Real Wealth Society

Tuesday, January 29, 2008

Thinking about rogues By Fred Cederholm

Column for on/after January 27th, 2008



I’ve been thinking about rogues. Actually I’ve been thinking about auditors, defalcations/ frauds, Societe Generale, systems of internal control, and convenience. Most of the financial news stories of the prior week focused on the bloodbath that hit the world’s stock exchanges as the current Sub-Prime/ Alternative-A loan debacle continues to unwind. The US markets (closed on Monday for the observance of the Martin Luther King holiday) seemed to get a get a temporary pass from a week of otherwise global carnage. Was it the FED’s emergency rate cut of .75% and all the MEGA media hype surrounding proposals for some “major” $600 windfall for each US taxpayer (“maybe” materializing three to four months down the road) that spared only those exchanges in North America’s Eastern Standard Time Zone from the massive bloodletting? I don’t TH*NK so!



You see as a forensic investigative accountant and auditor, I am fascinated by the unfolding drama in Paris, France involving “the alleged” defalcations/ frauds by ONE single employee which caused losses of at least $7.1 BILLION to the second largest bank in France – Societe Generale. One might ask: why even care about the French story because the US markets obviously dodged the bullet last week? The answer rests in that I don’t see the Societe Generale event as some isolated incident! I fear it is but a harbinger of similar potential horror stories to come anywhere on the planet. Remember the maxim: “don’t be too smug because there but for the grace of God go I”



The forthcoming details of how a solitary 31 year old, lower-level investments’ trader at this huge financial institution could pull off such a devastating illegal pattern of activities for almost two years fly in the face of all logic. Somewhere along the line, one would presume that whistles, sirens and red flags would have been triggered and the rogue’s activities halted. Any comprehensive and working system of internal controls, checks and balances, and safeguards would have precluded this from continuing beyond a few weeks given the dollars (make that EUROs) involved. Such intervention apparently did not happen! Was anyone really minding the store? It doesn’t look like it.



Financial service entities are traditionally inundated with systems of internal accounting control and auditors. They are unique in that there are at least three separate and distinct audit/ auditor forces which should function in related, yet distinct, oversight capacities. First, there are the internal audit teams and management committees who monitor and override potentially damaging overzealous/ excessive individual actions/ activities. Secondly, there are the external regulatory examiners who periodically (at least once a year) show up to verify compliance with mandated statutory guides and limitations. Finally, there are the outside independent public accountants who test/ verify compliance with systems and controls as part of their annual audits. Did all three drop the ball here? Or, is this another case, like ENRON, where nobody was concerned until losses surfaced?



It would appear that the individual in question somehow managed to completely circumvent at least five distinct levels of controls and firewalls. How was this even possible? How would he be privy to the user IDs and individual passwords/ codes for multiple other individuals, at multiple workstations, in multiple departments and locations? Given the amounts and number of transactions, were there no supervisory approvals and co-authorizations simultaneously required? Or, verified?



It is just too convenient to saddle one rogue individual at one institution as some isolated incident in the unfolding drama of the worldwide breakdown of our financial system network. I’m just not buying it. Who will be next? For how big a hit? And… who will be ultimately tapped to “cover” the loss(es)? I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.


Copyright 2008 Questions, Inc. All rights reserved.

Thursday, January 24, 2008

The American Free-Banking Experience, 1836-1860

Part II: The American Free-Banking Experience, 1836-1860
...Banks were also required to redeem their notes on demand in
gold or silver coin. Failure to do so resulted in the bank being closed by
the state, and the bank's assets being liquidated. The state's bank
examiners were in charge of enforcing this specie reserve requirement,, but
the banks were always one step ahead. Consider this account given by
Galbraith:

At the outer extreme of compliance, a group of Michigan banks
joined to cooperate in the ownership of reserves. These
were
transferred from one institution to the next in advance of the
examiner as he made his rounds.
And on this or other occasions,
there was further economy;
the top layer of gold coins in the
container was given a more impressive height by a larger layer of
ten-penny nails below.
But not all of the excesses of leverage
were in the West. In the same years, in the more conservative
precincts of New England, a bank was closed up with $500,000 in
notes outstanding and a specie reserve of $86.48 in hand
(Galbraith, 63-64)...

How did the free banking system perform in terms of depositor safety and
promoting economic stability? Rolnick and Weber (1982) studied four free
banking states (New York, Indiana, Minnesota, and Wisconsin) for which they
found data on 709 free banks during the period 1838-1863. They found that
about half of those banks failed with about a third of those unable to
redeem their banknotes for specie. Overall, about 16 percent of the free
banks in those states could not redeem their banknotes. In addition, free
banks were short-lived relative to modern banks. About 16 percent of free
banks existed for less than one year, with the overall average about five
years (Sechrest, 99). In the four states they studies, Rolnick and Weber
estimate depositor losses ranged from $1.6 million and $2.1 million per
state.

Nearly all of the free bank failures, Rolnick and Weber argue, were due to
sharp declines in the market value of the bonds the banks held rather than
being caused by fraud, as seems to be the popular perception. They were
caused mostly by the legal requirement to tie note issues to the market
value of the bank's bond-holdings. When the market value declined
substantially, the bank was required by law to withdraw some of its currency
from circulation. It did this by calling in loans, an act which frequently
put a tight credit vice on businesses and which shrank the money supply.

In terms of economic stability, the free banking era was characterized by
considerable swings in the money supply and the price level, as is shown in
the table below.

Period % Chng in Money Supply % Chng in Price Level
------- ---------------------- ---------------------
1834-37 + 61 + 28
1837-43 - 58 - 35
1843-48 + 102 + 9
1848-49 - 11 0
1849-54 + 109 + 32
1854-55 - 12 + 2
1855-57 + 18 + 1
1857-58 - 23 - 16
1858-61 + 35 - 4

(Sources: John Knox, A History of Banking in the United States, New York:
Bradford Rhodes, 1903; and Historical Statistics, 1960, series E 1-12.

Kidwell and some other economists blame the state banking system for
contributing to the volatility in the economy, even if it did not directly
cause it. In the initial expansionary phase of the business cycle, overly
optimistic banks would issue too many banknotes which would accelerate the
growth of the economy. However, this would eventually lead to inflation and
an over-extension of credit. A random downturn in key commodity markets
would then sharply reduce the market value of many bonds and loans, and
banks would be forced to call in loans and contract the money supply.
Sometimes this led to cases of depositor panic and further reductions in the
money supply, which brought the next contraction of economic activity
(Kidwell, 56)...
full chapter

Thinking about regulating By Fred Cederholm

Column for on/after January 20th, 2008


I’ve been thinking about regulating. Actually I’ve been thinking about bubbles, the FED, solutions, equity markets, the real State of our Union, and the Titanic. The hot button story on page one for this week and the next will be the US economy and what the Federal Government intends to do to forestall a recession (if we are not already in one) or turn things around (if a recession has already begun). The eyes of the nation and world are now fixed on the administration and its actions.



You see there has been the underlying presumption that the Federal Government can fix anything. What we are seeing now is the direct opposite. When one critically reviews our current crisis of debt, it is not so difficult to realize that Uncle $ugar and his misguided past policies have become not the solution to our ills, but are the driving forces behind them. The assumption that more (and bigger numbers) is always better is simply not true! One must look behind the numbers and ask the questions: Is more of “whatever is under examination” a plus, or a minus? Are we as a nation (or a people) better off with more of this, or less of it? Politics and reality are so often in contradiction.



In recent decades, Federal policies have been driven by the phobia that any downturns, or corrections to a boom, must be avoided at all costs. The dot-com bubble, and telecommunications’ bubble of the 1990’s that fed off it, were ill-conceived. The internet was hot - very hot. The problem was that out of all those great ideas, slogans, and companies very few had any clue of how to make a profit and capitalize on the creativity and newness. Lock in your share(s) of these companies and the profits will follow. Well, they didn’t… and the irrational exuberance behind those bubbles exploded.



The government’s solution to defuse that contraction, compounded by the fears following the attacks of 911, was to (again) promote consumption/ construction by lowering interest rates below the costs of inflation. This effectively made “borrowing to consume/ build” seem like some free ride. “When the going gets tough, the tough go shopping/ building” became the motto of that engineered soft landing. Well, replacing one bubble with an even bigger one was NO solution! We are seeing all of the painful repercussions of such a policy strategy now. Difficulty IS that the only way “to solve” an all-pervasive debt problem is to pay it down, restructure it (making it longer term), or write it off!



The Federal Reserve Bank (the FED) has been the government’s primary force in regulating the ebb and flow of the nation’s economy. Its arsenal consists of monetary and fiscal policy. The money supply and credit availability is either expanded or contracted as called for by the situation. The secondary means to regulate the economy’s pump comes via increasing/ decreasing taxation. The problem facing the administration now is that the long term solution will only aggravate the economy in the short run. There is no soft landing available for a debt or over-consumption bubble.



The equity (stock) markets rise and fall on the perception of the present and the anticipation of the future. Last week saw a continuation of the downward pricings and expectations. The Dow Industrials declined 4.02 %, the broader Standard & Poor's 500 Index dropped 5.41 %, and the tech weighted Nasdaq Composite Index fell 4.10 %. The first week of 2008 was not much better. These first two weeks’ pricings were perhaps the worst in almost thirty years - across all the exchanges!



The current bubble is more pervasive and larger than anything seen on this planet for a very long time. The packaging (and marketing) of debt-based securities have made this a global problem. A bubble conceived and fed by “liquidity” will not be fixed by more of the same. The solution to the dilemma faced by the White Star Line’s flagship in April of 1912 was not to provide more water and ice, now was it? I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.



Copyright 2008 Questions, Inc. All rights reserved.

The Smear Campaign against Ron Paul

The Smear Campaign against Ron Paul

January 16, 2008

Congressman Paul is no Saint Francis of Assisi. What he is is a modern day Cincinnatus, fully human and prone to imperfections -- but a political warrior who stands like a majestic oak of clarity and sanity in defense of the American ideal...

more
http://www.afr.org/Hultberg/index.htm

Stimulate This By Danny Schechter.

Stimulate This: Why The Talk of Economic Stimulus Will Remain Talk
By Danny Schechter.

The new word of the week is “economic stimulus package.” Everyone is for it.

The President wants it if only because he knows a worsening economic crisis will leave his Administration in deep doo-doo, the way it did his dad back in ’92. Ben Bernanke, chairman of the Federal Reserve, is all for it if only because all of his rate cuts and “injections” of money into the financial system have not turned the US economy around.

He told Congress Thursday: “put money into the hands of households and firms that would spend it in the near term.” This is likely to take the form of tax rebates and direct assistance.

And all the candidates–well most of them–want it too. Or at least they want something upbeat that will stimulate voters. John McCain lost Michigan, it is said, because he was too negative. Mitt Romney won because he promised to wave a magic wand, repeal Globalization and make Detroit what it once was.

Dream on.

The stimulus idea is simple–give people some money to spend and, presto, our problems will disappear. This is the “Alka Seltzer solution.” Take one tablet and when it fizzes, you’re better in the morning.

The only problem is that the real world isn’t so simple and simplistic solutions will not work.

We didn’t get into this mess because one thing went wrong. Many things went wrong — and over a long time.

more
http://www.mediachannel.org/

Why Ron Paul Will Be The Next U.S. President by J. Jaeger

Why Ron Paul Will Be The Next U.S. President
by James Jaeger


No one can easily predict who will be the next president of the United States, BUT one can predict who will NOT be the next president. Thus by process of elimination, the winner CAN be deduced. This essay will argue why it's now possible to predict why Ron Paul will be the next president using process of elimination and data indicating extant polling patterns.

The three main issues most concerning the American people at this time seem to be a) the war in Iraq, b) the economy and c) business as usual in Washington, i.e., "change."

Given that 65% - 70% of the electorate want out of the Iraq War immediately and at least 5 out of the 6 Republican presidential candidates say they will NOT deliver that state of affairs, it's reasonably safe to say we can eliminate 83.3% of the Republicans as the next president.(1)

Given that most of the electorate are concerned about the economy, and the incumbent Republican Party is responsible for the economy, it's safe to say we can eliminate a Republican as the next president on this account as well.

Given that most of the electorate want a "change" in Washington, and the incumbent party in Washington is Republican, then, in order to deliver such "change," it's safe to say we can eliminate a Republican as the next president because to not do so would not provide said "change."

Thus we can eliminate the Republican from the presidency by reason of at least three predominant issues.

If Ron Paul leaves the Republican Party and runs under a Third Party, say the Constitution Party, only a Democrat or a Constitutionalist will now stand a chance. None of the other Third Party candidates, such as a Nader or a Perot, will stand a chance because they have not garnered enough exposure during the past year of campaigning and debating and will never reach the 15% threshold for the presidential debates.

So how can we eliminate either the Democrat or the Constitutionalist to determine who will win the presidency?

more

http://www.mecfilms.com/universe/articles/whyron.htm

Saturday, January 19, 2008

Family-democracy By Joost van Steenis

Bangkok, January 12 2008

Dear reader, this is the 95th Letter of an Autonomous Thinker

I wish you all a happy and prosperous New Year!

Democracy is a word that is widely used but the Voice of the People has hardly any influence.

In many countries in the Third World family is more important in becoming Member of Parliament than capacities.

Thailand just had general elections and it seems that the majority of chosen people are spouses, sons, daughters, mothers, uncles, in-laws, etcetera of former Members of Parliament.

India knows political family-dynasties as the Gandhis that since independence belong to the top of the Indian society.

In Pakistan, the just murdered Bhutto was the daughter of a former president and now her 19-year old son has become party leader, assisted by his father who spent six years in jail on corruption charges.

I do not think these so-called democracies differ much from countries as North Korea or the Arab kingdoms were a few families are also monopolising power (and the money that comes with power).

I do not see any reason why members of these family-clans should be more capable than people that do not belong to these clans.

But Family-Power is not restricted to the Third World . See for example my Letters 57 and 58, Who belongs to the elite ( http://members.chello.nl/jsteenis/letter57.htm) and The elite is very old ( http://members.chello.nl /jsteenis/letter58.htm).

There are many examples of Family-Power in the USA.
The Kennedy-clan held many political functions.

The Bush-clan produced two presidents and the governor of Florida. Al Gore is also part of this family. Are these people more capable than someone without a powerful family (and the money that belongs to these families)?

Clinton was a gifted speaker, but should his wife have had the same chance to become the next president as when she had not been married to him?

That family-members have more chance to be chosen in a political function should be enough reason to be against the very idea of democracy.

That the Voice of the People is hardly taken into account is also determined by the power of the Voice of the Family, the voice of a small group of people around former powerful politicians.

Anyone with such strong family-bonds should be distrusted. It should compel masspeople never to vote for anyone who propagates to be the right person because she/he belongs to a certain family.

Decisions that will be taken by such persons will favour in the first place the already privileged families to which they belong.

Do not trust the democratic system as long as family is more important than arguments and capability.

There are other ways than democracy to change the world, direct ways by which the powerful are forced to listen to the Voice of the People.



Yours truly, Joost van Steenis
http://members.chello.nl/jsteenis
Ways to increase masspower

Wednesday, January 16, 2008

Thinking about trends By Fred Cederholm

Column for on/after January 13th, 2008



I’ve been thinking about trends. Actually I’ve been thinking about 2008, the first two weeks, stock indexes, a look back to 1968, recessions, Wal-Mart, historical inevitability, and my parents. Things don’t just happen in isolation. There is the tendency for events to occur in cycles and in inter-related groups. For each effect, there are multiple causes which have evolved over time. While there is the tendency to explain away any negative (or non- positive) occurrence as some isolated incident and not some systemic problem (particularly in an election year), THAT is proven generally not the case.



You see 2008 is shaping up to be a real year for the record books. I don’t mean that in a positive sense. The first weeks of a given year seem to set the pace for the full twelve months. This is particularly true in “years of correction” – the politically correct way of describing a redress of excesses and/ or just plain bad decisions. The 18th Century economist Adam Smith described this invisible hand of underlying market forces as the swinging of a pendulum. Under the laws of physics chronicled by Sir Isaac Newton, it reads that: “for every action, there is (eventually) an equal and opposite re-action.” In 2008, we shall see the developments, excesses, and mistakes of the past to try to correct themselves. This is the natural order of things be they financial, economic, political, social, and/ or military.



Thus far in 2008, we have seen declines in the US stock market indexes erase (as in wipe out) all the gains from all of 2007. This is pretty much true across the board, whether one is describing indexes segmented/ specialized as industrial, technological, utility focused, transportation, or service industries. The same is the case for the broader indexes - be they the NYSE, the Wilshire, or the Standard & Poors’. Traditionally what happens to the equity markets in the first weeks sets the pace for the entire year. Market analysts define a “correction” as a 10% decline. We’ve just had that. Are the downs behind us?



While there have been such corrections before in my adult lifetime, the swings of the pendulum have been very lopsided mostly in the wrong directions. I graduated from RTHS in 1968. I will use that as a benchmark. A year’s tuition AND fees at the U of I was just over $250. Gasoline was $ .25 a gallon. An “equipped” new car could be had for $ 2,500. The median priced home sold for $17,000. Gold was officially priced at $ 35 an ounce and silver was around $ 1.40. A full fast-food meal was a buck or less!



The US Dollar was king! The United States was the largest creditor nation on the planet. We invented and manufactured the goods that the world wanted to have. This was reflected in a huge global trade imbalance which was in our favor. “If” a family had ONE credit card, it was probably for some oil company and the entire balance was paid-in-full each month. Our TOTAL National Debt stood at $345 BILLION. Just TH*NK about where we are now some 40 years (or roughly two generations) later.



A recession is defined as two consecutive quarters with negative growth - which is the nice way of saying “a decline.” The dreaded “R” word has been surfacing a lot lately. But… all the trends and indicators suggest an “R” is now not a matter of if, but when? And… how bad? We have NEVER… not experienced a recession shortly after unemployment jumped by .5% in a given month. Unemployment jumped .6% in December of 2007. Last week saw 10,000 applicants line up for 350 jobs at a new Wal-Mart in Georgia. No incumbent (nor majority-controlling political party) wants to seek election/ re-election in a recession year. 2008 is no different. Change/ fixes thus become the focus of all campaigns.



I just looked back on what I have just written, and Oh, my God… I’ve finally morphed into my parents describing to me the 1920’s, the 1930’s, the Great Depression, FDR’s New Deal, and the need for another “therapeutic” World War. Brace yourself folks, we are in for quite a year! I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.



Copyright 2008 Questions, Inc. All rights reserved.

Sunday, January 13, 2008

Gorillas versus World Bank - VIDEO

Photographers Michael Nichols and Brent Stirton explain the significance
of the recent gorilla massacres in the Democratic Republic of Congo.

VIDEO:
http://ngm.nationalgeographic.com/

http://www.planetaazul.com.mx/


SAME EVILS AT WORK AGAIN


10.18.07 - Leído 35 veces. Enviar esta nota

Jeremy Lovell

A delegation of rainforest pygmies from Democratic Republic of Congo will fly to Washington this week to complain to the World Bank about its support for wholesale logging to help rebuild the war-ravaged economy

LONDON, UK; October 18, 2007.- The visit follows a leak of a report last week by the bank’s Inspection Panel that criticised it for backing a number of logging projects without adequate consideration of their sociological or environmental impact.

“We are going to Washington to tell the World Bank that they must not allow any expansion of the logging industry,” pygmy spokesman Adrian Sinafasi said in a statement released by the Rainforest Foundation, which is accompanying the delegation....

“Now the `Pygmies’ have the chance to meet face to face with the organisation that risked devastating their forests. Hopefully President Zoellick and his colleagues will listen to what we have to say and commit to working with them to protect Congo’s forests in the future.
http://www.planetaazul.com


Congo conflict menaces rare gorillas

Wednesday September 5 2007

Park rangers fleeing renewed conflict in eastern Congo have abandoned an endangered gorilla reserve.

Rebel troops led by General Laurent Nkunda's fighters seized three gorilla monitoring posts in the Virunga national park on Monday, and park rangers left the area.

Departing rangers told the Frankfurt Zoological Society's Robert Muir, who works with the park, government troops were fighting Gen Nkunda's troops in the heart of the sector where the endangered animals live.

"They have abandoned the gorilla sector because it is swamped with Nkunda's men and is a very difficult place to be right now," he said.

Mr Muir said rangers were still at posts in more distant areas.

Only some 700 mountain gorillas remain in the world, about 380 of them in the Virunga area, which crosses Congo, Rwanda and Uganda, according to conservationists.

About 100 of the animals are believed to live on the Congo side of the park.

Nine mountain gorillas have been killed in attacks this year in eastern Congo, according to the conservation group Wildlife Direct.

Park officials said more than 300 people working with the gorillas had been evacuated, including rangers and their families.

One park ranger was shot and killed today in a separate attack on a patrol post, officials said.

Violence broke out after Gen Nkunda pulled thousands of his men out of the national army last week, just months after they were integrated into it under the peace accords.

They then began attacking government troops, whom Gen Nkunda accused of collaborating with Hutu forces that fled into Congo after carrying out the 1994 genocide of Tutsis in Rwanda.

Gen Nkunda says he has gone back to war to protect the hundreds of thousands of Tutsis living in the eastern Kivu region who, he says, are still being targeted by Hutu rebels.

But the UN peacekeeping force in Congo has thrown its support behind the government's claim that Gen Nkunda is a "bandit", raising the prospect of another major conflict.

With 18,000 troops, the UN's contingent in Congo is the world's largest peacekeeping mission.

The UN has started airlifting thousands of government troops into Kivu, which has endured two foreign invasions and more than a decade of civil war.

About 4 million people have died in the conflicts, and the latest fighting has forced 10,000 people to flee into neighbouring Uganda since Monday.

The UN also said thousands of people had been on the move since the weekend within Congo's North Kivu province, which borders Rwanda and Uganda.

Congo army officials said at least 150 rebel fighters had been killed, including nearly 100 last week and 67 whose bodies were found abandoned on Monday after helicopter strikes.

The roots of the conflict lie in the genocide in Rwanda. The Hutu extremists who killed 800,000 Tutsis fled into what was then Zaire, from where they launched attacks on Rwanda's Tutsi rebel government.

Rwanda invaded twice to attack the Hutu insurgents but the conflict ended with the east of Congo controlled by Rwandan- and Ugandan-backed rebels.

Peace accords and elections last year offered hope, but resolution is likely only if Rwanda no longer feels Hutu rebels are threatening its border.

http://www.guardian.co.uk/environment/2007/sep/05/congo



World Bank accused of razing Congo forests

· Internal report says mass logging threatens Pygmies
· Findings are embarrassing for British government

Thursday October 4 2007

The World Bank encouraged foreign companies to destructively log the world's second largest forest, endangering the lives of thousands of Congolese Pygmies, according to a report on an internal investigation by senior bank staff and outside experts. The report by the independent inspection panel, seen by the Guardian, also accuses the bank of misleading Congo's government about the value of its forests and of breaking its own rules.

Congo's rainforests are the second largest in the world after the Amazon, locking nearly 8% of the planet's carbon and having some of its richest biodiversity. Nearly 40 million people depend on the forests for medicines, shelter, timber and food.

The report into the bank's activities in Democratic Republic of Congo since 2002 follows complaints made two years ago by an alliance of 12 Pygmy groups. The groups claimed that the bank-backed system of awarding vast logging concessions to companies to exploit the forests was causing "irreversible harm".

It will be discussed at board level in the World Bank within weeks and may lead to a complete rethink of how forestry in the DRC is practised.

It is particularly embarrassing for the British government, which is a development partner of the bank and its third largest financial contributor. It encouraged the bank to intervene in the Congo forests with export-driven industrial logging and has earmarked £50m for further Congo basin forestry aid.

When the bank moved back into Congo in 2002, after years of war which cost up to 4 million lives, it said industrial forestry could contribute most strongly to the country's recovery. In its rush to reform the economy it devised new forestry laws, divided the county into zones and aimed to create a favourable climate for industrial logging.

But although the bank is legally committed to protecting the environment, and trying to alleviate poverty, the panel found that the policies it imposed on the Congo were having the opposite social and environmental effects:

· An area of 600,000 square kilometres (232,000 square miles) of forest was earmarked for logging companies.

· The bank failed to address critical social and environmental issues.

· It ignored between 250,000 and 600,000 Pygmies believed to be living in the Congolese forests, even though their presence was well known and documented.

· It put the Pygmies in serious potential harm.

Criticism is made of the forestry reforms that the bank imposed in return for loans of more than $450m. Initially, said the panel, "the bank provided [to the government] estimates of export revenue from logging concessions that turned out to be far too high. This encouraged a focus on reform of the forestry system at the expense of pursuing sustainable uses of forests, the potential for community forests and for conservation.

For the most part foreign companies, or local companies controlled by foreigners, have been the beneficiaries of this," the report said.

In a scathing analysis of the bank's economic reasoning, the panel said the bank had "distorted the real economic value of the country's forests" by looking solely at the tax and revenue that increased industrial logging might generate. "There seems to have been little action to support alternative uses of the forest resources," it said.

The panel travelled deep into the forest to take evidence from the Pygmy communities, who told it they were not consulted before the bank launched its wide-ranging forestry reforms.

One Pygmy leader told the panel: "We are being made poor in every aspect ... the [logging] company prevents us from going into the forests." Another said that the company had bought the land so that people could no longer live in the forests.

"Roads are going ever deeper into the forests, opening it up. We are increasingly deprived of our foods and drugs. We have never seen anything from the bank except promises," said a third.

Research by non-government groups last year showed that 12 foreign-owned or foreign-controlled companies were encouraged by the bank to dominate the entire industry. Some had concessions of more than 5m hectares, and all included Pygmy communities in their holdings. The bank is reviewing the legality of many of these concessions.

Yesterday international groups that have worked with Congolese communities said they were shocked by the panel's findings.

"The Pygmies must be fully involved in developing any future plans for the forest, and the bank need to find ways of helping them uphold their rights, rather than helping logging companies to destroy them," said Simon Counsell, director of the Rainforest Foundation.

"The World Bank must change drastically its forest policies. Industrial logging is not contributing to poverty reduction, while its expansion undermines future financial benefits for environmental services," said Staphan van Praet, the Africa forest campaigner for Greenpeace International.

http://www.guardian.co.uk/environment/2007/oct/04/congo.forests

Friday, January 11, 2008

Attn Bank Of Canada, To David A. Dodge By David Jensen.

October 11, 2007

David A. Dodge, Governor

Bank of Canada

234 Wellington Street

Ottawa, Ontario K1A 0G9

Dear Governor Dodge,

Thank you for taking the time from your busy schedule to speak to the Vancouver Board of Trade. It was most enjoyable to once again make your acquaintance. I enjoyed the discussions that we had at UBC in the late 1990s and have followed with interest your progress at the Bank of Canada.

I have pondered how to approach the following topic; one to which I have now dedicated more than 6,000 hours outside of my employ over the past 5 years. I have concluded that the best way to approach this matter is straight-up as it suits your temperament and mine as well.

In your speech, you referred to the recent market turbulence as a re-pricing of risk after markets had become complacent after a period of excess. The implication is that the market is correcting itself as it should and that after a period of adjustment it will progress forward on a more stable footing. I believe that there is something profound underway with the subprime market turmoil representing an initial tremor in an approaching and severe correction in the world’s capital markets.

The market distortions inducing the current imbalance are difficult to perceive as two critical measures that provide critical reference points for economists and investors (and central banks) have themselves been distorted through intervention:

  • The distortion of the measure of inflation calculated as the CPI as calculated not just in the US, but in Canada, Australia, and the Euro zone as well; and
  • The price of gold.

Let me first deal with the distortion of the CPI. John Williams is an economist who was retained by Boeing in the late 1980s to resolve problems with their key economic models that had functioned well for decades up to that point. Boeing requires accurate economic models to forecast accelerations and deferrals of its commercial aircraft to maintain a functioning production line. The Boeing 747, for example, has over 2 million part numbers with some lead-times over 2 years. If the supply chain is whipsawed by inaccurate forecasts, supply disruptions, as occurred at that time, quickly manifest themselves.

What John Williams found was that the economic models worked fine. However inputs of inflation, which impact economic growth calculations, had been altered through adjustments in calculating the index by the Bureau of Labor Statistics (BLS) resulting in inflation being understated. Methods such as substitution effect, hedonics, owner-imputed rents for shelter costs, geometric vs. linear weighting, etc. had the effect of systematically understating inflation. When CPI inflation was calculated using the prior method used by the BLS, these economic models (and the resultant calculation of true economic growth and thus commercial aircraft demand) recovered their former high functionality.


John Williams maintains a website www.shadowstats.com where he provides a calculation of inflation using a constant method initially utilized by the BLS before modifying it with the above noted methods. The SGS (shadow government statistics) calculation of CPI differs by 8% from the current CPI-U. We can see that the divergence from the BLS’s original CPI calculation started mildly in 1982 and then strongly diverged in 1994/1995 just as Chairman Greenspan started announcing that inflation would decline due to internet related productivity improvements. As you can see in the following article, the CPI adjustments which accelerated in the 1990s occurred as a result of Mr. Greenspan’s efforts with the BLS http://www.shadowstats.com/cgi-bin/sgs/article/id=871 .

The second distortion introduced above is the price of gold. It has been noted by John Maynard Keynes and other economists supported by several centuries of historic data that real interest rates and the price of gold have a close one-for-one inverse correlation. As real interest rates fall, the price of gold climbs and vice versa. When real interest rates become negative such as in the late 1970s and early 1980s, the price of gold can accelerate quite strongly. Keynes called this phenomenon “Gibson’s Paradox” as interest rates correlated with the gold price level and not the rate of change of the general price level of goods as had been originally predicted. This relationship was so strong that he remarked it was “one of the most completely established empirical facts in the whole field of quantitative economics”.

If a low interest rate policy were to be embarked-upon it would be essential that the price of gold be contained. Mr. Greenspan is well aware of the importance of gold penning several articles on gold including one in the Wall Street Journal suggesting that it might be beneficial for the US to return to a gold standard (see: Can the U.S. Return to a Gold Standard?, The Wall Street Journal, September 1, 1981).

Greenspan has further commented twice in 1998 that “central banks stand ready to lease increasing quantities of gold should the price rise” (see: http://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm ).

Greenspan’s reference to gold leasing is of interest and gold leasing has been recently acknowledged by Barron’s Magazine in an article “A Secret Time Bomb Made of Gold” (See: http://online.barrons.com/article/SB118954417476624138.html?mod=9_0033_b_markets_main_collection ).

Prior to this article, three separate analyses of the gold market completed roughly 5 years ago came to the conclusion after studying the bullion markets that Central Banks had been leasing on average 1,000 tonnes per year into the world’s gold market for more than a decade. With annual mine supply of gold of approximately 2,500 tonnes p.a. this represents a very substantial amount. I will not go into too much detail here however the studies can be found at the following links:

  1. Frank Venerosso; “Facts, Evidence, and Logical Inference” ( http://www.gata.org/node/5275 ). Frank Verosso is an international banking consultant and his clients have included the World Bank, the O.A.S., and numerous governments.

  1. James Turk; “More Proof” ( http://www.fgmr.com/moreproof.htm ). James Turk is the owner of goldmoney.com .

  1. Reg Howe “Gold Derivatives: Moving Towards Checkmate” ( http://www.goldensextant.com/commentary23.html#anchor19855 ). Reg Howe operates www.goldensextant.com .

The silent leasing of gold would be a critical tool in containing gold prices as in the latter stages of the London Gold Pool in the late 1960s it experienced private off-takes of 400 tonnes of gold per day as the Pool tried to publicly maintain an appearance of strength of the dollar. By leasing gold, and showing gold holdings on central bank balance sheets as current assets while these assets were increasingly disbursed to the public through bullion bank leasing then sale of these assets, an invisible supply of gold could be brought to market containing the price of gold during a “new economic era” of low inflation along with liberal increases in the money stock. ( I refer to the broad money stock from an Austrian perspective and also as proposed by several European banks such as Commerzbank ( https://www.commerzbank.co.in/media/research/economic_research/pool/zwprognose/ezbaktuell/monetary_projection_060523.pdf )

Non-reporting of gold leases has been within policy strictures of the IMF (although the IMF has announced that it will release new policy guidelines on the reporting of leased gold), but of extremely dubious wisdom both due to the fact that the supply of central bank gold for lease is not eternal and the economic distortions that accompany an artificially low gold price, artificially low interest rates, and the resultant overextension of credit.

Coordination of gold leasing by key G7 central banks appears to have occurred through the BIS in Switzerland. William R. White of the BIS in a 2005 speech noted that the organization has served as a vehicle for the influencing of the price of gold “where this might be thought useful”.

Apart from the BIS, Switzerland plays a key role in the world’s physical gold trade. As noted by James Turk:

“As the IMF report states, even back in 1993 Switzerland "has retained its dominance in physical gold trading by providing specialized banking and ancillary gold services in an essentially unregulated and confidential environment." In other words, Switzerland is the center of the world's gold lending activity, and its transactions in physical metal dwarf the other gold-trading centers. While London remains the center for pricing gold, Zurich is by far the dominant location for transactions involving physical metal.”

http://www.fgmr.com/moreproof.htm

In addition to gold leasing by central banks, evidence of the manipulation of the price of gold both on the Comex and the Tocom (Tokyo) gold derivatives markets has also been documented by several observers. In the following graph prepared by Dimitri Speck, what appears to be a very statistically significant depression in the price of gold during trading hours on the Comex in New York can be observed. For a period, containment of the price of gold via the gold derivatives market is advantageous as, until such intervention is discovered, only small amounts of physical bullion are required. The appearance of the intervention in NY, repeatedly led by principal actors JP Morgan Chase and Goldman Sachs, is so marked that a particular day August 5, 1993 can be identified as the date of onset of the anomalous downward trade in gold on the NY Comex.

( http://www.gold-eagle.com/editorials_05/speck120605.html )

The impact of the combination of the distortion of the CPI measure along with suppression of the price of gold can be observed in the following graph prepared by Nicholas Laird of sharelynx.com showing the inflation-adjusted price of gold (plotted in inverse) vs. real interest rates where the nominal interest rate proxy is the 30 year bond and the rate of inflation used to calculate both an inflation-adjusted price of gold and real interest rates is as calculated by John Williams using the BLS’s CPI methodology of the early 1980s.

photo

It can be observed that with real interest rates of approximately -3.8% in 1980, gold surged to approximately $5,000 in 2007 dollars but then began a distinct departure from tracking the real interest rate starting in late 1987 to the point today where we now have real interest rates of -5% (using a constant methodology) and gold prices that are nowhere near their norms. Interest rates or the price of gold (or both) must go much higher from current levels. Given our record indebtedness and the instability of the real estate and derivatives markets, such movements couldn’t come at a worse time.

As a consequence of these distortions that have accelerated since the early 1990s, we are now at the tail-end of the greatest overextension of credit in the modern era and are in an economic landscape that is littered with the resultant bubbles in the equity markets, the housing and bond markets, and the derivatives market - accompanied by fearless speculators who know that Central Banks are in a position where they feel that their only choice is to intervene when market disruptions and liquidity shortages, such as in the CDO derivatives market this past summer, appear. The markets have now been distorted from a price discovery mechanism to a speculative arena with unstable structures such as the derivatives market that give potential for systemic dislocation.

Mr. Greenspan himself saw the dangers that would arise as a consequence of the accommodative Fed policy underway in 1997 and spoke about them in a speech in Belgium at the Catholic University at Leuven. That speech received no media coverage, however, Dr. Larry Parks has published a detailed analysis of that speech in his book “What Does Mr. Greenspan Really Think?” a .pdf of which I will forward in a follow-on e-mail. The market turmoil that we are now experiencing is induced by entrenched moral hazard itself a consequence of years of monetary expansion and Fed intervention and was foreseen by Greenspan even then.

Governor Dodge, I realize that this is not a pleasant aggregation of data and that its impact is disturbing. Many of the concerns mentioned above have also been stated repeatedly by the Gold Anti-Trust Action Committee ( www.gata.org ), however they have met with official sector silence.

I believe we are facing a crisis that must be addressed or we will experience what Christopher Ondaatje states will be “the end of this era of paper and its abuse which will end with horrific consequences”. These consequences will be felt not just in our economies but in our societies as well.

Canada now faces a challenge that may well impact her very sovereignty in the years ahead. I see 3 primary challenges that require urgent and near-term action:

  1. Currency reform to stabilize Canada’s currency when the inevitable unwind of this era occurs.

  1. Financial market reform.

  1. Alternative energy development. The U.S. imports approximately $500 billion of petroleum (60% of its consumption) each year in exchange for exported debt. If a currency crisis occurs, the US will face extraordinary pressure on its ability to import this critical resource whose demand is relatively inelastic in a functioning economy.

The above are the basic elements of my concern. I thank you for considering this matter and please feel free to contact me if I can be of any assistance or if you seek additional information.

Sincerely yours,


David Jensen.

© David Jensen 2008. All rights reserved.

Tuesday, January 08, 2008

'The Urgency Of Now:' Our Politicians Are Still In Denial By D. Schechter

'The Urgency Of Now:' Our Politicians Are Still In Denial

got to:

http://www.mediachannel.org/

Thinking about audits By Fred Cederholm

Column for on/after January 6th, 2008



I’ve been thinking about audits. Actually I’ve been thinking about Julius Caesar, the accounting profession, financial services uniqueness, Sub-Prime/ Alternate-A derivative paper, and the Resolution Trust Corporation. The busy season for the accounting profession is at hand. I’m not just talking about the majority of the income tax filings for businesses (due on the Ides of March) or those tax filings for individuals (due on April 15th). January thru April is also the time frame when the lion’s share of the field work is completed for the annual audits of businesses and publicly traded corporations. Respective audit reports with those ever-so-critical independent accountant opinion letters are also issued.



You see the word audit comes from the third-person single conjugation of the Latin verb audio – meaning “to hear.” Historically, it was first used in “the somewhat accounting context” of Julius Caesar’s commentaries on his Gallic Wars – De Bello Gallico. Members of his troops “traversed the battlefields (after a conflict) and speared the wounded.” This was done to determine who was still alive and who was dead. They “audited” the casualties and reported the results back to their commanders. I have no doubt that in some (rare) cases those either being “examined” in financial audits by outside accountants, or those undergoing an IRS audit, may feel that the process hasn’t changed in 2000+ years.



The accounting profession in the 21st Century is really a far cry from Julius Caesar’s troops. As a CPA/ CFE and forensic accountant who writes the weekly column TH*NK*NG, I am clearly biased to the profession despite the independence and professional skepticism I maintain both as an accountant and a writer. The attest function of the independent audit performed by the profession is critical to the business world, the banking industry at large, and the global equity/ financial markets. This has been true for a long time. In 2008, this will prove ever-more-so because of the looming crisis of derivatives.



The financial service industry is under the spotlight and has been so since August 2007 when the unfolding debacle of the Sub-Prime/Alternative-A derivative investments became the story on page one. TENs of BILLIONS of these have been written-off/ down worldwide with HUNDREDs of BILLIONS more to come. Such “investments” are literally popping up everywhere, but NOT necessarily where you might expect them to be! This current audit cycle will not only prove critical in identifying who is holding such dubious paper, but also what adjustments will be required to “fairly present” the financial statements (or statements of condition) of the entities under examination by the accounting profession.



While the public’s attention will focused on their banks and the timeliness of this year’s audit’s completion date as well as the nature of the independence accountants’ opinions – be they unqualified, qualified, adverse, or disclaimed; the real focus should be aimed at those audited financials and reports of investment bankers, mutual funds, hedge funds, money market funds, pension funds, municipalities, and insurance companies. While they may face concerns/issues regarding declines in local Real Estate values, and increased foreclosures; I foresee that the local/ regional community banks (who are locally owned and managed) and are not satellites of the national mega-money-center banks, will get thru their audits unscathed with flying colors. The proof behind my assertion will come in the next four months.



In terms of bigness, pervasiveness, and costliness, I fully expect this derivative investment crisis to surpass the Savings and Loan crisis of the late 1980’s and early 1990’s. There is still the potential for a similar cascading effect which would/ should/ could endanger the financial system of the entire planet if left unchecked. Back then, the doctrine of “too big to fail” ruled. Back then also, the “solution” came via the creation and mobilization of the Resolution Trust Corp. I worked there from February 1990 thru March 1993. This crisis is actually moving quicker. Will a re-activation of the RTC be required? Will there even be time? I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.



Copyright 2008 Questions, Inc. All rights reserved.