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Yellen Urges Development Banks To Stop Fossil Fuel Funding

Yellen Urges Development Banks To Stop Fossil Fuel Funding

U.S. Treasury Secretary Janet Yellen is prepared to gather together the heads of development banks to persuade them to stop fossil fuel project funding, according to Bloomberg.

The Treasury Secretary intends to “articulate our expectations that the MDBs align their portfolios with the Paris Agreement and net-zero goals as urgently as possible,” according to a written speech she is set to deliver at a climate conference in Italy.

The speech, soon to be delivered, follows just days behind a similar message that the financial community received at the G20, where financial leaders for the first time every acknowledged that carbon pricing was at least a potential tool in addressing climate change.

While Bloomberg notes that while development banks have never been responsible for the big bucks behind most fossil fuel projects, those funds are largely seen as a stepping stone for the projects to secure hefty commercial funding.

Since the pandemic began, development banks have thrown just $3 billion into oil and nat gas, with $0 going towards coal projects for the first time ever.

Meanwhile, development banks have funded $12 billion in clean energy projects.

But it is precisely these natural gas projects that will allow many countries to quickly and efficiently transition away from coal.

Prior to her appointment as Treasury Secretary, Yellen was criticized for her fossil fuel stock holdings. The Secretary vowed to divest her holdings in all fossil fuel companies as well as any companies that support fossil fuels.

Nevertheless, even before her time as Treasury Secretary and the chairman of the Financial Stability Oversight Council (FSOC), Yellen has been a staunch supporter of the environment and highly critical of the role fossil fuels have played in greenhouse gas emissions.

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When Expedient “Saves” Become Permanent, Ruin Is Assured

When Expedient “Saves” Become Permanent, Ruin Is Assured

The Fed’s “choice” is as illusory as the “wealth” the Fed has created with its perfection of moral hazard.

The belief that the Federal Reserve possesses god-like powers and wisdom would be comical if it wasn’t so deeply tragic, for the Fed doesn’t even have a plan, much less wisdom. All the Fed has is an incoherent jumble of expedient, panic-driven “saves” it cobbled together in the 2008-2009 Global Financial Meltdown that it had made inevitable.

The irony is the only thing that will still be rich when the whole rotten, corrupt, fragile financial system of illusory stability collapses in a heap of runaway instability. The irony is that the Fed’s leaky grab-bag of expedient “saves” was not designed to ensure systemic stability, though that was the PR cover story.

The Fed’s leaky grab-bag of expedient “saves” had only one purpose: save the fat-cats, skimmers, scammers, fraudsters and embezzlers who had gotten rich off the Fed’s cloaked transfer of wealth: the purpose of all the 2008-2009 extremes was not to impose the discipline required to truly stabilize the financial system; the purpose was to elevate moral hazard— the separation of risk from the consequences of risk–to unprecedented heights, backstopping every skimmer, scammer, fraudster and embezzler from well-deserved losses as the entire pyramid of fraud collapsed under its own enormous weight of risky bets gone bad.

To save its cronies from the catastrophic losses that should have been taken by those making the bets, the Fed instituted one expedient “save” after another: backstopped global banks with $16 trillion, dropped interest rates to zero, eliminated truthful reporting by ending mark-to-market pricing of risk, flooded the financial system with free money for financiers, all designed to signal that the Fed will never let its cronies suffer the consequences of their risky bets, i.e. the perfection of moral hazard.

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The long history of money

We are approaching a critical turning point in the history of financial systems.

Since the Great Financial Crisis, central banks have exerted control over the financial markets through their QE-programs and plan to extend their influence over the monetary system through the introduction of national digital currencies.  Opposing forces include, as usual, those of financial innovation, which include independent cryptocurrencies.

In the June issue of our Q-Review series, we will delve deep into the world of digital currencies and the future of monetary systems. To accompany our report, we intend to publish a series of blogs which examine the long history of monetary and financial systems.

Today we will start with a brief summary of the history of money.

The early days

Current archaeological research has established that the measurement of economic interactions, i.e. accounting, predates writing. The clay tablets discovered at the birthplace of Mesopotamia, the Temple of Uruk, were used as an accounting tool for commodities and even for human labor as early as 3100 B.C.

The foundations of banking practices were developed in Ancient Greece, in the harbor city of Piraeus, where the local bankers, or trapezitai, took deposits and provided loans. While borrowing and lending in commodities follows the principles of banking practices then in use in Mesopotamia, the establishment of the concept of a unified monetary value for all economic units, such as commodities, assets, services, human labor, etc. was created in Ancient Greece. This also made the eventual emergence of modern banking practices possible later.

Still, the first banks known that truly resembled modern banks operated in Imperial Rome. It has been said that Rome’s financial system was so sophisticated that it was matched only by the banking sector created during the Industrial Revolution over a millennium later.

Birth of fractional reserve banking

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People against Politicians Who Always Want War

QUESTION: Are you saying that the people left alone do not hate each other, it is the politicians?

FK

ANSWER: Yes. They do not teach hatred in school in Israel or the Arab world directly. They will teach biased history but that is in all countries. There are families who have lost people and that is why the old adage was you kill your enemy and his family for the son will only grow up to avenge their father’s death. The hostility is fostered at the political level.

Today, we have a very serious problem. As Matt Taibbi has reported, journalists once challenged the Spy State. Now, They’re Agents of It. If we look at the polls on Russia, the media in pushing Hillary’s agenda have turned Russia into an evil empire. The press in the United States REFUSED to ever investigate the fact that the bankers were blackmailing Yeltsin in 2000 which is why he withdrew in 2000 and handed it to Putin. That is why Hillary blamed the Russians because she was behind trying to take over Russia for the bankers. The media has ensured there will be World War III because they have promoted the propaganda and never investigated anything.

The people are not the problem. If the politicians were removed, things would be different. Take the famous Treaty of Versailles of 1919 when Germany surrendered at World War I. The French politicians insisted that is where it would take place because the previous Treaty of Versailles of 1871 is where the French surrendered and the German Empire was born. Politicians have long memories. When I had meetings in Yugoslavia, I heard about the justification for genocide against Muslims because of their Jihad against the Serbs during the 14th century when the Ottoman Empire was expanding…

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Canadian Banks Have an Outsized Impact on Global Fossil Fuel Financing

Canadian Banks Have an Outsized Impact on Global Fossil Fuel Financing

We pledged to reduce emissions by 30 per cent by 2030, but will financial institutions undermine this goal?

When 18-year-old climate activist Naisha Khan wants to start a conversation about how banking fuels climate change, she asks someone how they think their bank makes money to pay them interest each month.

If that person banks with any of Canada’s five largest banks, that money likely comes partly from fossil fuels. But Canadian banks don’t just make money from fossil fuels — they’re also financing the industry, big time.

Canada has pledged to cut its greenhouse gas emissions by at least 40 per cent below 2005 levels by 2030, but since the 2015 Paris Agreement the country’s five largest banks have poured $726 billion into fossil fuels, according to environmental advocacy organization Stand.earth.

That’s based on numbers from the Rainforest Action Network’s latest annual analysis of the world’s largest 60 banks.

Ranked by the amount of financing they’ve provided to fossil fuel companies since 2016, the Royal Bank of Canada comes in fifth in the world with US$160 billion. TD Bank is ninth at US$129 billion, Scotiabank is 11th at US$114 billion, the Bank of Montreal is 16th at US$97 billion and CIBC is 22nd at US$67 billion.

Stand.earth adds up this financing and converts it to Canadian dollars using the average exchange rate for the five-year period of C$1.28 to US$1.

When asked by the CBC why it continues to fund fossil fuel projects, RBC “reaffirmed its commitment to net zero emissions, including a promise of $500 billion in sustainable finance by 2025,” the broadcaster reported. “It said it was also the first bank to commit not to lend to resource projects in Alaska’s Arctic National Wildlife Refuge.”

…click on the above link to read the rest of the article…

Struggling to Make a Profit, Fracking Investors are Searching for the Exit

Banks and investors have given up on the U.S. fracking industry, which is bad news for current investors who waited too long to get out.
Derricks Credit: Pay No Mind (CC BY-SA 2.0) and Going out of business sign Credit: Michael Steeber (CC BY-SA 2.0) Photos adapted by: Justin Mikulka

The outlook is increasingly bleak for oil and gas companies. The beginning of this year has seen the highest number of companies announce bankruptcy during the first quarter in five years. Eight oil and gas companies announced they were filing for bankruptcy during the first quarter of 2021.

Meanwhile, earlier this month The Financial Times noted that of 500 privately owned oil and gas companies in the U.S., 400 are losing money and unlikely to ever pay back their large debts. According to the Financial Times, the remaining companies are focused on a “last gasp” effort to look profitable to potential buyers in order to “secure a profitable exit.”

If they can’t secure a “profitable exit” that will help them pay back their debts, the most likely outcome is bankruptcy.

As Adam Waterous, head of the private equity group Waterous Energy Fund, told the Financial Times: “This business is broken. The industry is going through a multiyear process of wringing capital out of the sector, not bringing new capital in.”

Investors appear to be done with the fracking industry as they realize that the only people making money are the Wall Street banks and shale company executives. With investors losing interest in the fracking industry — and banks no longer interested in loaning money to fracking companies  —  there is a lack of new money available to prop up the struggling fracking business model.

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$17.5 Million In Revenue And $5.4 Billion In Losses: Archegos Was A 300x-Levered Time Bomb For Credit Suisse

$17.5 Million In Revenue And $5.4 Billion In Losses: Archegos Was A 300x-Levered Time Bomb For Credit Suisse

A bank’s prime brokerage unit is supposed to be a safe, reliable and predictable generator of revenue, resulting from modest-margin transactions with a bank’s hedge fund client base. It’s safe because the bank’s risk managers scour the bank’s exposure to various hedge funds, and immediately flag any clients that become too big and a potential source of loss (it’s also “safe” because the bank’s prime brokerage management tends to make far less than the frontline Sales and Trading staff).

That is, at least, the theory. The practice, as the recent Archegos fiasco demonstrated, is anything but.

Case in point, the now infamous Credit Suisse disaster in its dealing with Archegos, which as of this moment have resulted in more than $5.4 billion in losses for the Swiss bank, and which as the FT reported today, resulted in a paltry CHF16 million (US$17.5 million) in revenue last year. In simplistic terms, this means that somehow the funding chain and the leverage Credit Suisse afforded to Archegos resulted in over 300x leverage in the wrong direction!

As the FT notes this morning, the paltry fees Credit Suisse received from Archegos “raises further questions about the risks the lender was prepared to shoulder in pursuit of relationships with ultra-wealthy clients” and adds that “the low level of fees and high risk exposure have caused concern among the board and senior executives, who are investigating the arrangement, according to two people with knowledge of the process.” It has also caused a flood of layoffs and terminations as the bank belatedly looked at its books – the infamous scene from Margin Call comes to mind here…

… and realized just how massive its exposure had been all along, and how nobody had any idea how big the loss would end up being until it was finally booked following the now infamous late-March liquidation frenzy.

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A dangerous misunderstanding

How much money should there be in the world?  It is an interesting question; to which, at any time, there is a correct answer that is unknown to anyone.  It is the amount at which money is able to perfectly perform its two key functions – being a medium of exchange and a store of value.  Too little money in circulation and it would cease being a fair store of value because its value would be increasing – something that hasn’t occurred in half a century.  Most often, money ceases to be a store of value on the downside – losing its value – because it is far easier for states and banks to create new currency than it is to destroy it.

In practice, whether there is too much, or not enough money in the system is largely a matter of political economy rather than science.  There are two broad economic camps – Monetarists and Keynesians – which largely correspond to conservative and liberal politics.  The conservative-monetarist camp has been arguing for more than a decade that there is too much money in a system which should have been allowed to fail back in 2008.  The liberal-Keynesian camp in contrast, argues that the absence of productivity gains, inflation and wage growth pressure show that there is too little money in circulation.

The liberal-Keynesian camp appears to be winning the argument for now.  This is because the economic fallout from the pandemic and the response to it would – at least in the short-term – have been devastating were it not for the various grants, loans, bailouts, stimulus payments and public services spending embarked upon by states and central banks around the world.  Moreover, by pumping trillions of newly created dollars into the system, the Biden administration may well create a short-term post-pandemic bounce which will prevent the immediate onset of depression.

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Understanding the Persecution of John Law

COMMENT: Hi Mr. Armstrong…..this is a surprising (to me) summary, on John Law. Every piece I ever read about him, cast him as a complete scoundrel, yet you obviously write with admiration. Just another example of history depending on someone’s perspective. You never cease to surprise. And that’s good.

HS

REPLY: John Law was actually a brilliant man. His legacy is not so different from John Maynard Keynes. He advocated deficit spending ONLY in times of recession, but governments have spent relentlessly with deficits that never end. We call this “Keynesian economics” when in fact he never advocated such a system. Likewise, John Law never advocated what the French government did in creating the Mississippi Bubble.

It is true that John Law fled to Amsterdam, but this is when he studied real banking operations and saw that money was actually virtual. Because coins were counterfeited or their edges shaved, bank money was more valuable than coins. Once the coins were deposited, each had to be inspected. So the bank became a sort of guarantor of the validity of the coins. Here is an ancient coin from Lydia with numerous banking marks applied, verifying that the coin had been inspected by them before for the same reasons.

It was this first-hand observation that led John Law to see that money was actually virtual, whereby people preferred bank money to actual coins. John then returned to Scotland, where he published in 1705 his Money and Trade Considered, with a Proposal for Supplying the Nation with Money. Law would later publish a second edition in 1720. He attempted to use his writing to convince the Scottish Parliament to adopt his ideas about money, but they declined, giving rise to the adage that a genius is never acknowledged in his native land (i.e. Columbus, Einstein to just mention two)…

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john law, currency, money, martin armstrong, armstrong economics, banking, banks,

Archegos Implosion is a Sign of Massive Stock Market Leverage that Stays Hidden until it Blows Up and Hits the Banks

Archegos Implosion is a Sign of Massive Stock Market Leverage that Stays Hidden until it Blows Up and Hits the Banks

Banks, as prime brokers and counterparties to the hedge fund, are eating multi-billion-dollar losses as they try to get out of these secretive stock derivative positions.

The implosion of an undisclosed hedge fund, now widely reported to be Archegos Capital Management, is hitting the stocks of banks that served as prime brokers to the fund. The highly leveraged derivative positions, based on stocks, had blown up spectacularly. Banks get into these risky leveraged deals because they generate enormous amounts of profit – until they blow up and banks get hit as counterparties.

Credit Suisse [CS] is down 13% at the moment in US trading after it warned this morning that “a significant US-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks,” and that it and “a number of other banks are in the process of exiting these positions,” and that the loss resulting from this exit “could be highly significant and material to our first quarter results.” The bank deemed it “premature to quantify” the loss.

Nomura Holdings [NMR] is down 14% at the moment in US trading after it warned this morning that “an event occurred that could subject one of its US subsidiaries to a significant loss arising from transactions with a US client.” It estimated the loss from this one client at “approximately $2 billion, based on market prices as of March 26.”

As Credit Suisse pointed out, “a number of other banks” are also involved as counterparties to that one unnamed hedge fund, and have been trying to get out of these positions since last week.

…click on the above link to read the rest of the article…

financial markets, archegos, wolf richter, wolfstreet, stock market leverage, credit suisse, banks, nomura

Instability

Instability

In every century the same thing happens at one point or another. Society loses the plot and gets caught up in a mania, a grandiose exercise in self delusion. It can be political, it can be religious, and yes it can be economic. Sometimes these manias are confined to regions or small groups of people, sometimes they are vast in reach and impact and have global consequences. We can all think of examples. Religious? How about witch burnings? Politics? How about Nazism? Economics? How about all the manias that had fervent believers and adherents that with the hindsight of time were completely insane? The South Sea Bubble, the Tulip mania, the 1929 mania, etc. All of these bringing about vast social instability versus the previous status quo with often disastrous consequences.

And whatever we got going here is now approaching a similar frantic delusion that appears to infect everyone.

All of these manic periods have something in common: Believing in something absolutely even though it is either completely wrong or unrealistic. Seeing reality becoming untethered.

I’ve long argued that central banks aiming to be a stabilizing force are actually bringing about societal instability. Occupy Wall Street, Black Lives Matter, the storming of the Capitol, angry Trump voters, angry Democrat voters and yes even Gamestop reddit buyers may all have different causes and triggers and motivations, but they actually have one thing in common: They are angry, angry at a system that has screwed them over, a sense of deep pervasive injustice and inequality, a fissure that keeps widening with every central bank intervention program.

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The Markets in Light of the Chaos

When we look around the world the final say in every election is always the vote of capital – which is international rather than confined to local politics. Biden has already shut down the pipeline from Alberta which will only be symbolic for whatever substitute will mere be brought in by ship and pumped into another pipeline. But politics is never about reality – it is only concerned about appearance.

When we look around the world, we must do so through the eyes of the FX markets for only then will we begin to see the real trends. The German DAX has made a new high in euros, but not in the main global currencies. In both dollars and Japanese yen, the DAX has not yet come close to making new highs.

 

Then we have the confusing trend in gold. So many have been asking for a Gold Report ASAP because nothing has made sense after all of these years touting gold is a hedge against inflation and the dollar will collapse. There is even the most bizarre analysis claiming that just a few months before Covid appeared, the Fed was busy pouring boat-loads of dollars into the US banks into the inter-lending market known as REPO to prevent bank-runs which were starting to develop. They claimed these were the same “tectonic fissures that developed prior to the 2008 crisis” when banks became so distrustful of each other’s solvency. They concluded: “If unsuppressed the lending rates would continue to rise, laying a path to bank failures and a contagion which would eventually derail the economy and undermine the dollar itself.”

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What Does the Fed See Heading at Big Banks? Blocks Share-Buybacks, Slaps on Dividend Caps Due to “Economic Uncertainty” and “Cushion Against Loan Losses”

What Does the Fed See Heading at Big Banks? Blocks Share-Buybacks, Slaps on Dividend Caps Due to “Economic Uncertainty” and “Cushion Against Loan Losses”

My Big-Four Bank Index already got crushed back to 2004 level.

After the stock market closed today, the Federal Reserve announced that “in light of the economic uncertainty,” and to provide “a cushion against loan losses,” and to support lending, it would extend for another quarter, so through December 31, the blanket prohibition on share buybacks by large banks (banks with over $100 billion in assets). For the same reasons, it would also cap dividend payments tied to a formula based on recent income.

The Fed said that according to a stress test and additional analysis, whose results were released in June, “all large banks were sufficiently capitalized” to deal with the fallout from the Pandemic.

But it appears that the Fed now thinks the banks need to be even more sufficiently capitalized, so to speak, to deal with whatever may be coming at them. And the Fed will conduct another stress test later this year.

Many banks had voluntarily halted share buybacks in March as all heck was breaking loose. In June, following the release of the stress test results, the Fed imposed the buyback prohibition for the third quarter, now extended through the fourth quarter.

So, let’s put it this way: As far as the Fed is concerned, this crisis is not a blip, and banks need to be prepared for what’s coming at them. The large banks have already set aside billions of dollars each to deal with the fallout on their loan books. But apparently, the Fed thinks there’s more to come.

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“Inflation” and America’s Accelerating Class War

“Inflation” and America’s Accelerating Class War

Those who don’t see the fragmentation, the scarcities and the battlelines being drawn will be surprised by the acceleration of the unraveling.

I recently came across the idea that inflation is a two-factor optimization problem: inflation is necessary for the macro-economy (or so we’re told) and so the trick for policy makers (and their statisticians who measure the economy) is to maximize inflation in the economy but only to the point that it doesn’t snuff out businesses and starve workers to death.

From this perspective, households have to grin and bear the negative consequences of inflation for the good of the whole economy.

This narrative, so typical of economics, ignores the core reality of “inflation” in America: it’s a battleground for the class war that’s accelerating. Allow me to explain.

“Inflation” affects different classes very differently. I put “inflation” in italics because it’s not one phenomenon, it’s numerous phenomena crammed into one deceptively simple word.

When “inflation” boosts the value of homes, stocks, bonds, diamonds, quatloos etc. to the moon, those who own these assets are cheering. When “inflation” reduces the purchasing power of wages, those whose only income is earned from their labor suffer a decline in their lifestyles as their wages buy fewer goods and services.

They are suffering while the wealthy owners of soaring assets are cheering.

The Federal Reserve and federal authorities are not neutral observers in this war. The Fed only cares about two things: enriching the banking sector and further enriching the already-rich.

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The anatomy of a financial crisis

In this blog, we present the anatomy of a financial crisis. A characteristic feature of a banking crisis is that it tends to follow, more-or-less, the same path regardless of the ‘shock’ or ‘trigger’ that initiates it.

The next phase of the crisis is likely to be a global financial crisis, as we have been anticipating for quite some time (see, e.g., Q-Review 4/2017). However, few understand what a financial crisis is, though it is probably among the most feared economic phenomena of mankind.

So, let’s dive in.

The initiation

If a banking system is sound and robust, it can usually withstand financial and economic shocks.

But a banking system may be fragile. Usually this is due to high leverage levels, where banks have either lent aggressively or carry risky financial investments on their balance sheets—usually both. Banks can also have a weak financial position, with chronically low profitability and insufficient reserves. As we have explained earlier, this is exactly the state the European banking sector finds itself in.

The onset of a financial crisis requires a trigger. The most common is a recession or the expectation of recession among consumers and investors.

Recession leads to diminished income and defaults by both corporations and households. This increases the share of non-performing loans in bank loan portfolios, reducing the value of loan collateral and increasing bank risks and capital needs. As write-downs and losses increase, mistrust among other banks and depositors and investors does as well. The bank’s share price will usually start to reflect this.

A ‘bank run’

If suspicion spreads, banks will be apprehensive about counterparty risk and will be unwilling to lend to one another even on an overnight basis.  If allowed to continue, this will have a calamitous impact on liquidity in money markets.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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