The Most Recent Meeting -

Annual CMRE Spring Meeting
Thursday, May 15, 2008
The Union League Club -- 38 East 37th Street, New York City

Cocktails at 4:30; Program at 5:00

Securitization – Insolvency – Stagflation

On The Program

James Grant, “Grant’s Interest Rate Observer”, the man who has brought financial reporting to a high art. In politics, James recently praised Grover Cleveland as president. (We agree and if your knowledge is incomplete regarding Cleveland, check the Mackinac Institute for the article by Lawrence Reed,* fellow supporter of sound money.)

Charles Peabody of Portales Partners, reports on the world’s banks and economies. In January, Charles had this provocative coverage, “Is China the Next Disease? We think so!” His list of what a collapse in Chinese markets could produce for US financial companies is not to be missed. Can the bubble burst before the Olympics?

Walter J. “John” Williams prepares Shadow Government Statistics, an extraordinary service for sound analysis that he started when a client asked for his assistance as he could not depend on Department of Commerce GDP figures. Williams found the government figures faulty. His corrections lasted until… GNP methodological changes eventually made the underlying data worthless. His outlook is a deteriorating but still inflationary recession.

Stanley Sporkin, known for his uncompromising work as a lawyer and a judge, he distinguished himself as a legal critic. Sporkin was SEC Chief of Enforcement during the Carter Administration. President Reagan appointed him to the U.S. District Court for the District of Columbia. He retired as a federal judge in January 2000.

Chairman for the Evening

Richard L. Hanley, CFA
Richard L. Hanley Associates; Hambletonian Partners, LP
CMRE Director

Following the formal program there will be ample time for Q&A, your comments, Bill Laggner of Bearing Asset will add his, and by special request Alex MacDougall will present once again the history of the destruction of the German mark in 1923.

Background - The Program of May 15, 2008

For an educational Committee, there is always valuable background for a meeting. For example, in his book, The Bankers, The Next Generation *(1997) Martin Mayer included this statement by Lowell Bryan of McKinsey & Co. in 1991. “The force of securitization is driven by fundamental economics. Bluntly put, the securities business system is more efficient than the banking business system. As a nation we, should accept the fact that anything that can be securitized will be securitized.”

From his own experience. Mayer recalled a meeting with the House Banking Committee in the mid 1980s. When he spoke critically of banks’ willingness to lend in Latin America and play games with government bonds and exotic instruments while ignoring their social function of lending to enterprise at home, one major banker blew up at him, saying, “Look. There is no more plain vanilla lending any more.” And so we have events that led to 2007-2008.

There is a broader background to the current economic conditions, one that began some 72 years ago when John Maynard Keynes brought out his work, The General Theory of Employment, Interest and Money. Recently we asked an economist if Keynesian economics was still being taught throughout academe. He assured us that it is taught and is now in full swing in our current Stagflation. It is also to be remembered that when Richard Nixon closed the US gold window in 1971, he commented, “We are all Keynesians now.”

For the essence of Keynes’s work, and for pleasurable reading, we turned to, The Failure of the New Economics*** and The Critics of Keynesian Economics,**** both written by this Committee’s distinguished colleague, Henry Hazlitt.

In the section analyzing Keynes’s criticism of classical economics, Hazlitt juxtaposed his ideas and those of Keynes. When Keynes complained that classical economics reached conclusions quite different from that of the ordinary uninstructed person, Keynes supposed that added to its intellectual prestige. Hazlitt responded, “Keynes certainly reached conclusions quite different from the ordinary uninstructed person – for instance that saving is a sin and squandering a virtue.” (The Failure… pg. 56)

When Keynes said that the teaching of classical economics translated into practice was austere and often unpalatable and that lent it virtue… (The Failure…pg. 56) Hazlitt wrote, “The ‘virtue’ of Keynes’ teaching is that it praised thriftlessness, reckless spending, and unbalanced budgets and was therefore extremely palatable to the politicians in power.” Hazlitt consistently objected to Keynes’s doctrine of government spending, artificially low interest rates, and printing press money. (The Failure… pg.56)

Hazlitt quoted L. Albert Hann who compared the reading of Keynes to watching…”a sort of trick film. Everything happens in a manner that is exactly the opposite of what the non-Keynesian is used to.” (The Failure…pg 44) /CMRE Ed. - the Bizarro world of Batman and Seinfeld?/

Hazlitt called The General Theory…one of the most obscure, awkward and circumlocutory economic books ever written….Its existence is one of the great intellectual scandals of our age…as with some of the works of Hegel and Marx, the very mystification added to the book’s prestige.” (The Critics of Keynesian Economics…pg. 10)

To Keynes, credit expansion would perform the “miracle…of turning a stone into bread….”

Ludwig von Mises rejected the much glorified “progressive” economic policies of Keynes saying…”no one should expect that any logical argument or any experience could ever shake the almost religious fervor of those who believe in salvation through spending and credit expansion. (The Critics…pg. 315)

And finally. . .

In the book Capitalism, The Unknown Ideal (1967) by Ayn Rand with articles by Alan Greenspan, the former Federal Reserve Chairman, made clear what Keynes had promoted: “This is the shabby secret of the welfare statist’s tirades… Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statist’s antagonism towards the gold standard.”

Invite your colleagues to join you in attending the meeting.

++++++++++++++++++

*The Bankers – The Next Generation by Martin Mayer
“The New World of Money, Credit and Banking in an Electronic Age
Truman Talley Books, Plume, New York, 1997
**Grover Cleveland and Sound Currency by Lawrence W. Reed
Mackinac Center, Speech delivered October 28, 2006
(The first dinner registrant who reports what Joseph Pulitzer
said about Grover Cleveland will be acknowledged with a prize.)
***The Failure of the “New Economics”
Henry Hazlitt. D. van Nostrand Co. Inc. 1959
****The Critics of Keynesian Economics
D. van Nostrand Co., Inc. Copyright transferred to Henry Hazlitt, 1973
New Preface Copyright, 1977 by Henry Hazlitt, Arlington House

Recent Meeting -

Annual CMRE Fall Dinner Meeting
Thursday, October 25, 2007
The Union League Club -- 38 East 37th St. New York City

Globalization
August 15, 1971* – October 25, 2007
Perspective and Analysis of Roiled Markets

Cocktails and Registration 4:30 PM
Introduction of Guests
Chairman for the Evening
Sean Fieler, Equinox Partners, CMRE Director

Opening Session 5:15 – 6:00 PM

Leonard Liggio, Vice President, Atlas Research Foundation
- A View of the U.S. in the World Beyond the Markets -

Eugene Schroder, Rancher, Scholar, Historian

- Farming, The (Endangered) Industry that Keeps the Nation Going

- The Return of “Cowboy Ethics”-

Speeches will continue while Dinner is Served

Session II – Special Report:
Robert Brooke, Rhombus Research, London, England

Learning the Lessons from Japan
- There is a similarity between conditions in the subprime crisis in the U.S. and the way that subsector after subsector of the Japanese finance industry was destroyed during the 90s “… few commentators seem to have made the link.”

Session III

Randall Dodd, President, Financial Policy Forum; Derivatives Study Center

The Credit (Debt) Crisis

Martin Mayer, distinguished author, especially on the banking industry,

- The Use and Abuse of Credit Derivatives Ratings -

- The Question of Ending National Currencies -

Richard W. Rahn, Director of the Cayman Island Monetary Authority,

Chairman, Institute for Global Economic Growth; Author, “The End of Money”

And, the Final Word………

*August 15, 1971

In his May 3, 2007 WSJ article, Leo Melamed, Chairman Emeritus of the Chicago Mercantile Exchange , wrote: “If one had to pinpoint the birth of globalization, a good bet would be Aug. 15, 1971.”

He continues: “When US dollar convertibility to gold was dropped, there came an irreversible breakdown of fixed exchange rates, which initiated the modern era of globalization and provided the rationale for the launch of financial futures by the Chicago Mercantile Exchange. The world left the gold standard for the information standard and the U.S. then for three decades dominated the world’s capital markets. With derivatives, the CME, Chicago Board of Trade and the New York Mercantile Exchange initiated the modern futures era. Financial engineers created a vast array of financial instruments. In securities, Chicago Board of Trade Options Exchange stock options were born and the NYSE, Nasdaq and other American exchanges grew without equal.”

Merton Miller, Nobel Laurent in economics, said the period between the mid-1960s and mid-1980s was unique, no other 20-year period in American history witnessed even a tenth of the financial innovation of that time. But, suddenly, American first mover advantage was over while the growth of other industrial nations moved up.

The date, August 15, 1971, marks the time the founders of CMRE were forming the Committee. In the spring of 1973, they held their first conference at Arden House, Harriman, New York. Among the stars who spoke were Jacques Rueff, Robert Triffin, Hans Sennholz, Donald H. McLaughlin, Otto Roethenmund, Sir Roy Harrod, C. Lowell Harriss, Henry Hazlitt and John Exter.

There had been a dollar crises, the U.S. had to devalue the dollar and the Bretton Woods system was all but finished. That group of esteemed economists conducted a discussion with the seriousness the situation warranted. Jacques Rueff concluded saying, “Western Civilization is in great danger. Let us hope we shall not delay too long before adopting the measures that are indispensable if we are to save it.”

(That kind of remark sends one back to reading Gibbon – Decline and Fall…)

But in the political world where money was managed, measures were not adopted with Western Civilization in mind.

Henry Hazlitt was brilliant. “Establishing a sound currency is an ethical problem.
There is a moral issue here.
We have forgotten that our currency unit, the dollar, was originally a pledge. It was a solemn pledge by the U.S. Government to pay its bearer on demand 1/20^th of an ounce of gold. Our government disdainfully repudiated that pledge in 1933. It made another pledge to pay 1/35^th of an ounce, not to our own people but to foreign central banks. That pledge was repudiated in 1971.”

Adam Smith warned, said Hazlitt, that whenever a nation piled up too much debt, it usually paid it off in a depreciated currency. "The raising of the denomination of the coin (currency devaluation) has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment.” Hazlitt concluded, “We should agree that this is a swindle and that some mere ‘technical adjustment’ is not required.”

In that regard, one can consider that China holds around $1.3 trillion of foreign exchange reserves, nearly all of them estimated to be in dollars. Japan holds about $900 billion dollars of reserves, around two-thirds of them in dollars. Other players, Russia, India, etc., hold smaller but still impressive amounts of dollars. One might wonder what Adam Smith and Henry Hazlitt would say of this situation. Is there a future swindle lurking in there someplace, and if so, who is being set up to take the hit?

What is to be done to liquidate those dollar claims? Creditor countries could buy gold from the U.S. and give us dollars they hold in return. One bright economist has suggested they could buy Ft. Knox and take a deed to it in exchange for cancellation of the Treasury notes they hold.

Moreover, the U.S. now faces a serious crisis in the real estate market that is said to be “battering investor confidence across the globe, and dashing hopes of a quick end to the recent credit-led turmoil in global markets.”
(Financial Times, London, August 1, 2007)

Mr. Melamed concluded his article recognizing the benefits of the U.S. first-mover advantage as a priceless intellectual legacy. The knowledge and experience from that reservoir, coupled with the constitutional and cultural birthright Americans have to think freely, experiment and create, give Americans an extraordinary potency. The discussion in October can include that unique American background and the opportunities that it creates.

We write this brief history for your greater appreciation of the grand program scheduled for October 25. CMRE monographs could add to your understanding of this subject. You may write for information regarding those publications. A new monograph (No. 56) by Forrest Capie, “The Search for Stable Prices and the Role of Gold,” is now available.
Invite your associates to join you on October 25.

Audio CDs of the Oct 5, 2005 meeting and the May 11, 2006 meeting are available.
$50. each (includes shipping)

If you would like to learn more about these meetings,
you may write to:
CMRE
10004 Greenwood Ct.
Charlotte, NC 28215

Globalization August 15, 1971* – October 25, 2007 Perspective and Analysis of Roiled Markets

Cocktails and Registration 4:30 PM Introduction of Guests Chairman for the Evening Sean Fieler, Equinox Partners, CMRE Director