"Not Clear What That Means"


Doug Nolan
 
 
November 15 – Bloomberg (Nishant Kumar and Suzy Waite): “Hedge-fund manager David Einhorn said the problems that caused the global financial crisis a decade ago still haven’t been resolved. ‘Have we learned our lesson? It depends what the lesson was…’ Einhorn said he identified several issues at the time of the crisis, including the fact that institutions that could have gone under were deemed too big to fail. The scarcity of major credit-rating agencies was and remains a factor, Einhorn said, while problems in the derivatives market ‘could have been dealt with differently.’ And in the ‘so-called structured-credit market, risk was transferred, but not really being transferred, and not properly valued.’ ‘If you took all of the obvious problems from the financial crisis, we kind of solved none of them,’ Einhorn said… Instead, the world ‘went the bailout route.’ ‘We sweep as much under the rug as we can and move on as quickly as we can,’ he said.”

October 12 – ANSA: “European Central Bank President Mario Draghi defended quantitative easing at a conference with former Fed chief Ben Bernanke, saying the policy had helped create seven million jobs in four years. Bernanke chided the idea that QE distorted the markets, saying ‘It's not clear what that means’.”


Once you provide a benefit it’s just very difficult to take it way. This sure seems to have become a bigger and more complex issue than it had been in the past. Taking away benefits is certainly front and center in contentious Washington with tax and healthcare reform. It is fundamental to the dilemma confronting central bankers these days.

When I read David Einhorn’s above analysis, my thoughts returned to Ben Bernanke’s comment last month regarding distorted markets: “It’s Not Clear What That Means.” Einhorn attended one of those paid dinners with Bernanke back in 2014, and then shared thoughts on Bloomberg television: “I got to ask him all these questions that had been on my mind for a very long period of time. And then on the other side, it was, like, sort of frightening, because the answers weren’t any better than I thought that they might be.” A successful hedge fund manager such a Mr. Einhorn is keen to decipher market distortions. Dr. Bernanke was keen to benefit markets – to inflate them.

During the mortgage finance Bubble period, I often referred to “The Moneyness of Credit” and “Wall Street Alchemy.” Various risk intermediation processes were basically transforming endless (increasingly) risky loans into perceived safe and liquid money-like instruments. 
 
Throughout history, insatiable demand for money creates great power and peril. I can’t conceptualize a more far-reaching market distortion than conferring money attributes to risky financial instruments. Pandora’s Box. For a while now, I’ve been astounded that the Federal Reserve has no issue with epic market distortions.

Fannie and Freddie were on the hook for insuring Trillions of mortgage securities. These GSEs essentially had no reserves or equity in the event of a significant downturn, a fact that had no bearing whatsoever on the safe haven pricing of their perceived money-like securities. Insurers of Credit were on the hook for Trillions, with minimal reserves. So, investors held (and leveraged) Trillions of “AAA” with little concern for losses or illiquid trading. Meanwhile, there was the gargantuan derivatives marketplace thriving on the assumption of liquid and continuous markets, despite hundreds of years of market history replete with recurring bouts of illiquidity and dislocation.

There were as well myriad variations of cheap market “insurance” readily available, bolstering risk-taking with the misperception that risks (equities, Credit, interest-rates, etc.) could always be easily hedged. And so long as Credit expanded (risky loans into “money”), the economy boomed and markets inflated, the pricing for market insurance remained low (or went lower).

As Einhorn stated, “risk was transferred, but not really being transferred, and not properly valued.” It amounted to a historic market Bubble distortion. Underlying risks were being grossly distorted and mispriced in the marketplace. Distortions fostered a massive expansion of risky Credit and untenable financial intermediation – a powerful boom and bust dynamic that culminated in a crash. Amazingly, catastrophic market distortions evolved gradually enough over years so to barely garnered attention. Can’t worry about risk when there’s easy “money” to amass.

Central bankers learned the wrong lessons from that modern-day market crisis. The post-crisis focus was on traditional lending and bank capital. As the thinking goes, so long as banks avoid reckless lending and remain well-capitalized, the risk of a repeat crisis is negligible. They did come to appreciate the risk of institutional Too Big to Fail, but again the solution was additional bank capital. Market distortions behind the Bubble and crash didn’t even enter into the discussion. Indeed, the Fed moved aggressively to reflate market prices, employing various measures that specifically manipulated market perceptions, prices and dynamics. There was no recognition that this course would elevate the entire structure of global market Bubbles to Too Big to Fail.

The “Moneyness of Credit” evolved into the “Moneyness of Risk Assets.” It moved so far beyond Fannie, Freddie, and Wall Street structured finance distorting perceptions of risk in mortgage securities. The Federal Reserve and global central bankers turned to brazenly distorting risk perceptions throughout equities, corporate Credit, sovereign debt, EM and the rest. Slash rates and force savers into the risk asset marketplace. Inject new “money” into the securities markets and guarantee liquid, continuous and levitated markets. Who wouldn’t write flood insurance during a predetermined drought? And then, why not reach for risk, speculate and leverage with prices rising and market insurance remaining so cheap? History’s Greatest Market Distortions.

The VIX ended Friday’s session at 11.43, only somewhat above recent historic lows. The Fed is only a few weeks from what will likely be its fifth “tightening” move of this cycle. And with rather conspicuous market excesses facing a tightening cycle, why does market insurance remain so cheap? For one, markets assume that central bankers will not actually impose a tightening of market or financial conditions. Second, the greater risk asset Bubbles inflate the more confident the markets become that central bankers have no alternative than to backstop market liquidity and prices.

“The West will never allow a Russian collapse.” Then, after the LTCM bailout and the “committee to save the world,” the powers that be would surely not allow a crisis in 1999. Then it was “Washington will never allow a housing bust.” Later it was 2008 as the “100-year flood.” Global central bankers will simply not tolerate another crisis. And it is always these types of pervasive market misperceptions that ensure far-reaching distortions – risk-taking, lending, speculating, leveraging, investing, etc. – that inevitably ensure problematic market “adjustments.”

One of the Capitalism’s great virtues is the capacity for a well-functioning pricing mechanism to promote self-adjustment and self-correction. And I would argue that the pricing of finance is absolutely critical to system adjustment and sustainability. Increasing demands for finance should induce higher borrowing costs that work to temper demand. But the proliferation of non-traditional non-bank and market-based finance essentially generated unlimited supply. It may have been subtle, though consequences were earth-shattering.

With Wall Street intermediation leading the charge, the mortgage finance Bubble period experienced a huge surge in demand for Credit accommodated at declining borrowing costs. 
 
This was transformative particularly for home and securities price inflation dynamics, where rising asset prices generally tend to incite heightened speculative demand. The critical pricing mechanisms that promote self-adjustment and correction became inoperable.

There is a special place in market hell for long-term price distortions. Given sufficient time, an enterprising Wall Street will ensure a proliferation of new products and strategies meant to profit from upward price trends and ingrained market perceptions. As central banks punished savers and “helped” the markets with low rates, QE and liquidity assurances, The Street ensured an onslaught of enticing new investment vehicles and approaches. Why not just buy a corporate Credit ETF instead of holding zero-rate deposits or T-bills? Of course it’s perfectly rational to own equities index ETFs, especially with central bankers ensuring underperformance by active managers conscious of risk. And after a number of years, with markets booming and economies humming along, don’t fundamentals beckon for participating in the junk bond ETF bonanza?

From my perspective, there are two key areas where central banker-induced market distortions have been precariously exacerbated by (fed and fed by) structural developments. First, the perception of “moneyness” has spurred Trillions of flows into the ETF complex. Indeed, the perception of safety and liquidity has created a structural vulnerability to a destabilizing reversal of flows. Everyone perceives they can easily – and almost instantaneously - get out of the market with a couple mouse clicks. And in a rehash of Wall Street Alchemy, hundreds of billions (Trillions?) of illiquid securities have been intermediated through the ETF complex - transformed into perceived liquid ETF shares. This has been a particularly momentous development for corporate Credit and critical as well for mid- and small cap equities.

A second perilous structural development has been within the Wild West of Derivatives. The perception that there are no limits to what central bankers will do to bolster the markets has fostered an explosion of derivative strategies - variations of writing market protection or “selling flood insurance during a drought”. The availability of cheap risk protection became fundamental to financial excess on a systemic basis.

I would add, as well, that over the years a powerful interplay has evolved between the ETF complex and derivatives markets. The perception of highly liquid ETF shares – especially in corporate Credit and liquidity-challenged equities – has been integral to “dynamic” derivative hedging strategies. Why not leverage in corporate Credit and outperforming small cap stocks when cheap derivative protection is so readily available? Better yet, why not leverage a “diversified” portfolio of multiple asset classes (i.e. “risk parity”)? And, likewise, why not garner easy returns from selling such insurance on the low-probability of a market decline? After all, liquid markets in ETF shares are available for shorting in the unlikely event the seller of market protection decides to hedge risk.

November 17 – CNBC (Jeff Cox): “Though stock market prices have held up in November, investors generally are running from risk at a near-record pace. Judging from the flow of money out of high-yield bonds, investors are getting increasingly leery of a market that continues to hover around record levels, despite a handful of rough trading sessions in November and a rocky start Friday. Funds that track junk bonds saw $6.8 billion of outflows over the past week through Wednesday, according to Bank of America Merrill Lynch. That's the third-highest on record.”


Just a very interesting week in the markets. There was a Risk Off feel to junk bond flows. Risk aversion also appeared to be gaining some momentum early in the week. The S&P500 traded to a two-week low in early-Wednesday trading, confirmed by a safe haven bid to Treasuries. 
 
Equities then rallied sharply Thursday, in what appeared a habitual final jam prior to option expiration (conveniently crushing the value of puts). For the week, the safe haven yen gained 1.1%, while the euro increased 1.1% and the Swiss franc rose 0.7%. Gold gained 1.5%. The Treasury yield curve flattened notably, with two-year yields up seven bps and ten-year yields down five bps (62 bps spread a 10-year low).

There were other dynamics not necessarily inconsistent with incipient Risk Off. The small caps rallied 1.2% this week. There also appeared a squeeze in some of the popularly shorted stocks and sectors. The Retail Sector ETF (XRT) surged 3.9%. Footlocker jumped 34.5% and Abercrombie & Fitch rose 23.8%. And speaking of popular shorts, Mattel jumped 27.8% and Buffalo Wild Wings gained 16.3%.

It would not be extraordinary for a market to succumb to Risk Off at the conclusion of a short squeeze. In the initial phase of Risk Off, the leveraged speculating community pares back both longs and shorts. The upward bias on popular short positions fuels disappointing performance generally on the short side, spurring short covering, frustration and position adjustments. The market had that kind of feel this week. Definitely some instability beneath the markets’ surface, while complacency generally held sway.

Next-Generation Crazy: The Fed Plans For The Coming Recession

Insanity, like criminality, usually starts small and expands with time. In the Fed’s case, the process began in the 1990s with a series of (in retrospect) relatively minor problems running from Mexico’s currency crisis thorough Russia’s bond default, the Asian Contagion financial crisis, the Long Term Capital Management collapse and finally the Y2K computer bug.

With the exception of Y2K – which turned out to be a total non-event – these mini-crises were threats primarily to the big banks that had unwisely lent money to entities that then flushed it away. But instead of recognizing that this kind of non-fatal failure is crucial to the proper functioning of a market economy, providing as it does a set of object lessons for everyone else on what not to do, the Fed chose to protect the big banks from the consequences of their mistakes. It cut interest rates dramatically and/or acquiesced in federal bailouts that converted well-deserved big-bank losses into major profits.

The banks concluded from this that any level of risk is okay because they’ll keep the proceeds without having to worry about the associated risks.

At this point – let’s say late 1999 — the Fed is corrupt rather than crazy. But the world created by its corruption was about to push it into full-on delusion.

The amount of credit flowing into the system in the late 1990s converted the tech stock bull market of 1996 into the dot-com bubble of 1999, which burst spectacularly in 2000, causing a deep, chaotic recession.

Instead of letting this (also well-deserved) crisis run its course, the Fed again protected Wall Street by cutting interest rates to unprecedentedly-low levels, something that rational observers warned would cause another bubble of some kind. Sure enough, the resulting housing bubble expanded to epic proportions before popping in 2007, with results that most readers remember clearly.

The Fed then completely lost it, setting short-term interest rates at literally zero and buying trillions of dollars of bonds to push long-term rates down to record low levels. This lit a rocket under asset prices, enriching the banks and their wealthy clients while saddling the rest of society with debilitating student loan, car, house and credit card debt. Again – to observers outside the Keynesian bubble delusion – this was not sane behavior. But in the context of an overriding compulsion to save Wall Street at any cost, it was sold – and bought – as somehow heroic rather than pathological.

Which brings us to today, 9 years into the latest bubble-driven recovery with debts everywhere at record levels, stocks and bonds priced for perfection, and interest rates still at historically low levels.

Now the Fed is making plans for the next, inevitable recession. And not surprisingly, given the past three decades’ trajectory, those plans are even crazier than their predecessors:

Fed’s Williams calls for global rethink of monetary policy 
(Reuters) – Global central bankers should take this moment of “relative economic calm” to rethink their approach to monetary policy, San Francisco Fed President John Williams said Thursday, warning that to fight the next recession, as with the last, they would need to do more than just cut interest rates.
Other Fed officials, including Chicago Fed Bank President Charles Evans, have in recent days urged a strategy review at the Fed, but Williams’ call for a worldwide review is considerably more ambitious. 
With many major economies facing slower growth and thus lower interest rates even when unemployment is low, central banks will need to find ways to stimulate their economies that work even when many other countries are also trying to boost their growth. 
“We will all be better able to contain the next economic recession if we develop approaches that succeed even when many countries are simultaneously constrained by the lower bound,” Williams said at the opening of a two-day conference on Asian economic policies at the San Francisco Fed. “And that means taking into account the nature of monetary policy spillovers.” 
Strategies that central banks should consider including not only the bond-buying and forward guidance used widely in the last recession, but also negative interest rates that was used in some non-U.S. countries, as well as untried tools including so-called price-level targeting or nominal-income targeting. Central banks may also want to consider setting a higher inflation target, he said.

—————————–


(MarketWatch) – Inflation has been too low for too long and the U.S. central bank has to alter its communications with the markets to convince investors the central bank is willing to let it run hotter than the 2% target, said Charles Evans, the president of the Chicago Fed, on Wednesday. In a speech in London, Evans said the Fed must alter its statement to make clear that its inflation target of 2% is not a ceiling. “Our communications should be much clearer about our willingness to deliver on a symmetric inflation outcome, acknowledging a greater chance of inflation at 2.5% in the future than what has been communicated in the past,” Evans said. Many economists and Fed officials think the low inflation seen this year is due to transitory factors. But Evans said “it gets harder and harder for me to feel comfortable” with the transitory explanation “with each low monthly reading.”

Some thoughts

 Think of the Fed – and the other major central banks – as a person who does a stupid but not necessarily criminal or pathological thing, and then starts committing ever-more serious crimes to cover up the original act. Each new atrocity is justifiable in the moment, since it keeps the perpetrator out of jail, but the later stages of the process seem criminally-insane to rational bystanders. Here’s some of what the Fed is planning and why it’s bad:

  • Negative interest rates are a distortion of markets that imply a fundamental misunderstanding of the purpose of markets, which is to efficiently allocate capital. When savings generates a negative return, as they do when bonds and bank accounts charge rather than pay interest, capital shrinks rather than grows. There is no possibility of “efficient allocation” when returns are negative.

  • “Evans said the Fed must alter its statement to make clear that its inflation target of 2% is not a ceiling.” One of the hallmarks of obsession is a fixation on one thing to the exclusion of everything else. The Fed official quoted here is living in a world where real estate, bond and stock prices are at record levels, and consumer, corporate and government debt is soaring. And where a painting, wristwatch, and piece of paper with a single line of text recently sold, respectively, for $450 million, $17 million, and $1.8 million. And he sees unacceptably-low inflation.

  • “Strategies that central banks should consider including not only the bond-buying and forward guidance used widely in the last recession, but also negative interest rates that was used in some non-U.S. countries, as well as untried tools including so-called price-level targeting or nominal-income targeting, he said.” Price-level targeting, since it focuses on the wrong prices, will simply blow up even bigger asset bubbles (thus illustrating another definition of insanity: repeating the same activity while expecting a different outcome).

    And nominal-income targeting? Here again, it’s easy to raise the average income by enriching the 1%, but using negative interest rates (which lower the incomes of small savers) and asset purchases (which bypass small savers who lack big stock and bond portfolios) to help society as a whole is worse than pointless. Which is another sign that the Fed literally doesn’t see the biggest part of the economy — financial asset prices — because those prices aren’t accounted for in its “aggregate demand” economic models.

Anyhow, the list of delusions and other pathologies could go on for a while. Suffice it to say that when the next recession hits – which, based on the action in junk bonds, subprime mortgages and the yield curve, may be fairly soon – some truly crazy ideas will be dumped on a still (amazingly) unsuspecting public.


A Republican tax plan that will help the rich and harm growth

Are shareholders really the most worthy recipients of a windfall?

by Lawrence Summers


US House Speaker Paul Ryan, a Republican from Wisconsin, speaks during a news conference on tax reform © Bloomberg



With the release late last week of the Republican tax proposal, the most important debate on tax in the US in a generation is now in full swing.

Most reasonable experts will agree that tax reform has the potential to spur investment and raise wages, while at the same time simplifying the system and increasing its fairness and legitimacy. The right issue for debate is not the desirability of tax reform or even of business tax reform directed at spurring investment. It is instead the likely economic effect of particular proposals.

Unfortunately, the proposal from Republicans in the House of Representatives on offer now may well retard growth, reward the wealthy, add complexity to the tax code and cheat the future even as it raises burdens on the middle class and poor. There are three aspects of the proposal that I find almost inexplicable, except with reference to the power of entrenched interests.

First, what is the rationale for tax cuts which increase the deficit by $1.5tn in this decade and potentially more in the future, rather than revenue neutral reform such as that adopted in 1986? There is no present need for fiscal stimulus. The national debt is already on an explosive path, even before taking account of large new spending needs that are almost certain to arise in areas ranging from national security to infrastructure to addressing those left behind by globalisation and technology.

Borrowing to pay for tax cuts is a way of deferring, not avoiding, pain. Ultimately the power of compound interest makes even larger tax increases or spending cuts necessary. But in the meantime debt-financed tax cuts raise the trade deficit, and reduce investment thereby cheating the future.

Second, what is the compelling case for cutting the corporate rate to 20 per cent? Under the proposed plan, for at least five years businesses will be able to write off investments in new equipment entirely in the year they are made. So the government is sharing to an equal extent in the costs of and the returns from investment, eliminating any tax induced disincentive to invest. The effective tax rate on new investment is reduced to zero or less, before even considering the corporate rate reduction.

Corporate rate reduction serves only to reward monopoly profits, other rents or past investments.

After the trends of the past few years, are shareholders really the most worthy recipients of a windfall?

Proponents of the House approach defend it by pointing to international considerations. Unfortunately the “territorial” approach pushed by the House could, by renouncing the objective of taxing the global income of US companies, actually work to encourage offshore production. Wouldn’t it be much better for the US to lead an initiative to prevent a race to the bottom in global corporate taxation than to try to win a race to the bottom?

Third, why include new complexities that help the richest taxpayers while taking steps that hurt middle income families? Why should passive owners of businesses that are already avoiding corporate tax get a big rate reduction to 25 per cent, when those who actually operate and work in such businesses pay at a higher rate? What is the rationale for eliminating the estate tax when it is paid by only 0.2 per cent of households?

At a bare minimum, if such provisions are to be adopted one would assume that they would be paid for to the maximum extent possible through steps like eliminating the carried interest loophole, or loopholes that enable real estate tax shelters. Not so. The proposal instead goes after measures like the adoption tax credit, deductions for major medical expenses and the deductibility of student loan interest. These seem like far better benefits to preserve than carried interest.

Instead of pursuing the current plan, Congress should return to the 1986 approach of revenue neutral tax reform, with an effort made not to adversely affect the progressivity of the tax system. This would enable what is most important now — strengthening incentives for investment in the US relative to other countries, while at the same time raising the legitimacy of the tax code.

It is possible, though I doubt it, that the questions I have raised here have good answers. And there may be reasons why 1986 is an inapplicable model for today. What is certain, though, is that a once-in-a-generation debate is under way. Even those who disagree on policy should be able to agree on the importance of not taking decisions until all relevant analysis can be completed.


The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary


A Risky Corner of the Market With Room to Run

Money has flooded of late into so-called leveraged loans, which are arranged by banks often to help private-equity firms leverage up companies they buy

By Paul J. Davies

A bubble occurs and ultimately pops when fundamental demand is misjudged and too many assets of ever poorer quality are mistakenly—or cynically—supplied to the market. Photo: MARY ALTAFFER/Associated Press 


The market for packaging risky loans is running hot-as-hell. It may not be a bubble yet, but troubling characteristics make it an area to watch.

Money has flooded of late into so-called leveraged loans, which have the credit quality of junk bonds and are arranged by banks often to help private-equity firms leverage up companies they buy. The banks then sell the loans on to investors.

U.S. retail investors in particular have piled into loan-focused mutual funds and ETFs. There have been outflows in recent weeks, but these funds still hold $97 billion of investors’ money compared with less than $18 billion a decade ago, according to Lipper.


RISK REVERSAL
Weekly flows into and out of U.S mutual and exchange-traded funds investing in loans



Insurers and pension funds have also invested heavily, both with specialist managers and through buying structured funds known as collateralized loan obligations. U.S. and European CLO volumes could hit totals in 2017 that rank as their second or third biggest year ever.


STRUCTURAL DEMAND
Issuance of special investment funds known as collateralized loan obligations (CLO)



With such huge demand, yields on such loans have been crushed: in Europe they are at record lows and still falling, according to S&P Global LCD, in the U.S. they are just very low. Demand from investors has outstripped supply as private-equity firms have found it hard to close really big buyouts. And this is the source of worrying signs.


DRIFTING APART
Yields on U.S. and European loans sold in capital markets



Funds struggling to put investors’ money to work have been accepting cheaper and looser terms. Borrowers now have the whip hand. This has allowed them to slash interest rates on their debt by refinancing quickly. They have also managed to kill the traditional covenants, which protect lenders from businesses developing problems in repaying their debt.

Fewer covenants mean fewer defaults as borrowers have no conditions to breach. But this could also mean that when defaults do come, borrowers will be in a much worse state and lenders get less back.

These loans and the CLOs that invest in them are typically less easily tradable than securities such as corporate bonds. It is this illiquidity that gives them the extra sliver of yield that investors desire. As such, loans and CLOs fit into the broader pattern of investors’ drift into illiquid and private assets in the hunt for better returns.

If this sounds worrying, there could be a leg up to keep the loan market going. Supply has been held back partly because U.S. regulators have restricted how much debt can be used in buyout deals. The White House is pushing to change this, which could give the entire market another boost, improving supply, but also make loans riskier.

A bubble occurs and ultimately pops when fundamental demand is misjudged and too many assets of ever poorer quality are mistakenly—or cynically—supplied to the market. The loan market is fertile ground for such conditions to take root, but there may be a way to go before things get really dangerous.


The Triumph of Collectivism

by Jeff Thomas



The French Revolution began in 1789. Maximilien Robespierre was one of its most eager proponents.

An extreme left-winger, he sought a totalitarian rule that claimed to be “for the people” (echoing the recently successful American Revolution), but in reality was “for the rulers.” He in turn inspired Karl Marx, author of The Communist Manifesto.

Both Robespierre and Marx had been well-born and well-educated but rather spoiled and, as young adults, found that they had no particular talent or inclination to pay their own way in life through gainful employment. Consequently, they shared a hatred for those who succeeded economically through their own efforts and sought a governmental system that would drain such people of their achievements, to be shared amongst those who had achieved less.

Interestingly, neither one saw himself as a mere equal to the proletariat that they championed.

Each saw himself in the role of the one who was to cut up the spoils and make the decisions for the rest of society.

It’s worthy of note that collectivist leaders never see themselves as becoming the humble and patient recipients of whatever bones the government chooses to throw them. They always see themselves in the role of rulers.

Collectivism has remained unchanged in its essence to the present day. It attracts those who would take the productivity of others, enrich themselves, and dole out the remainder to the masses. Seen in this light, collectivism would seem abhorrent. Who in his right mind would wish to lose his freedom, to end up as a member of the lumpenproletariat?

But collectivism has thrived, based on one human emotion—jealousy. Collectivist leaders have learned to sell the people on the enslavement of collectivism by convincing them that those they envy will be brought down—to have their gains taken from them and distributed by the state to those who are less able or less inspired.

Let’s have a look at a few quotes from some of the most noted collectivists and see how their ideas are holding up in today’s world…

“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.” – Vladimir Lenin


“The best way to destroy the capitalist system is to debauch the currency.” – Vladimir Lenin


Both of these principles are moving rapidly ahead in the EU, US, and other “advanced” countries.

Taxation in both jurisdictions is already high and leaders plan increases. Inflation is claimed to be necessary, although they claim the present level to be lower than it really is. In fact, it’s unnecessary.

It was only a century ago that income tax became institutionalised, robbing people steadily of their wealth without them realizing it, through inflation.

The euro, which gobbled up dozens of independent currencies, is in trouble, and the dollar is nearing the end of its ability to function. They will both soon be destroyed, very much as Comrade Lenin would have wished.

Another primary objective is to dictate what constitutes truth.

“Make the lie big, make it simple, keep saying it and eventually, they will believe it.” – Joseph Goebbels

“A lie told often enough becomes the truth.” – Vladimir Lenin

“Print is the sharpest and the strongest weapon of our party.” – Joseph Stalin


Governments have always been known for lying to their constituents, but today, it’s become a fine art. Today, through television, governments are capable of spoon-feeding simplistic dogma and repeating it over and over again, in a way that the three leaders above could never have imagined (but George Orwell most certainly did).

“Give us a child for eight years and it will be a Bolshevik forever.” – Vladimir Lenin

“The secret of freedom lies in educating people, whereas the secret in tyranny is in keeping them ignorant.” – Maximilien Robespierre


All collectivist leaders figure out early on that, whilst education can make a country grow and prosper, it also inspires people to think for themselves, and this must not be allowed to proliferate. Hence the conscious effort to dumb down the proletariat.

In the US in particular, scholastic accomplishment has been steadily and purposely declining since 1965. Although many current US history books no longer teach students about the American founding fathers, they do teach about gender bias, the need for enforced equalization between citizens, and even the significance of Oprah Winfrey. They are no longer history books; they are now books on contemporary culture.

But dumbing down is insufficient. The use of force is often necessary, and that means disarming the populace.

“The only real power comes out of a long rifle.” – Joseph Stalin

“The most foolish mistake we could possibly make would be to allow the subjugated races to possess arms.” – Adolf Hitler

“We don’t let them have ideas. Why would we let them have guns?” – Joseph Stalin


The first quote is from 1924, but an avowed fan of Stalin, Mao Tse-Tung, echoed this principle, saying, “Political power grows out of the barrel of a gun,” in his Problems of War and Strategy in 1938. The quote from Adolf Hitler is from 1942.

Certainly, the EU and the US in particular have been dramatically ramping up their authorities in the weapons department, indicating that they believe doing so will more greatly ensure their power. By going further to disarm their people, as they are also pursuing, they will further ensure that the state becomes all-powerful.

Here are a few miscellaneous quotes to ponder:

“When there is state, there can be no freedom, but when there is freedom there will be no state.” – Vladimir Lenin

“It is enough that the people know there was an election. The people who cast the votes decide nothing. The people who count the votes decide everything.” – Joseph Stalin

“Demoralise the enemy from within by surprise, terror, sabotage, assassination. This is the war of the future.” – Adolf Hitler


The first quote reminds us that, in the eyes of collectivist leaders, freedom and the state are opposites, regardless of what their rhetoric might say. The second quote reminds us that the belief that democracy exists because voting is allowed is a false hope. The third quote warns that the terror in our midst is no accident. Nor is it necessarily due to outside forces. If need be, terrorism can always be created through false-flag events to justify the removal of the rights of the populace.

Political leaders in the former “free” world regularly state that the removal of inalienable rights, the ever-increasing taxation, and the now-perpetual warfare are “making the world safe for democracy.” However, when the democracy is destroyed by these very acts, they are in fact making the world safe for collectivism. As they themselves state:

“The bureaucrat has the world as a mere object of his action.” – Karl Marx


The Latin Left Hijacks Human Rights

The Inter-American Commission meeting was about revenge, not reconciliation.

By Mary Anastasia O’Grady


An effort by the Organization of American States’ Inter-American Commission on Human Rights to patch old political hatreds got off to a bad start in Montevideo, Uruguay, two weeks ago. The commission deserves most of the blame.

What it calls a “memory, truth and justice” curriculum for 2018-19 is an attempt to recall, recognize and record human-rights violations and reconcile societies. But what transpired in Montevideo demonstrates how despised truth-seekers can be among the Latin American left, which has hijacked the term “human rights” for its own political purposes.


                     Paulo Abrão, April, 21. Photo: Servicio Universal Noticias/Zuma Press 


The event brought some 250 rights advocates together at the Four Points Sheraton hotel for a public consultation on the curriculum. That representatives of the Venezuelan Marxist dictatorship were present gives you some idea of the leftist tilt. But there were also six Argentines—lawyers and representatives—from two human-rights groups dedicated to equality under the law and due process.

María Elena García is president of the Collective for the Defense of the Human Rights of Persons Deprived of Freedom and Access to Justice in Argentina. The organization works to secure due process and humanitarian treatment for Argentines who fought guerrilla terrorism and are imprisoned in violation of their civil liberties.


She told me in an email that when her colleague Guillermo Fanego rose to speak about the importance of “complete” memory—that is, recognizing victims on both sides of a conflict—he was shouted down. The Argentine daily La Nación confirmed that account. In an editorial on Oct. 27 it described the assaults against the Argentines as “loud boos, insults, threats and shoving, which generated an unfortunate climate of violence and intolerance.”

Ms. García told me that the moderator, commission executive secretary Paulo Abrão, was complicit in his silence during the uproar. Later, she told me, he announced that the curriculum will deal only with abuses committed by states. This, Ms. García noted, is “in clear contradiction to the postulates” of the commission. Another witness noted that the Venezuelan Marxists were not cut off when they accused civilians in their country of human-rights crimes.

Moreover, Mr. Abrão did not intervene when a Chilean called for a show of hands to expel the Argentines from the meeting, which is what transpired.

Commissioner Paulo Vannuchi gave shout-outs to leftist groups, according to participant María Werlau, executive director of the U.S.-based nongovernmental Cuba Archive. She told me in an email that Mr. Vannuchi also spoke about the honor he felt at attending a recent memorial event for Che Guevara in Bolivia. While there, he said, he complained to the government about its failure to form a “truth commission” to investigate the Guevara’s death and had offered technical assistance from the commission to do it.

This was strange coming from a human-rights advocate, Ms. Werlau noted in her email, given that Guevara’s own writings endorsed “killing, hatred, violence, repression, racism and homophobia.” Cuba Archive has documented 98 extrajudicial executions directly ordered by Guevara after Fidel Castro took power in 1959.

On Friday consultant Renata Barreto Preturlan at the Human Rights Commission answered my request for comment. She described the Argentines as “representatives and relatives of military officials condemned for or accused of human rights violations during the Argentine dictatorship.”

This is certainly not an accurate description of Ms. García’s group. Its emphasis on “complete” memory is a plea to clarify the country’s history leading up to and during the military dictatorship because thousands of victims of guerrilla terrorism from that period have been denied justice. It works to restore the rights of many Argentines—not only military—who were rounded up during the hard-left Kirchner governments (2003-15) and imprisoned without proof of a crime but merely because they opposed the terrorists years ago.

Ms. Barreto claimed that the Argentines “spoke on the same terms as the other participants,” which is patently false because no other participants were shouted down and expelled.

Ms. Barreto explained the expulsion on grounds that the Argentines had objected to being segregated into a specially designated breakout group. This generated “a reaction on the part of the participants themselves.” The implication being that the Argentines were not proper participants.

In fact the prearranged breakout groups had innocuous nonpolitical titles like “memory politics,” “archives and access to information” and “justice and the struggle against impunity.” Banishing the Argentines was an act of blatant discrimination.

Ms. Barreto closed her response by noting that the commission “is not responsible for the attitudes of third parties in its activities.” Yet surely it has a role in protecting minority viewpoints and defending the rights of all to speak and engage in the process. Judging from this first meeting, it looks as if its work has already been compromised by the left and will turn out to be more about revenge than reconciliation.


A Broke, and Broken, Flood Insurance Program

Now, an unusual coalition of insurers, environmentalists and fiscal conservatives is seeking major changes in the federal plan as a deadline approaches.

By MARY WILLIAMS WALSH

David Clutter in front of his home in Long Beach, N.Y. After Hurricane Sandy, he had to take out a third mortgage to repair the foundation because the National Flood Insurance Program denied his claim. Credit Greg Miller for The New York Times       


In August, when Hurricane Harvey was bearing down on Texas, David Clutter was in court, trying one more time to make his insurer pay his flood claim — from Hurricane Sandy, five years before.

Mr. Clutter’s insurer is the federal government. As it resists his claims, he has been forced to take out a third mortgage on his house in Long Beach, N.Y., to pay for repairs to make it habitable for his wife and three children. He owes more than the house is worth, and his flood-insurance premiums just went up.

The government-run National Flood Insurance Program is, for now, virtually the only source of flood insurance for more than five million households in the United States. This hurricane season, as tens of thousands of Americans seek compensation for storm-inflicted water damage, they face a problem: The flood insurance program is broke and broken.

The program, administered by the Federal Emergency Management Agency, has been in the red since Hurricane Katrina flooded New Orleans in 2005. It still has more than a thousand disputed claims left over from Sandy. And in October, it exhausted its $30 billion borrowing capacity and had to get a bailout just to keep paying current claims.


 Temporary sidewalks in Greenville, Miss., during a 1927 flood. The extent of the destruction prompted home insurers to stop writing flood coverage. Credit Getty Images 


Congress must decide by Dec. 8 whether to keep the program going. An unusual coalition of insurers, environmentalists and fiscal conservatives has joined the Trump administration in calling for fundamental changes in the program, including direct competition from private insurers. The fiscal conservatives note that the program was supposed to take the burden off taxpayers but has not, and environmentalists argue that it has become an enabler of construction on flood-prone coastlines, by charging premiums too low to reflect the true cost of building there.

The program has other troubles as well. It cannot force vulnerable households to buy insurance, even though they are required by law to have it. Its flood maps can’t keep up with new construction that can change an area’s flood risk. It has spent billions of dollars repairing houses that just flood again. Its records, for instance, show that a house in Spring, Tex., has been repaired 19 times, for a total of $912,732 — even though it is worth only $42,024.

And after really big floods, the program must rely on armies of subcontractors to determine payments, baffling and infuriating policyholders, like Mr. Clutter, who cannot figure out who is opposing their claims, or why.

Roy E. Wright, who has directed the flood insurance program for FEMA since June 2015, acknowledged in an interview on Friday that major changes were called for and said some were already in the works. The program’s rate-setting methods, for example, are 30 years old, he said, and new ones will be phased in over the next two years. But other changes — like cutting off coverage to homes that are repeatedly flooded — would require an act of Congress.

“The administration feels very strongly that there needs to be reform this year,” he said. “I believe strongly that we need to expand flood coverage in the United States, and the private insurers are part of that.”

The federal program was created to fill a void left after the Great Mississippi Flood of 1927, when multiple levees failed, swamping an area bigger than West Virginia and leaving hundreds of thousands homeless. Insurers, terrified of the never-ending claims they might have to pay, started to exclude flooding from homeowners’ insurance policies. For decades, your only hope if your home was damaged in a flood was disaster relief from the government.

Policymakers thought an insurance program would be better than ad hoc bailouts. If crafted properly, it would make developers and homeowners pay for the risks they took.

When Congress established the National Flood Insurance Program in 1968, it hoped to revive the private flood-insurance market. Initially about 130 insurers gave it a shot, pooling their capital with the government. But there were clashes, and eventually the government drove out the insurers and took over most operations.

Since 1983, Washington has set the insurance rates, mapped the floodplains, written the rules and borne all of the risk. The role of private insurers has been confined to marketing policies and processing claims, as government contractors.

That worked for a few decades. But now, relentless coastal development and the increasing frequency of megastorms and billion-dollar floods have changed the calculus.

“Put plainly, the N.F.I.P. is not designed to handle catastrophic losses like those caused by Harvey, Irma and Maria,” Mick Mulvaney, the director of the White House Office of Management and Budget, said in a letter to members of Congress after the three huge hurricanes barreled into the United States this season.

Mr. Mulvaney called on Congress to forgive $16 billion of the program’s debt, which both houses agreed to do.

The program, however, needs more than a financial lifeline: Without major, long-term changes, it will just burn through the $16 billion in savings and be back for more.

The White House is hoping to lure companies back into the market, letting them try to turn a profit on underwriting flood policies instead of simply processing claims for the government.

One measure proposed by the Trump administration is for the government to stop writing coverage on newly built houses on floodplains, starting in 2021. New construction there is supposed to be flood-resistant, and if the government retreats, private insurers may step in. Or so the theory goes.

“The private market is anxious, willing and completely able to take everything except the severe repetitive-loss properties,” said Craig Poulton, chief executive of Poulton Associates, which underwrites American risks for Lloyd’s of London, the big international insurance marketplace.

“Severe repetitive-loss properties” is FEMA’s term for houses that are flooded again and again. There are tens of thousands of them. While they account for fewer than 1 percent of the government’s policies, they make up more than 10 percent of the insurance claims, according to the Natural Resources Defense Council, which sued FEMA to get the data.

The Trump administration has also proposed creating a new category of properties that are at extreme risk of repeat flooding and that could have their insurance cut off the next time they flooded.

That might sound harsh. Environmental groups, though, argue it’s worse to repeatedly repair doomed houses on flood-prone sites as oceans warm and sea levels rise. The Natural Resources Defense Council argues that the flood-insurance program should buy such properties so the owners can move somewhere safer.

The program, however, has only limited authority to make such purchases; homeowners need to line up funding through other government agencies. As a result, such buyouts are rare.

“I have mounds and mounds of paper, and I’m still waiting,” said Olga McKissic of Louisville, Ky., who applied for a buyout in 2015 after her house flooded for the fifth time. “I want them to tear it down.”

Ms. McKissic even had her house classified as a severe repetitive-loss property, thinking FEMA would give it higher priority. But FEMA has not responded to her application. Instead, it doubled her premiums.

The Nottingham Forest section of Houston is not on a designated floodplain, so residents were not told to buy flood insurance. But it flooded during Hurricane Harvey when officials released water from overloaded reservoirs. Credit Daniel Borris for The New York Times 



Streets in the Santurce section of San Juan, P.R., remained flooded a week after Hurricane Maria struck the island in September. Credit Victor J. Blue for The New York Times


That’s what happens when there’s a monopoly, said Mr. Poulton, the Lloyd’s underwriter.
 
Over the years, he said, he has noticed that his customers are buying Lloyd’s earthquake insurance because it includes flood coverage. They do not like the government’s flood insurance because payouts are capped at $250,000 and have other limits.
 
Such as basements.
 
Matt Herr of Superior Flood in Brighton, Colo., another underwriter for Lloyd’s, recalled a client whose handicapped son lived in a “sunken living room,” eight inches lower than the rest of the house. When the neighborhood flooded, $22,000 of medical equipment was ruined. The government refused to pay, calling the living room a basement. Its policies exclude basements.

While the government program insures more than five million homeowners, that is just a small fraction of the number of people who live on floodplains.
 
Mr. Poulton researched the flood insurance program and eventually found a public report that explained how its pricing worked. The program, he learned, was not using the detailed, house-by-house information on flood risk that is available through satellite imagery and other sources.
 
That’s because Congress gave the program a legal mandate to work with communities, not individual households. So the program was surveying floodplains, then calculating an “average annual loss” for all the houses there. Its insurance rates were based on those averages.
 
“It undercharges 50 percent of its risks, and it overcharges 50 percent of its risks, on an equal weighting,” Mr. Poulton said.
Offer a better deal to the households with a below-average risk of flooding — a policy whose price reflects their lower risk — and they will jump at the opportunity to save money on premiums, he said.
 
But the government does not readily divulge all of its historical claims data, so insurers cannot comb through them and analyze the risks.
 
“What we know is snippets,” said Martin Hartley, chief operating officer of Pure Insurance in White Plains, which offers supplementary flood insurance to homeowners who want more than the government’s $250,000 coverage.
 
Also, the government relies on mortgage lenders to enforce the rule requiring at-risk homeowners to buy flood insurance. Mr. Poulton said he found that FEMA officials had told lenders that, in effect, they shouldn’t trust private insurance.
 
Pages from an engineer’s report showing damage to the side and basement of Mr. Clutter’s house. Credit Greg Miller for The New York Times

Mr. Clutter has kept records of the damage to his house and how it was repaired. He sued the National Flood Insurance Program for breach of contract in August. Credit Greg Miller for The New York Times       


He went to Washington to complain to program officials.

 
“We told them their guidelines were bad, bad for consumers,” he said. “We said: ‘They’re only good for you. You’ve got to change them.’ They said: ‘We don’t answer to you. We answer to Congress.’
 
We’ve been lobbying ever since.”
 
No one paid much attention until after Sandy, when the program fell deeper into debt with the Treasury. To help fill that hole, Congress in 2012 approved big increases in its premiums. But that caused an uproar when people got their bills. Two years later, Congress rescinded much of the increase.
 
Then came this season’s hurricanes and the $16 billion bailout.
 
The Office of Management and Budget sent Congress an updated list of proposals in October, including measures that would remove certain obstacles to private-sector competition. Its plan would open up the data trove to potential competitors and direct mortgage lenders to accept private flood-insurance policies. It would also revoke an agreement that the program’s contractors — including about 70 insurance companies — must currently sign, promising not to compete against the government program.
 
Some members of Congress — including Democrats like Senators Chuck Schumer of New York and Robert Menendez of New Jersey, whose states have significant flood exposure and bad memories of Hurricane Sandy — are resisting. They say bringing in private insurers would make the program’s troubles worse, because the insurers would cherry-pick the most profitable customers and leave the government with all the “severe repetitive-loss properties.”
Mr. Poulton did not dispute that. In fact, he said that was exactly what should happen.
 
“We need the N.F.I.P. to be a full participant in this as the insurer of last resort,” he said. That means it would take the high-risk properties that the private insurers did not want, acting like the state-run insurance pools for especially risky drivers.
 
Some lawyers for aggrieved policyholders think a shake-up might improve things, if it brought accountability.
 
August J. Matteis, who is representing Mr. Clutter in his lawsuit, said the insurance program had been so criticized by Congress for its borrowing that by the time Sandy blew in, it had instructed contractors to hold the line on claims. They did so with a vengeance. Thousands of people with flood damage from Sandy ended up disputing the government’s handling of their claims.
 
Long Beach, Mr. Clutter’s town, is on a barrier island off the southern shore of Long Island. When Sandy sent several feet of floodwater washing over it, the piers supporting the Clutter family’s foundation collapsed. Upstairs, floors buckled. Walls cracked.
 
Mr. Clutter called Wright National Flood Insurance, the Florida company that administers his policy. Wright sent an independent adjuster, who took photos with captions like “structural foundation wall has been washed in” and “piers have collapsed — no longer supporting risk.”
 
But then, Wright sent a structural engineer from U.S. Forensic of Louisiana who declared that Sandy had not caused the damage.
 
In 2015, Mr. Clutter happened to catch a “60 Minutes” report on the aftermath of Sandy. It included accusations that U.S. Forensic had falsified engineering reports on other people’s houses.
 
There were so many disputed claims and questionable inspections, in fact, that the government opened an unusual review process for Sandy victims. Mr. Clutter went through it, but said the government’s offer fell far short of his repair costs. He sued FEMA and Wright Flood Insurance in August.
 
A car was buried in sand on Long Beach Island, N.J., during Sandy. Lawmakers from New York and New Jersey are concerned that changes in the National Flood Insurance Program could drive up premiums. Credit Luke Sharrett for The New York Time

 
Michael Sloane, Wright Flood’s executive vice president, said in an email that while the company could not comment on Mr. Clutter’s case, “we are always committed to working with our customers to keep the lines of communication open as we continue working toward resolution.”U.S. Forensic did not respond to messages.

Mr. Wright, the program director, acknowledged the problems after Sandy but said corrective measures had been taken “so that it doesn’t happen again.”

Much of Long Beach has been rebuilt since Sandy. Small houses like Mr. Clutter’s are being torn down and replaced with bigger ones that sprawl across two lots. Mr. Clutter worries that if insurers, not the government, set the prices, premiums will soar.

“Then, what happens to me?” he asked. “I’m essentially being driven out of my home that I have three mortgages on.”