My Word Is My Financial Sovereign Bond

Let’s Bond Market Over Tea Shall We

By Melvin J. Howard

The beginning of the Boston Tea Party is often sourced to what the Colonists felt was an unfair tax on tea. This is only partly true. The Tea Party was a protest in reaction to a tax meant to help raise funds following the French and Indian War. But the tax was also a political power move on behalf of Parliament, meant to reassert control over the colonies, as well as an economic decision designed to bail out the floundering East India Company, a threshold of English commercial interests. After the long and costly war between France and England, King George III and the British Parliament implemented a tax to help raise money to pay off the massive debts incurred. They chose to place this tax on tea sold in both England and in the English Colonies. They were convinced that people would rather pay a tax than give up their daily tea. 

It was also an item that the colonies were required to import only from England. Furthermore, the tax was a way to reign in the colonies, who had been neglected during the long war, and remind them that their allegiance belonged to England. One of the first persons to master the Bond market was Nathan Rothschild. Master of universe at that time, he boasted that he was the arbiter of peace and war, and that the credit of nations depends upon his nod. So just what are Bonds a Bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest. There are many kinds of bonds but for this entry I will be focusing on Government Bonds. Nathan Mayer Rothschild, founder of the London branch of what was, for most of the nineteenth century, the biggest bank in the world. But it was the bond market that made the Rothschild family rich real rich. 

Lord Rothschild, Nathan's great-great-great-grandson. Said of Nathan he was 'short, fat, obsessive, extremely clever, wholly focused I can't imagine he would have been a very pleasant person to have dealings with. The Battle of Waterloo was the culmination of more than two decades of intermittent conflict between Britain and France. But it was more than a battle between two armies. It was also a contest between rival financial systems: one, the French, which under Napoleon had come to be based on plunder (the taxation of the conquered); the other, the British, based on debt. Between 1793 and 1815 the British national debt increased by a factor of three to more than double the annual output of the UK economy. This increase in the supply of bonds had weighed heavily on the London market.

Now let’s jump to the other side of the Atlantic to another war the Civil war in America and how the North really won. The South's ability to manipulate the bond market depended on one overriding condition that investors should be able to take physical possession of the cotton, which underpinned the confederate bonds if the South failed to make its interest payments. Collateral is; after all, only good if a creditor can get his hands on it. And that is why the fall of New Orleans was the real turning point in the American Civil War. With the South's main port in Union hands, any investor who wanted to get hold of Southern cotton had to run the Union's naval blockade not once but twice, in and out. Given the North's growing naval power in and around the Mississippi, that was non-starter.

If the South had managed to keep New Orleans until the cotton harvest had been offloaded to Europe, they might have been able to sell more cotton bonds in London. The Confederacy had miscalculated. They had turned off the cotton tap, but then wasn’t able to turn it back on. By 1863 the mills of Lancashire England had found new sources of cotton in China, Egypt and India. And now investors were rapidly losing faith in the South's cotton-backed bonds. The consequences for the Confederate economy were disastrous. With its domestic bond market exhausted and only two paltry foreign loans, the Confederate government was forced to print unbacked paper dollars to pay for the war and its other expenses, 1.7 billion dollars' worth in all. Both sides in the Civil War had to print money. But by the end of the war the Union's 'greenback' dollars were still worth about 50 cents in gold, whereas the Confederacy's 'greybacks' were worth just one cent. The situation got worst by the ability of Southern states and municipalities to print paper money of their own.

With ever more paper money chasing ever fewer goods, inflation exploded. Prices in the South rose by around 4,000 per cent during the Civil War. By contrast, prices in the North rose by just 60 per cent. Even before the surrender of the principal Confederate armies in April 1865, the economy of the South was collapsing, with hyperinflation remember this word I will come back to it later. Was the partner of the North in the defeat of the South. Those who had invested in Confederate bonds ended up losing their shirts. The North pledged not to honor the debts of the South. In the end, there had been no option but to finance the Southern war effort by printing money. It would not be the last time in history that an attempt to buck the bond market would end in ruinous inflation and military humiliation. The fate of those who lost their shirts on Confederate bonds was not especially unusual in the nineteenth century.

The Confederacy was far from the only state in the Americas to end up disappointing its bondholders; it was merely the northernmost delinquent. South of the Rio Grande, debt defaults and currency depreciation's verged on the commonplace. Latin America in the nineteenth century in many ways foreshadowed problems that would become almost universal in the middle of the twentieth century. Partly it was because Latin American republics were among the first to discover that it was relatively painless to default when a substantial proportion of bondholders were foreign. It was no mere accident that the first great Latin American debt crisis happened as early as 1816, when Peru, Colombia, Chile, Mexico, Guatemala and Argentina all defaulted on loans issued in London just a few years before.

But by the later nineteenth century, countries that defaulted on their debts risked economic sanctions, the imposition of foreign control over their finances and even, in at least five cases, military intervention. Defeat itself had a high price. All sides had reassured taxpayers and bondholders that the enemy would pay for the war. Now the bills fell due take Berlin Germany for instance. One way to understand the post-war hyperinflation was a form of state bankruptcy. Those who had bought war bonds had invested in a promise of victory; defeat and revolution represented a national insolvency, the brunt of which necessarily had to be borne by the Germans creditors. At the conference at Versailles, which imposed an unspecified reparations liability on the fledgling Republic the total indemnity was finally fixed in 1921, the Germans found themselves saddled with a huge external debt with a nominal capital value of 132, billion 'gold marks' (pre-war marks), equivalent to more than three times national income. Although not all this new debt was immediately interest-bearing, the scheduled reparations payments accounted for more than a third of all hail Hitler’s expenditure in 1921 and 1922.

Hyperinflation seemed to be the word of the day after the First World War. Austria - as well as the newly independent Hungary and Poland - also suffered comparably bad currency collapses between 1917 and 1924. In the Russian case, hyperinflation came after the Bolsheviks had defaulted outright on the entire Tsarist debt. Bondholders would suffer similar fates in the aftermath of the Second World War, when Germany, Hungary and Greece all saw their currencies and bond markets collapse. It could be easy to associate hyperinflation with the costs of losing world wars; it would be relatively easy to understand. Yet there is a caveat in more recent times, a number of countries have been driven to default on their debts. Either directly by suspending interest payments, or indirectly by debasing the currency in which the debts are denominated.

There is a slight gamble involved when an investor buys a bond. Part of that gamble is that an upsurge in inflation will not consume the value of the bond's annual interest payments. If inflation goes up to ten per cent and the value of a fixed rate interest is only five, then that basically means that the bond holder is falling behind inflation by five per cent.' As we have seen, the danger that rising inflation poses is that it erodes the purchasing power of both the capital sum invested and the interest payments due. And that is why, at the first whiff of higher inflation, bond prices tend to fall. In 1975, as inflation soared around the world, the bond market made the casino’s look like a pretty safe place to invest your money. At that time when US inflation was surging into double digits, peaking at just fewer than 15 per cent in 1980. That was perhaps the worst bond bear market in history.' To be precise, real annual returns on U.S. government bonds in the 1975 were minus 3 percent, almost as bad as during the inflationary years of the world wars. Today, only a handful of countries have inflation rates above 10 per cent and only one, Zimbabwe, is afflicted with hyperinflation.'"" But back in 1979 at least seven countries had an annual inflation rate above 50 per cent and more than sixty countries, including Britain and the United States, had inflation in double digits. Among the countries worst affected, none suffered more severe long-term damage than Argentina.

Inflation has come down partly because many of the items we buy, from clothes to computers, have got cheaper as a result of technological innovation and the relocation of production to low-wage economies in Asia. It has also been reduced because of a worldwide transformation in monetary policy, which began with the monetarist-inspired increases in short-term rates implemented by the Bank of England and the Federal Reserve in late 1975 and early 1985. Also trade unions have become less powerful. Loss-making state industries have been privatized. But, perhaps most importantly of all, the social constituency with an interest in positive real returns on bonds has grown. A rising share of wealth is held in the form of private pension funds and other savings institutions that are required, or at least expected, to hold a high proportion of their assets in the form of government bonds and other fixed income securities. With every passing year, the proportion of the population living off the income from such funds goes up, as the share of retirees’ increases. In a graying society, there is a huge and growing need for fixed income securities, and for low inflation to ensure that the interest they pay retains its purchasing power. As more and more people leave the workforce, recurrent public sector deficits ensure that the bond market will never be short of new bonds to sell. 

Daddy where does money come from and how do you make it?

Show Me The Money

By Melvin J. Howard

This got me thinking about the time when my children were very young. One of them ask me Dad how do you make money and where does it come from? I said good question that got me to thinking how many grown-ups do not know the answer of how money is made and where it comes from either. For many years I had really had no answer they do not teach it in school. That’s when I set out on a quest for knowledge not just about making money but the philosophy behind it. How do societies start how do they rise and fall why some countries are rich and why some are poor? Science, Philosophy, Metaphysics, Anthropology, Sociology, Economics all the stuff I use to avoid like the plague in school I find myself drawn to it now. How is money created, and what role does the Federal Reserve and its member banks play?

Let’s start with some common misconceptions about money, and why they are not true:

Misconception 1: You make money by going to work, or by selling something.

FALSE: Nobody can make money except commercial banks (also called depository institutions) and the Federal Reserve, which is owned by the commercial banking industry. When you get paid for work it is merely a transfer of money that already exists. It was, at some time in the past, created by the banking industry (or really lend) money. The main reason people get a job is to get a transfer of money from people who already have some.

When we talk about money here we mean money that can be used in all transactions and in the repayment of all debts. This is what we are calling bank money. However, many non-bank types of so called "money" raising instruments are increasingly being used by non-bank corporations to avoid direct contact with the bank money creating process. This includes things like corporate bonds and shareholder equity, which expand on the bank money supply, but all are completely dependent on, and rely on the confidence that they can be liquidated for, "bank money". Hence the credit crunch in the subprime commercial paper and bond markets. We might call this other stuff "near money". Since, in our society, it is really bank money people seem to need for the basics of life, and these other near monies are luxuries for people that have excess, we will just focus on bank money here.

Misconception 2: Money has something to do with gold at Fort Knox.

FALSE: The monetary system use to be backed by the gold standard until President Nixon abolished the Gold Standard in 1971 during the Vietnam War. He did this because there was not enough gold at Fort Knox, KY to back all the money that needed to be created to fund the massive wartime expenditures. The axing of the gold standard backing the US dollar led to the "floating" of most national currencies, which were no longer pegged to a gold conversion standard. This lead to phenomenal growth in speculation against international currencies, which later led to massive economic and social crises in various countries that were speculated against. Examples include the Mexican Peso crisis of 1994-95, the Asian financial crisis of the late 1990s, followed by the Russian ruble crisis. Since the death of the gold standard and the floating of most major currencies we have seen currency speculation increase to an astonishing 98% of all international transactions. This means that "real economic" transactions account for a mere 2% of international transactions. This data on currency speculation is derived from the Bank for International Settlements and summarized in the book "The Future of Money" by Bernard Lietaer.

Money supply and debt have exploded in the absence of gold convertibility. Money is no longer a store of value. It is only a measure, an electronic accounting system of credits and debits that has come to be accepted world over as the only way of conducting trade. Each day several trillion dollars travels the globe trying to attract more electronic credits for its owners. Today's money is not backed by gold. It is now backed by our trust in the monetary system. This is ultimately a trust in those that create and control money the commercial banking system, and its major shareholders. The statement on all Federal Reserve Notes "In God We Trust" is a solid reminder of that trust.

Misconception 3: Money is Created by the Government Printing it.

FALSE: Today almost NO money is created by the government. Most of the total money supply is created by banks making loans to the non-bank public. Almost all money (more than 95% at any time) is created by the creation of a corresponding amount of debt. Currency in circulation is just a very small proportion of the total money supply and it is created by the Federal Reserve System, not the government.

So how then does money get created?

Having gotten some of these misconceptions out of the way let’s talk briefly about the actual mechanics of money creation. Money creation happens in two main ways. First the creation of base money, which is mostly physical currency notes, created by the Federal Reserve. The second money creation process involves checking account or deposit money created by the commercial banks, and which makes up most of the money supply.

Base money, also called high powered money, is created when the Federal Reserve performs what are known as Open Market Operations. In this process the Federal Reserve injects money by buying Government Securities, which then become debt owed by the government (that is the American Taxpayer) to the Federal Reserve. And where does the Federal Reserve get this money to buy the government securities? Well, that’s another story. The Federal Reserve has no budget, quite simply because it doesn’t need one. In fact, almost all money we come by has its basis in high powered money that the Federal Reserve pumped into the system at some time in the past. Most of this base money is currency in the form of Federal Reserve Notes.

The Federal Reserve then creates a spurious "liability" on its balance sheet called Federal Reserve Notes outstanding, and in return gets an asset in the form of government securities, which the public must repay through the efforts of real work. Every time the Federal Reserve creates or extinguishes base money the financial press and other mainstream media reports it as an interest rate announcement. This is not technically correct but it does sound more palatable than saying that the Federal Reserve just printed some money up or just took some money out of circulation.

Once this base money is created, banks can create around 10 times this amount in checking accounts and other deposits. They do this by making loans to the non-bank public. A corresponding amount of checking account money is created for each new loan. So most money is created just by bankers writing some new numbers on a piece of paper, or these days, entering bits and bytes in computers, since money really now exist just on a bunch of computer records. This means that when you go to borrow money to buy a house or car, the money is really being created by the bank, and being credited to the checking account of the seller.

The bank has a distinct advantage in all this just by being a bank. For if you can’t pay the loan through your hard work, they automatically get the house, and all they did was write some numbers into the computer. From the banks perspective however, if you don’t pay off the loan, they would have to write down their asset. (i.e. your loan) and this would affect the earnings they report. If lots of people did this the bank could go "belly up".

To reduce risk of banking system failure (which ultimately comes from sudden loss of confidence or trust in the system) institutions such as the IMF and World Bank have evolved into mechanisms for preventing banking system collapse. Unfortunately, however, what these mechanisms amount to is transferring the cost that could collapse the banking system outside of the banking system. And these costs end up being borne by those who have the least say in the financial system the regular taxpayer.

Partnership Banking

HEALTH CARE PARTNERING WITH  NON BANK LENDERS

By MELVIN J. HOWARD

The advent of non-bank lending institutions, whose only business is making loans. Have opened new doors for Health care developers, Physicians and Hospitals who need capital to start, build and grow their businesses. Medical facilities in businesses that do not typically qualify for conventional financing have discovered that non-bank lenders offer a viable alternative. Medical facilities such as specialty hospitals and clinic, physicians practices or small regional hospital centers that are difficult for banks to finance because they are single use properties, or the medical facility fall’s outside the bank's risk profile. Although it might seem that banks and non-banks would be rivals competing for Small Business customers. Increasingly conventional banks and non-banks are collaborating to benefit both the customer and themselves.

Partnering with a non-bank lender benefits the conventional lender in several ways. Perhaps most significant is that such a partnership can provide a bank an opportunity to say "yes" to a prospective borrower. Banks receive numerous loan inquiries through their broad networks of branches and business development officers. Many requests are turned down because they do not fit the bank's desired risk profile. However, these same prospects are likely to have deposits and/or other banking needs, both of which are desirable to a bank for its operations and overall profitability. Loans referred to a non-bank lender provide an opportunity for a bank to outsource loans it cannot approve while maintaining the profitable, non-credit portion of the relationship.

Non-banks can also serve as an outplacement resource for a bank's existing credit situations that no longer meet its desired risk profile. For example, as a result of a merger or acquisition, a bank may find that it now has a number of loans that do not fit its risk profile. A lender may also wish to outplace a loan that is performing, but is no longer desirable due to changes in loan-to-value, covenant violations or changes in operations. A non-bank lender may be able to refinance the loan, usually over a longer term and without covenants, thus improving the customer's cash flow and stability and removing the risk from the bank's balance sheet without impacting the remainder of the bank relationship.

A partnership between banks and non-banks ultimately benefits the customer. First and foremost, a non-bank often provides access to financing that is not available from a conventional lender. Furthermore, the customer's borrowing needs are met in a permanent way. Term loans do not have to be balloon payments, eliminating the need for a borrower to refinance the loan in 5 or 10 years. Therefore, the costs associated with a long-term loan (i.e. appraisals, environmental reports, and legal costs) are incurred just once.

When working with a non-bank lender, a customer can be assured that the lender is focused entirely on the loan transaction. Because a non-bank lender is interested only in the loan transaction, there is no need for a customer to unwind its banking relationship or move its deposit accounts. Many non-bank lenders have earned "preferred" lender status enabling them to provide quick turnaround on loan decisions with a high level of expertise in the loan process, thus providing a customer with painless fulfillment of it financing need.

Key to understanding how the bank and the non-bank work together, is an understanding of how they are different. Aside from the organizational or structural differences, how does a non-bank lender differ from a conventional bank? First, non-banks' only business is that of making loans. They do not take deposits or sell other services such as payroll, cash management, etc.

Contrary to popular opinion, non-bank lenders are not necessarily more aggressive in their evaluation of a loan request. However, because their loans are not funded by deposits and because they are not subject to the same set of regulations as banks, the non-banks can and will consider industries and situations conventional lenders will typically shy away from. Examples of industries that non-bank lenders will consider include gas stations/convenience stores, auto body shops, car washes, restaurants and the hospitality industry (hotels/motels). In addition, non-bank lenders are willing to consider situations, such as start-up businesses or businesses/individuals with problematic credit histories, which are generally perceived as being higher-risk.

Non-bank lenders can also be flexible in other ways. For example, non-bank lenders are typically long-term lenders, with a desired loan term of seven to 25 years, depending on the use of loan proceeds. In addition, many non-bank lenders lend nationally and are not restricted to a particular region or "footprint." Lastly, non-bank lenders often take a more holistic approach to a loan request, particularly with regards to collateral. As business assets may be insufficient to adequately secure a loan, a non-bank lender will often look to the availability of other assets as part of the entire collateral pool.

As we often hear, small and regional clinics and hospitals are the backbone of rural communities. They are often also the backbone of a bank's branch deposit base and overall profitability. By partnering with a non-bank lender, a bank can benefit both itself and its health care commercial customers.

Social Security And Medicare How Is It Funded

And Will It Still Be Around For The Next Generation?

By Melvin J. Howard

If you look at your pay-stub you will see two deductions for FICA taxes. Ever wondered what it means? Well FICA stands for Federal Insurance Contributions Act and covers two basic benefits for retirees and disabled persons:

Social Security:

Labeled as FICA-OASDI or Old Age and Survivors Insurance and Disability Insurance. This provides pension benefits to retirees, survivors and disabled persons.

Medicare:

Labeled as FICA-HI or Health Insurance. This provides medical insurance for retirees, survivors and disabled persons.

Some of you may be aware that the amount of money the government collects from employees and employers as the FICA taxes has exceeded the government's obligations in Social Security and Medicare payments for the past three decades. This has been true since FICA taxes were increased under the Reagan administration in 1983, at a time when other Federal Income Taxes were reduced. Then the question is "What has the government done with that excess money?" It’s all been spent on other things. About $2.2 Trillion of Social Security and Medicare Surpluses - all spent elsewhere by the US Treasury. Let’s see why this is. Many people are upset because they think the government should have "saved the money" for the future and often they are misled to believe this through the existence of what are called the Social Security and Medicare Trusts, or sometimes known as the Lock Boxes. In what form could the government save the money?

Perhaps:

* Keep it as US dollars or deposit it in a bank,

* Invest in the private sector, or

* Buy government bonds. I.e. write IOUs to oneself.

Let's look at the first possibility. If the government keeps the money as US dollars this is tantamount to the Treasury intervening in monetary policy, which is the job of the Federal Reserve. The Treasury would be essentially holding large sums of money out of the economy for many years, which would not make sense at all. The Treasury could instead decide to deposit the savings in a bank thereby making the funds available for use in the economy and draw on its deposits later as benefits fall due. But the banking system is backed up by the government itself, so the promises of the bank to make good on depositor’s funds is ultimately the promise of the government to itself. So why bother with all the banking fees?

It makes more sense for the government just to write a note to itself - "I owe to myself $x trillions of dollars", which is essentially what happens. A similar argument applies to investing the funds in the non-government guaranteed private sector. The private sector depends for its success on the stability and financial security of the State. If the State collapses so does the private enterprise defined by the rules of the State. If certain private enterprises collapse it shouldn't affect the State, except if there is massive widespread collapse like the recent banking crisis and then the State would step in to provide as many guarantees as possible. So some ultimate risks are still born by the State. The main point is that investing in the private sector carries with it higher risks than holding a government obligation. And the main point of Social Security is to pass risk from those that can least bear it over to those that can. Private investing without government guarantees completely removes this risk transfer feature of Social Security and places private sector investment risks onto those who can least afford it.

Therefore, as nonsensical as it sounds, so long as there is a surplus collection, the most sensible thing to do is for the Social Security and Medicare funds to pass over the excess funds they collect each year to the Treasury for it to spend back into the economy. The Treasury then writes an IOU to the trust fund to pay back the amount it just spent on something else. Basically the Government is writing an IOU to itself. Then they put the IOU in a box, lock it up and call it a safe "lock box" or trust fund. Whether intentional or not, what effectively happened to the Social Security and Medicare surpluses generated by the Reagan Era FICA tax increases and reductions in benefits, helped fund Reagan's big military build-up of the eighties. With a Federal Income Tax Cut, but an increase in FICA taxes, the tax burden was less progressive, and the loss in tax revenues in the general Treasury account was somewhat offset by Social Security Surpluses. This shifting of funds also enabled the government to replace borrowing from the private sector (the markets), which it cannot default on without dire consequences to the economy, with a promise to "pay back" the funds to Social Security and Medicare many years in the future when needed. This is a much less serious promise than issuing debt to the private sector because future governments may very well get away with reducing publicly funded social security benefits if they argue it effectively enough.

However the government cannot default on debt issued to the private sector else it will send the markets into a tailspin (since it is the most risk-free asset) and thus send the world's economy crashing. The Bush tax cuts and the recent extension of those cuts has compounded this trend of borrowing from Social Security and Medicare to make up for lower general revenues and thereby fund other government expenditures, and substitute borrowing from the markets with borrowing from Social Security/Medicare. Only time will tell if this was the right move or will promises be broken.

John Law's seeds of modern banking

The Law of Banking 

By Melvin J. Howard

Studying Quantum Physics has taught me a lot of things about the life around us it begins to explain how somethings in our world comes to be.  And the lack of awareness of this fact and how the physical matter comes about and your role in it, makes your life appear to you as an occurrence that is out of your control. It may appear to you as if you are the victim of circumstances, while all along you are the cause of those circumstances. Take for instance JOHN LAW, here is a perfect example of a person who realize how to create the circumstances around his life. A goldsmith's son, he was born in Edinburgh, Scotland, in April 1671. 

Having escaped from prison in London, where he was held after conviction of murder in his early twenties, he toured Europe, earning his living as a professional gambler, and then achieved the most amazing leap in history. From the gaming table to the highest office in France a country of which he was not a citizen and from which, a few years before, he had been ejected by the minister of police because of his suspiciously. And when he assumed the role of financial dictator of France he had the satisfaction of succeeding the very gentleman who as minister of police had invited him to clear out of Paris. Law discovered and perfected the device that has played, perhaps, the most important role in the growth of what we now call finance capitalism. Here is what he discovered. On the first day of January 1939, the banks in America had on deposit, guaranteed by the government, the money of their depositors to the extent of fifty billion dollars. 

But the balance sheets of these banks showed only seventeen billion dollars in cash. A closer examination, however, reveals that not only was the fifty billion in deposits a myth, but the seventeen billions in cash was equally a fiction. There was not that much cash in America then. The actual amount of cash—currency—in the banks was less than a billion dollars. Law's famous Mississippi Bubble was something more than a mere get-rich-quick scheme. To understand it you must have a clear idea of the theory, which lay at its base.

This theory consisted in two propositions. One was that the world had insufficient supplies of metal money to do business with. The other was that, by means of a bank of discount, a nation could create all the money it required, without depending on the inadequate metallic resources of the world. The bank Law had in mind was nothing more or less than the kind of banks we now do business with universally. 

But this was a unique proposal back then. Law did not invent this idea. He found the germs of it in a bank then in existence—the Bank of Amsterdam. This Law got the opportunity to observe when he was a fugitive from England. The Bank of Amsterdam, established in 1609, was owned by the city. Amsterdam was the great port of the world. In its marts circulated the coins of innumerable states and cities. Every nation, many princes and lords, many trading cities minted their own coins. The merchant who sold a shipment of wool might get in payment a bag full of guilders, drachmas, gulden, marks, ducats, livres, pistoles, ducatoons, piscatoons, and a miscellany of coins he had never heard of. This is what made the business of the moneychanger so essential. Every moneychanger carried a manual kept up to date listing all these coins. The manual contained the names and valuations of 500 gold coins and 340 silver ones minted all over Europe. No man could know the value of these coins, for they were being devalued continually by princes and clipped by merchants. To remedy this situation, the Bank of Amsterdam was established. Here is how it worked. A merchant could bring his money to the bank. 

The bank would weigh and assay all the coins and give him a credit on its books for the honest value in guilders. Thereafter that deposit remained steadfast in value. It was in fact a deposit. Checks were not in use. But it was treated as a loan by the bank with the coins as security. The bank loaned the merchant what it called bank credit. Thereafter if he wished to pay a bill he could transfer to his creditor a part of his bank credit. The creditor preferred this to money. He would rather have a payment in a medium the value of which was fixed and guaranteed than in a hatful of suspicious, fluctuating coins from a score of countries. So much was this true that a man who was willing to sell an article for a hundred guilders would take a hundred in bank credit but demand a hundred and five in cash. One effect of this was that once coin or bullion went into this bank it tended to remain there. All merchants, even foreigners, kept their cash there. When one merchant paid another, the transaction was effected by transfer on the books of the bank and the metal remained in its vaults. Why should a merchant withdraw cash when the cash would buy for him only 95 per cent of what he could purchase with the bank credit? And so in time most of the metal of Europe tended to flow into this bank. There was in Amsterdam another corporation—the East India Company. 

A great trading corporation, it was considered of vital importance to the city's business. The city owned half its stock. The time came when the East India Company needed money to build ships. In the bank lay that great pool of cash. The trading company's managers itched to get hold of some of it. The mayor, who named the bank commissioners, put pressure on them to make loans to the company—loans without any deposit of money or bullion. It was done in absolute secrecy. It was against the law of the bank. But the bank was powerless to resist. The bank and the company did this surreptitiously. They did not realize the nature of the powerful instrument they had forged. They did not realize they were laying the foundations of modern finance called capitalism. It was Law who saw this. Law perceived with clarity that this bank, in its secret violation of its charter, had actually invented a method of creating money. He came to the conclusion that this was something, which should be not merely legalized, but put into general use to cure the ills of Europe. 

He also saw clearly that this bank had brought into existence a great pool or reservoir of money and that he who controlled this supply could perform wonders. This was to be one of the most powerful weapons of the acquisitive man of the future—the collection of vast stores of other people's money into pools and the capture of control of those pools. Here is what Law saw. It is an operation that takes place in banks daily. Lets say The First National Bank of Middletown has on deposit a million dollars. Mr. Smith walks into the bank and asks for a loan of $10,000. The bank makes the loan. But it does not give him ten thousand in cash. Instead the cashier writes in his deposit book a record of a deposit of $10,000. Mr. Smith has not deposited ten thousand. The bank has loaned him a deposit. The cashier also writes upon the bank's books the record of this deposit of Mr. Smith. When Mr. Smith walks out of the bank he has a deposit of ten thousand that he did not have when he entered. The bank has deposits of a million dollars when Mr. Smith enters. When he leaves it has deposits of a million and ten thousand dollars. Its deposits have been increased ten thousand dollars by the mere act of making a loan to Mr. Smith. Mr. Smith uses this deposit as money. 

It is bank money this bank money has been created not by depositing cash but by loans by the bank to depositors. This is what the Bank of Amsterdam did by its secret loans to the East India Company, which it hoped would never be found out. This is what Law saw, but more important, he saw the social uses of it. It became the foundation of our current banking System.

FINANCIAL DERIVATIVES FROM A HEALTH CARE POINT OF VIEW

BETTING ON RISK  

By Melvin J. Howard

Derivatives has been a huge part of hospital's financial problems in the past and as evidence suggest translated into a lack of hospital beds. Since the 1980's innovative bankers have entered into the health care industry with an array of financial products. But what the financial crisis brought to the surface was that some CEOs or so called "sophisticated" investors participated in all sorts of transactions they simply could not understand. 

Hospital managers should concentrate on the hospital at hand not their financial complex portfolios. The job as the CEO of a hospital is to be a healthcare expert not Warren Buffet but egos prevailed. Even though health care organizations have long used floating-rate debt in finance with great success. I myself have deployed this technique many times but it is not for the un-sophisticated.

For some health care administrators, derivatives seemed like a safe bet and why not. The potential rewards were too great to resist, for years and years it was a smart strategy. Hospitals made money on these for a long time. What changed? the financial crisis and they lost money. When times were good it worked for a while but when times went bad it went very bad. Boom you took a hit on your swaps.

Many hospitals committed cash to alternative investments as they took on additional risk by borrowing in short-term markets, debt that could be unloaded by investors for quick repayment, assuming bonds could be sold to new investors. Some used derivatives known as "swaps" as an interest-rate hedge for bonds in short-term markets. Conventional thinking was the wisdom about swaps is that they can be a good way for hospitals to guard against a sudden change in rates. This was true in some cases but the key word is "some." Just not always. Just what are Derivatives they are bets, pure and simple, predictions about the future. 

The concept of derivative is to create a contract that derives from an original contract or asset. For example, stock market derivatives are contracts that are settled based on movements in prices of stocks, without transferring the underlying stock. Similarly, a credit derivative is a contract that involves a contract between parties in relation to the returns from a credit asset, without transferring the asset as such. As you may notice this is a financial instrument that is used by financial institutions. It has now been expanded to a number of industries. In order to properly serve as a hospital administrator or CEO. It is important that one has some information on the different methods of financing and mitigating risks of their health care facility but I often find that this roll is often conflicted with the CEO and CFO of the facility and the fund that owns it. 

What is a credit derivative? A credit asset is the extension of credit in some form: normally a loan, installment credit or financial lease contract. Every credit asset is a bundle of risks and returns: every credit asset is acquired to make certain returns on the asset, and the probability of not making the expected return is the risk inherent in a credit asset. There are several reasons due to which a credit asset may not end up giving the expected return to the holder: delinquency, default, losses, foreclosure, prepayment, interest rate movements, exchange rate movements, etc. A credit derivative contract intends to transfer the risk of the total return in a credit transaction falling below a stipulated rate, without transferring the underlying asset. For example, if bank A enters into a credit derivative with bank B relating to the former's portfolio, bank B bears the risk, of course for a fee, inherent in the portfolio held by bank A, while bank A continues to hold the portfolio. 

The motivation to enter into credit derivatives transactions are well appreciable. The above example has depicted credit derivatives being a bilateral transaction - as a sort of a bartering of risks. As a matter of fact, credit derivatives can be completely marketable contracts the credit risk inherent in a portfolio can be securitized and sold in the capital market just like any other capital market security. So, anyone who buys such a security is inherently buying a fragment of the risk inherent in the portfolio, and the buyers of such securities are buying a fraction of the risks and returns of a portfolio held by the originating bank. Thus, the concept of derivatives and securitization have joined together to make risk a tradable commodity of which we participate in.

    

 A definition of credit derivatives: Credit derivatives can be defined as arrangements that allow one party (protection buyer or originator) to transfer credit risk of a reference asset, which it may or may not own, to one or more other parties (the protection sellers). Types of credit derivatives: The easiest and the most traditional form of a credit derivative is a guarantee. Financial guarantees have existed for thousands of years. However, the present day concept of credit derivatives has traveled much farther than a simple bank guarantee. The credit derivatives being currently used in the market can be broadly classified into the following:

     

Total return swap: As the name implies, a total return swap is a swap of the total return out of a credit asset against a contracted prefixed return. The total return out of a credit asset can be affected by various factors, some of which may be quite extraneous to the asset in question, such as interest rate movements, exchange rate fluctuations etc. Nevertheless, the protection seller here guarantees a prefixed return to the originator, who in turn, agrees to pass on the entire collections from the credit asset to the protection seller. That is to say, the protection buyer swaps the total return from a credit asset for a predetermined, prefixed return.

Credit default swap: Credit default swap is a refined form of a traditional financial guarantee, with the difference that a credit swap need not be limited to compensation upon an actual default but might even cover events such as downgrading, apprehended default etc. In a credit default swap, the protection seller agrees, for an upfront or continuing premium or fee, to compensate the protection buyer upon the happening of a specified event, such as a default, downgrading of the obligor, apprehended default etc. Credit default swap covers only the credit risk inherent in the asset, while risks on account of other factors such as interest rate movements remains with the originator.

Credit linked notes: Credit linked notes are a securitized form of credit derivatives. The technology of securitization here has been borrowed from the catastrophe bonds or risk securitization instruments. Here, the protection buyer issues notes. The investor who buys the notes has to suffer either a delay in repayment or has to forego interest, if a specified credit event, say, default or bankruptcy, takes place. This device also transfers merely the credit risk and not other risks involved with the credit asset. Now that you know the different methods it doesn't get hospital administrators off the hook. You should not use financial instruments you don't understand. The point I am making is this hospitals the health care industry, like companies in other sectors, relies increasingly on the securities market to drive profits. Over the years they've developed an ever greater appetite for all sorts of risk, particularly hedge funds, as investors push health care companies to boost return on capital so you should be aware of all scenarios.

CAPTAIN KIRK POLITICS IT IS SIMPLY NOT LOGICAL

Arguments Theories and Conspiracies

By Melvin J. Howard

You have probably heard Spock say to Captain Kirk on the TV series Star Trek (That is not logical Captain) now that the elections are coming up. The push is on to get your votes but how do you make an intelligent decision with so much information coming at you like the speed of light. How do you decipher fact from fiction who is wrong who is right? Since there are no federal laws requiring truth in political ads at all. And the few states that have attempted such laws have had them overturned or found them ineffective. Some believe that politicians can be sued for defamation if they stray too far from the truth, and they think that provides some protection to voters. It doesn’t the courts move to slowly for that trust me and they rightly give candidates the full benefit of free-speech protection of the U.S. constitution. So lawsuits for false political claims are rare or non-existent. The reality is that the public is exposed to enormous amounts of deception that go unchallenged by government regulators the courts or the news media. Fear has been a staple tactic of advertisers and politicians for so long that it has become the political go to when all else fails.  We should always approach claims cautiously when they are too dramatic, especially when you want them to be true. Extravagant claims are just too easy to accept when they match your own biases.

People who find their position weak or indefensible often attack. You see our minds betray us not only when it comes to politics but all sorts of matters. People are not by nature the fact driven rational beings we think we are. We embrace information that supports our beliefs and reject evidence that challenges them. You see anyone who cites statistics or poll numbers has an investment in the statistic. It is quite rare to hear a statistic from an unbiased voice. Statistics and actuarial tables work because most people live predictable lives. They are influenced by the same news casts read the same newspapers read the same bill boards consume the same fast foods. Listen to the same sermons agree with people of the same skin color, oppose the same political party fight over money and complain about the same problems and are willing to settle for a cookie-cutter way of life. But for those of us who do not adhere to a robotic existence we use logic or deep thinking. We all use the word logic but what does the word mean? It is the science or study of how to evaluate arguments and reasoning. Logic is a way to allow us to distinguish correct reasoning from poor reasoning. Logic is important because it helps us reason correctly without correct reasoning, we don’t have a viable means for knowing the truth or arriving at sound beliefs. I have a personal interest in logic and how the mind works as Spock would say it is fascinating.

Logic is not a matter of opinion when it comes to evaluating arguments; there are specific principles and criteria, which are used. If we use those principles and criteria, then we are using logic. This is important because sometimes people don’t realize that what sounds reasonable isn’t necessarily logical in the strict sense of the word. The ability to use reasoning is far from perfect, but it is also our most reliable and successful means for developing sound judgments about the world around us. In general, our ability to survive depends upon our ability to know what is true, or at least what is more likely true than not true. For that, we need to use reason. I had a very good friend and business partner whom was my lawyer he has since passed away. His passing was a terrible lost to me personally and professionally. We were roughly the same age we had some of the same ideas about life. But we were the polar opposites when it came to our personal style he was downtown I was uptown. But we clicked he knew how my mind worked it was magic.

But what Dave gave to me was more important than any legal advice he taught me how to think in terms of logic and reason. Of course, reason can be used well or it can be used poorly and that is where logic comes in. The Greek philosopher Aristotle is generally regarded as the “father” of logic. Others before him discussed the nature of arguments and how to evaluate them, but he was the one who first created a system for doing it. Whatever the subject matter logic is applicable anywhere that reasoning and arguments are being used. If we don’t apply the criteria of logic to our arguments, we cannot trust that our reasoning is sound.

When a lawyer makes an argument for a particular course of action, how can that argument be properly evaluated without an understanding of the principles of logic? When a CEO makes a pitch for a product, arguing that it is superior to the competition, how can we determine whether to trust the claims if we aren’t familiar with what distinguishes a good argument from a poor one? Here is where we have to use critical thinking, critical thinking is an effort to develop reliable, rational evaluations about what is reasonable for us to believe or disbelieve. Critical thinking makes use of the tools of logic and science because it values skepticism over gullibility or dogmatism, reason over faith, science of pseudoscience, and rationality over wishful thinking. Critical thinking does not guarantee that you will arrive at the truth, but it does make it much more likely than not you will.

Open Your Mind

A person who wishes to think critically about something like politics must be open-minded. This requires being open to the possibility that not only are others right, but also that you are wrong. Too often people launch into a frenzy of arguments apparently without taking any time to consider that they may be mistaken in something. Of course, it is also possible to be too “open-minded” because not every idea is equally valid or has an equal chance of being true. Although we should technically allow for the possibility that someone is correct, we must still require that they offer support for their claims if they cannot or do not, we may be justified in dismissing those claims and acting as if they weren’t true. Even if you have clear logical reason for accepting an idea, you also probably have emotional and psychological reasons for accepting it. Reasons, which you are not fully aware of. It is important though, that you learn to separate the two because the latter can easily interfere with the former.

Don’t Jump

It’s easy for people to quickly go to the first and most obvious conclusion in any sort of dilemma, but the fact of the matter is the obvious conclusion isn’t always the correct one. Remember all those TV crime dramas that you thought you had wrapped up in 15 minutes only to be wrong at the end of the show. Unfortunately, once a person adopts a conclusion it can be difficult to get them to give it up in favor of something else after all, no one wants to be wrong, do they? One of the most important things to watch out for in arguments is the influence of bias or vested interest and every human has them. Both are variations on the same sort of problem, although there are differences that require mentioning each separately. Bias occurs any time that facts are interpreted in a way that unreasonably favors one position over another; vested interest is a cause of bias in which one will personally and specifically benefit if people adopt a particular position. Ultimately, some sort of bias is always going to exist we all have our passions, desires, and preferences. We wouldn’t even be debating particular issues unless we cared about them in some way, so the very nature that we are participating in a debate or discussion is itself evidence of some sort of bias.

Having a bias, however, is not the same as allowing one’s reasoning and arguments to succumb to bias. In critical thinking the person makes a sincere effort to recognize and acknowledge their biases, ultimately taking them into account when weighing evidence and logic so as to ensure that those biases don’t unfairly tip the scales in an inappropriate direction. It is also important to listen when someone points out possible biases because, quite frankly, we often aren’t good at noticing when we have biases that influence our thinking. A vested interest is a particular cause of bias, which occurs not simply when one unreasonably favors a preferred perspective, but in fact favors a perspective which provides them with specific benefits. An obvious example of vested interest would be anyone who is paid to promote a product in commercials.

There are also many ways in which a person can have a vested interest which aren’t quite so obvious. A person might, for example, discount allegations of unethical or illegal conduct against a company they have stock in. They might also favor any reports that improve the image of their case on the assumption that anything, which makes their theory look better, must therefore make them look better as well. You can also identify backwards-looking examples of vested interest because people seem to have a strong interest in defending decisions that have already been made i.e. the wrongly convicted no one wants to be wrong. Similar behavior can be seen when it comes to political candidates or political parties’ ideology.