This program was inspired by the European “Bolongne Process” for higher education.  Student leaders and many professors believe that the new “quality assurance” measures were in fact an underhanded method of reducing university education from (using Aristotle’s terms) a “liberal education” which produces problem solvers who can integrate knowledge over boundaries to a “servile education.” In this servile form of education, the student is reduced to performing a certain series of tasks which are determined by industry, banks or government.   Three major student groups as well as some professors unions in Quebec had been protesting this policy last year.  

Or as George Carlin put it:  They want people who are just smart enough to run the machines and do the paperwork but just dumb enough to passively accept all these increasingly crappier jobs with the lower pay, the longer hours, reduced benefits, the end of overtime and the vanishing pension that disappears the minute you go to collect it.

U de Montreal bookshop as seen in April of 2012. Note the
references to indigenous movements, OCCUPY and Los Indignados
Notice the reference to banks in the bottom right
hand corner.
Student literature has identified bankers (among others) as being targets for the ongoing protests.  Student leaders fear they are being asked to pay more for an education which is increasingly tailored to serve the interests of “business people, bankers and other private managers” rather than the broader needs of society or the students themselves. 

It might be a good idea for politicians and the press to pay closer attention to what is happening in Quebec.  A student movement has (arguably) been able to force a government from power in an election while continuing to challenge the views of the new government. 

This may be economics for the rest of us in the future.  Heads up!

Can the Pope's Leadership Style affect Bankers and Politicians?

***Please feel free to leave comments or ask questions at the bottom of the article. We will reply or will write a special article to answer your questions.***

Photo by Reuters
It is unlikely that we will see Prime Minister Cameron washing socks for the Chelsea Pensioners over at the Royal Hospital Chelsea.  Nor are we likely to see President Obama visiting inmates at Guantanamo Bay.  No one should hold their breath to see if Prime Minister Netanyahu will wash the feet of Palestinian convicts any more than the leader of HAMAS would wash the feet of Israelis wounded by suicide bombers.  Still.....

Washing the feet of drug addicted convicts in a prison appears to be part of a larger lifestyle and leadership method for this new Bishop of Rome. The Vatican may yet regain some of it moral authority as Pope Francis the First appears to be exhibiting some strange behaviour for a high public figure – humility.

Pope Francis seems to have a genuine humility which he has exercised while living as a bishop and archbishop.  This is not the sort of fake humility exhibited when Hollywood stars or politicians get their pictures taken at a homeless shelter in order to show they are “good people.” 

This humility may have a significant economic and financial impact in an unexpected way.

Currently, much of the population in the Christian world and elsewhere has become adapted to public displays of incredible wealth and arrogance by leadership figures. In the USA for instance, leaders in the automotive industry flew their private jets to Washington in order to beg for taxpayer dollars to bail out their mismanaged enterprises. 

Photo from Yogesh Pandey
Arrogance breeds risk taking.  This has been especially clear in the banking sector as the “Masters of the Universe” who run The City and Wall Street have made a series of disastrous decisions over the last twenty years.  Arrogance also believes that other should have to pay for your mistakes, as we have seen in the banking sector as various banks have demanded huge bailouts while their leaders take bonuses which are astronomical. 

It is doubtful that even Galileo could conceive of the vastness that is the arrogant universe of today’s leadership figures who put themselves alone at the centre of their worlds.

Humility, on the other hand, tends to breed responsibility and a bit of caution.  Humility also tends to breed integrity – a quality which is sorely lacking in the governmental and banking sectors at the moment.  How is one to have confidence in the IMF, for instance, when its last leader was arrested and its current leader has her flat raided by corruption police?

The advanced economy democracies are facing at least of another decade of economic deprivation brought about by the hubris of its leaders.  What we are seeing now in Greece, Spain, Cyprus and Ireland is what we will start to see in France, the UK, the USA and Canada as our debt and arrogance catch up to us.

If the Pope continues his behaviour of humility, his actions will become a considerable embarrassment for the other leaders in public life. This humility carries its own risks – strong forces will oppose a leadership role being used in such a manner.

However, by exhibiting such behaviour in public, he may over the medium term gradually impress upon other leaders that their role in life is not to display arrogance and hubris. Their power and influence might be used for the overall improvement of society rather than the raw extraction of existing wealth.

Can the Pope fix the economy?  Not likely. Can the Pope embarrass other leaders in the banking and government world into accepting more humility in their lives?  Time will tell.

Friday, March 22, 2013

Spain and Cyprus - Savers Get Robbed Either Way

Warning: The bankers and the government will get your savings one way or another.

Note the protest sign at top:  Banks in Spain cheat on you!
BBC News - Getty Images

If you think Cyprus is a mess and the people there might get their savings accounts raided, wait until you see what the bankers and the government have just done in Spain.

Following the housing market crash in Spain, a number of regional banks were rapidly moving towards bankruptcy.  As a means of fixing this problem, the Spanish government and its central bank orchestrated a 2010 scheme whereby seven of the banks would be rolled into one and recapitalized.

As a means of raising cash for this new creation to be known as “Bankia” Spanish citizens were told by their local bankers that they could buy shares. Based on years of trust and government approval, some 350,000 Spanish citizens sank their hard earned cash into the new shares.

The Bankia shares were valued at 3.75 Euros and the citizens were told the bank would have a rough start followed by a return to profitability in a relatively short time.  Indeed, the bank announced that for 2011 it would make a small profit of 309 million Euros.

Small problem however... 

Instead of making some 300 million Euros as announced, the bank later re-estimated its accounts and stated that it would lose approximately 3 BILLION Euros instead. 

On top of all of that, the bailed out bank would need to be bailed out again. 

The upshot for the Spanish citizens was that their 3.75 Euro shares were today valuated at – get this -.01 Euros or one cent apiece.  To add insult to injury, the Spanish government has also announced there will be a sort of inverse stock split of 100 to 1. 

In other words, for every 100 shares you have in Bankia, they will now be turned into one share that will be worth 1 Euro. 

Spanish savers (350,000 of them) were given a major haircut. Their 3.75 a piece share actually bought them 1 cents worth of value. 

How is that for a haircut? 

There is a lesson in this. Savers have money.  And when the bankers and the governments decided they need it – they will take it one way or another. 

In Cyprus, the savers (and the non-resident Russians) may lose some of their money in an involuntary onetime tax or levy. In Spain, the savers were just fleeced the old fashioned way by con artists. 

This is economics for the rest of us.  Savers beware no matter where you are!

Excuse Me Waiter - There is a Horse in my Soup! (Globalized Supply Chains are an Issue)

Is that you Black Beauty?
What can you do about horse meat showing up on your plate or in your burger? 

A long supply chain means no control of what you are eating.  The recent series of scandals concerning horse meat showing up in burgers, frozen lasagna and IKEA meatballs highlights two of the major problems with globalization.  This is just the surface of the problem.  No doubt there are other things going on we have not heard about yet.  Hopefully there is no soylent green in the food chain yet! (Cultural reference to the 1973 science fiction film of the same name.  Google it. Scary stuff.)

But seriously, when a supply chain reaches hundreds or thousands of kilometres and spans national borders, little control can be exerted even if the buyers are motivated to ensure good products.  A live horse can be sold in Belgium or the UK, shipped to Poland or Hungary and the meat can be resold in Romania.  It can then be relabeled and shipped to France or Spain or Ireland. Then it can be processed as beef and sold in the UK or anywhere else.   

The second problem is that the consumer or final-point-of-sale retailer really has no ability to find out what went wrong or who to blame. In addition, trying for a resolution by suing those responsible can be a tiresome process with limited prospects of success.  And that is just within Europe.   Imagine what happens when the food supply chain runs through China or India.  Good luck establishing responsibility in that case.

Then there is the issue of dog meat entering the supply chain in Spain. Don’t even think about that one...

What can the consumer or small local retailer do about this problem?  The answers are rather simple.
First, if you are a retailer, buy from a local supplier who has a short supply chain.  Your ability to monitor and trust goes up if you have a good view of your local supplier. 

Second, as a consumer, you should always buy food that as closely as possible resembles its original form. If you are buying highly processed pre-made frozen meals, you really have no idea of what that “beef” might be in your frozen lasagna. However, if you buy a pork chop or some ground beef, your own eyes should do a good job assessing what you have.  You can also see the person who is selling it to you if you buy from a local butcher shop.  So again, trust goes up a bit.
The answers? 

Buy locally produced food.

Buy real food that has not been heavily processed.  This goes for both meat and vegetables.  

Both of these choices are probably good for you – in health terms and for your local economy.
This is economics for the rest of us - enjoy that lasagna that comes from a globalized supply chain.  As for me, I have a sudden craving for a nice bag of oats!

The USA, UK and EU are Planning to take your Savings: A Whiff of Desperation in the Air?

***Please feel free to leave comments or ask questions at the bottom of the article. We will reply or will write a special article to answer your questions.***

Yes, they are planning to take your savings in the USA, the UK and the EU.

Katia Christodoulou / EPA
A woman unsuccessfully attempts to withdraw from a Cypriot bank ATM in Greece on Sunday.

 A recent paper by the Bank of England and the American Federal Deposit Insurance Corporation (FDIC)  demonstrates that both governments have a plan to take your savings money in a financial crisis.  Scarily enough, the paper was published in December 2012.

As recent events in Cyprus, Spain, Portugal, Greece and Italy have shown, an unthinkable financial crisis can actually emerge at any time - just like it did in 2008. The 2008 crisis required trillions of dollars (pounds, euros) to bail out broken banks.
So, you have to ask yourself:  Could my government take my money out of my savings account?
The answer is almost every case is “Yes”.  In the USA, the UK and the EU,  not only is it possible, but the reality is that two of the governments have just recently discussed how they would take your money.  As with almost all economic writing, it lacks clarity and appears bland, but when read and reread it several times, it is chilling.  
The title of the paper is Resolving Globally Active, Systemically Important, Financial Institutions.
A translation is necessary here.  To an economist or banker the term “resolving” means “giving money to.” “Globally active” means a bank that has operations in more than just one country.   The term “systemically important” is banker speak for “we think this bank is too big to fail and therefore we have to bail it out.”  The term “financial institutions” refers to banks as well as large insurance companies such as Lloyd's of London or AIG in America. 
The title of this paper is actually “In the event of another financial crisis like the one in 2008, we are going to take money from savers and tax payers and give it to the international banks which are holding us as financial hostages by being too big to fail.” 
As an aside, this is also an indirect admission that the problems that caused the 2008 financial crisis have not been addressed.
Have a look at the following key paragraph, and then see the explanations below.
34. The U.K. has also given consideration to the recapitalization process in a scenario in which a G-SIFI’s liabilities do not include much debt issuance at the holding company or parent bank level but instead comprise insured retail deposits held in the operating subsidiaries. Under such a scenario, deposit guarantee schemes may be required to contribute to the recapitalization of the firm, as they may do under the Banking Act in the use of other resolution tools. The proposed RRD also permits such an approach because it allows deposit guarantee scheme funds to be used to support the use of resolution tools, including bail-in, provided that the amount contributed does not exceed what the deposit guarantee scheme would have as a claimant in liquidation if it had made a payout to the insured depositors. That is consistent with the contribution requirement that is already imposed on the Financial Services Compensation Scheme in the U.K. in the exercise of resolution powers10 and simulates the losses that would have been incurred by those deposit guarantee schemes during bank insolvency. But insofar as a bail-in provides for continuity in operations and preserves value, losses to a deposit guarantee scheme in a bail-in should be much lower than in liquidation. Insured depositors themselves would remain unaffected. Uninsured deposits would be treated in line with other similarly ranked liabilities in the resolution process, with the expectation that they might be written down.
The abbreviation RRD refers to the European Union Recovery and Resolution Directive.  In other words, the joint UK and USA paper actually has its roots in the large European Union, so the concepts in this paper could easily be applied to the other countries in the EU.  (Hello France and Belgium and yes even Germany!!) 
The following words are key to the intent  of the authors:  it allows deposit guarantee scheme funds to be used to support the use of resolution tools, including bail-in.  This means that money that is intended to be given to depositors (savers) in the event of a bank failure can instead be given to the bank itself as a means of resolving the crisis. 
In other words, depositors are told that the first 100,000 dollars (pounds, Euros) of their savings are guaranteed by a government program so that even if the bank fails, the depositor will get their money back up to the agreed limit.   
Now, the new plan is to give that guaranteed money to the bank, rather than the depositor. 
The theory behind this is explained in the second underlined section. These economists have the idea that if the bank is going to fail, why not give it the guaranteed money to the bank so it can continue operations, and small depositors will then not lose any money as the bank keeps going.  They also appear to reason that larger depositors (more than 100,000) may lose money in the event, but that this plan will be cheaper overall.
On the surface, this accounting trick may sound reasonable, but the plan is deeply flawed.  
First, it breaks the guarantee that you will get your money back if there is a bank failure. The bank gets it.
More importantly, it does not address what will happen after the deposit guaranteed money is given to the bank.  The flaw is that if the public becomes aware of the money transfer – and they will – then the large depositors and bond holders will lose faith in the institution.  They will quietly take out their money as soon as they can, and then the cycle starts over again.The outcome is that the bank will fail again.  Only this time, the money that should have gone to the small time depositors from the FDIC is already gone – taken by the bank!  So another bailout is needed. This is simply a wealth transfer from the government to the banks at the expense of the saver and taxpayer.
Behind all the laws, rules and economic jargon that no one can really understand, there are some real world facts that cannot be changed.
They are:
1.  Most of the advanced Western democracies have crippling debt levels that they cannot fix through increased austerity, taxes or increased stimulus.  They will need to find more money and they need it soon.
2.  The governments and banks of the advanced democracies are run by persons who have a significant interest in maintaining the status quo which gives them their power and wealth. 
3.  When government and banks need more money, they will get it. They will change the laws to make this happen.
4.  Savers have money, debtors do not. 
5.  Governments and banks have multiple ways of getting this money, either though taxes, fees, low interest rates or inflation or – most simply – just taking it as they are now discussing in this paper.
The belief that your money is safe in a bank due to the government guarantee on the first 100,000 is no longer a valid concept.  Those that have the power (Banks and Governments) may need this money soon.  If you have it, they will find a way of taking it.   
This is economics as it is for the rest of us. Savers beware!