Eye Crosser #4: What is a Reserve Currency?

The U.S. dollar is currently the dominant reserve currency in the world. There are other currencies considered reserve currencies, e.g. the Euro, Japanese Yen and Pound Sterling.

Crude oil is priced in U.S. Dollars. Other commodities are priced in U.S. dollars. Countries of the world buy and sell to each other and the currency used for exchange is U.S. dollars.  The following article published on the International Monetary Fund website discusses the U.S. dollar as reserve currency. The Dollar Reigns Supreme, by Default, FINANCE & DEVELOPMENT, March 2014, Vol. 51, No. 1, Eswar Prasad, author.  http://www.imf.org/external/pubs/ft/fandd/2014/03/prasad.htm

Using a reserve currency allows world commerce to flow easier. Many countries hold financial instruments in reserve currencies because these currencies are more stable and reliable than other currencies. Two countries doing import/export business with each other can “pay” each other in a reserve currency to finalize their transactions.

Below are two (2) more reference sites.

U.S. Treasury website

http://search.treasury.gov/search?affiliate=treasury&commit=Search&query=reserve%20currency

Appendix 1: An historical perspective on the reserve currency status of the U.S. Dollar

http://www.treasury.gov/resource-center/international/exchange-rate-policies/Documents/Appendix%201%20Final%20October%2015%202009.pdf

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Carry
Perplexed

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In Defense of Glass-Steagall Act

The Volcker rule, named for former Federal Reserve Chairman Paul Volcker, attempts to modernize the Glass-Steagall firewall between commercial and investment banks for the 21st century. As written by Merkley and Levin, it would stop banks that take customer deposits and borrow cheaply from the Federal Reserve from also running big-bet, high-risk trading operations. The goal is to push that activity out to hedge funds and other private investors, who would pose less of a threat to the financial system. Regular banks would engage in the lending activities critical to a strong economy, rather than gambling with their customers’ money.

Quote from New Republic article written by David Dayen and published 12/10/2013.

The Volcker Rule has been proposed, revised, and finally passed into law on January 14, 2014. The Volcker Rule is a response to the damage inflicted upon our economy by the revoking of the Glass-Steagall Act.

On July 26, 2010, John Cassidy of the New Yorker wrote an extensive article on the Volcker Rule. The article is a blow-by-blow account of Paul Volcker’s efforts to create the Volcker Rule. This is a lengthy article of 17 pages.

To paraphrase from James B. Stewart’s article of the New York Times entitled “Volcker Rule, Once Simple, Now Boggles“:

  • Paul Volcker outlined his proposal in a three-page letter
  • when the Volcker Rule became part of Dodd-Frank Act, the Volcker Rule took up 10 pages
  • when Volcker Rule emerged for public comment, the text swelled to 298 pages accompanied by more than 1,300 questions and about 400 topics

CNBC has a short summary of the status of the Volcker Rule: Volcker Rule. This was written in the year 2012.

The Glass-Steagall Act was between 33 and 37 pages long! It kept our banking system “safe” for 60 years. Yes, times have changed. Technology plays a vital roll in our personal lives and our financial and economic systems. I’m with those who wish the U.S. Government would at least temporarily reinstate Glass-Steagall while we figure out a “better can opener” or perhaps a better “mouse trap” is more appropriate!

 
Profound

Eye Crosser #3: Interest Rates

If you don’t know where you are going, you might wind up someplace else.

Yogi Berra

Yogi Berra. (n.d.). BrainyQuote.com. Retrieved July 29, 2015, from BrainyQuote.com Web site: http://www.brainyquote.com/quotes/quotes/y/yogiberra391900.html

The American stock market has been anticipating the Federal Reserve Bank (the Fed) raising its Fed Funds Rate for several years at this point. And what a point it is…..how about nine (9) years since the rate has been cut to its current low rate. Let’s not quibble, the current Fed funds rate is and has been about ZERO % for this long length of time. The American saver has literally only earned pennies on thousands of dollars of savings. On the other hand, anyone borrowing money has NOT paid a very high interest rate on loans. In fact, people have been able to buy cars at ZERO % interest. Now if the borrower isn’t paying any interest, how can the saver EARN any interest.!!! Talk about a “Catch 22.”

catch-22. (n.d.). Dictionary.com Unabridged. Retrieved July 29, 2015, from Dictionary.com website: http://dictionary.reference.com/browse/catch-22

I wanted to give a fairly simple definition of the Federal Funds Rate and how it affects the American economy and perhaps the global economy. As I’ve discovered, there is no “fairly simple” explanation because the Fed funds rate is used in conjunction with other monetary policy rates to regulate the U.S. banking system. I can say that “basically” the Fed funds rate is an overnight rate used to determine the amount of amount charged to banks to borrow money literally “overnight”. The Investopedia website has a short animated presentation to explain the difference between the Federal Funds Rate and the Discount Rate. Be sure to scroll down the page a little to find the animation. Both rates may be used to manipulate interest rates.

What are the tools of U.S. monetary policy?

“Because the recent recession was so severe, the Fed used a number of extraordinary monetary policy tools that are not part of its traditional toolkit.” On the Federal Reserve Bank of San Francisco’s website, there is a definition of the monetary tools used to contain the economic disaster staring the U.S. Government and U.S. banking institutions in the face. The usual tools include: open market operations, the discount rate, reserve requirements and interest on reserves.

Here’s another article about interest rates: Difference between Federal Funds rate and Discount Rate

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Miniature

Eye Crosser #2: Collateralized Debt Obligations or CDOs

Just in case you did not view my blog entitled:
Some details that help explain the Great Recession and Global Economy Crisis
I thought that I’d repeat the definition of a CDO.  CDOs were at the root of most of the global economic crisis that has unfolded. The link at the end of the definition paragraph leads to a great animated graphic of how a CDO works.  Thanks to BizJournals for this animated graphic.

Residential mortgage-backed securities. A type of derivative (as I understand it) that was sliced and diced up to make the many levels of tranches of “risk” that were sold to both governments, private, public, religious organizations, you name it…these securities were “HOT.” They are referred to in several different ways: CMOs, CDOs, it appears that there are different ways to “package” a derivative, through the use of mortgages, currencies, etc. The Business Journals designed an interactive graphic to visually depict this type of instrument “in action.”  What is a C.D.O?

Author’s Addendum (9/13/15): Here’s a short video from CNBC about: Collateralized Debt Obligations (CDOs): CNBC Explains.

 

Eye Crosser #1, determining the beginning and end of economic cycles

This is my first “eye crosser” as I will call them. Every so often I’ll run across something that will help us understand the four (4) W’s, i.e. when, where, why, who. Maybe even a “how” every now and then.

The Business Cycle Dating Committee of the National Bureau of Economic Research met by conference call on Friday, November 28. The committee maintains a chronology of the beginning and ending dates (months and quarters) of U.S. recessions. The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months. NBER.ORG

There’s an FAQ at the bottom of the article from which the above quote was taken. The FAQ may answer some of your “burning questions” that reading the article may raise.

I wonder how an artist such as Chagall or Calder, or  name your own modernist sculptor or painter, would depict our Great Recession. Who painted “The Scream?” Was it Edvard Munch? I think Edvard gets my vote.  Anyway, you get the idea.
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Complicated

Laboring over LIBOR scandal

A definition of what LIBOR is:  “a benchmark rate that some of the world’s leading banks charge each other for short-term loans. It stands for Intercontinental Exchange London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world.”  Definition by investopedia.com.

Read more: Investopedia’s definition of LIBOR.
Source: Investopedia

Here’s a short video presentation on what LIBOR is, made by CNBC and lectured by Salman Kahn, Libor:CNBC Explains.

Now for some details of the scandal, first a quote from the New York Times newspaper:

“…Now, the regulatory void has spawned another round of criminal accusations and multibillion-dollar penalties — enough to wipe out nearly all the revenue that major investment banks generated from their foreign exchange businesses last year.

On Wednesday, four large global banks —CitigroupJPMorgan ChaseBarclays and Royal Bank of Scotland — pleaded guilty to a series of federal crimes over a scheme to manipulate the value of the world’s currencies…”   Michael Corkery and Ben Protess, NYTimes, 5/20/2015

Well, just when we thought it was “safe to go back into the pool”, the LIBOR scandal started to unfold. I can’t pinpoint when the popular media “got the scent” and the LIBOR story “broke” to the general public but I’m offering three (3) timelines for your perusal.

Reuters timeline for the LIBOR scandal.  Reuters timeline

ProPublica’s timeline for the LIBOR scandal.   ProPublica timeline

New York Time’s timeline for the LIBOR scandal.    New York Times timeline

Here’s the link to the complete article by Corkery and Protess of the New York Times. Title of their article is Rigging of Foreign Exchange Market Makes Felons of Top BanksCorkery and Protess article

To close out this blog item, here’s PBS and Frontline’s documentary entitled The Untouchables. It was produced in January of year 2013. The Untouchables

A Side Trip from the Main Topic: Wanderlust

In response to The Daily Post’s writing prompt: “The Wanderer.”

In response to the Blogging assignment we have received, here it goes… when I was younger I had “wanderlust.” My car gave me this feeling. Maybe it was the freedom that owning a car gives one! Ha, that is the reason one feels wanderlust. My best friend lived for 10 years about 2-1/2 hours from me in Michigan. I would call her up and say I’m coming up for a visit, is that OK. Of course it usually was OK. What is it about driving along the highway? I did not have a convertible but one could still feel the wind blowing your hair.

I’m not one for “blasting” the radio, it’s just not a very courteous thing to do…but once in a while I would turn up the volume, it just felt so good. Unfortunately, my youth is far-removed at this time of my life but many of the trips in my car were pleasurable. That’s what part of life is about, doing pleasurable things with your friends.

“Flash Crash” and “London Whale”

Even in the year 2015, it’s difficult  for me to believe that ONE person caused such a horrific seismic effect on the New York stock exchange and in such a short amount of time! Here’s a quote from the British newspaper, theGuardian:

“In a matter of minutes the Dow Jones index lost almost 9% of its value – in a sequences of events that quickly became known as “flash crash” . Hundreds of billions of dollars were wiped off the share prices of household name companies like Proctor & Gamble and General Electric. But the carnage, which took place at a speed never before witnessed, did not last long. The market rapidly regained its composure and eventually closed 3% lower.”   Flash Crash  April 22, 2015

An article in Forbes magazine written in year 2013 contends that the “flash crash” could happen again:

“It’s bad enough that the flash crash occurred. Worse though, is that the corrective measures have focused on mitigating the effects of the crash, not the cause.”   Forbes article  August 9, 2013

I don’t know who first coined the term “London Whale”, but here he is headlined by Bloomberg news:

“The trader known as the London Whale lost at least $6.2 billion for JPMorgan Chase & Co. in 2012.”

London Whale  October 13, 2013

The New Yorker magazine published an article in August 2013 which commented the following:

“The details of the indictment underscore the fact that one of the most significant instances of Wall Street misbehavior in recent years had less to do with a deficit of rules than with JPMorgan’s failure to follow the ones that already existed, and the government’s failure to notice.”  New Yorker magazine  August 21, 2013

The Financial Times published a short synopsis of the London Whale event and in-fact displays a cartoon editorial entitled “Whale in a Teapot”. Financial Times

NPR (National Public Radio) offers a Q&A presentation of the “Whale” incident. Short and with pointed questions, the reader gets an overview of the ‘Flash Crash.”  One explanation of the Whale trade

So there “he” is….the London Whale. So much blubber and bone and whale oil to boot. $2 Billion worth and that’s just JP Morgan’s loss??????!!!!! Wow.

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Mistake

details of Great Recession and Global Economy Crisis

  1. CDO: Collateralized Debt Obligations

Residential mortgage-backed securities. A type of derivative (as I understand it) that was sliced and diced up to make the many levels of tranches of “risk” that were sold to both governments, private, public, religious organizations, you name it…these securities were “HOT.” They are referred to in several different ways: CMOs, CDOs, it appears that there are different ways to “package” a derivative, through the use of mortgages, currencies, etc. The Business Journals designed an interactive graphic to visually depict this type of instrument “in action.”  What is a C.D.O?

  1. Global Financial Sector Write-Downs

It was not just U.S. banks that needed bailouts and had significant “write-downs”, the Washington Post put together a worldwide listing:  Here’s the link: Write-downs

  1. As “they” say, a picture is worth a thousand words. Here is a graph, developed by the Washington Post newspaper, of what the global investments looked like around year 2008. The graphic displays equity, debt and bank deposits: Boom and Bust

I linked in an earlier blog posting to the 3-part article that accompanies the Boom and Bust graphic.

I may add to this blog in the future and reference back to it in future blogs.

By the way, Captain Ahab is still searchin’ for the “London” whale. But it will be harpooned for my next blog post. If we thought the management at “Big Banks” were in control at all, you will see how “wild West” and laisser-faire the management of bank traders really was.

Author’s Addendum (9/13/15): Here’s a short video from CNBC about: Collateralized Debt Obligations (CDOs): CNBC Explains.

Deja Vu all over again, little about Greece, crisis goes global!

Money, Power and Wall Street

This 4-part documentary series is a Cliffs Notes* summary. The first two (2) episodes of this documentary series are a recap of documentaries that I have referenced in prior blog postings. If you have viewed my previous blogs , these first two episodes will refresh your memory on the Wall Street and U.S. Government shenanigans up until around the election of President Obama.

*Cliffs Notes were study guides or summaries of literature used by students in the 1960’s.

Episode three (3) highlights the election of President Obama. The American economy lost 650,000 jobs, the stock market plunged 6,000 points, Citigroup bank was failing and needed a $120 billion bailout. The “Occupy Wall Street” movement occurred. $45 billion was given to Bank of America. The largest banks received $180 billion in taxpayer bailout money.

Episode four (4), however, highlights how Greece became indebted beyond its possibility of repayment through the use of derivatives. Greece reportedly used swaps to make its balance sheet look better when applying to join the European Union. The bundling and selling of derivatives spreads to Europe. The country of Iceland goes bankrupt! The bond rating agencies falsely rate the derivative investment instruments.

A couple of opinions from insiders to the ongoing Crisis:

“Phil Angelides was chairman of the Financial Crisis Inquiry Commission, which was created by Congress in 2009 to investigate the causes of the crisis. In its report submitted in January 2011, the commission concluded that the crisis was avoidable, a result of excessive risk taking, failures of regulation and poorly prepared government leaders. This is the edited transcript of an interview conducted by producer Jim Gilmore on Jan. 4, 2012.” Quoted from Frontline, PBS.org.

Phil Angelides…oral histories of 2008 financial crisis

http://www.pbs.org/wgbh/pages/frontline/oral-history/financial-crisis/phil-angelides/

“TWO and a half years ago, Congress passed the legislation that bailed out the country’s banks. The government has declared its mission accomplished, calling the program remarkably effective “by any objective measure.” On my last day as the special inspector general of the bailout program, I regret to say that I strongly disagree. The bank bailout, more formally called the Troubled Asset Relief Program, failed to meet some of its most important goals.”

http://www.nytimes.com/2011/03/30/opinion/30barofsky.html?_r=0

Where the Bailout Went Wrong

By NEIL M. BAROFSKY       MARCH 29, 2011

Next Stop: The London Whale