The EU's leaders agreed today on reforms to financial supervision, following a deal between the UK, France and Germany on two of the main elements.

The reforms will include granting new powers to EU committees tasked with overseeing the health of individual financial institutions and the creation of a European Systemic Risk Board (ESRB) responsible for identifying threats to the EU economy as a whole. Angela Merkel, the German chancellor, said the agreement was "a new constitution for the financial market system".

The reforms are based on proposals drawn up by a high-level group led by Jacques de Larosière, a former director of the International Monetary Fund, to prevent a repeat of the financial crisis. The European Commission, which convened the de Larosière group, developed the plans further in proposals presented to member states last month.

VANCOUVER, Jun 15 (IPS) - Sitting in the restaurant of Vancouver's posh Fairmount Waterfront Hotel, the former chief economist for one of Canada's largest banks doesn't seem like the typical apocalyptic peak oil theorist.

But in his new book, "Why Your World is About to Get a Whole Lot Smaller", Jeff Rubin argues that globalisation, fuelled by cheap oil, is finished. In the book, Rubin contends the current global recession is a result of expensive oil, rather than subprime mortgages in the U.S.

Frequently ranked as Canada's top economist, Rubin predicts that one barrel of oil will cost 225 dollars by 2012. Other analysts consider that number outlandish; the conservative National Post newspaper, where he was frequently quoted as an economic expert before leaving his job at CIBC World Markets, accuses him of "anti-materialism" and "Big oil paranoia."

But in 2000, Rubin correctly predicted that oil would top 50 dollars per barrel by 2005. And, in 2005 he got it right again, forecasting prices would top 100 dollars per barrel in 2007.

Rubin sat down with IPS at his hotel after giving a lunch address to the Vancouver Board of Trade.

IPS: If Iraq's security situation improves, and its cheap oil comes back online for export, could that stop your prediction of 225 dollars per barrel by 2012?

Jeff Rubin: Not even close. Nor would it stop the prediction that exports from OPEC (the Organisation of Petroleum Exporting Countries), instead of growing, are likely to fall by about one to one and a half million barrels per day over the next four or five years.

It's not just about depletion [of OPEC oil fields], though depletion is playing a key role. It is also about the explosive growth of oil consumption in OPEC countries themselves.

After two smugglers were stopped last week with what at first appeared to be $134bn in US state bonds, the tension and paranoia surrounding the fate of the dollar hit a new high.

How on earth did these two men, who at first refused to identify themselves, come to be there, trying to ride the train into Switzerland carrying bonds worth more than the gross domestic product of Singapore? If the bonds were genuine, the pair would have been America's fourth-biggest creditor, ahead of the UK and just behind Russia.

No sooner had the story leaked out from the Italian lakes region last week than it sparked a panoply of conspiracy tales. But one resounded more than any other: that the men were agents of the Japanese finance ministry, in the country for the G8 meeting, making a surreptitious journey into Switzerland to sell off one small chunk of the massive mountain of US bonds stacked up in the Japanese Treasury vaults.

In the event, late last week American officials confirmed that the notes were forgeries. The men, it appeared, were nothing more than ambitious scamsters. But many remain unconvinced.

Goldman to make record bonus payout
Surviving banks accused of undermining stability

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm's 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.

A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.

Staff in London were briefed last week on the banking and securities company's prospects and told they could look forward to bumper bonuses if, as predicted, it completed its most profitable year ever. Figures next month detailing the firm's second-quarter earnings are expected to show a further jump in profits. Warren Buffett, who bought $5bn of the company's shares in January, has already made a $1bn gain on his investment.

Bailout Costs vs Big Historical Events

It is exceedingly difficult to convey exactly how much we are spending on all these bailouts. Whenever I start talking trillions (versus mere billions), I get puzzled looks from people. Humans have a hard time conceptualizing any number that large.  I wanted a graphic way to clearly show how astonishingly ginormous the amounts involved were.

So I once again went to Jess Bachman at Wallstats. I gave him my list of expenditures (inflation adjusted of course!) and he went to work. This early Bailout Nation graphic shows the the total costs to the taxpayer of all the monies spent, lent, consumed, borrowed, printed, guaranteed, assumed or  otherwise committed.

It is nothing short of astonishing.

It includes the total outlay for all the bailouts to date. In just about one short year (March 2008 -  March 2009), the bailouts managed to spend far in excess of nearly every major one time expenditure of the USA, including WW1&2 (omitted from graphic), the moon shot, the New Deal, total NASA budgets (omitted from graphic), Iraq, Viet Nam and Korean wars -- COMBINED.

206 years versus 12 months. Total cost: ~$15 trillion and counting . . .

As the race to list the first credit contracts on the world's financial exchanges intensifies, regulators are under increasing pressure to impose tighter constraints on the market. While one of the main challenges for the exchanges and their partners will be defining the specifications of the contracts, a bigger concern is the risk that investors will be taking. The much publicized corporate failures of the past few years have only added to the general awareness of the risks involved in credit derivatives, many of which are still only partially understood by all but a handful of major players.
.....

Unfortunately, many trades are cross-border, and a number of national regulators are concerned that the ISDA rules are inadequate. They are looking into creating their own rules, triggering concern among the major banks that these groups will lag behind the market, resulting in rules that are out of date before they are even implemented.

Credit derivatives have only recently attracted the attention of national regulatory bodies. This is mostly because the market was traditionally the almost exclusive realm of the major investment banks, and the number of credits was small. In 2004, however, it is expected that insurance companies will be the single largest participant in the market, with hedge funds also playing a major role. The past two years has also seen an increase in uptake among retail investors.

This expansion of the investor pool and the rapid growth in the number and variety of credits has led to concern that the new holders of such instruments may not have a clear understanding of the risks they are taking.

Abstract:

This article is an updated version of an article that was published in Seeking Alpha. I have updated  and clarified certain definitions. The relevance of that article in todays' Market justify this updated publication.

The commodities we are concerned with here are those with potentially very low storage costs. Minerals, when kept in the ground, have a storage cost next to zero.

I observed a strong link between the evolution of the market price of minerals and the shape of the yield curve.

The slope of the yield curve indicates the fair valuation or not of the price of short-term assets compared to long-term assets.

I am going to show that the shape of the yield curve is a first order parameter of the evolution of the price of minerals.

When the yield curve is inverted, because of profit maximization, Miners & Drillers prefer hoarding a higher proportion of their minerals in the ground (their preferred short-term assets) rather than extracting them and investing the proceeds in long-term instruments. Hence, the marginal cost of extraction of minerals becomes irrelevant to their market price as miners stop maximizing their output under the constraint: Market Price - Their Marginal Cost of Extraction.

Prevailing Theory:

According to the prevailing theory the Market price of a mineral is its marginal cost of extraction: the cost of extraction of the most expensive unit that find its way on the Market.

Reminder: the Marginal Cost of Extraction does not include fixed cost (i.e. exploration cost, cost of an offshore platform, etc...).

If that was true then the marginal cost of extraction would have risen has much as $140!

In order to account for that unexpected behaviour people have invoked the concept of peak oil or the possibility that minerals would behave like stocks and would discount some future value, without even trying to find out what those future value were.

Need for a Global Parameter:

The price of minerals has grown unabated since the yield curve started being inverted with acceleration when the Federal Reserve started increasing short-term rates from 1%. At that time, long term interest rates were so low that the yield curve became inverted when the short term rates reached 2.5% All of the minerals have grown together, which cannot be explained by the growth of the marginal price of extraction alone; no price increases have caused the price of any mineral to stop its growth as a result of an increased investment in exploration.

Fascinating stuff from one Shalom Hamou, not just here but other stuff on his site Yield Curve which gets down to the relationship between yields from (fictitious) financial assets and the yield of "real" productive (but for non-renewables, essentially finite) assets over time.

Should be of particular interest to Jerome professionally, I would think, and to Migeru intellectually! A couple of Diaries there, methinks.

"Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky