Financial "Reform" and Berkshire Hathaway

Warren Buffet was criticizing one aspect of the proposed financial "reform" law. Certain insurance and derivative contracts will be subject to higher capital requirements.

The problem is that the current version of the regulation also affects previously existing contracts. In effect, Congress is altering private contracts.

Suppose A and B agree to a derivative contract. They also agree to a 1% margin requirement. Congress passes a law imposing a 10% margin requirement. Congress altered this private contract. The problem is that the trade was profitable with 1% margin. With 10% margin required, the trade becomes a big money-loser.

Berkshire Hathaway makes many reinsurance contracts. They might be subject to a higher margin requirement. Also, the proposed law requires cash collateral, while Berkshire Hathaway currently invests the collateral. The proposed law would wreck Berkshire Hathaway's future business. The proposed law would make many current reinsurance contracts unprofitable.

There's a problem with reinsurance and certain derivatives like credit default swap insurance. There is only a small chance of a payout, but the loss is huge when a payout does occur. The proposed law would cause the price of reinsurance to skyrocket.

With high margin requirements, the price of reinsurance would be much higher. With low margin requirements, there's a risk of default when a payout is needed; that's what happened to AIG. In effect, Berkshire Hathaway's business will be ruined due to mistakes made at AIG.

One solution is to grandfather old contracts. However, that would lead to a bunch of contracts getting signed just before the law passes. Besides, what right does Congress have to impose restrictions on private contracts?

However, banks and Berkshire Hathaway receive massive direct and indirect State subsidies. Even though Warren Buffet criticizes State largesse, I've never heard him say "The Federal Reserve central bank credit monopoly is immoral!" Even though Berkshire Hathaway doesn't borrow from the Federal Reserve, State monetary policy affects Berkshire Hathaway's access to capital at cheap rates.

One amusing bit was Warren Buffet saying "WTF? Congress can't alter private contracts! That's a dangerous precedent." That's exactly what happened in 1933, when President Roosevelt defaulted on the gold-redeemability of the Federal Reserve Note, confiscated the gold, and devalued the dollar.

In 1933, Congress also declared "gold clauses" illegal, a decision upheld by the Supreme Court. Anticipating a gold standard default, clever lenders inserted "gold clauses" into their debt contracts. If the dollar were devalued relative to gold, then the principal and interest due would increase proportionally. By declaring these gold clauses invalid, Congress stole from every creditor. Congress breached every private debt contract. Insiders knew this law was coming and borrowed as much as they could, repaying with devalued dollars.

In 1975, gold ownership was re-legalized. I don't know if the legal system would enforce a gold clause in a post-1975 contract. I tried looking it up and got conflicting answers from different sources. I don't know of anyone using a gold clause. For example, suppose a celebrity signs a 5 year contract to do a show. To protect himself from inflation, the celebrity really should ask for a gold clause. I don't know of anyone who has asked for a gold clause, so I don't know if the legal system would enforce such a contract.

For example, A-Rod gets paid $25M per year for 10 years; the fallacy is that $25M ten years from now is worth a lot less than $25M when the contract was signed. To be really fair, A-Rod should have asked for a gold clause. Then, he's protected from the devaluation of the dollar.

In the present, the banksters don't mind inflation, because they borrow at the Fed Funds Rate and lend money. Their profit rate is unrelated to inflation. Their profit rate is the interest rate spread times their leverage ratio. Therefore, the banksters load up on as much leverage as they can. The banksters like inflation. Inflation makes it more likely that borrowers can repay their loan. Banksters profit from printing and spending/lending brand new money.

There actually was a precedent before 1933, of Congress breaching private debt contracts. President Lincoln's greenbacks were accompanied by a legal tender law. Even so, greenbacks traded at a discount to gold. Someone borrowed dollars/gold and made payment with greenbacks. The creditor refused to accept them, because they were worth much less than gold. The Supreme Court ruled that the creditor had to accept the greenbacks, even though the debt contract specified payment in gold.

The proposed financial industry "reform" law is one big evil fnord. The real problem is the Federal Reserve credit monopoly, combined with laws and taxes that forbid use of sound money. The "reform" law completely ignores the real problem. It probably was written by lobbyists for the financial industry.

Warren Buffet's criticism shows the problem with any new regulation. Higher capital requirements sounds like a good idea. However, that could also cause prices to skyrocket. The only way to find the fair requirement is via a really free market.

In a really free market, an insurer/bank with too much leverage would be subject to a run and lose customers. An insurer/bank with too little leverage is charging too much. Even before 1913, State regulations required banks to operate under corrupt fractional reserve principles. In the present, the banksters have a State-backed monopoly.

Many investment banks, like Goldman Sachs, primarily borrow from the State/Federal Reserve. They don't need to have any customers/depositors!

The US financial system is one big scam. The proposed financial "reform" law is an evil fnord designed to preserve the scam, while providing the illusion of reform.

Resolution Fund

This story was interesting. The proposed financial "reform" law has a provision for a "resolution fund". There will be a tax on banks, with the proceeds going to a "resolution fund". This fund will be used to bail out banks during the next severe recession/depression.

This sounds a lot like FDIC insurance. FDIC insurance is paid via a tax on bank deposits. The tax is used to bail out failing banks. The tax isn't free. It's passed on to customers via lower interest rates or lower quality service.

Banks have an explicit State-backed monopoly. Placing a tax on businesses with a monopoly is pointless. If you tax a monopoly, the cost of the tax is passed on to customers as higher prices.

For example, banks borrow at the Fed Fund Rate, currently 0.25%, and lend at 5%. If politicians place a 0.1% tax on banks, then banks merely lend at 5.1% instead of 5%. The banks make the same amount of profit.

Only banks may create money. Everyone else needs bank-issued money to pay taxes. You can't boycott bank profits and bank taxes unless you also boycott the Federal Reserve and income tax. The rules of the monetary system and taxation system are set up so that the banksters get their cut no matter what. "Banking is a huge % of the economy" isn't the result of a free market; it's the result of regulations and State subsidies and the inflation tax.

The "resolution fund" is itself an illusion. The "resolution fund" is held in dollars or Treasury debt. It makes no sense when a government holds a trust fund in its own money. It's just an accounting gimmick. A taxation surplus is deflationary. A budget deficit is inflationary.

When money is paid into the "resolution fund", that's slightly deflationary, but negligible compared to the overall inflation rate. When the "resolution fund" makes a payout, that's inflationary. FDIC insurance and the Social Security Trust Fund function similarly.

BTW, the Social Security Trust Fund is cashflow negative. Benefits paid exceed taxes collected. Interest on the trust fund should be excluded from the cashflow analysis, because that's just an accounting trick. Until this year, Social Security taxes collected were more than benefits.

In other words, Social Security was a huge cash cow for State parasites. Like all Ponzi schemes, it must end eventually. There will have to be a tax hike, an inflation hike, a benefit cut, or some combination of all three. Inflation is a stealthy way to cut benefits; you get your check but the purchasing power is less.

The Federal government promises to explicitly and indirectly guarantee bank deposits. This creates the illusion that a bank deposit is a safe investment. If you put money in a bank, the nominal value of your deposit is guaranteed by the State. However, it's practically guaranteed that the interest is less than true inflation. The inflation tax makes a checking account the riskiest investment. State comedians promote the lie that inflation is low and that a checking account is safe.

Bank deposits receive many direct and indirect State subsidies. The State guarantee on deposits, combined with propaganda that inflation is low, tricks people into keeping their savings in a checking account where they can be ripped off via inflation. FDIC insurance is part of this illusion. During a recession, the Federal Reserve cuts interest rates. An interest rate cut is a bank subsidy, because it makes outstanding loans worth more. During a mild recession, a Fed Funds Rate cut is sufficient to bail out banks. During a severe recession/depression, bailout money is explicitly allocated by the government.

The taxation system and monetary system make everyone dependent on the banksters. The rules of the monetary system were chosen by the banksters. "Banks are too big to fail!" doesn't occur in a really free market. It's a consequence of State restriction of the market.

The Federal Reserve price-fixing cartel is the most evil aspect of bank regulations. None of the mainstream "reform" proposals seriously consider eliminating the Federal Reserve.

Recessions and depressions don't occur naturally in a free market. They are caused by State restrictions on the monetary system. Even before the Federal Reserve was created, there were many bad laws regulating money and banks.

The "resolution fund" is just an evil fnord. There is the illusion of reform. Insiders will still be able to steal. The problem with the US economy is that stealing via the State is more profitable than doing actual useful work.

There's really only one way to avoid theft by the banksters and State parasites. You should invest in gold/silver and take physical delivery. You should boycott the Federal Reserve and income tax. Politicians can't implement real reform, because too many people profit from the corrupt way things are now.

The banksters receive massive direct and indirect State subsidies. They can always profitably lobby against real reform. That's the reason the Federal Reserve is "politically untouchable".

South Park and Mohammed

The latest episode of South Park had an interesting point. It's effectively illegal to publish a cartoon picture of Mohammed. No mainstream media corporation executives will publish it, because they fear violent retaliation.

This illustrates a problem with the State police monopoly. If you make a violent threat against the President, police will visit you and correct you. If you make a violent threat against the authors of a cartoon, that's OK.

Imagine if someone published a picture of JFK getting shot and wrote "Look what happened to the last President who attempted real financial reform!", that might be treated harshly if interpreted as a threat. It's OK to publish pictures of someone else getting murdered because he published a picture of Mohammed, with the implied threat of violence against South Park's authors.

State police do a notoriously bad job at providing protection, when a non-insider is threatened with violence based on their beliefs. The President has a huge security team. Non-insiders threatened with violence are SOL.

However, it's pretty obvious that the episode was intended to be censored. Otherwise, the joke about Mohammed's "censored" box being transferred to Tom Cruise doesn't make sense. Also, they probably knew that "Mohammed" was going to be bleeped out, because they juxtaposed "Mohammed" with other censored words. Censoring those speeches at the end probably gives them an opportunity to air the "uncensored" or "less censored" episode later.

There also is a religious double standard. South Park ridicules Jesus. Nobody threatens violence for that. Even if someone did that, State leaders in the USA would say "That's wrong!" Why don't some Islamic leaders question this policy? Why doesn't someone say "Threatening violence against people who make cartoons of Mohammed is wrong!"?

One advantage of the USA compared to other countries is that it's acceptable to question or ridicule leaders. In other countries, the slaves don't get that perk. Less freedom of thought leads to lower economic productivity.

The State police monopoly does a bad job of protecting people who are threatened with violence based on their non-mainstream beliefs. As another example, I read someone debunking "Unions and corporate greed led to violence, before unions were regulated." What really happened was that State police didn't enforce laws protecting property and individuals, when there was a union dispute.

Trey Parker and Matt Stone have a valid point. Why is it forbidden to ridicule Mohammed? Why should a tiny violent minority be allowed to impose censorship? The State police monopoly is bad at handling situations like this.

Is the Economy Getting Better?

It's hard to be sure. I expect the trend of "money supply grows faster than real GDP" to continue.

However, I noticed that I'm getting a lot of unsolicited calls from headhunters. I'm not wasting time on that right now. My current job is good enough.

It's just one data point. The job market for software engineers seems to be increasing, at least as measured by "number of unsolicited calls from headhunters".

The DDT Conspiracy Theory

I saw an interesting new conspiracy theory circulating. It says "DDT is harmful!" is State propaganda.

I remember learning about DDT and the ban in my State brainwashing center (school). The story is that State leaders were brilliant for banning this harmful chemical.

Just because you learned something in school, doesn't automatically mean it's wrong. It's possible that DDT really is harmful to humans and other animals. If a chemical kills insects, it may have harmful effects on other animals.

Even if DDT is safe and effective, it won't work forever. Over time, insects would evolve immunity to DDT, just like antibiotic-resistant bacteria are evolving.

Who profits from banning DDT? Originally, DDT was patented. The patent expired. By banning DDT, other pesticides can be promoted instead. They may be more or less safe and effective than DDT. Banning DDT creates a profit opportunity for other patented pesticides.

As another example, incandescent light bulb technology is in the public domain. Banning incandescent light bulbs gives a monopoly to insiders who own the patent for compact fluorescent light bulbs. Due to the incandescent light bulb ban, a handful of insiders now have a State-backed light bulb monopoly.

The DDT ban is hyped as a success for the State. Even if DDT really is harmful, a really free market could handle the ban. People injured by DDT could sue the polluter. A free market court would be fair.

In the present, the State justice monopoly protects polluters. Pursing an environmental lawsuit is expensive and time consuming. Insiders like an expensive drawn-out legal system, because it protects them from negative consequences of fraud and misconduct.

The legal system provides the illusion of justice rather than real justice. Via "Problem! Reaction! Solution!", this creates the illusion that more State regulations are needed. Paradoxically, polluting insiders like environmental regulations. They just have to do the minimum required by the regulation, and they're immune from liability.

I have no idea if DDT really is harmful or if that's just State propaganda. Other pesticides currently used may be just as bad or worse. It makes sense that a chemical that kills insects also hurts other animals. However, it also makes sense that insiders banned DDT so they could profit.

As usual, the State science monopoly makes it hard to determine the real truth. I have to put "DDT is harmful!" in the "I'm not sure." category.

Is It Worth Hoarding Nickels?

According to coinflation, a nickel now has a melt value of $0.062+. The melt value is greater than the legal tender value. Via Gresham's law, when the melt value of a coin is greater than or equal to its legal tender value, then people start hoarding that coin.

This gives the nickel an implied put option. If metal prices continue to rise, keep the nickel or sell it for the melt value. If metal prices drop, you can spend it for the legal tender value.

I expect metal prices to continue to rise, due to inflation. However, after the melt value rose above $0.05 last time, the melt value dropped to $0.03.

My father had been hoarding nickels. When the melt value crashed, he spent them; now he's saving them again. I thought this was silly. My father pointed out that if he had invested the difference in silver or gold, that would have performed better. He didn't actually do this.

I read stories about people going to banks and buying nickels. As the melt value rises, this will become harder. The banks have probably been instructed to not give out nickels. Some may now charge a premium for nickels.

If you can buy a nickel for $0.05, that's a good deal. However, you're also spending time looking for the opportunity. You can also get inflation protection by buying gold or silver coins. Nickels probably won't be as liquid as a simple gold or silver 1 ounce rounds/bars.

During times of hyperinflation, coins are driven from circulation. The melt value rapidly becomes greater than the face amount. This leads to people hoarding them, and using them as barter money based on the melt value instead of the legal tender value.

Congress is going to be forced to change the composition of the nickel soon. They probably will be forced to eliminate the penny soon. Right now, the penny melt value is only worth 2/3 of the legal tender value.

Some countries with hyperinflation revalue their coins, to ensure they continue to circulate. For example, a penny could be declared to be worth $0.10, a nickel worth $0.50, a dime $1.00, a quarter $2.50, etc. (Multiply all values by 10.) However, this would be a public admission of inflation. Also, it would allow people to escape inflation by hoarding coins. That is contrary to the main point of the State monetary system, which is theft via inflation.

If you get a nickel as change, you might as well keep it. It doesn't pay to explicitly seek out nickels, when you include the value of time wasted. (I earn a decent salary in my wage slave job.) You can just as easily get inflation protection by buying gold or silver rounds.

Synthetic CDOs and Goldman Sachs

The latest Goldman Sachs scandal involved a synthetic CDO (Collateralized Debt Obligation). That's a type of complicated derivative that treats the market like a casino.

For a regular CDO, the buyer partially owns the mortgages in the CDO. The interest payments come from mortgage repayments. For a synthetic CDO, you're betting on mortgages actually owned by someone else. The only way you can buy a synthetic CDO is if someone else is willing to short sell it. Any profits by one side are exactly matched by losses on the other side.

Here's another example. For a single-stock option, you take actual delivery of the stock when exercising. For index options, you only get cash based on the index price. The index option is another synthetic derivative. You're getting paid based on something you don't own.

For most financial derivatives, gains by one party exactly equal losses by another party. A synthetic CDO or credit default swap is a pure bet; one party's gain is the other's loss.

Sometimes, there are different interest rates for different parties. An airline wants to hedge its fuel expense. The airline would have to borrow at 6%, while a bank borrows at the Fed Funds Rate. The airline buys an oil future/derivative from a bank. The bank borrows newly printed money from the Federal Reserve to finance the transaction. In that case, the cost is paid by the rest of society via inflation. Both the airline and bank profit from that trade, but everyone else experiences inflation.

Most of the time, inflation and negative real interest rates feed derivative transactions. The derivatives market didn't explode until after the gold standard was fully abandoned in 1971. With a gold standard, interest rates can't fall below 0%, limiting financial industry shenanigans and derivatives. Negative real interest rates are a key component of most derivative transactions. It's pure parasitism.

Why would anyone buy a sythetic CDO? Due to the Federal Reserve credit monopoly, interest rates are less than true inflation. This forces people to chase higher returns, just to keep pace with inflation.

If money market rates are 4% and the CDO pays 4.5%, then you'll buy the CDO. The CDO is marketed as a super-safe investment. If the synthetic CDO pays 4.7%, then you'll buy the synthetic CDO instead of the regular CDO.

Goldman Sachs said that the synthetic CDO was a good investment. In fact, the bonds in the synthetic CDO were cherry-picked so that the CDO would do poorly. That's the basis of the fraud case.

Whoever bought the synthetic CDO probably was stupid. They should have realized that the only way to buy a synthetic CDO is if someone else is willing to short sell it. A slightly higher return shouldn't entice you, because that always comes with higher risk.

A non-free market forces people into lousy investment choices. One criticism is "Insiders have an advantage. They know the details of the CDO, but the customers do not." In a really free market, nobody would ever accept such an obviously unfair arrangement. The banks act as a cartel. If you don't want to get ripped off by inflation, you have to invest. Inflation is a tax on people holding cash, forcing people to invest. For most investment products (other than physical gold or silver), there are hefty commissions (explicit and indirect) earned by the financial industry. For example, a money market investment has an hidden tax, the difference between the interest rate and true inflation. The money market investment seems safe, but it's really the riskiest investment due to the guaranteed loss to inflation.

The Federal Reserve credit monopoly gives the banksters an unfair advantage over everyone else. If a bankster wants to finance a mortgage, he borrows at the Fed Funds Rate (currently 0.25%) and buys a mortgage yielding approximately 5%. With high leverage, this is a very lucrative trade. If I want to finance mortgages, I don't get to borrow at the Fed Funds Rate. The return of 5% is insufficient compensation for inflation. The Federal Reserve credit monopoly gives insiders a monopoly for financing mortgages and businesses.

It's silly to talk about financial industry reform without also discussing the immoral Federal Reserve credit monopoly. The actual "reform" proposals are probably a type of corporate welfare. The cost of complying with the new regulations will cost small banks a larger % of their profit than large banks. More regulation usually makes things worse. The real problem with the financial industry is the Federal Reserve credit monopoly. There also are laws and taxes that make competing monetary systems illegal.

Goldman Sachs' abuse of synthetic CDOs is a symptom of a bigger problem. The USA does not have a free market banking system. State control of money and inflation affect all economic activity. Via a corrupt monetary system, State parasites profit at the expense of productive workers. Via inflation and taxes, State parasites get a cut of all on-the-books productive economic activity.