The Federal Reserve System

Michael S. Rozeff, on May 4, 2010, published part eight of his brilliant story on America’s decline into unconstitutional money, entitled "The U.S. Constitution and Money".

Rozeff's mission is to summarize one of my favorite monetary books of all time, Edwin Vieira’s Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution. Part eight below is about the federal reserve system and Rozeff states, "This is the first of several that sheds light on the Fed. I also include a note on money and a note on banking. Discover how half a dozen court cases have failed to arouse the courts to consider the statutory basis of the Fed, and how the courts put down both Henry Reuss and Don Riegle. Find out what Congressmen were thinking as they debated the Federal Reserve Act in 1913. Discover what part of the Fed is governmental and what part is private, and how the whole operation is a corporative state (fascist) cartel. The Fed’s constitutional vulnerabilities will be addressed in a future article."

The U.S. Constitution and Money, Part 1 and Part 2, can be found here.

The U.S. Constitution and Money, Part 3 and Part 4, can be found here.

The U.S. Constitution and Money, Part 5, can be found here.

The U.S. Constitution and Money, Part 6, can be found here.

The U.S. Constitution and Money, Part 7, can be found here.

The U.S. Constitution and Money: The Federal Reserve System (Part 8)

The U.S. Constitution and Money, Part 9, can be found here.

Michael S. Rozeff is a retired Professor of Finance living in East Amherst, New York. He is the author of the free e-book Essays on American Empire.

Europe Prepares Nuclear Response to Save Monetary Union

By Ambrose Evans-Pritchard
The Telegraph, London
Sunday, May 9, 2010

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7702335/Europe-prepares-nuclear-response-to-save-monetary-union.html

Are Europe's leaders grasping the nettle at last? Faced with the imminent disintegration of monetary union, they appear poised to create the beginnings of an EU debt union and authorize the European Central Bank to step in immediately to stabilize the eurozone bond markets.

"It is an absolute general mobilization: we have decided to give the eurozone a veritable economic government," said French president Nicolas Sarkozy, once again basking as Europe's action man. "Today we have an attack on the whole of the eurozone. This is a systemic crisis: the response must be systemic. When the markets open on Monday morning we will be ready to defend the euro."

Great caution is in order. German Chancellor Angela Merkel has so far said little. The descriptions of the deal agreed by EU leaders in the early hours of Saturday are coming from the French bloc and EU bureaucrats. How many times during the Greek saga of the last four months have we heard claims from Brussels that turned out to be a distortion of what Germany had actually agreed, causing each relief rally to falter within days? They had better get it right this time.

But if the early reports are near true, the accord profoundly alters the character of the European Union. The walls of fiscal and economic sovereignty are being breached. The creation of an EU rescue mechanism with powers to issue bonds with Europe's AAA rating to help eurozone states in trouble -- apparently €60bn, with a separate facility that may be able to lever up to €600bn -- is to go far beyond the Lisbon Treaty. This new agency is an EU Treasury in all but name, managing an EU fiscal union where liabilities become shared. A European state is being created before our eyes.

No EMU country will be allowed to default, whatever the moral hazard. Mrs Merkel seems to have bowed to extreme pressure as contagion spread to Portugal, Ireland, and -- the two clinchers -- Spain and Italy. "We have a serious situation, not just in one country but in several," she said.

The euro's founding fathers have for now won their strategic bet that monetary union would one day force EU states to create the machinery needed to make it work, or put another way that Germany would go along rather than squander its half-century investment in Europe's power-war order.

Whether the German nation will acquiesce for long is another matter. Popular fury over the Greek rescue has already cost Mrs Merkel control over North Rhine-Westphalia and with it the Bundesrat, dooming her reform agenda. The result was a rout.Events are getting out of hand, and not just on the streets of Athens.

For now, the world has avoided a financial cataclysm that would have been as serious and far-reaching as the collapse of Lehman Brothers, AIG, Fannie and Freddie in September 2008, and perhaps worse given the already depleted capital ratios of banks and the growing aversion to sovereign debt

Bond risk on European banks as measured by the iTraxx financial index reached even higher levels late last week than in the worst moments of the Lehman crisis. The safe-haven flight into two-year German Schatz was flashing the most extreme stress warnings since the instruments where created forty years ago."We're seeing herd behavior in the markets that are really wolfpack behavior," said Anders Borg, Sweden's Finance Minister.

Credit specialists in Frankfurt, London, and New York feared a blow-up by Thursday afternoon, when ECB president Jean-Claude Trichet said the bank's council had not even discussed the `nuclear option' of buying Club Med bonds. The ECB seemed to be on another planet.

It was the fall-out from that press conference -- at a moment when markets were losing all confidence in EU leadership -- that had much to do with the DOW's 1000 point drop in New York hours later. This is not to blame Mr Trichet. He did not have a mandate to go further at that stage. The Bundesbank had blocked him, knowing full-well that ECB purchases of bonds is the end of monetary discipline and the start of a Primrose Path to Hell. As they say in Frankfurt, a central bank should be like pudding: "the more you beat it, the harder it gets".

It is pointless to fault either camp is this clash of Latin and Teutonic mores. The euro was never an "optimal currency area", which is to say it was never an "optimal legal and cultural area". It was a late 20th Century version of the same Hegelian reflex of imposing ideas from above -- making facts fit the theory -- that has so cursed Europe. Schopenhauer said Hegel had "completely disorganized and ruined the minds of a whole generation". Little did he know how long the spell would last.

But I digress. There is a difference between quantitative easing by the US Federal Reserve and the Bank of England for liquidity purposes, and use of this policy to soak up the debt of governments dependent on external finance to cover structural deficits. The lines are of course blurred. One purpose can leak into the other.

But whatever the objections of the Bundesbank, it seems that Europe's elected leaders pulled rank this weekend -- and high time too says the French Left. The reaction in Germany already been fierce. "The ECB is going crank up the printing presses," said Anton Börner, head of Germany's export federation. "In five to ten yeas we will have a weak currency, with rising inflation and higher rates of inflation that will act as a break on growth."

I don't agree with Mr Börner. The M3 money supply is contracting in the eurozone, pointing to the risk of a Japan-style slide into deflationary perma-slump, although the panic response to that down the road may well be to call in the printers. But there is no doubt that Mr Börner represents German opinion.

The EU is invoking the "exceptional circumstances" clause of Article 122 of the Lisbon Treaty, arguing that the euro is subject to an "organized worldwide attack". This is a legal minefield. A group of professors has already filed a case at Germany's Constitutional Court, claiming that the Greek bail-out is illegal and that the EMU is degenerating into a zone of monetary disorder.

Read the rest of the article.

IMF Can't Explain Gold Sales Now Without Revealing Squeeze

By Adrian Douglas
Gold Anti-Trust Action Committee
Thursday, May 6, 2010

http://www.gata.org/node/8607

The bailout package for Greece is $146 billion offered jointly by the International Monetary Fund (IMF) and the European Union (EU). If the IMF is taking half the responsibility for this loan package, it is on the hook for $73 billion.

The IMF's sale of 212 tonnes of gold in 2009 to India, Sri Lanka, and Mauritius netted $7.1 billion. So to raise all the IMF's share of the Greek bailout package, the IMF would have to sell a further 1,773 tonnes or 59 percent of IMF gold reserves. If the IMF subsequently has to bail out Spain or Portugal, it would then have no gold at all.

But this is just hypothetical because the IMF doesn't have 3,005 tonnes of gold to sell. It has only 168 tonnes, which is what remains from the 403 tonnes it declared it was selling in 2009. This gold is what the IMF claims it earned through transactions it made after the Second Amendment to its Articles in 1978. The IMF is authorized to sell only this gold, and the IMF's Internet site shows that this is the only gold it actually has.

GATA has long maintained that the IMF has little to no gold. It has only pledges of gold that are part of the central bank gold reserves of IMF member countries. This view is supported by the inability of the IMF in 2008 to tell GATA Secretary/Treasurer Chris Powell exactly where the IMF's gold is stored and if it is audited. (See http://www.gata.org/node/6242.) Business Insider's Vince Veneziani was also stonewalled when he recently asked the IMF about the whereabouts of its gold. (See http://www.gata.org/node/8583.)

The IMF Internet site notes that the gold that had been pledged to the IMF before the Second Amendment, approximately 2,800 tonnes is subject to "restitution" to the IMF's founding members. (See http://www.imf.org/external/np/exr/facts/gold.htm.)

"Restitution. The Articles also provide for the restitution of the gold the Fund held on the date of the Second Amendment (April 1978) to those countries that were members of the Fund as of August 31, 1975. Restitution would involve the sale of gold to this group of member countries at the former official price of SDR [Special Drawing Rights] 35 per ounce, with such sales made to those members who agree to buy it in proportion to their quotas on the date of the Second Amendment. A decision to restitute gold requires support from an 85 percent majority of the total voting power. The Articles do not provide for the restitution of gold the Fund has acquired after the date of the Second Amendment."

The former official price of SDR 35/oz equates today to about $68/oz. So this means that however you look at it, the IMF has no gold. IMF member countries pledged gold to the IMF and at any time they can buy it back for $68/oz.

Yes, restitution of the gold requires an 85 percent majority vote at the IMF, but would anyone vote against buying gold at $68/oz?

This means that there is no way that the 2,800 tonnes of gold the IMF was pledged before the Second Amendment will ever be sold by the IMF to anyone except the member countries that pledged it.

So how could anyone think that the original gold ever physically changed geographic location?

The gold almost certainly has been left in IMF member central bank vaults and double-counted, first as IMF member gold reserves and then as the IMF's own gold reserves.

Is this just guesswork? Absolutely not. In February 2008 the IMF approved gold sales guidelines that are explained at the IMF's Internet site:

"The IMF's Executive Board has reaffirmed the long-standing principle that the Fund has a systemic responsibility to avoid causing disruptions that would adversely affect gold holders and gold producers, as well as the functioning of the gold market. To that end, in February 2008, the Board endorsed the following guidelines to govern the envisaged gold sales:

"(i) Sales should be strictly limited to the amount of gold that the Fund has acquired since the Second Amendment of the Articles of Agreement (12,965,649 fine troy ounces or 403.3 metric tons, which represent one-eighth of the Fund's total holdings)."[Emphasis added.]

So by its own executive board resolution the IMF cannot sell any gold beyond the 403.3 tonnes it has already announced, leaving the only possible method of disposal of the remaining 2,800 tonnes as a resale to the founding members at the original Special Drawing Right price.

IMF gold is clearly just a ledger entry.

The 403 tonnes that the IMF obtained since the Second Amendment probably is real gold and that explains why the IMF was obliged to sell it: Because the Western central banks and their bullion bank cartel allies are desperate for liquidity to keep their gold price suppression scheme going. Once that 403 tonnes are gone, there is no more gold available from the IMF. And the IMF's balance sheet can be squared away with just $6.9 billion to cancel out those 2,800 tonnes of ledger-entry gold if at any point the IMF wishes to do so.

It is comical that the IMF's gold sales were spun as a way to raise money to set up an endowment fund that could be a better-performing asset than gold itself, which generates no income stream. So what is in the endowment fund that will perform better than 200 tonnes of gold?

Greek bonds!

The IMF must have got investment advice from Gordon Brown on that one.

In a dispatch on May 4 GATA reported that the World Gold Council (WGC) had discovered that the IMF sold 5.6 tonnes of gold in February and 18.5 tonnes in March. This was discovered by the WGC staff examining the monthly financial statements of the IMF. This is astonishing news.

The IMF has always announced at least 500 times its vague determinations that it might want to sell gold, and when it decided to actually sell 403.3 tonnes this too was announced many times, followed by an announcement of the approval to do so then, followed by the announcements it had actually sold gold to India, Sri Lanka, and Mauritius.

Suddenly in complete contrast the IMF now is apparently selling gold in large amounts in total silence. This even appears to contravene the IMF Executive Board's guidelines approved in February 2008, which state:

"(v) A strong governance and control framework, together with a high degree of transparency, would be essential for gold sales conducted by the Fund. A clear, transparent communications strategy, including regular external reporting on sales, should be adopted, in order to assure markets that the gold sales are being conducted in a responsible manner."

So why has the IMF not followed its own guidelines? Why is the IMF not announcing these sales multiple times as before?

My interpretation is that such announcements now would require the IMF to report to whom the gold has been sold. I believe that the bullion banks are having trouble meeting surging demand for real metal. Some of this demand has been stimulated by GATA's recent revelations about how the London Bullion Market Association's OTC market operates on a fractional reserve basis, where much more gold is sold than could possibly be delivered.

If this is the case, it is clear that the IMF would not announce who received the gold, just as the Federal Reserve refuses to reveal which banks received TARP money.

If my interpretation is correct, the IMF's sudden silence about the disposal of its gold is another indication that a short squeeze of epic proportions is fast approaching. This would fit with the extensive market study made for GATA by Frank Veneroso in 2000 that concluded that the Western central banks would deplete their gold available for suppressing the market in seven to 10 years.

Adrian Douglas is publisher of the Market Force Analysis financial letter and a member of GATA's Board of Directors. Reprinted with permission.

For further reading:
"Manipulation of Precious-metals Market Under Fire", Alex Newman, May 6, 2010
"China - the Gorilla in the 3rd gold war", Lawrence Williams, May 4, 2010

Real Banking Reform? End the Federal Reserve

By Richard M. Ebeling
Northwood University
Friday, January 22, 2010

http://defenseofcapitalism.blogspot.com/2010/01/real-banking-reform-end-federal-reserve.html

President Obama announced on January 21 that he will push for legislation that would significantly limit the size of banks to make sure that they are not “too big to fail,” as well limiting their ability to invest in what the president referred to as investments that are “too risky.”

Two important questions immediately come to mind: First, when is a bank “too big” to be too big to fail? And, second, when is an investment “too risky” and who is to make that judgment call?

The fact is, the answers to both questions will end up being decided by politicians who sign off on the regulatory legislation and by bureaucrats who will have the discretionary power to implement the new guidelines.

Legalized Plunders and Political Power

The next major question that needs to be asked is: How do they know? These are the same politicians whose time horizon goes no further than the next election day, and who pander to the special interest groups that provide them with the campaign contributions and the votes that keep them in office.

And these are the same bureaucrats whose bread and butter are based on constantly finding more “social problems” and “market failures” to justify getting bigger budgets each year, along with more authority to control other people’s lives as the vehicle to get promotions and higher pay and perks within the bureaucratic structure.

They are not quite the god-like oracles and disinterested ethical eunuchs they claim to be in their public rhetoric about their desire to only further some elusive and indefinable “common interest” and “general welfare.” They are, in fact, what the ninteenth century French economist, Frederic Bastiat, called the “legalized plunders” of society.

They are also the same people who have a professional knack for shifting responsibility for their own policy mistakes on to others. The current economic and financial crisis was “made in Washington D. C.,” by politicians and bureaucrats who orchestrated a disastrous monetary policy and a frenzy-like housing boom, the consequences of which have now fallen on the shoulders of millions of ordinary Americans, as well as many others around the world.

But listening to those politicians and bureaucrats it is all the fault of the greedy bankers and businessmen, whose irresponsible behavior now has to be reined in by wise and judicious government regulation. It reminds one of that scene in the old movie, Casablanca, in which the prefect of police announces that he is ordering Rick’s Café to be closed because he is shocked to discover there is gambling going on in the backroom, and just then the croupier walks up to the prefect and says, “Your winnings, sir.”

Free Markets and the Banking Industry

In reality, those politicians and bureaucrats have neither the knowledge nor ability to rationally regulate either banking or business in general, even if they were the disinterested public servants they so loudly claim to be. Theirs is the arrogance of the social engineer who believes himself wise enough to mastermind the complex economic affairs of an entire nation.

The advantage of a decentralized and competitive market economy is that it can leave each of us free to manage and guide our own business affairs, with our limited and specialized knowledge about our own particular circumstances. It is the role of market prices and the profit and loss mechanism to guide us into producing and providing those products and services that consumers want to buy, while providing the required feedback to tell us if we are doing so successfully or not. The market gives us the necessary pat on the head (profits) or slap on the behind (losses), to see that the supplies we offer are more or less matching up with things that are demanded.

This applies no less to the banking industry than any other line of business in the economy. The problem with the banking industry is that it is not a free, competitive market. It is already highly regulated – in spite of the rhetoric coming out of Washington and much of the news media – and it operates within a system of monetary central planning.

Banks are supposed to act as intermediaries lending the savings of income earners to others who wish to borrow that savings for investment activities and other future-oriented desired uses. The market rates of interest are supposed to balance the supply of savings with the demands to borrow, and see to it that the investments undertaken do not over reach the savings available to sustain and maintain them. A construction project begun may not be completed, for example, if the blueprint design that is guiding the work requires more resources and building material than are available to finish the job.

How “big” any bank should be is the same question that can be asked about any other business in the free market: It should be the size that represents its profitability and market share as a reflection of its success in better serving its customers than its rivals in the market place.

What kind of and how much risk should a bank take on in investing its capital and its depositors’ saving? That type and degree of risk that sound business practices suggest in a financial environment not manipulated or distorted by “activist” monetary policy. If a bank makes a sufficient number of mistakes in making these decisions, then it will fail the market test and should be allowed to go under, regardless of its size. This will create more caution by other banks in making their own investment decisions when they really believe that there is no taxpayers’ safety net to bail them out.

Central Banking the Cause of Economic Crises

America’s central bank – the Federal Reserve – is the monopoly controller of the supply of money and credit. It has the ability to create the illusion that there is more savings in the economy to start and work on investment projects than is really the case by pumping money into the banking system “out of thin air.” As a result, interest rates can be artificially pushed down for a period of time that generates a mismatch between investments undertaken and the real savings pool available to support them. Investment and housing bubbles can be created that eventually must burst.

This situation easily fosters a feeding frenzy in which banks and other financial institutions undertake risks in support of investment ventures that would never appear attractively profitable at higher market-based interest rates, and if the amount of money available to lend out was limited to the real savings that has been set aside out of people’s incomes.

There often is unreasonable systemic risk-taking in the banking sector, but it is not due to anything inherent in the banking business or the profit-motivated behavior of bank managers or lending officers. It has to do with the Federal Reserve’s mismanagement of the financial environment in which bank managers and lending officers are given “money to burn” through monetary expansion, and induced to inappropriately evaluate what is reasonable risk and who is a creditworthy borrower due to false interest rate signals resulting from misguided monetary policy.

A Free Market Agenda for Banking Reform

The only real banking reform that would reduce the possibility and likelihood of the type of financial and economic disaster through which we have been passing is to radically reform the monetary system. This means abolishing the Federal Reserve System and end monetary central planning by doing away with central banking.

In other words, the goal of real reform should be the establishment of private, competitive free banking in the United States.

The following would be the steps to bring this about:

1.The repeal of the Federal Reserve Act of 1913 and all complementary and related legislation giving the federal government authority and control over the monetary and banking system.

2. Repeal of legal-tender laws, which give government the power to specify the medium through which all debts and other financial obligations, public and private, may be settled.

3. Repeal of all restrictions and regulations on free entry into the banking business, including interstate banking.

4. Repeal of all restrictions on the right of private banks to issue their own bank notes and to open accounts denominated in foreign currencies or gold and silver.

5. Repeal of all federal and state rules, laws, and regulations concerning bank reserve requirements, interest rates, and capital requirements.

6. Abolish the Federal Deposit Insurance Corporation. Any deposit-insurance arrangements and agreements between banks and their customers, or among associations of banks, would be private, voluntary, and market-based.

This six-point plan for banking reform would set America on a path to far greater monetary, banking, and financial stability than anything central banking has or can provide. It would be the establishment of a real free enterprise system in the banking industry, and put an end to the danger and damage of a Federal Reserve-created business cycle for the remainder of the twenty-first century.

For further reading:
"The Gold Standard: The Case for Another Look", Sean Fieler and Jeffrey Bell, The Wall Street Journal, May 7, 2010

Thriving E-Money Industry Puzzles Regulators

By Irina Filatova

The Moscow Times
Wednesday, May 5, 2010

http://www.themoscowtimes.com/business/article/thriving-e-money-industry-puzzles-regulators/405368.html

Veronika Moiseyeva, 24, a broadcast journalist, loses no sleep over holiday gifts because she knows she can always send her friends a virtual bouquet of flowers on Vkontakte.ru, Russia's leading social network.

"The last time I sent flowers to my friends was on March 8. But there are different occasions. It's a new way to communicate," Moiseyeva said.

Vkontakte.ru offers a variety of inexpensive virtual gifts that can be purchased through an instant cell phone message, a credit card or an electronic payments terminal.

Buying virtual gifts is one of the most popular types of electronic payments, major players on the electronic money market said. But legal regulations remain a matter of concern for many operators as the presidential administration considers two versions of a bill to create a new National Payment System aimed at uniting players in the electronic payment market.

The e-money market was worth 40 billion rubles ($1.3 billion) in 2009 and may double this year "if a proper law is approved and the current dynamics remain," said Viktor Dostov, chairman of the Russian E-Money Association, an industry group.

Industry players said regulation is needed but should be compatible with the current market model. The government, however, is caught in an inner struggle over the legal status of e-money operators.

The Finance Ministry was supposed to prepare the legislation by April 1, but its proposals were rejected by the Central Bank, which is set to be the regulator for e-money operators.

The bank said it would not be entitled to oversee the operators if they retained their current status of payment organizations, and it has drafted its own version of the bill, changing their status to that of credit organizations, which makes them similar to banks.

Extended discussions between the ministry and the Central Bank resulted in them sending two separate versions of the bill to the presidential administration on April 1.

Market players support the Finance Ministry proposal, which defines the status of electronic market operators without turning them into credit organizations.

The industry does not object to being regulated by the Central Bank, but it fears that turning e-money operators into credit organizations would lead to excessive regulations from the Central Bank and might cause commission fees to increase, said Dostov of the Russian E-Money Association.

"We do not want to restrict the power of the Central Bank. We clearly see that the power of the Central Bank should be expanded to noncredit organizations involved in payment operations," Dostov told The Moscow Times.

E-money operators should not be turned into credit organizations because their income is significantly less than that of other segments of the financial market, said Yevgenia Zavalishina, chief executive of Yandex.Dengi, one of Russia's leading electronic money operators.

"We think that the regulations must be proportional to the risks. An electronic money operator cannot give loans, which removes most of the risks that banks are bearing," Zavalishina said in an e-mailed statement.

Another option is to turn electronic money operators into nonbanking credit organizations, said Sergei Barsukov, head of the Finance Ministry's financial policy department, which was in charge of drafting the bill.

In that case, the Central Bank could set more flexible rules for e-money operators than for other nonbanking credit organizations, he said.

He promised that the e-money market would not be damaged regardless of the future status of the operators.

Electronic money operators keep simpler accounting records than banks because they handle small payments requiring no bank accounts, which removes credit risks that banks need to manage.

The average one-time payment handled by e-money operators amounts to 500 rubles ($17), but there is also a segment for small payments less than 100 rubles ($3.50), Dostov said.

"Electronic money operations are very cheap, the commission is very low, and their cost price is very low," he said. "Therefore, it is profitable to make not only 1,000 ruble or 500 ruble payments. This operation remains profitable for payment system operators even with payments of several rubles."

Electronic money is attracting consumers since it is a very convenient payment instrument, Dostov said.

"To open an electronic wallet … it is enough to have a computer with Internet access or a cell phone," he said.

An electronic wallet, as defined by Investorwords.com, is an encrypted storage medium holding financial information that can be used to complete electronic transactions without re-entering the stored data at the time of the transaction.

Electronic wallets, available on the web, pay terminals and cell phones, currently have 20 million active users in Russia, according to the Russian E-Money Association. The number of web wallets alone amounted to 2.3 million last year, 1.2 million of them with Yandex.Dengi and about 1 million being WebMoney accounts.

The work on the new e-money legislation began in December, when President Dmitry Medvedev ordered the Finance Ministry to draft a bill regulating the electronic payments market and modernizing the financial system.

In March, Medvedev chaired a meeting on the National Payment System, which he called "a strategic issue" that would make the economy more stable.

Creating a legal basis for the National Payment System, which will also introduce electronic payments for state-provided services, and determining its major participants is a priority for the government, Medvedev said.

The industry is cautiously optimistic of the new legislation. "The rules of the game in the market will be clearer. That usually results in improving the quality of services and, in many cases, in decreasing their cost as well," Zavalishina of Yandex.Dengi said of the bill.

"If we all are lucky and the law is approved without sophisticated restrictions and requirements, consumers will benefit," she said.

The new bill on the e-money market will define consumer rights and expand the range of services provided by operators, Dostov said.

E-money is hardly a vital economic tool for its current users.

Moiseyeva, the broadcast journalist who sends virtual gifts to her friends on Vkontakte.ru, said she never deposits more than 100 rubles a time into her account at the site.

After depositing money through one-time payments, users of Vkontakte.ru can buy “voices,” the social network's currency used to purchase gifts, the number of which indicates popularity of the user.

"When you visit someone's page and see many gifts, you think, 'Wow!'" Moiseyeva said.

Hobson's Choice for Germany, ECB

By Richard Barley
The Wall Street Journal
Wednesday, April 28, 2010

http://online.wsj.com/article/SB10001424052748704471204575210413650656220.html

The euro-zone crisis risks spinning out of control. The Standard & Poor's downgrades of Greece to junk status and Portugal by two notches to A-minus, although only confirmation of what markets prices were already saying, may have broken already fragile investor confidence. The single currency's fate is now in the hands of the German government and the European Central Bank. None of the choices on offer are good ones.

Germany must decide whether to commit its highly reluctant taxpayers to a vast Greek bailout. If the package is too small, markets will conclude the euro zone is unwilling and unable to support its members, triggering contagion to other countries and a possible break-up of the euro zone. But if Germany agrees a big enough package to draw a line under Greece's funding problems for several years, as investors seem to be demanding, it must do so aware it is unlikely to get all its money back. After all, investors now suspect Greece's problem is one of solvency rather than simply liquidity.

The ECB's challenge is no less crucial: It must decide whether to continue accepting Greek government debt as collateral for its lending operations if all three major ratings firms downgrade it to junk. Under ECB rules, already weakened once to accommodate Greece, eligibility requires at least one investment-grade rating. Moody's Investors Service still rates Greek debt four notches above junk. It may retain that investment-grade rating if an aid package materializes—after all, global banks remained investment-grade even after Lehman's collapse, thanks to government support. But S&P's three-notch downgrade shows how quickly the situation can change.

Read the rest of the article.

For further reading:
"Opa! Greek Government Announces Yet Another Bailout, But Who is Really Getting Bailed Out?", The Agonist, May 3, 2010
"Germany Clears Rescue for Greece", The New York Times, May 3, 2010
"Greek Money Mystery", Adrian Ash, May 3, 2010
"The Euro Trap", Paul Krugman, April 29, 2010
"Sovereign Debt Crisis Past the Point of No Return?", Financial Advisory, April 28, 2010
"ECB may have to turn to 'nuclear option' to prevent Southern European debt collapse", Ambrose Evans-Pritchard, April 27, 2010
"The Euro Can Survive a Greek Default", Daniel Gros, April 26, 2010

Sound Money and Free Banking

Lawrence H. White spoke on sound money, free banking, and the rule of law at George Mason University on April 19, 2010. The event was sponsored by the Atlas Economic Research Foundation's Sound Money Project and hosted by the GMU Economics Society.

Lawrence H. White on Sound Money from Atlas Network on Vimeo.