Fisher's Debt-Deflation Theory of Great Depressions and a possible revision

“Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”

- Mr John Mills, Article read before the Manchester Statistical Society, December 11, 1867, on Credit Cycles and the Origin of Commercial Panics as quoted in Financial crises and periods of industrial and commercial depression, Burton, T. E. (1931, first published 1902). New York and London: D. Appleton & Co

I have been both a central banker and a market regulator. I now find myself questioning whether my early career, largely devoted to liberalising and deregulating banking and financial markets, was misguided. In short, I wonder whether I contributed - along with a countless others in regulation, banking, academia and politics - to a great misallocation of capital, distortion of markets and the impairment of the real economy. We permitted the banks to betray capital into “hopelessly unproductive works”, promoting their efforts with monetary laxity, regulatory forbearance and government tax incentives that marginalised investment in “productive works”. We permitted markets to become so fragmented by off-exchange trading and derivatives that they no longer perform the economically critical functions of capital/resource allocation and price discovery efficiently or transparently. The results have been serial bubbles - debt-financed speculative frenzy in real estate, investments and commodities.

Since August of 2007 we have been seeing a steady constriction of credit markets, starting with subprime mortgage back securities, spreading to commercial paper and then to interbank credit and then to bond markets and then to securities generally. While the problem is usually expressed as one of confidence, a more honest conclusion is that credit extended in the past has been employed unproductively and so will not be repaid according to the original terms. In other words, capital has been betrayed into unproductive works.

The credit crunch today is not destroying capital but recognising that capital was destroyed by misallocation in the years of irrational exuberance. If that is so, then we are entering a spiral of debt deflation that will play out slowly for years to come. To understand how that works, we turn to Professor Irving Fisher of Yale.

Like me, Professor Fisher lived to question his earlier convictions and pursuits, learning by dear experience the lessons of financial instability.

Professor Fisher was an early mathematical economist, specialising in monetary and financial economics. Fisher’s contributions to the field of economics included the equation of exchange, the distinction between real and nominal interest rates, and an early analysis of intertemporal allocation. As his status grew, he became an icon for popularising 1920s fads for investment, healthy living and social engineering, including Prohibition and eugenics.

He is less famous for all of this today than for his one statement in September 1929 that “stock prices had reached a permanently high plateau”. He subsequently lost a personal fortune of between $6 and $10 million in the crash. As J.K. Galbraith remarked, “This was a sizable sum, even for an economics professor.” Fisher’s investment bank failed in the bear market, losing the fortunes of investors and his public reputation.

Professor Fisher made his “permanently high plateau” remark in an environment very similar to that prevailing in the summer of 2007. Currencies had been competitively devalued in all the major nations as each sought to gain or defend export market share. The devaluation stoked asset bubbles as easy credit led to more and more speculative investments, including a boom in globalisation as investors bought bonds from abroad to gain higher yields. Then, as now, many speculators on Wall Street had unshakeable faith in the Federal Reserve’s ability to keep the party going.

After the crash and financial ruin, Professor Fisher turned his considerable talents to determining the underlying mechanisms of the crash. His Debt-Deflation Theory of Great Depressions (1933) was powerful and resonant, although largely neglected by officialdom, Wall Street and academia alike. Fisher’s theory raised too many uncomfortable questions about the roles played by the Federal Reserve, Wall Street and Washington in propagating the conditions for credit excess and the debt deflation that followed.

The whole paper is worth reading carefully, but I’ll extract here some choice quotes which give a flavour of the whole. Prefacing his theory, Fisher first discusses instability around equilibrium and the influence of ‘forced’ cycles (like seasons) and ‘free’ cycles (self-generating like waves). Unlike the Chicago School, Fisher says bluntly that “exact equilibrium thus sought is seldom reached and never long maintained. New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below ideal equilibrium.” He bluntly asserts:

“Theoretically there may be — in fact, at most times there must be — over- or under-production, over- or under-consumption, over- or under-spending, over- or under-saving, over- or under-investment, and over or under everything else. It is as absurd to assume that, for any long period of time, the variables in the economic organization, or any part of them, will “stay put,” in perfect equilibrium, as to assume that the Atlantic Ocean can ever be without a wave.”

While disturbances will cause oscillations which lead to recessions, he suggests:

"[I]n the great booms and depressions, each of the above-named factors has played a subordinate role as compared with two dominant factors, namely over-indebtedness to start with and deflation following soon after; also that where any of the other factors do become conspicuous, they are often merely effects or symptions of these two.”

This is the critical argument of the paper. Viewed from this perspective we may see USA and UK decades of under-production, over-consumption, over-spending and under-investment as all tending to a greater imbalance in debt which may, if combined with oscillations induced by disturbances, take the US and UK economies beyond the point where they could right themselves into a deflationary spiral.

Fisher outlines how just 9 factors interacting with one another under conditions of debt and deflation create the mechanics of boom to bust for a Great Depression:

Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links: (1) Debt liquidation leads to distress selling and to (2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes (3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be (4) A still greater fall in the net worths of business, precipitating bankruptcies and (5) A like fall in profits, which in a “capitalistic,” that is, a private-profit society, leads the concerns which are running at a loss to make (6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to (7) Hoarding and slowing down still more the velocity of circulation.

The above eight changes cause (9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

Evidently debt and deflation go far toward explaining a great mass of phenomena in a very simple logical way.

Hyman Minsky and James Tobin credited Fisher’s Debt-Deflation Theory as a crucial precursor of their theories of macroeconomic financial instability.

Fisher explicitly ties loose money to over-indebtedness, fuelling speculation and asset bubbles:

Easy money is the great cause of over-borrowing. When an investor thinks he can make over 100 per cent per annum by borrowing at 6 per cent, he will be tempted to borrow, and to invest or speculate with the borrowed money. This was a prime cause leading to the over-indebtedness of 1929. Inventions and technological improvements created wonderful investment opportunities, and so caused big debts.

* * *

The public psychology of going into debt for gain passes through several more or less distinct phases: (a) the lure of big prospective dividends or gains in income in the remote future; (b) the hope of selling at a profit, and realising a capital gain in the immediate future; (c) the vogue of reckless promotions, taking advantage of the habituation of the public to great expectations; (d) the development of downright fraud, imposing on a public which had grown credulous and gullible.

Fisher then sums up his theory of debt, deflation and instability in one paragraph:

In summary, we find that: (1) economic changes include steady trends and unsteady occasional disturbances which act as starters for cyclical oscillations of innumerable kinds; (2) among the many occasional disturbances, are new opportunities to invest, especially because of new inventions; (3) these, with other causes, sometimes conspire to lead to a great volume of over-indebtedness; (4) this in turn, leads to attempts to liquidate; (5) these, in turn, lead (unless counteracted by reflation) to falling prices or a swelling dollar; (6) the dollar may swell faster than the number of dollars owed shrinks; (7) in that case, liquidation does not really liquidate but actually aggravates the debts, and the depression grows worse instead of better, as indicated by all nine factors; (8) the ways out are either laissez faire (bankruptcy) or scientific medication (reflation), and reflation might just as well have been applied in the first place.

The lender of last resort function of central banks and government support of the financial system through GSEs and fiscal measures are the modern mechanisms of reflation. Like Keynes, I suspect that Fisher saw reflation as a limited and temporary intervention rather than a long term sustained policy of credit expansion a la Greenspan/Bernanke.

I’m seriously worried that reflationary practice by Washington and the Fed in response to every market hiccup in recent decades was storing up a bigger debt deflation problem for the future. This very scary chart (click through to view) gives a measure of the threat in comparing Depression era total debt to GDP to today’s much higher debt to GDP.

Certainly Washington and the Fed have been very enthusiastic and innovative in “reflating” the debt-sensitive financial, real estate, automotive and consumer sectors for the past many years. I’m tempted to coin a new noun for reflation enthusiasm: refllatio?

Had Fisher observed the Greenspan/Bernanke Fed in action, he might have updated his theory with a revision. At some point, capital betrayed into unproductive works has to either be repaid or written off. If either is inhibited by reflation or regulatory forbearance, then a cost is imposed on productive works, whether through inflation, higher interest, diversion of consumption, or taxation to socialise losses. Over time that cost ultimately hollows out the real productive economy leaving only bubble assets standing. Without a productive foundation, as reflation and forbearance reach their limits, those bubble assets must deflate.

Fisher’s debt deflation theory was little recognised in his lifetime, probably because he was right in drawing attention to the systemic failures that precipitated the crash. Speaking truth to power isn’t a ticket to popularity today either.

___________________________________

Thank you, Professor Roubini, for being brave enough to challenge orthodoxy before the crash, and for being generous enough to share your forum so that we can collectively address the causes and consequences of financial excess today.

Hattip: Robert Dimand, Department of Economics Brock University St. Catharines Ontario Canada for all of his efforts to rehabilitate Fisher’s debt deflation theory.

Hattip: The Federal Reserve Bank of St Louis for making Fisher’s entire 1933 paper from Econometrica available online in PDF.

Hattip: Guest on 2015-07-29 21:10:21 for the debt/GDP chart.

Hattip: SWK/Kilgores for suggesting a post on Fisher.

Hattip: Steve Phillips for tracing the Mills quote back and demonstrating it wasn't JS Mill as I originally attributed it.

Quotable: To Infinity and Beyond!

"The difference between stupidity and genius is that genius has its limits."
-Albert Einstein

Hattip to P1AQL (the blogger formerly known as Print 1st Ask Questions Later)

Credit Cards Contracting

From Javelin Strategy and Research:

“The sharp decline in credit card spending challenges the popular belief that more Americans are charging basic goods in order to sustain their quality of life,” said Jim Van Dyke, president of Javelin Strategy & Research. “Consumers are making deliberate cutbacks like shopping at superstores, eating out less and watching what they charge. We believe this is because most people have already been impacted by the downturn or they’re anticipating that we haven’t seen the worst of it. It’s very cautious behavior.”

Javelin analysts also found significant cutbacks among credit card issuers. Seven out of ten issuers have reduced efforts to solicit new customers and 62% have cut back the lines of credit they make available to consumers.

“From declining consumer use, rising risk levels, and possible new merchant fee legislation, the credit card industry is taking several hits right now, which could have unintended consequences on Americans,” said Bruce Cundiff, director of payments research and consulting at Javelin Strategy & Research. “If the economy continues to decline, consumers will likely be forced to turn to credit, but find it unavailable when they need it most.”

Tomorrow I'll be writing about debt deflation and how contractions in credit intensify into a deflationary spiral. Hint: It starts when the middle class gets squeezed so hard by wage stagnation that it can't support any more debt.

Signs of Debt Deflation in Commercial Lending

A while back I said that one of the things to watch for was contraction of commercial and trade credit as that would signal the contagion of the financial crisis from the financial economy to the real economy. Here is more evidence that it is going to be ugly out there - and definitely deflationary in due course:

U.S. banks sharply reduce business loans
By Peter S. Goodman, International Herald Tribune

Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring.

Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term "commercial paper" not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.

The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.

I'll be writing more about Irving Fisher's theory of debt deflation as causing the Great Depression in my Friday RGE blog, which I'll cross-post here. Fisher was marginalised and neglected by the Chicago School free marketers, but is well worth reappraising given the way history is repeating itself.

Quotable: Bastiat, Jefferson and Gandhi

I love good quotes. Now with this blog I have a place to highlight them as I come across them. Some good ones are appearing today over on RGE Blog:

“The law perverted! And the police powers of the state perverted along with it! The law, I say, not only turned from its proper purpose but made to follow an entirely contrary purpose! The law become the weapon of every kind of greed! Instead of checking crime, the law itself guilty of the evils it is supposed to punish!

“If this is true, it is a serious fact, and moral duty requires me to call the attention of my fellow-citizens to it.”

-- Frederic Bastiat, The Law (1848)

Hattip: Guest on 2015-07-25 15:18:16 on RGE Blog

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

-- Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)
3rd president of US (1743 - 1826)

Hattip: Mike C on 2015-07-25 17:40:32

"The Roots of Violence: Wealth without work, Pleasure without conscience, Knowledge without character, Commerce without morality, Science without humanity, Worship without sacrifice, Politics without principles"

-- Mahatma Gandhi: Indian leader, 1869-1948

Hattip: PeterJB on 2015-07-25 18:24:58

What's up with the covered bond push?

I've been particularly busy this week, nonetheless, I hope to convey enough background on the topic of covered bonds to start a discussion that I think may lead to interesting ideas.

Whenever Henry Paulson at Treasury, Ben Bernanke at the Fed and Shiela Bair at FDIC agree on anything, American taxpayers should check for their wallets to see if they are being mugged. As a result, my eyebrows rose a bit when these three started pressing in concert for covered bond issuance in US markets some weeks ago.

Covered bonds are a huge market of over $3 trillion in Europe, but have never been popular in the USA where securitisation was the preferred model for financing banks. They are perfectly legal and raise no issues, they just haven't been as profitable as securitisation so haven't been supported by the US markets. Covered bonds allow for extension of credit to a bank SIV or trust that will be serviced by income from hypothecated assets on the bank's balance sheet. The assets stay on the bank's balance sheet unless there is a default on the bonds, at which time the assets are forfeit as collateral to the trust vehicle servicing the covered bond.

Last week the FDIC released a policy statement on covered bonds that provides for "expedited release of collateral" if an issuing bank is taken into FDIC receivership or liquidation. The Treasury is expected to release a protocol on best practices for covered bond issuance in a high profile event next week. Hmmmm. What could be up?

If I had to guess, I suspect what we will soon see is something near to the following scenario:

Lists will circulate of troubled banks likely to go into FDIC receivership. Blogs have been full of such lists as of this week, quite suddenly, as it happens. The FDIC has to have a list because there are so many banks approaching insolvency that they are queued for FDIC receivership rather like planes circling Heathrow waiting for runway clearance to land.

Several of the central players in the recent market dramas - particularly those investment banks and hedge funds on close terms with Mr Paulson (naming no names, but initials GS comes to mind) - will go strong and aggressive for the covered bond market. They will go around to their list of troubled banks, which of course they will have compiled independently using Texas Ratio maybe, rather than having any foreknowledge of FDIC concerns. They will issue covered bonds to these trouble banks against any assets with real, proveable value left on the banks' balance sheets. They will be praised to the heavens by their friends in Washington as providing timely and necessary liquidity to a troubled banking system, proving the efficiency of the free market, bravely bearing the risk of new credit in exchange for troubled bank assets.
When the troubled bank nonetheless fails, our golden circle creditors get the good collateral in an expedited release from FDIC under its new policy statement. The FDIC is left with all the toxic waste assets and liability for depositor insurance claims, with no prospect of recovery of any value from the insolvent bank liquidation.

In the corporate sector, we could see the same kind of issuance. Covered bonds will be used to render profitable assets off soon-to-be-bankrupt corporates, leaving pensioners and other creditors with the stripped carcass in the liquidation.

When the FDIC itself becomes insolvent, which it surely must do as this game gets played to its obvious outcome, then the FDIC gets a GSE-style bailout via Treasury finance and the poor taxpayers get reamed again.

Am I too cynical? Is this a genuine attempt to realistically help improve liquidity and prosperity for America's banks? Or are the banks already destined to fail going to be looted and pillaged by the insiders before being burnt, leaving smouldering ruins for taxpayers to contemplate?

I'm not sure on this one, so I'm looking forward to views from those more expert here.

RGE Refugees Welcome!

It seems that free access to Professor Nouriel Roubini's blog may soon be coming to an end as some regulars have received cryptic e-mails this week. I've set up this blogsite for refugees from the Professor's blog who want to carry on our dialogue over here. I'll be posting my weekly RGE blog here, and probably more informal content in the interim as I feel motivated.

Mostly I just want us to keep those in the sandbox playing happily together.

[UPDATE]: Professor Roubini commented over on my RGE blog as follows:

LB,
great you will have your own blog. I am not sure about the source of the rumor that my blog will soon be restricted to only paid users of RGE. That is utterly false; the blog is always free subject to free registration. But it is good you have your own forum. Many congrats. Nouriel

Written by Nouriel Roubini on 2015-07-25 15:39:46

So, no purge! Stop worrying! But come here to chat if you want anyway.

For Want of a Nail, the Ship Was Lost

Imagine a great ship dominating the skyline on a distant sea. Imagine the complexity of that ship: keel, ribs, planks, masts, spars, and an infinite number of less readily named components. Each component was hand-crafted by a craftsman skilled in his trade, to precise requirements, and secured in position to take the stress and strain of a life at sea.

Now imagine a crew. They didn't build the ship. The crew are told that the one and only purpose of the ship is to realise a profit for every man jack aboard. Any hand not contributing a profit will be turned ashore. Down below in the ship are nails. Thousands and thousands of nails. Nails are useful. Nails are much sought after in every port the ship enters. Nails can be readily sold and never traced.

The crew has been told that their purpose is profit. They have taken the lesson to heart. In every port they assess the value of the nails, and compare it to their function in the ship.

They tell themselves that the lubbers at Admiralty have no idea of ships. They specified too many nails in the regulations for ship procurement and licensing. The ship will be just fine with fewer nails.

So the crew below starts sneaking out the nails and selling them in the ports. They self-certify to their warrant officer, who self-certifies to the midshipman, who self-certifies to the lieutenant, who self-certifies to the captain, who self-certifies to the admiral, who self-certifies to the Sea Lords that every nail is where it should be and the supply of surplus nails remains adequate to meet unexpected reverses. And they turn a profit, so everyone is happy and the crew are given bonuses.

Until there is a leak, no one bothers to check the inventory of nails still in the woodwork. And when there is a leak, it is taken by all involved to be a localised problem that can be solved with a local solution, stemming the flow into the bilges from that one leak.

No broader inventory of nails is ever suggested. The crew are asked to conduct a stress test scenario that confronts a gale, or an enemy warship, and they self-certify that they would remain sound.

When RMBS valuations and ratings were questioned in 2007, it was taken to be a localised leak. Bear Stearns, Lehman and Northern Rock were sunk, but surely the rest of the fleet was still sound with a bit of extra liquidity to keep them afloat.

But a crew that is accustomed to enriching itself selling nails is unlikely to stop just because the Admiralty takes an interest and orders more nails be provided to shore up the creaking woodwork. They will take all the nails Admiralty is generous enough to provide and keep selling them in every port. Their purpose is profit, and profit they must. The ships still creak, the water gets deeper in the well each watch, but the self-reporting of the ships' condition improves in every dispatch to the Admiralty.

This is where we are, and this is what the LIBOR scandal reveals. Self-certified valuations of fixed income, OTC derivatives and other instruments not traded and valued on exchanges should all be suspect. Even the exchange valuations should be suspect, as they are influenced by the OTC positions. Some of those ships are being held together by the collective greed of the crews, unwilling to lose the means of profit at the Admiralty's (and taxpayers') expense.

No one suggests that we can let them all sink to the bottom as a lesson to seamen who follow. The navy is critical to our image of ourselves as strong and resilient. The navy must be saved. But how, when every nail that is sent aboard is sold in the next port to the profit of a man with no loyalty to the crown or the ship?

Basel Accords: "Tissue paper over a mountain range"

In 1987 I used the title of this post to describe the brand new Basel Capital Accords. I was a young and novice central banker, but as soon as I looked at the proposed accords, I knew they were sowing the seeds of a great misallocation of capital. The principal flaw was the uniform weighting of assets:
- zero weight for OECD government debt and all other government debt with less than one year maturity;
- 20 percent weight for debt of OECD banks;
- 50 percent weight for mortgage debt.

Young as I was, I had the confidence to express to my elders and betters that they were making a mistake treating a French bank - with unlimited state support - exactly the same as a Italian bank - where state support would be subject to greater political and currency risk. Given the massive differences in yield and liquidity, how could an Italian government bond be just as good as a US Treasury held as bank capital?

The enthusiasm of my colleagues did not convince me. I knew that by drawing these clumsy rules we were telling banks that they no longer had individual, direct responsibility for assessment of the creditworthiness of their assets or their bank counterparties. The banks could use the uniform weightings of Basel to justify bad judgement and lend to Italian banks just as if they were French. Worse, the zero weighting of all OECD government debt would make Italian bonds just as good as Gilts or Treasuries as capital assets, despite more volatile liquidity and the obvious credit risks. [Italian governments changed almost weekly back then.] If the bank regulators slapped a label of capital adequacy on a bank, they would keep on lending unto disaster.

"But no!", my colleagues declaimed, "We are making the world safe for capitalism. With level playing fields from here to West Germany, American and British banks can grow internationally in every market because competition will favour more efficient international banks." [At the time the Soviet Union was still a bar to capitalist extremism in Eastern Europe and we were all devoted to Chicago School free markets elsewhere.]

Basel Capital Accords did promote global competition, and so the concentration of global banking into a very few global banks by punishing smaller banks with higher capital requirements. And to that extent, the plan worked to favour Wall Street and the City. The plan also worked in favour of the Italians, who could issue copious government debt to capitalise their banks at the zero risk weighting and flog that debt to American, British and German banks who carried it at zero risk too.

But as the American, British and German banks were relieved of the onerous responsibility for due diligence, they took sillier and sillier risks. For example, they bought lots of Italian government bonds. They spread the emergent model of securitisation far past any productive reinvestment of capital to the point of wasting each nation's decades of accumulated wealth to finance excess consumption. They bought ratings from willing rating agencies to justify more and more leverage with less and less capital. They used derivatives to make their balance sheets and accounting impenetrable and misleading, and then got governments to adopt the same techniques in the public sector to support increasing government debt. And all the time the bias of Basel made them more and more powerful.

Basel II cemented big banks' control of both regulators and markets. They could use ratings to justify investments in structured products that seemed to have no economic rationale for either investors or intermediaries, but were magically profitable for everyone in theory. They could use internal models to book profits now and defer losses indefinitely, so ensuring wonderful bonus growth. Ah, glory days!

It is all starting to unravel now. Despite a commitment to Basel III - to be implemented far in the future - I doubt Basel II will last much longer. This week saw Portugese and Irish government bonds downrated to junk. Even the mighty US Treasury is on creditwatch for downrating given the rising risk of default.

Junk rating means risk. Recognition of an asset as capital implies that it can be priced in a liquid market when cash is required. When sovereign debt is junk rated and only good for collateral at the ECB or Fed, then it should not be eligible for bank capital. And so, zero weighting of these bonds as bank capital assets is no longer defensible. The banks holding Irish and Portugese debt as zero weighted for regulatory capital will have to supplement their capital at a time when bond markets are already dysfunctional and becoming downright illiquid for new issues. Huge maturity mismatch and refinancing overhangs were already threatening banks over the next few years, and now it will be much, much worse.

The ECB has ripped up its liquidity facilities rulebook this week to permit Portugese government debt to remain eligible as collateral despite the downgrades. That just tells the banks that there is no longer any rulebook that will not be ripped up as the occasion requires. And that inevitably includes Basel II and Basel III. The ECB has doubled down on moral hazard.

Watch the banks use the next crisis to ensure that no rules apply to them at all. Basel II will be suspended as regulators come under pressure to agree to continue to zero weight even junk bonds, despite high risks of sovereign defaults. You won't hear the Portugese, Irish, Italians or Spanish - or likely even the Germans - object to that when the time comes and the alternative is recognition of widespread capital deficits and bank failures.

But if the Basel II rulebook gets ripped up, that will also destroy the means by which the banks suborned regulators, central banks and governments to their service, chasing ever higher yields and ever bigger marketshare. I'm not sure what will come after that, but it probably won't have zero weight and certainly not zero risk.

Related posts:
More on the lunacy of the Basel Accords
Basel Faulty: Sovereign defaults and bank capital

Lies, Damn Lies and LIBOR

I've been hesitant to write about the LIBOR scandal because what I want to say goes so much further. We now know that Barclays and other major global banks have been manipulating the calculation of LIBOR through the quotation data they provided to the British Bankers Association. What I suspect is that this is not a flaw but a feature of modern financial markets. And if it was happening in LIBOR for between 5 and 15 years, then the business model has been profitably replicated to many other quotation-based reference prices.

Price discovery is not a sexy function of markets, but it is critical to the efficient allocation of scarce capital and resources, and to the preservation of the long term wealth of investors and the economy as a whole. If price discovery is compromised by manipulation, then we will all be gradually impoverished and the economy will be imbalanced and unstable.

Over the past 25 years the forces of regulatory liberalisation and demutualisation of markets have allowed the largest global banks to set the rules, processes and infrastructure of global markets to their own self-interested requirements. Regulatory complexity and harmonisation benefit the biggest banks disproportionately, eroding the competitive stance of smaller, local banks and market participants. This has led to a very high degree of concentration in a very few banks in most markets that determine global reference rates for interest rates, currencies, commodities and investments. If those few collude with each other - as Adam Smith warned was always the result - then they impoverish us all.

We have allowed markets to evolve in ways that make supervision of markets almost impossible. Many instruments trade off-exchange or in multiple venues, making it nearly impossible for any single investor or regulator to supervise trading to prevent or detect manipulation or abuse. Many financial instruments are now synthetic compilations of underlying assets and derivatives, with multiple pricing components determined by reference to other prices or rates. Demutualisation and regualtory reforms stripped exchanges of the self-regulating interest in preventing manipulation and abuse by their members as mergers, profits and market share came to dominate governance objectives.

Off-exchange trading has been allowed to proliferate, creating massive ill-transparent and largely illiquid markets in almost every sector of finance. Pricing in these markets is based around calculated reference rates which, like LIBOR, are open to abusive quotation and data input practices. Many OTC derivatives are priced and margined using reference rates calculated against quotations unrelated to actual reported transactions. Synthetic securities such as ETFs are another example of an instrument that prices off a reference rate rather than the actual contents of an underlying asset portfolio. These instruments are open to consistent abusive pricing as a means of incrementally impoverishing those market participants who are the krill on which the global banks thrive.

How has it been possible for banks to grow from less than 4 per cent of the global economy to more than 12 per cent of the global economy without impoverishing others? How has it been possible for profits in the financial sector to be consistently higher than profits from other human endeavors with more tangible products or impacts on our daily lives - such as agriculture, transport, health care or utilities? How has it been possible that banks derive their profits not from the protected and regulated activities of deposit-taking and lending, but from the unsupervised and often unknowable escalation of off-balance sheet assets and liabilities? How has it been possible that pension savings have increased while pension returns have declined to the point where only bankers can expect a comfortable old age? Global banks have built the casinos and tilted the odds in the house's favour by rigging the data that determines the outcomes of most of the bets on the table. Every one of us that sits at the table long enough - whether saver, investor, borrower, taxpayer or pensioner - will be a loser. It is not a flaw; it is a feature.

There is a reason that financial infrastructure used to be dominated by mutuals. Mutual gain and mutual liability created a natural discipline on excess and on rogue elements that would impoverish their peers.

There is a reason why trading was restricted to exchanges, and exchanges and clearing houses used to be self-regulating, and even had responsibility for resolution and liquidation of their members. Direct responsibility, authority and financial control meant that they could exert very powerful and immediate consequences on those members identified as abusing the market or investors.

The investigations into market rigging are just beginning. Paul Tucker opened the box yesterday when he admitted that he could not know whether the abuses discovered in setting LIBOR had spread to other synthetically calculated reference rates. As events unfold, it may be that we begin to appreciate just how deeply vulnerable we have become to predation by bankers with no stake in a local economy or in the local quality of life of the people they impoverish. A reckoning is needed, and then a rebalancing toward more local and mutual provision of essential services and market infrastructure that serves markets rather than those few bankers on the board.

As a start, regulators should consider punitive restrictions on the sale of instruments which price on reference rates unrelated to reported market transactions or underlying asset portfolios. Pricing should reflect real market transactions rather than guesstimates talking the banker's book.

We need to rethink as a society what banks are for, what exchanges are for, and what clearing houses are for. If they are for the profit of the few at the expense of the many now, that is because it is the business model we have permitted. If banks, markets and clearing are protected because they have a social function, we should make certain that social function is adding value. If it isn't, then we need some new models and some new rules.

Personal injury protection

Personal Injury Protection (PIP) is an extension of car insurance available in some U.S. states that covers medical expenses and, in some cases, lost wages and other damages. PIP is sometimes referred to as "no-fault" coverage, because the statutes enacting it are generally known as no-fault laws, and PIP is designed to be paid without regard to "fault," or more properly, legal liability. PIP is also called "no-fault" because, by definition, a claimant's, or insured's, insurance premium should not increase due to a PIP claim.

Personal injury protection could also refer to personal injury insurance or coverage, which is insurance in any context which includes coverage for personal injury, particularly coverage for emotional distress (typically negligent infliction of emotional distress rather than intentional infliction of emotional distress), libel, or defamation as opposed to coverage for only bodily injury. Home insurance typically includes coverage for liability arising from bodily injury, especially on an insureds' premises, but not from liability arising from mental injury. Coverage from mental injury can be included and is typically called "personal injury" coverage.

PIP is a mandatory coverage in some states. PIP coverage may vary from state to state in terms of both what is covered and what types of treatments are considered customary and reasonable. For example, in Utah, acupuncture is a permissible medical treatment, while in California it is not. Some states also allow for PIP claims even if a Workers' Compensation claim exists, while others do not.

In some states, PIP is subrogable, meaning that your insurance carrier will pay for your loss, regardless of liability, and then recover (or subrogate) what it paid from the liable party's insurance carrier. This generally leaves the claimant/insured in a much better financial position, because his or her medical bills are paid, and the insurance carriers get to fight it out on their own, and after the fact.

PIP can cover, within the specified dollar and time limits, the medical and funeral expenses of the insured, others in its vehicle at the time of the loss, and pedestrians struck by its vehicle. The basic coverage is for the insured's own injuries, on a first-party basis, without regard to liability. Again, it is only available in certain states.

Many states that do not have PIP have Auto Medical Payments coverage, or AMP, and some states even have both. AMP is also a first party coverage, without regard to liability, but is only subrogable in a few states, and generally optional.

AMP & PIP limits range from $1500.00 to $250,000.00 depending on the injury and the state. Claimants involved in an auto accident are wise to submit their own insurance information to their medical providers, as third party carriers are under no legal obligation to pay a claimant's medical bills, while first party carriers are.

Third party carriers are subject to payment only after a judgment against them, and any payments prior to that are considered voluntary. Settling a claim with a third party carrier is considered a voluntary payment.

Florida made personal injury protection insurance, mandatory for drivers. Claims fraud was the highest in the nation in 2011, estimated at about $1 billion.

Home Insurance

Home insurance, also commonly called hazard insurance or homeowners insurance (often abbreviated in the real estate industry as HOI), is the type of property insurance that covers private homes. This is an insurance policy that combines various personal insurance protections which can include losses occurring to your home, its contents, loss of use (additional living expenses) or loss of personal property owners and other liability insurance for accidents that may occur at home or in the hands of the homeowner policy in the territory. Is necessary that at least one of the named insured occupies the home. Housing policy (DP) is similar, but used for residences which do not qualify for various reasons, such as vacant / unoccupied, temporary residence / school, or age.

This is a multi-line insurance, meaning that includes both property and liability, with an indivisible premium, meaning that a single premium is paid for all risks. Standard forms divide coverage into several categories, and coverage is generally a percentage of the coverage of A, which is the principal dwelling coverage.
The cost of homeowners insurance often depends on what it would cost to replace the house and that other riders-additional items to be insured to join politics. The insurance policy itself is an extended contract, and names what will and will not be paid in the case of multiple events. Generally, claims due to flooding or war (whose definition typically includes a nuclear explosion from any source), among other exclusions based (like termites) are excluded. Special insurance can be purchased for these possibilities, including insurance against flooding. The insurance must be adjusted to reflect the replacement cost, usually after applying a factor of inflation or cost index.
The insurance policy is usually a contract, a contract clause is in force for a period of time. The payment the insured makes the insurer sets the premium. The insured must pay the insurer the premium each term. Most insurers charge a lower premium if it appears less likely that the house was damaged or destroyed, for example, if the house is located next to a fire station and is equipped with fire sprinklers and fire alarm, if exposure of the house after mitigation measures, such as hurricane shutters, or if the house has a security system and approved the insurance block installed. On perpetual insurance, a type of home insurance without a fixed term, can also be obtained in certain areas.

List of top 15 life insurance companies

1. Ohio National:

Ohio National Life Assurance Corporation
P.O. Box 237
Cincinnati, OH 45201
(800) 366-6654

  

2. Savings Bank:

Savings Bank Life Insurance Company of MA

One Linscott Road
Woburn, MA 01801
(781) 938-3500

  

3. Banner

Banner Life Insurance Company
1701 Research Blvd.
Rockville, MD 20850
(800) 638-8428

   

4. ReliaStar

ReliaStar Life Insurance Company
20 Washington Avenue South
Minneapolis, MN 55401
(877) 886-5050

  

5. American General    

American General Life Insurance Company
P.O. Box 1591
Houston, TX 77251
(800) 231-3655

6. Genworth Annuity

Genworth Life and Annuity Insurance Company
6620 West Broad St.
Richmond, VA 23230
(800) 975-1377

7. Security Mutual

Security Mutual Life Insurance Co of NY
P.O. Box 1625
Binghamton, NY 13902
(800) 346-7171

8. Genworth Life

Genworth Life Insurance Company
700 Main St.
Lynchburg, VA 24505
(888) 325-5433

9. Cincinatti

Cincinnati Life Insurance Company
6200 South Gilmore Road
Fairfield, OH 45014
(513) 870-2000

10. Midland National

Midland National Life Insurance Company
1 Midland Plaza
Sioux Falls, SD 57193
(605) 335-5700

11. Minnesota Life

Minnesota Life Insurance Company
400 Robert Street North
St. Paul, MN 55101
(651) 665-3500

12. Protective

Protective Life Insurance Company
P.O. Box 2606
Birmingham, AL 35202
(800) 866-3555

 

13. Transamerica

Transamerica Occidental Life Insurance
4333 Edgewood Road N.E.
Cedar Rapids, IA 52499
(213) 742-2111

14. North American

North American Company for Life and Health
222 S. Riverside Plaza
Chicago, IL 60690
(800) 800-3656

15. West Coast

West Coast Life Insurance Company
343 Sansome St.
San Francisco, CA 94104
(800) 366-9378

Permanent life insurance

Permanent life insurance is a form of life insurance as any life or endowment funds, where the policy is for the life of the insured, the payment is fixed at the end of the policy (assuming the current policy is maintained) and the policy cash value accumulates.
This compares with the term life insurance, where insurance is purchased for a specified period (usually one year, or during periods of level such as 5, 10, 15, 20 and even 25 to 30 years), a death benefit will be paid to the beneficiary if the insured dies during the period of time.

Permanent life insurance originally was offered as a premium product fixed return known as whole life insurance shall also known as the redemption of life insurance. This offer guarantees to consumers that the accumulation of cash value and price. Consumers want more flexibility than that offered on a universal life insurance. Universal life insurance allows consumers flexibility when premiums are paid and the amount that would be. The universal life policies also allowed consumers to withdraw money from a permanent policy without the interest associated with the loan provisions in insurance policies for life. The universal life policies retained the fixed investment performance of whole life insurance policies. On variable life insurance follows the mold of whole life or universal, but moves the investment risk for the consumer and the potential for higher returns. Variable universal life insurance combines this with the flexibility in premium structure of universal life to create more choice for consumers to manage their own money (at your own risk). Variable life insurance policies are considered more universal replacement for permanent life insurance because of the favorable tax treatment of all life insurance policies and their potential for higher returns than permanent life insurance permanent other.
What are the characteristics of term life insurance?
The characteristics of life insurance include coverage term, no cash value and maturity of the policy if you survive long term.
Term life insurance is temporary life insurance protection, usually for a period of 1-30 years. Many life insurance policies are issued for years 10, 15, 20 or 30.
Life insurance is pure protection, you only pay for life insurance, no cash value that accumulates in the policy.
If you survive the term of your contract, the life insurance coverage expires.
Term life insurance can enable an option to renew the building, allowing you to renew your life insurance policy without a physical exam to qualify for the new policy.
Permanent life insurance can cost 2-3 times more than term life insurance.

Definition of "life insurance"

*** A policy with a term limit on the coverage period. Once the policy has expired, is the owner of the police to decide to renew the life insurance contract or leave the final cover. This type of insurance policy contrasts with permanent life insurance, which prolongs until the policyholder reaches 100 years of age (ie death).

*** These policies provide a benefit shown on the death of the insured, provided death occurs within a specific timeframe. However, the policy does not provide benefits beyond the stated benefit, unlike permanent life insurance with a savings component that can be used for the accumulation of wealth.