DOW + 155 = 112,651SPX + 14 = 1329NAS + 17 = 283610 YR YLD +.01 = 1.61 OIL +.44 = 84.35GOLD + 5.70 = 1624.30SILV - .22 = 28.74PLAT + 27.00 = 1498.00
All righty class, it is time for a pop quiz. Please answer the following question: What is the Ironclad Rule of Wall Street?Put down you pencils.And the answer is: Wall Street loves free money.
And where does free money come from? And the answer is: Central banks. If you answered the Federal Reserve and Helicopter Ben, give yourself a partial credit; if you answered taxpayers, give yourself partial credit; while those answers are technically correct it is outdated and more than a tad provincial. Think bigger, think globally.
Today, Greek bank stocks surged more than 20 percent, with speculators betting on a favorable pro-bailout outcome after Sunday's election. The action there drew the attention of traders on Wall Street.
Officials from the G-20 confirmed today that the central banks from major economies stand ready to take steps to stabilize financial markets by providing liquidity and preventing a credit squeeze if the outcome of Greek elections on Sunday causes tumultuous trading even if the Greek election will not provide "the definitive signal on what happens next" in the euro-zone economic crisis.
The Greek election is Sunday and then there is a G20 summit of world leaders in Los Cabos, Mexico, on Monday and Tuesday, with Europe's escalating crisis topping the agenda. Leaders will be accompanied by finance ministers playing an advisory role. Depending on the severity of the market response, an emergency meeting of ministers from the Group of Seven developed nations could be held on Monday or Tuesday in Los Cabos, with central bankers joining by phone.
Their first line of defense probably would be a statement that policymakers are ready to take whatever steps are needed to assure market stability. Currency swap lines already are in place, and they can be drawn upon to ensure there are enough dollars available if global investors rush into the safety of U.S. assets. Central banks also can hold extra auctions to flood banks with short-term cash via repurchase agreements. Currency intervention also is possible. Japan and Switzerland might intervene to weaken their currencies if a rush to safe-haven assets pushes up the yen and the Swiss franc. Japan already has indicated to its G7 partners concerns about yen strength and it had considered acting earlier this month. No one questions the Swiss determination to keep the franc competitively valued.
While central banks might stand together to counter credit tightness and market volatility, the bar would be far higher for coordinated monetary easing. Only the ECB, with rates at 1 percent, could deliver a significant cut in interest rates. More significant would be a relaunch of ECB bond-buying programs. But why wait for the elections? Better to be proactive. The Bank of England and the British government will act together with new monetary policy tools to tackle tightening credit. We don't know specifically what that means and we'll have to wait a couple of weeks while they figure out what that means, but they felt it was important to let the markets know that the Bank of England and the British government will act together to throw free money at the markets.
Finance Minister George Osborne said: "I can tell you today that the governor and I will take coordinated action on liquidity and on funding for new bank lending in order to inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy."
I knew they were trying to inject something, I just didn't realize it was confidence.
You see, one of the big problems with the Greek elections is that it involves democracy, and you have all these people, masses of people, making decisions that will affect the prosperity of nations, and governments, and multi-national corporations, and megabanks, and year-end bonuses. We all know that regular people can't be trusted with determining their own economic future and so it is necessary for the central banks to have contingency plans for the inevitable messy results of democratic elections.
Democracy is messy, messy business. Case in point: two days before the second round of presidential elections, Egypt's highest court dissolved the Islamist-dominated parliament and ruled that the army-backed candidate could stay in the race, in what was widely seen as a double blow for the Muslim Brotherhood. You see, what happens when people have elections, they elect the Muslim Brotherhood, and the Supreme Court has to step in.
The decision was denounced as a coup by opposition leaders of all kinds and many within the Brotherhood, who fear that they will lose much of the political ground they have gained since the US backed dictator Hosni Mubarak was ousted 16 months ago.
The decision by the supreme constitutional court – whose judges were appointed by Mubarak – delineated the power struggle between the Muslim Brotherhood and the supreme council of the armed forces (Scaf), the military council that took up the reins of power after Mubarak's fall. The Brotherhood has now lost its power base in parliament, at the same time as seeing the military-backed candidate, Ahmad Shafiq, the last president to serve under Mubarak, receive a boost.
Anyway, you can see the importance of having experts in charge of something as important as a government or a country's economy.
Take the example of Spain. You'll recall that just a few days ago, Spain was on the brink of a major economic disaster. It appeared borrowing cost would jump precipitously and lending would freeze and there would be a bank run and things might turn very ugly. And so the Euro-zone leaders offered to step in over the weekend and bailout the Spanish economy with a $125 billion dollar Non-Bailout Spanish Bank Bailout which has failed to keep borrowing costs from hitting new highs.
The interest rate on Spain's benchmark 10-year bonds rose as much as 25 basis points to a euro-era high of 7.02%, breaching the level that triggered a collapse in confidence in Portugal, Ireland and Greece. But the important thing was that the Non-Bailout Spanish Bank Bailout wasn't really about saving the Spanish economy, it was really just a firewall to prevent the spread of the economic crisis to countries like Italy.
And today, Italy's flagging economy experienced minor bouts of panic among international lenders at an auction of three-year bonds pushed the price of borrowing to 5.3%, up from 3.91% last month. Rome has succeeded until recently in convincing investors that a mix of austerity and economic reforms have put the country in a better position to weather the euro-zone crisis, but political stalemate over deregulation of several markets and resistance to labor reforms, coupled with the longest double dip recession among the major euro-zone countries has undermined the confidence of many investors.
The jump in Spain's borrowing costs followed a downgrade by the ratings agency Moody's of three notches from A3 to Baa3. The cut in Spain's sovereign debt puts its credit status alongside Croatia and Azerbaijan with a rating just above "junk". Moody's said the downgrade followed the offer from euro-zone leaders of up to $125 billion to prop up its failing banking sector, which the ratings agency believes will add considerably to the government's debt burden. The downgrade will hurt Spain because organizations such as pension funds are mandated not to invest in assets with such a low score. Moody's said the Spanish government's ability to raise finance on the world's markets was being hindered by high interest rates, a situation which had led it to accept funds to recapitalize its debt-burdened banks.
If I were to try to draw that out on a chart, it would look something like a pretzel.
But I think we all now recognize the vital necessity of nipping democracy in the bud, before it has a chance to blossom into something messy and chaotic and nonsensical. Just nip it.
Of course, I'm confident the Greek elections will proceed without a problem, everyone will do the right thing and everything will work out fine. Today's rally on Wall Street? Well, that's just in case there is a glitch.
If you visit the audio archives at moneyradio.com you can hear today's interview with Chris Hayes, author of a new book “Twilight of the Elites”.
Let me try to bring the problem with the elites to this week's news; when elites are held in check, everyone else in society does much better, the economy does better, and sustained growth becomes possible. It is not easy to hold the elites in check; the powers-that-be employ and army of lobbyists and politicians and they all work hard to relax the constraints on their actions. When there are few constraints, the elite are able to redistribute the economic spoils to themselves; this undermines economic growth and the resultant inequality destroys the common good.
There is historical proof that when powerful people get out of hand it tears apart society. It is usually easier to recognize this pattern in other cultures. We are in denial that our own society now has an elite less subject to effective constraints and more able to exert power in an abusive fashion. Once upon a time there were strong institutions in place in the United States. Andrew Jackson fought the bankers and won. FDR instituted the Glass-Steagall Act, only after declaring a bank holiday, and the bankers fell in line. These restraints worked well for a long time. It's difficult for some people to acknowledge that we have serious governance issues that need to be addressed.
And that brings us to Jamie Dimon’s seat on the board of the Federal Reserve Bank of New York. Dimon is the chief executive of JPMorgan Chase, the largest bank in America. If any bank is too big to fail, it is JPMorgan Chase.
If Jamie Dimon doesn't understand the difference between hedging and speculative trading – as his testimony indicated yesterday – and if JPM starts making risky bets with excess customer deposits, and if the losses mount, and JPMorgan runs out of money; I'm not saying this has happened; I'm just posing a hypothetical – then nobody truly believes the Federal Reserve would just let JPMorgan collapse. There would be bailouts and the money would ultimately be provided by the taxpayers. You know it. I know it. Jamie Dimon knows it, and all the counterparties to all the JPMorgan speculative trades know it.
Once upon a time there was a bank holiday in the US; it didn't last long but it effectively established a hierarchy. Once upon a time we kept the elites under control and did not allow special privilege, just as we have never allowed a monarchy. Maybe you remember that history. Maybe you imagine Wall Street in this way. It's time to wake up. We no longer constrain the bankers and now they run the place. The megabanks have excessive power and special privilege. Jamie Dimon can lie during his testimony in Congress. The Megabanks have appropriated the full faith and credit of the government; they have looted the Treasury and they know they can do it again and again and again. The can take excessive risk and they can fill their pockets if the bet pays off or they can dump the losses on us.
Once upon a time we had a structure in the financial sector which helped prevent the banks from becoming too big to fail. Now we have the Federal Reserve regulating the banks that own the Fed and to whom the Fed pays dividends. And one of the jobs of the Federal Reserve is to constrain the potentially reckless acts of Jamie Dimon and the London Whale or whatever other monstrosity Dimon dreams up. And Jamie Dimon sits on the board of the New York Fed – and part of his job is to oversee the potentially constraining actions of the Fed. If you're waiting for Congress to do something, you might as well be waiting for Godot. The elite banksters not only hire the lobbyists to write the legislation, they have enthroned themselves as the enforcers. When the actions of the elite become so egregious that they no longer try to maintain an aura of propriety, we no that they have gone to far. It is plain to see - the fox now rules the hen-house.