Pretty Peggy Townsend, who will be crowned Cherry Blossom Queen at the festival to be held Friday, picked out a Cherry Tree to get her first glimpse of the beautiful blossoms in Potomac Park.
Ilargi: There is a long-standing misunderstanding about the perceived influence of perceived limits to energy availability in our societies that leaves people from the energy field, or even those who have trouble understanding finance, convinced that what is known as peak oil is the driving force in our present financial collapse.
As crucial as energy is to our lives and lifestyles, such claims are simply wrong. People -except in exceptional cases- don't lose their homes because gas at the pump became more expensive, and banks wouldn’t have gone bankrupt -barring trillions in public bailouts- because their energy costs went up. I don't want to regurgitate the entire topic, but then there’s no need for that either; a brief glance at the numbers should say enough.
As you may remember, sometime in 2008, the price of gas temporarily went up by about $1 per gallon. This is when the first accounts began to appear of people linking the present financial crisis to the energy crisis, claiming that the latter caused the former. To me, this never made much sense. I do, however, have fond memories of very interesting discussions on the topic at the time with very smart oil man Jeffrey Brown.
Still, the numbers were what they were, even back then, and in the end, derivatives didn’t cause peak oil anymore than peak oil caused derivatives. Some phenomena simply need no help destroying themselves.
Say, to drive 25,000 miles (40.000 km) per year, the average American needs about 1000 gallons of gas. The price rise in 2008 then cost her an extra $1000 for the year. In that same year, her home lost about 20% of its value, or $40,000. Her pension went down an often reported 30%, which can, depending on her age, range anywhere from say, $100,000 to $1 million. In other words, the average American easily lost about 50 times as much in pure financial market terms as she did at the pump in 2008.
In 2009, gas prices came down considerably, but home prices kept on falling. Hence: while her financial losses on energy costs diminished, the home price losses continued.
Yes, home price losses lessened somewhat towards the end of the year, but Bob Shiller predicts a 28% additional loss for 2010. Yes, pension funds made good on some of their losses on rising stock markets, but that was achieved through what I like to call the $1 trillion-a-month government financial injection. Which means that while our protagonist may now thus have the fleeting promise of a tad more pension income when she passes the eligible age in the future (a receding horizon in and of itself), she also has additional "personalized federal" losses tacked onto her account that run in the tens if not hundreds of thousand dollars. And since the annual US federal deficit is acknowledged by all sides to remain at least in the multiple trillion dollar range for many years to come, she will be called on to pay goddess-only-knows how much going forward.
Where did the financial losses originate? In the energy field? Not even close. They stem instead from low post tech bubble interest rates which led to low mortgage costs which led to everyone wanting to buy a home which led to no-questions asked loans which led to high volumes of mortgage based securities which led to a zillion other forms and sorts of derivatives which led to untold trillions in lost wagers which led to a collapsing financial economic system, a process we find ourselves in the early stages of. We can argue about the sequence in which these things happened, but not about whether they did happen, or about the role of peak oil in their occurrence.
A derivative is a bet, pure and simple, and the time when more than 50% of all bets turn winners is of necessity limited by the same laws that limit the life expectancy of any ponzi scheme. They are self-destructive. Since energy prices have nothing to do with the collapse of the MBS ponzi tower, which doesn’t need any help breaking down, thank you very much, since its demise is firmly written into its own foundations, the idea that peak oil or any other form of energy crisis was the cause of the financial crisis, i.e. the cause of the collapse of the housing/securities/derivatives scheme(s), can be safely discarded and put out by the curb with the rest of our broken dreams. Once you understand what derivatives are, and why there were $1 quadrillion of them floating around at one point in time, maybe that's where you start to see why peak oil is not a factor in this crisis of ours.
That is not to say that energy issues could never be, or even never have been, the cause of financial problems. Just that they are not this time around. Nor were they, obviously, in the 1930's depression, not an insignificant point for those who are still confused. Neither does any of this take away from the importance of peak oil. That importance, however, will play out in the future, it does not do so now. For one thing, energy demand and usage have plunged in the past two years. For another, oil producing countries are pumping out fuel literally like there's no tomorrow, because the finance crisis hits their budgets like so many sledgehammers. Something, incidentally, that I've long predicted, not a hard call to make, since an organization such as OPEC, and the quota it boasts, have credence only in times of economic plenty. The financial losses on investments incurred by Middle East nations are surely staggering, though we have no concrete numbers other than Dubai's demise, and they were definitely not caused by oil running out, but by Saudi and Abu Dhabi investments in US securities.
Admittedly, there is a different aspect to this theme, though it's not a game- or evidence changer. On March 7, 1956, Shell geologist Marion King Hubbert spoke at a conference in Texas, where he launched his now famous notion of a peak in both US and world oil production. The pre-printed version of Hubbert's paper distributed at the meeting made the following statements:
"According to the best currently available information, the production of petroleum and natural gas on a world scale will probably pass its climax within the order of a half a century, while for both the United States and for Texas, the peaks of production may be expected to occur within the next 10 or 15 years."
In the official company version after the talk, Shell left out Hubbert’s world oil production prediction altogether and changed his words about the US to:
"[..] the culmination for petroleum and natural gas in both the United States and Texas should occur within the next few decades."
The truly powerful people on this planet, and they do exist, and no, you don’t know their names and faces, may of course have picked up on what Hubbert said, then and there or in subsequent years, devised strategies to hold on to what they had in the face of what he predicted, and decided to (pre-)crash the entire world economy in the face of the inevitable crash peak oil would bring about sometime down the line.
But that is all merely a guessing game, with anonymous potential actors toting potential ideas about potential outcomes playing out over many decades, during which many potential power players would have died. Nice theory, but not exactly something we can base any solid idea on about a connection between energy and the economy.
Peak oil will take its well-deserved center stage place when our debt drama has somehow been resolved, many years from now, and at the expense of the lives and health of many millions of our friends and family members. Could you survive losing your entire wealth and belongings after gambling them all away in Vegas? Yes, you could, and many have. Could you do so in the face of a mortal disease, let's call it peak oil, in your new found poverty? Yes, you could, many have, and for many years too. Peak oil is mortal, but not instantly. Peak oil isn't even an issue, is it, if demand collapses?
Maybe it's not the impact of peak oil on finance, but the impact of finance on peak oil that will be the biggest threat to our societies. As oil prices linger at record highs, albeit below the 2008 $147 a barrel, exploration budgets have been cut to the bone. And trust me, new-fangled notions of using spent nuclear rods to develop shale oil won’t change that. That, after all, is what I based my Law of Receding Horizons on, with kudo’s to Ken Deffeyes. Shale is dead, and it was never born other than in the minds of people with dollar signs in their eyes.
I tried to write the above as a train of thought piece, didn’t research my own words through the years on the topic, nor anyone else’s, apart from the exact date and words for Hubbert’s Texas speech. I see no need to do so. I could write ten times as much as I have here on this, but I hope that won't be necessary. I hope you better understand now what the links are between peak oil and you losing your homes and jobs, and that they are not what some well-meaning people would like you to believe.
PS: Wait, Greece? The EU can’t do a thing unless it promises to deal with Italy the same way it does with Greece, and with JPMorgan and Société Générale the same way it does with Goldman Sachs. Not too likely for now. So Ron Paul's suggestion that the US Fed is busy bailing out Athens sounds perfectly plausible to me. Don't believe a word you hear. I don't.
Ilargi: Make the world a better, and a smarter place, while you make yourself better and smarter. We call this win-win. Donate to The Automatic Earth, so we can continue to explain the world around you as only we can. And visit our advertisers frequently, that's what they're here for.
Speaking of which: Stoneleigh speaks February 23 in Ottawa, ON at the McNabb Community Centre.
Brussels threatens to widen net on currency swaps
The European Commission has said it will widen its investigation into complex currency transactions, used to hide the true extent of national debt levels, if evidence suggests they were deployed in more than one member state. The EU's statistics office, Eurostat, launched an investigation into Greece over the weekend, following recent reports that Wall Street investment banks provided Athens with swaps and other financial instruments throughout the last decade.
Speaking after a meeting of EU finance ministers in Brussels on Tuesday (16 February), EU economy commissioner Olli Rehn said Greece has until 19 February to justify their legitimacy, adding that the net could be widened to other capitals. "In case there is reason to expect that these kind of techniques have been used by other member states, not only Greece, then we will request information from other member states," said Mr Rehn. The Finnish politician said Eurostat had no evidence of other capitals using the swaps, but the statistics agency was also unaware of Athens' activities until very recently.
Media reports over the weekend said Europe's other chronic big spender, Italy, has also used the off-balance sheet items in the past to hide its debt pile. Greek finance minister George Papaconstantinou told journalists on Monday: "Greece was not the only country using them. They have since been made illegal and Greece has not used them since." Spanish economy minister and current chair of the bloc's finance meetings, Elena Salgado, said Spain had not been approached by investment banks concerning the products. "If such a proposal had been made it would not have been accepted, but there has not been any proposal along those lines," she said. Mr Rehn also extended a warning to the firms themselves. "If confirmed that some investment banks have been involved in these kind of exercises, we have to see whether the rules have been respected," he said.
Investment bank Goldman Sachs is alleged to have arranged so-called cross-currency swaps for Greece at the start of 2002, under which government debt issued in dollars and yen was swapped for euro debt for a certain period, to be exchanged back into the original currencies at a later date. The procedure is widely practised by governments looking for different currencies, but questions have been asked about the validity of the exchange rates used in the Greek case. The reports suggest Goldman Sachs used fictional rates to enable Athens to receive a far higher sum than the actual euro market value of its dollar / yen denominated debt, with the additional credit gained in this way going undetected by Brussels.
As well as formally adopting commission excessive deficit recommendations on a number of EU countries, and approving the Greek government's deficit cutting programme, EU finance ministers also listened to presentations from the bloc's various economic commissioners regarding plans for the next five years. Internal market commissioner Michel Barnier said the EU was currently studying recent US proposals to reform its banking sector, but indicated the EU was not intending to merely adopt them whole scale.
"You can't just transpose or copy the ideas or reforms proposed by [US President] Obama to the European continent," said Mr Barnier who is heading to Washington and New York in the coming days to discuss the plans with American officials. "In Europe we have more problems related to the interconnection of the banks, rather than the specific nature of the activities or the scale of individual banks," he said. The US plans, named after their chief architect and former Federal Reserve Chairman Paul Volcker, aim to limit the size and risk-taking of banks operating in America.
Robert Mundell Says Italy is Biggest Threat to Euro
Bloomberg's Sara Eisen reports on Nobel laureate Robert Mundell's comments on the euro.
Credit markets flash hottest warning signal since crisis
by Ambrose Evans-Pritchard
European credit markets are flashing the most serious warnings signs in a year as the yields on risker bonds rise sharply and a string of companies cancel share flotations, raising fears that the recovery may falter in coming months. Jitters over Chinese credit tightening and default risks in Greece and Dubai are causing bond vigilantes to batten down the hatches across the world, bringing the most dramatic credit rally for a century to a shuddering halt.
The Markit iTraxx Crossover index measuring yields on lower-grade debt has jumped by almost 130 basis points since mid-January to 514, while the main index of investment grade bonds has jumped by a third to 93. "This is the biggest move since the financial crisis in early 2009, said Gavan Nolan, Markit's credit analyst. "The index is a leading indicator so it is a warning signal. This is being driven by volatility in sovereign debt, with Greece being the biggest issue at the moment but tightening in China could be a bigger negative catalyst in the long-term," he said.
The rating agency Moody's said market ructions have led to a "material" rise in borrowing costs over the last month, prompting the cancellation of debt issues by the Dutch energy group New World Resources, Italy's Snai betting group, and the UK's Travelport. Sixteen companies wordwide have pulled debt issues worth a $7.3bn (£4.66bn) since mid-January, including Canada's Bombardier. Dr Suki Mann, a credit specialist at Societe Generale, said stronger companies should weather any squall but concerns are mounting. "The world has woken up to the real possibility of a double dip. These are nervous times," he said.
BusinessEurope, the EU-wide lobby, warned this week of a "very worrying situation" as it become harder to raise money at a viable cost, if at all. The group called on the European Central Bank to send a "clear signal" about its collateral policy. Fears of tougher ECB rules are a key factor causing market flight from Greek debt. The sudden halt in bond issues is disturbing since companies have been relying on capital markets to raise money as an alternative to Europe's fragile banks. The ECB said on Tuesday that 42pc of small businesses in the eurozone had reported worsening credit conditions in the second half of last year, despite the emergency stimulus of the authorities.
Conditions appear to be deteriorating. Bank loans to companies contracted at an annual rate of 1.9pc in November and 2.3pc in December. Consumer credit also fell. The Bundesbank fears that disastrous earnings last year will cause scores of German companies to breach loan covenants, triggering a wave of downgrades that further damage German banks and potentially setting off a second wave of the credit crisis. New Basel III rules intended to force banks to raise risk-adjust capital levels may be making matters worse. The rules are causing weaker banks to cut lending, throwing the 'credit multiplier' into reverse.
Andrew Sheets, a credit expert at Morgan Stanley, said corporate bond spreads have not spiked as far as Greek or southern European sovereign yields, so they may rise higher as the price of risk comes back into alignment. "What's changed over the last two weeks is that valuations have become too rich compared to broader sovereigns," he said. Credit rallied far ahead of stocks last year, creating the chance of a "equity carry trade". Dividend yields on Telefonica are 8.2pc while yields on the company's five-year debt are 3.8pc, comparable to Spanish state debt. Likewise for France Telecom at 8.5pc against 3.3pc. This is an extreme aberration by historical standards. Either equity prices must rise a long way, or credit spreads must widen.
Is The Federal Reserve Secretly Bailing Out Greece (on Goldman’s behalf)?
by Ron Paul
Last week we were reminded that ours is not the only country suffering from severe economic turmoil. The Greek government is the latest to come close to default on their massive public debt. Greece has insufficient funds in their treasury to make even the minimum payments that are now coming due. Their debt level is about 120 percent of their gross domestic product and their public sector absorbs what amounts to 40 percent of GDP. Any talk of cutting costs and spending is met with violent protests from the many Greeks heavily dependent on government payments. Mounting fears of default have sent shockwaves through their creditors and all of the eurozone countries.
But there have been statements made by the European Central Bank to calm fears and give assurances that Greece will get the aid it needs. Details of agreements are not forthcoming. Is it possible that our Federal Reserve has had some hand in bailing out Greece? The fact is, we don’t know, and current laws exempt agreements between the Fed and foreign central banks from disclosure or audit.
Greece is only the latest in a series of countries that have faced this type of crisis in recent memory. Not too long ago the same types of fears were mounting about Dubai, and before that, Iceland. Several other countries (Spain, Portugal, Ireland, Latvia) are approaching crisis levels with public debt as well. Many have strong ties to Goldman Sachs and the case could easily be made that default could have serious implications for big US banking cartels. Considering the ties between the Fed and these big banks, it is not outlandish to wonder if the US taxpayer is secretly bailing out the entire world, country by country, even as our real unemployment tops 20 percent. Unless laws are changed to allow a complete and meaningful audit of the Federal Reserve, including its agreements with foreign central banks, we might never know if this is occurring or not.
This global financial crisis is a predictable result of secretive central banking and unsound fiat currency. Governments are entirely committed to this system of fiat money and fractional reserve banking for obvious reasons: it enables them to do what they love most, namely, spend hoards of money with near impunity. Without the limitations of sound money, governments will spend without limit. They will spend money to hire their cronies, pay off special interests, give out favors, create dependence and generally distract from the terrible job they do at their chief mandate, which is to protect the liberties of the people. Fiat money is a blank check to government, which is very dangerous, and we are witnessing the death throes of the system as the bills come due and the underlying capital is squandered away.
Because of our globe-straddling empire and lingering reserve currency status, perhaps no one has a more vested interest in keeping this system cobbled together than our own government and the Federal Reserve. The agreements that Iceland and Dubai and Greece have negotiated can amount to little more than kicking the can down the road, as their overall spending habits remain largely intact, fiat currencies are still legal tender and more debt is issued on top of unsustainable debt. The American people have the right to know if they are going to be the ones holding the bag in the end because the Federal Reserve secretly put them on the hook for it. This knowledge would be a key factor in peacefully dismantling this immoral and unconstitutional system.
Greece loses EU voting power in blow to sovereignty
by Ambrose Evans-Pritchard
The European Union has shown its righteous wrath by stripping Greece of its vote at a crucial meeting next month, the worst humiliation ever suffered by an EU member state. The council of EU finance ministers said Athens must comply with austerity demands by March 16 or lose control over its own tax and spend policies altogether. It if fails to do so, the EU will itself impose cuts under the draconian Article 126.9 of the Lisbon Treaty in what would amount to economic suzerainty. While the symbolic move to suspend Greece of its voting rights at one meeting makes no practical difference, it marks a constitutional watershed and represents a crushing loss of sovereignty.
"We certainly won't let them off the hook," said Austria's finance minister, Josef Proll, echoing views shared by colleagues in Northern Europe. Some German officials have called for Greece to be denied a vote in all EU matter until it emerges from "receivership". The EU has still refused to reveal details of how it might help Greece raise €30bn (£26bn) from global debt markets by the end of June. Investors are unsure whether this is part of Kabuki play of "constructive ambiguity" to pressure Greece and keep markets guessing, or reflects the deep reluctance by Germany to be drawn deeper in an EU fiscal union. Greek bonds sold off as ten-year yields jumped to 6.42pc, but the euro rallied to $1.3765 against the dollar as broader issues resurfaced in currency markets.
Jean-Claude Juncker, head of the Eurogroup, hinted that ministers have already agreed on a support mechanism, should it be necessary. It will most likely involve by bilateral aid by eurozone states. He said proposals for an IMF bailout - backed by Britain - were "absurd" and would shatter the credibility of monetary union. Many Germans disagree, including Otmar Issing, once the backbone of the European Central Bank. He said an EU rescue for Greece would be fatal, arguing that unflinching rigour is the only way to hold monetary union together without political union.
Tuesday's EU verdict amounted to a thumbs down on Greece's earlier austerity efforts, viewed as too reliant on one-off measures and too light on spending cuts. Greece must reduce its deficit from 12.7pc of GDP to 3pc in three years. Greek customs officials expressed their anger by kicking off a three-day strike, the first of many stoppages set to culminate in a general strike next week. However, premier George Papandreou has won support from key political parties and a majority of the people. Greece may yet surprise critics by mustering its Spartan Spirit.
Goldman Sachs, Greece Didn’t Disclose Swap, Leaving Investors ‘Fooled’
Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit. No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.
Failing to disclose the swap may have allowed Goldman, a co-lead manager on many of the sales, other underwriters and Greece to get a better price for the securities, said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP, a London-based broker and fund manager. “The price of bonds should reflect the reality of Greece’s finances,” Blain said. “If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled.”
Goldman Sachs, Wall Street’s most profitable securities firm, is being criticized by European politicians including Germany’s ruling Christian Democrats, who have questioned whether the firm helped Greece hide its deficit to comply with the currency’s membership criteria. Greece is also being faulted by fellow euro-region countries for failing to disclose the swaps to EU regulators. The swaps used by Greece to manage debt were “at the time legal,” Greek Finance Minister George Papaconstantinou said on Feb. 15. The government doesn’t use the swaps now, he said. Eurostat, the EU’s statistics office, this week ordered Greece to hand over information on the swaps transactions by the end of this week in an investigation that may extend to other EU countries.
Goldman Sachs earned about 735 million euros ($1 billion) underwriting Greek government bonds since 2002, data compiled by Bloomberg show. Goldman Sachs underwrote 10 bond sales. Prospectuses for six of them, obtained by Bloomberg, contain no mention of the swaps. The other four couldn’t be obtained. The yield on Greek 10-year government bonds jumped to as much as 7.2 percent on Jan. 28 amid the worst crisis in the euro’s 11-year history. The premium, or spread, investors demand to hold Greek 10-year notes instead of German bunds, Europe’s benchmark government securities, widened yesterday by 18 basis points to 323 basis points. The spread reached 396 basis points last month, the most since the year before the euro’s debut in 1999, compared with an average of 57 basis points in the past decade. A basis point is 0.01 percentage point.
“When people start to fear that the numbers aren’t accurate, they fear the worst,” said Simon Johnson, a former International Monetary Fund chief economist who is now a professor at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts. Goldman could face legal liability “if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading,” said Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill. “But that would be a tough hill to climb, in terms of burden of proof. There’d have to be some sort of smoking-gun memo.”
The swap enabled Greece to improve its budget and deficit and meet a target needed to remain within the region’s single currency. Knowledge of their existence may have changed investors’ perception of the risk associated with Greece, and the price they may have been willing to pay for the country’s securities. “From what we know, this is an egregious example of a conflict of interest” for Goldman Sachs, MIT’s Johnson said. “Even if the deal had been authorized, it doesn’t let them off the hook.”
A Greek government inquiry this month identified a series of swaps agreements with securities firms that allowed the country to hide its mounting deficit. Greece used the swaps to defer interest payments, causing “long-term damage” to the Greek state, according to the Feb. 1 document, commissioned by the Finance Ministry. European Union officials said this week they only recently became aware of the transaction with Goldman. The swaps don’t necessarily break EU rules, European Commission spokesman Amadeu Altafaj told reporters in Brussels on Feb. 15.
The transaction with Goldman consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen, according to Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time. That was swapped into euros using a historical exchange rate, a mechanism that implied a reduction in debt and generated about $1 billion in an up-front payment from Goldman to Greece, Sardelis said. He declined to give specifics on how the swap affected the country’s deficit or debt.
European politicians such as Luxembourg Treasury Minister Jean-Claude Juncker this week criticized Goldman Sachs for arranging the Greek swap and are pressing the firm and Greece for more disclosure. Chancellor Angela Merkel’s Christian Democrats aim to push for new rules that will force euro-region nations and banks to disclose bond swaps that have an impact on public finances, financial affairs spokesman Michael Meister said. “Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”
When is a Fraud Not a Fraud? (Greece-Goldman Edition)
by Yves Smith
The short answer to the question in the headline is “When there are no rules.”
A headline in a current Bloomberg story illustrates the problem: “Goldman Sachs, Greece Didn’t Disclose Swap, Investors ‘Fooled’.”
“Fooled” is an unusual choice of words, particularly when applied to to presumed grown-ups like institutional investors and international overseers. Bloomberg seems to be mincing around the more obvious F-words, like “fraud” (as in defrauded) or “fleeced.”
Although there is a considerable amount of well-warranted consternation about how Goldman sold swaps to Greece that allowed it to mask how bad its deteriorating finances were from the EU budget police, there has been perilous little discussion of why the fact that this was permissible says there is something very wrong with the rules in place.
The latest twist is that Goldman managed $15 billion of debt sales for Greece after the debt-disguising swaps were in place, and (needless to say) there was no disclosure of the existence of the hidden debt (Bloomberg was able to obtain only six of ten prospectuses in question and found no mention of the swaps; it seems pretty unlikely that the others disclosed their existence). That means investors were hoodwinked. It goes without saying they would have seen Greece as a worse credit risk if they had been in full possession of the facts, and would presumably have required a higher interest rate.
Yet we get amazingly weak statements from the experts quizzed by Bloomberg:Goldman could face legal liability “if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading,” said Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill. “But that would be a tough hill to climb, in terms of burden of proof. There’d have to be some sort of smoking-gun memo.”
Yves here. I’m not certain how much a US law professor knows about the securities laws that govern this particular offering (as in it most certainly is NOT US securities regs). But there seem to be three issues:
1. What disclosure standards would apply to the Greece bond offering. The offering memorandum, from a legal standpoint, is the issuer’s document, meaning Greece’s, not Goldman’s. So any shortcoming in disclosure is a liability issue for Greece (no joke, the deal manager makes the issuer sign a little letter acknowledging what portions of the offering memo were provided by it, and it is just a few sentences, like the selling price of the bonds, the underwriters’ spread, stuff like that. The description of the issuer and the securities themselves is most assuredly NOT the responsibility of the issuer).
2. OK, but what about this famous due diligence that investment bankers are supposed to perform? Well I have to tell you, even in good old SEC land, it’s less than you might think. In my day, the only thing that seemed to be required was visiting the major facilities of a new issuer (as in a company doing an IPO or first bond offering) and having outside counsel read board minutes (and tell the managers if they saw anything they found troubling).
3. But in this case, we have an interesting conundrum. Goldman clearly HAD TO KNOW the Greek offering documents were incomplete, right? They had arranged those swaps, they knew there was more debt than Greece was ‘fessing up to in its later offering memoranda.
Point 3 is where matters get a bit sticky. Under SEC regs, the failure to mention the swaps or their effect (that there was additional debt that had been deferred) would be a violation. This is a simplification, , but the concept is that the offering documents have to make a full and fair disclosure. That means not only do the statement made need to be accurate as of the date when they were made, but further more, they cannot fail to state a material fact if leaving that information out would be misleading. So question is whether under the regs governing this deal, whether an omission of this sort would also be considered a regulatory violation and/or an investor fraud.
If so, it’s pretty clear Greece defrauded investors. But what about Goldman? Here, Prof. Hazen is far too charitable to Goldman. “Smoking gun memo?” No, you just need to understand how Goldman works. Even though my knowledge is dated, I strongly suspect the firm is still organized more or less the same way, because it was considered a competitive strength and was widely emulated in the industry (t had the effect of creating loyalty to the brand rather than individuals).
Goldman has centralized account management. One person, a relationship manager, is ultimately responsible for selling all products to particular corporate clients and government entities. His full time job is client coverage; he then works with product specialists as needed to get deals done (specialists are also assigned to particular accounts, but the relationship manager is always in the mix. Hank Paulson was one of these relationship managers, called investment banking services). So Goldman cannot pretend that somehow the team that handled the bond offering didn’t know about the swaps deal. That’s unlikely to begin with, given Goldman’s fetish about communication, but structurally impossible (the new business guy would have known about both sets of deals).
In addition, Goldman new business officers (the account managers) are required to document every meeting with the client (this is to protect the firm in case someone is hit by a bus or leaves the firm). This was also a long-standing fetish. In the 1980s, I as a junior account member could ask the library for the “credit memos” as these notes were called. On well-established clients, the meeting notes went back to the 1950s.
So I’m not certain you need a particular memo, even though such documents probably exist. All you need to do is walk through the structure of Goldman relationship management and their usual client communication protocols to establish that it is just not credible that the team working on the bond issues could not have known about the swaps. Then you just need to figure out a legal theory as to why what Goldman did was not kosher (presumably it was an investor fraud, but you’d need the relevant statutes and precedents).
Some people are willing to say in a pretty straightforward fashion that this sort of thing is not right. And if the regs really are so lax that this sort of omission is permissible, that is yet another bit of evidence that deregulation has gone too far (and I fail to understand why investor would be willing to buy paper in a disclosure regime that inadequate, but that is a bigger topic that we will hopefully turn to at another point). From the Bloomberg story:“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s [Bill] Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”
Even before this latest wrinkle, Simon Johnson was quite clear that these deals did not pass the smell test:Faced with enormous pressure from those eurozone countries now on the hook for saving Greece, the Commission will surely launch a special audit of Goldman and all its European clients…
If the Federal Reserve were an effective supervisor, it would have the political will sufficient to determine that Goldman Sachs has not been acting in accordance with its banking license. But any meaningful action from this direction seems unlikely….
To preserve Goldman, on incredibly generous terms, in the name of saving the financial system was and is hard to defend – but that is where we are. To allow the current government-backed (massive) Goldman to behave recklessly and with complete disregard to the basic tenets of international financial stability is utterly indefensible.
Yves here. Goldman has made a science of being too clever by half, but it may have made a fatal mistake. Governments do not take well to being abused or made to look foolish, and Goldman appears to have done both.
EU demands details on Greek swaps
Wall Street’s role in the unfolding Greek debt crisis will come under greater scrutiny after European Union authorities requested information from Athens about currency swaps. The transactions were undertaken from 2001 to 2008, and may have allowed the highly indebted Greek government to conceal billions of euros of new debt from the public and regulators. The information was requested by Eurostat, the EU’s statistical office, and is due by the end of the month. “The question is, was this legitimate in government management operations?” Amadeu Altafaj Tardio, a European Commission official, said.
A key focus for authorities, according to Mr Altafaj Tardio, would be whether the currency swaps, a derivatives transaction, had been calculated based on prevailing market rates. Goldman Sachs, Morgan Stanley, Deutsche Bank and other investment banks arranged complex transactions that enabled the Greek government to raise cash for budget spending without having to classify the proceeds as public debt. One of the biggest of such deals was a securitisation in 2001 in which Greece raised €2bn backed by grants the finance ministry expected to receive from EU structural funds.
Italy, Spain and Portugal used similar forms of off-balance sheet accounting as they sought to keep their budget deficits within the 3 per cent of gross domestic product mandated by the eurozone. The Commission said on Monday that the Greek government failed to disclose information about the currency swaps to a Eurostat team that visited Athens in September 2008 to monitor Greece’s debt management. But Greeks with knowledge of a 2002 currency swap and a series of asset-backed securitisation deals – all carried out under the previous Socialist government that held power between 2000 and 2004 – disputed that contention.
“Eurostat knew all about these deals, which were perfectly legal at that time. We didn’t keep them secret,” said a former senior Greek finance ministry official. George Papaconstantinou, Greece’s finance minister, told a meeting of the European Policy Centre think-tank: “The kind of derivatives contracts that are being reported by some newspapers were, at the time, legal and Greece was not the only country to use them. They have since been made illegal, and Greece has not used them since.” He added: “The current government has neither mandated not considered any instrument which is not compliant with Eurostat rules.”
A Eurostat representative declined to say which transactions were subject to the group’s request, or whether it was focusing on the work of specific banks. The focus on Wall Street, first detailed in a New York Times report, came as the Commission on Monday moved to tighten control over member states’ book-keeping. It approved proposals that would strengthen Eurostat’s hand to audit governments’ finances and ensure they provided accurate data. Those measures will now go to the European Council for consideration.
EU asks Greece to explain derivatives reports
The European Union has asked Greece to explain reports that it engaged in derivatives trades with U.S. investment banks that may have allowed it to mask the size of its debt and deficit from EU authorities. According to the New York Times, one contract in 2001 -- carried out just as Greece was joining Europe's monetary union -- involved Greece selling forward future lottery receipts and airport landing fees in exchange for cash to write down debts. The deal was treated as a currency trade rather than a loan, according to the newspaper, allowing Greece to hide it from public view while meeting EU deficit limits.
Greece's finance minister, George Papaconstantinou, on Monday dismissed suggestions that his country may have played fast and loose with monetary rules, saying the transactions Greece took part in were permissible at the time. "The kind of derivatives contracts reported by some newspapers were legal at that time," he told reporters in Brussels. "Greece was not the only country to use them...They were made illegal; we have not used them since then." The issue has become a focus of attention as Greece has now acknowledged that it has a budget deficit of nearly 13 percent of gross domestic product -- more than four times EU limits -- and a national debt equivalent to 120 percent of GDP.
The fiscal problems have led to pressure on Greek debt in bond markets and weakened the European single currency. The European Commission, the EU's executive that is responsible for enforcing EU laws, said it had asked Greece to explain what contracts it had engaged in as Eurostat, the EU's statistics agency, had never been informed. "I want to state that Eurostat was not aware of such transactions," Commission spokesman Amadeu Altafaj told a regular briefing on Monday. "But I can tell you that Eurostat has indeed, following these reports, already requested the Greek authorities for an explanation by the end of February."
Asked if the derivatives trades that Greece is alleged to have conducted fell within EU budget rules, Altafaj said: "We need the information on what kind of transactions took place, if they did (take place), and what was the effect on the government accounts of Greece...This is something that we don't have the information (on) yet and we have requested." A senior Greek finance ministry official told Reuters that Greece's current debt financing operations were transparent and complied with Eurostat rules.
But Eurostat, which already has profound concerns about the reliability of Greek macroeconomic data, is likely to take a very hard look at exactly what transactions took place and when. "This is why we are requesting more capacity for Eurostat to indeed to have more thorough and deeper view on these statistics. Reliable statistics are a key issue in management of public finances," Altafaj said. What Greece appears to have carried out, at least on one occasion, is a currency swap, which Altafaj said would have to be examined to see if it met EU rules. In particular, Eurostat will assess if underlying exchange rates and interest rates in any swaps were calculated based on observed market rates, which may be necessary for such deals to be considered legitimate, he said.
An article in Risk magazine last week said a deal between Greece and Goldman Sachs, completed in 2002, had effectively allowed Greece to borrow about 1 billion euros without adding to its public debt figures, at a time when the size of its borrowing threatened to attract a fine by Brussels. Risk said such swaps were legal, common at the time, and widely marketed by a number of banks. Under the deals, a country could reduce the size of the debt on its balance sheet by issuing euro-denominated debt and swapping it into a foreign currency such as dollars, using an artificially weak or off-market euro exchange rate.
The debt would be recognized by Eurostat at the market rate, cutting the country's recorded debt burden, although the country would end up paying higher coupons on the debt, Risk said. At a meeting later on Monday, euro zone finance ministers were expected to exert more pressure on Greece to implement planned budget deficit cuts. EU leaders pledged last week to help Athens resolve its crisis if needed, but they are still hoping to avoid having to provide concrete aid.
Greek Tax-Dodgers Threaten Papandreou’s Plan to Cut Budget Gap
Apostolis Rigas took his Opel sedan for a 220-euro ($354) service at a repair shop in northern Athens. When he asked for a receipt, the price jumped to 260 euros as his mechanic would have to declare the income and pay tax. “There’s no taboo about this,” the 23-year-old student said in a Feb. 2 interview. “Tax evasion helps support families, but it’s not good for the Greek state.” Prime Minister George Papandreou’s drive to tackle the European Union’s biggest budget deficit and pacify investors who have dumped Greek assets may hinge on convincing more people like Rigas to abandon this tax-dodging tradition. Papandreou says that Greek workers and companies have skirted tax worth 31 billion euros, more than 10 percent of gross domestic product.
Greece’s revenue from income tax was 4.7 percent of GDP in 2007, compared with an EU average of 8 percent, EU statistics show. Tax revenue fell by 2.5 percentage points of GDP between 2000 and 2007 to a euro region-low of 32 percent even as economic growth averaged 4.1 percent a year. That decline has helped push the deficit to 12.7 percent of GDP, more than four times the EU limit. It has also inflated the national debt, which at 120 percent of GDP will be the highest in the euro region this year
oncerns about Greece’s finances led to a slump in bond prices, pushing the premium investors demand to buy its debt over comparable German bonds to almost 400 basis points on Jan. 28, the highest since 1998. The EU’s Feb. 11 pledge to potentially aid Greece narrowed that gap, though at 301 basis points, it’s still twice the level of early November. EU finance ministers in Brussels today are reviewing the government’s three-year deficit reduction plans that call for 2.4 billion euros in additional revenue from squeezing tax evaders and dodged social security payments. That’s about a quarter of the entire deficit-reduction package, which includes a wage freeze for public workers, less government spending and higher levies on fuel, tobacco and property. “If these practices continue, they will lead to much bigger problems for us all,” Papandreou said in Brussels on Feb. 11 after EU leaders agreed to offer aid if Greece sticks to the deficit goals.
The government is seeking to tap more revenue from a society in which 95 percent of taxpayers declare annual income of less than 30,000 euros. The Bank of Greece estimates a campaign against evasion and corruption could glean as much as 5 billion euros a year. “What distinguishes Greece from the rest of the pack is the extent of tax evasion,” said Michael Massourakis, chief economist at Athens-based Alpha Bank, the country’s third biggest-lender, in a Feb. 5 telephone interview. “If you don’t attack tax evasion you don’t have the moral authority to cut spending.” As part of its drive to pressure the country’s one million self-employed to declare more income, the government is offering a tax break for expenses with receipts. That’s why Rigas accepted the extra repair cost to get a receipt from his mechanic in the Nea Ionia neighborhood of Athens.
Papandreou’s plan also targets doctors and gas stations, and seeks to discourage bribery of tax inspectors. The government is establishing Internet and telephone-based systems for filing returns to make bribery more difficult. It will also put barcodes on prescriptions to monitor how many patients doctors treat and track gasoline tankers by satellite to detect black market fuel sales. The government has started scrutinizing professionals suspected of widespread evasion. An investigation in the central Athens neighborhood of Kolonaki, where shoppers can buy Manolo Blahnik shoes and find the city’s only Prada store, showed more than half of doctors declared less than 30,000 euros in annual income, Finance Minister George Papaconstantinou said in November. The probe led to an audit.
Papandreou also announced an overhaul of the tax system to broaden its base and make taxes more equitable. The threshold for paying the highest rate of 40 percent was lowered to 60,000 euros from 75,000 euros, the government said last week. Those earning less than 40,000 euros will pay less and the corporate rate will be lowered by 5 points to 20 percent. Greece has been here before. Virtually every modern prime minister, including Papandreou’s father, Andreas, pledged to act. This time, the pressure from the EU and investors may help, said Harris Stamatopoulos, chairman of Athens-based Opap SA, Europe’s biggest traded gambling company. “Greeks are late starters but very good finishers,” he said in a Feb. 2 interview. “We have to be told many times before we believe things are as urgent as politicians say, but once we realize, we really move.”
More than 64 percent support the government’s efforts to rein in the deficit, a Kappa Research poll for To Vima newspaper published Feb. 7 said. Still, Papandreou’s campaign against evasion comes as he cuts public wages and services, and risks fueling mistrust of government corruption and inefficiency that helps many justify dodging the tax man, said Evangelos Karaindros, 41, a self- employed lawyer based in downtown Athens. “I pay taxes, but I don’t get any services,” he said in a Feb. 1 interview. “The man on the street feels this country offers him nothing.”
That anger taps into a tradition of tax evasion-as-protest against nearly four centuries of rule by the Ottoman Turks that ended with Greek independence in 1829, Massourakis said. Even for those who pay, colluding with tax-dodging of taxi drivers and bar-owners is still considered a form of solidarity. “If this was a friend of mine he wouldn’t give me a receipt and I wouldn’t ask,” Rigas said. “I’m not so sure they’ll succeed.”
European Union Sets Deadline for Greece to Make Cuts
Greece faced increased pressure Tuesday over its use of complex financial instruments to mask its rising debt, with European officials demanding detailed explanations by the end of the week and saying they could extend their inquiry to other countries. The announcement came at the end of a meeting of European Union finance ministers in Brussels, a gathering that threatened Athens with further austerity measures unless it proves within a month that its deficit reduction program is working.
A crisis of confidence in the financial markets over Greece’s huge public deficit and high debt levels has prompted the biggest test for the European single currency since its inception. The finance ministers on Tuesday told Greece that it will have to show by March 16 that spending cuts it is planning can bring its deficit down from 12.7 percent of gross domestic product, to 8.7 percent this year. The ministers warned Athens — which already faces a wave of strikes — to ready itself for additional cuts in case a verification mission finds that the Greek austerity program is insufficient to achieve the targets set.
Though E.U. leaders promised last week to take determined and coordinated action to defend the euro if necessary, there was no public discussion Tuesday on what form that could take.
Ireland’s finance minister, Brian Lenihan, said that the 16 euro zone finance ministers had agreed “that we will not talk about what the instruments are. We believe that would be unwise.” On Tuesday, the European commissioner for economic and monetary affairs, Olli Rehn, moved forward a deadline for Athens to give its explanation of the use of sophisticated financial instruments that concealed the scale of the deficit. The use of such instruments was first reported in The New York Times.
The deadline, which the European Commission said Monday night had been set for the end of the month, would be set for the end of this week, Mr. Rehn said. “It is clear that a profound investigation must be done on this matter,” he said, “and I will ensure that we conduct the inquiry so we see whether all the rules were respected.” He added that if it turned out that the use of the instruments was “not in line with the rules of the time, then of course we would need to take action,” including requesting information from other member states if necessary.
Asked at a press conference if Spain, another heavily indebted E.U. state, had been approached by big investment banks with similar ideas about using derivatives, the Spanish economy minister, Elena Salgado, replied: “No, absolutely not, and if such a proposal had been made it would not have been accepted.” E.U. officials suspect that investment banks may have exploited loopholes in procedures for reporting debt and deficit figures, both of which are central criteria for euro membership. Mr Rehn said pointedly that “the banks themselves should also ask, not least after the financial crisis, if this has been in line with the code of ethics.”
It remains unclear what, in addition to the measures already being taken against Greece, Mr. Rehn could do if the answers he gets from Athens are not to his liking. Greece is already facing action by the European Union over its excessive budget deficit, which far exceeds the limit of 3 percent of G.D.P. set by the treaty that established the euro. Greece also faces legal proceedings brought by the European Commission, the E.U. executive, over flaws in its statistical reporting. The use of complicated derivative swaps by Greece to mask its deficit was not reported to E.U. authorities or to the European Union statistical agency, Eurostat.
“Eurostat made a methodological visit to Greece on 15-19 September 2008,” said Amadeu Altafaj, spokesman for Mr. Rehn. “At the time the Greek authorities confirmed that, by law, government units could not enter into fictitious derivatives transactions.” On Monday the Greek finance minister, George Papaconstantinou, said that such swaps were legal when Greece used them. He added that they were no longer being used.
Britain and the PIGS
by Ambrose Evans-Pritchard
As of today, the British government must pay a higher interest rate to borrow money for ten years than either the Italian or the Spanish governments, despite the extraordinary ructions going on within the eurozone. The yields on 10-year British Gilts have risen to 4.06pc, compared to 4.05pc and 4.01pc for Spain. So if international bond markets are turning wary of Club Med sovereign bonds, they seem even more distrustful of British bonds.
Eurosceptics should resist any Schadenfreude over the unfolding EMU drama in Greece. (Not to mention the huge exposure of British banks to Club Med). The Greek crisis is a dress rehearsal for attacks on any sovereign state with public accounts in disarray. While Britain went in to this crisis with a much lower public debt than Greece or Italy (though higher total debt than either), it now has the highest budget deficit in the OECD rich club — and perhaps the world — at 13pc of GDP.
I have a very nasty feeling that markets are about to pounce on Britain. All they are waiting for is a trigger, perhaps a poll prediction of a hung-Parliament or further hints that Tories dare not confront the beneficiaries of state spending. Of course, bond yields do not tell the whole story. Credit Default Swaps (CDS) measuring bankruptcy risk are much lower for the UK than for Greece or Spain. Bond yields capture the risk of devaluation and inflation, where CDS measure pure default risk (or do in theory — though they are also speculative tools). Britain may engage in stealth default by monetizing debt and inflating, but that does not count for CDS contracts. Countries in a fixed exchange system with loans in somebody else’s currency — the Gold Standard in the 1930s, EMU today — can indeed default.
Britain’s current account deficit is down to 1.4pc of GDP, much better than Club Med. Still, It would be unwise to count too much on this distinction. Devaluation has acted as a shock absorber for Britain in this crisis, but it is no cure. It is a necessary condition for recovery, but it is not sufficient and it creates its own dangers. A disorderly fall in sterling at this stage (ie collapse) could prove as traumatic as default. Like many Telegraph readers, I am quite angry that neither Labour nor the Tories seem willing to grasp the nettle. They absolutely must map out systematic and draconian cuts, stretched out over four years in an orderly way, leaving it to the Bank of England to offset fiscal tightening with an easy monetary policy.
The Tories were complicit in Labour’s fiscal madness (3pc deficit at the top of the cycle, compared to a surplus of 2pc in Spain and 4pc in Finland) since they pledged to match to the spending programmes. They are now repeating the error by ring-fencing the lion’s share of the welfare state. David Cameron views the NHS as sacrosanct, but that is precisely what must be cut. It is anachronistic that you cannot obtain prescription drugs without going through a doctor — wasting everybody’s time — as if doctors these days reach a better decision in two minutes than well-informed patients with an acute self-interest in getting the matter right.
It is precisely this edifice that needs to be hacked down with a machete in a revolutionary rethink about the functions of the state. And not just the NHS either. I suspect that if the Tories came out swinging, they could win an election that promised nothing but blood, toil, sweat, and tears. The new taste for austerity was amply demonstrated in the Massachusetts Senate election. Having got that off my chest, I will return to Greece.
Beijing Sells Whopping $34.2 Billion Treasuries In December As Japan Becomes Largest Official Holder Of US Debt
Gradually we are getting confirmation that Chinese "posturing" about offloading US debt is all too real. The most recent TIC data confirmed the Treasury's greatest nightmare: China is now dumping US bonds. In December China sold $34.2 billion of debt ($38.8 billion in Bills sold offset by $4.6 billion in Bonds purchased), lowering its total holdings $755.4 billion, the lowest since February 2009, and for the first time in many years relinquishing the top US debt holder spot to Japan, which bought $11.5 billion (mostly in Bonds, selling $1.4 billion Bills) bringing its total to $768.8 billion.
Also, very oddly, the surge in UK holding continues, providing yet another clue as to the identity if the "direct bidder" - as we first assumed, these are merely UK centers transacting primarily on behalf of China as well as hedge funds, which are accumulating US debt under the radar. UK holdings increased from $230.7 billion to $302.5 billion in December: a stunning $70 billion increase in a two month span. Yet, with the identity of the UK-based buyers a secret, it really could be anyone... Anyone with very deep pockets.
China Has a Plan, America Doesn't
America has been squandering money it borrowed from the Chinese. Instead of criticizing China's monetary policy, US President Barack Obama should acknowledge the financial skill being displayed by the new world power and learn a few useful lessons. Everyone knows that it is important to have friends. But in politics it is just as important to have enemies. Being united against a common foe can be more than helpful. So it may come as no surprise that the embattled US president, Barack Obama, is continuing where his predecessor George W. Bush left off: complaining about the Chinese. Obama recently said China's monetary policy was hurting the US job market. That strikes a chord with Americans. It's even true. But it doesn't make any difference.
The US is the world's biggest debtor and therefore not in the best position to get its way with the People's Republic of China. Of each dollar that Obama wants to spend in 2010, over 30 cents are borrowed. And a large part of the loan comes from China. It might be smarter for the US to stop with the reproaches and to learn from the Chinese instead. When compared to the Americans, their financial situation is more than rosy. And their monetary policy is highly sophisticated. The Chinese don't borrow, they save. And they do this with the kind of dedication with which the Americans spend. An ordinary Chinese person puts 40 percent of his or her salary into their bank account, while an ordinary American saves at most 3 percent. The People's Bank of China has hoarded over $2 trillion in currency reserves. America meanwhile has a small dollar reserve and an XXL-sized budget deficit which currently stands at just under $14 trillion.
China is gently putting a stop to the expansionary monetary policy that helped to stabilize the fragile monetary system during the financial crisis. The government has increased interest rates and forced private commercial banks to hold larger reserves. It is withdrawing the liquidity it pumped into the market. The days of cheap money are ending. America can't yet bring itself to end its debt-financed anti-crisis policy. The Federal Reserve is still lending money at close to zero interest. It is devoting billions of dollars to shoring up the real estate market. It's an attempt to buy the recovery now and pay for it later. On the international stage, China's monetary policy officials are givers, not takers. They are starting to issue government debt abroad, even though the country doesn't need to borrow any money. But many states, for example Brazil, India and Russia, are happy to have an alternative to the US bond market. They buy Chinese bonds, and the Chinese in turn use this money to buy Russian, Indian and Brazilian bonds. This has created a second monetary circuit alongside the dollar.
This won't replace the dollar as a global currency in the foreseeable future, but it will help to prepare the ground for its replacement. Xiao Gang, the chairman of the board of directors of the Bank of China, said last summer: "The time has come to internationalize the yuan." America by contrast is self-absorbed with its monetary policy. It has ignored warnings of rising inflation and a new asset price bubble -- and in doing so is isolating itself, also from the Europeans. In the meantime, China is forging new alliances. The People's Republic has quietly been taking stakes in virtually all the world's regional development banks. Like a mini-World Bank, China has been helping to shore up financially troubled countries in Latin America, Africa and Asia. It has also increased its stake in the International Monetary Fund, by $50 billion. Chinese monetary experts, not Chinese soldiers, have been driving the nation's expansion -- silently and efficiently.
The oil business is the foundation of the dollar's hegemony. The oil-producing states do some $2.2 trillion dollars' worth of business each year in the US currency. Larry Summers, Obama's top economic adviser, once compared the dollar to the English language in terms of its importance to international trade. But China, a huge consumer of oil, is already discussing alternative means of payment with its suppliers. It would like to pay in yuan. The oil states wouldn't be able to use that currency worldwide, but they could make purchases in China. That, by contrast, would be like learning Mandarin. China is talking down the dollar to serve its own interests. When the dollar depreciates against the euro and the yen, the yuan declines as well, because the Chinese currency is pegged to the dollar. And the declining yuan helps boost Chinese exports to Europe and elsewhere in Asia.
China now sells significantly more goods in Europe than it does in America. Rarely has a government used the instruments of state monetary policy in such a calculated way. Obama is complaining, China keeps on growing and we're all confused. The economics textbooks never imagined a planned economy that was also run so cleverly. The world of planned economies is "a completely paralyzed, artificially distorted, pseudo-order incapable of reaction," Ludwig Erhard, the former German chancellor and economy minister widely credited with engineering Germany's post-war economic miracle, once said. It would "collapse like a pack of cards." If he were alive today, Erhard would definitely change his mind, given Asia's successes. That's because China has a plan, and America apparently doesn't.
Wall Street Is A High-On-Crack Driver That Just Smashed Into Your House
by Janet Tavakoli
If a high-on-crack driver crashed his speeding rental car into your house and killed your spouse, you would be outraged if law enforcers took bribes and gave the driver a pass on a blood test. If the judge then merely fined the killer and ordered you to pay it, you would appeal, wondering what happened to justice. If the government then handed the crack-driver keys to a bigger rental car and presented you with the rental bill, you would certainly protest.
How is it, then, that you have remained largely silent in the face of the same sort of behavior by Wall Street and Washington? Bonus-seeking bankers careened off the right path and ran Ponzi schemes that nearly ruined our economy. Bureaucrats and elected officials bailed them out without demanding consequences. Bankers are revving their engines again.
Bankers Get Bonuses, the USA Gets the Great Recession
Taxpayers are asked to believe that over-borrowing by U.S. consumers created a global financial crisis. This myth aids and abets Wall Street. The economy was nearly destroyed because banks borrowed massively, and they borrowed many multiples more than they could afford. Wall Street pumped the Fed's cheap money through financial meth labs, and deceptive financial vehicles ran over securities laws at top speed. More than 20% of mortgage loans--including originally sound loans--are underwater, meaning the borrower owes more than the home is worth. Official unemployment numbers hover at around 10%. If you include underemployment, it is around 18%. In depressed areas where the nation's poorest--chiefly minorities--have been hurt the most, unemployment has soared past 30%. For this destitute group, unemployment combined with underemployment exceeds 50%. As U.S. soldiers fought wars in Iraq and Afghanistan, Wall Street flattened Main Street. Our foreign wars drag on, while the U.S. battles a crippling recession at home.
Global Ponzi Scheme
Fraud by borrowers, fraud on borrowers, and speculation by people who thought home prices would rise forever have all tarnished mortgage lending. Yet this pales compared to the epidemic of predatory lending. Predatory snipers committed financial murder as deliberately as British soldiers sold smallpox contaminated blankets to Native Americans. Honest homeowners were systematically targeted and actively misled into bad mortgage products. Loans were presented as gifts, but these Trojan horse loans hid destructive risk. "Disclosures" were acts of malice.
When Wall Street packaged these loans and sold deceptive "investments," documents did not specifically disclose that credit ratings were misleading. If you know or should know a car's gas tank will blow up, you cannot use a misleading third-party consumer report as an excuse. Yet bonus-seeking bankers used this sort of excuse to get through a few more highly-paid bonus cycles, before it all fell apart. Only the elite crowd of insiders prospered.* This was the most massive Ponzi scheme in the history of the global capital markets. U.S. taxpayers became unwilling unsophisticated investors when we bailed out the financial system. We must hold Wall Street accountable for its fraud.
More Bonuses for Bankers, a Deeper Recession for the USA
Banks that contributed to our economic distress are heralded as geniuses at risk management, after taxpayers saved them from ruin. Wall Street escaped prosecution (so far), and Congress gave it a faster and more powerful car.
Paul Volcker suggested reforms, and special interest groups successfully lobbied to make them meaningless. His proposal to limit "proprietary" trading--a small step in the right direction--has been thwarted by banks claiming they engage in high risk trades on behalf of customers. Washington seems to have already forgotten that AIG nearly went bankrupt--and nearly took the entire financial system down with it--because of Wall Street's "customer" trades. Wall Street and AIG insiders grew rich on bonuses based on a myth, and taxpayers funded AIG's $180 billion bailout.
Wall Street now makes most of its "profits" from high-risk trading, and rewards risk with huge bonuses. It has unfettered access to more U.S. taxpayer money than in the history of the United States. Traditional banking suffers; it cannot generate enough revenue to "justify" massive bonuses. Bankers get billions in bonuses based on a myth, and U.S. taxpayers get a deeper recession and more risk.
Reform Starts with the President and Congress
Congress has protected Wall Street and passed on the costs to hard-working taxpayers. "Too-big-to-fail" financial institutions are too big to exist, and it is past time to break them up. They currently enjoy around $13 trillion of taxpayer-funded support, including tens of billions of FDIC debt guarantees for each of the too-big-to-fail banks and more than $2 trillion in nearly zero-cost funding from the Fed. President Obama has not yet condemned Wall Street's massive fraud, and Congress's bailout methods rewarded Wall Street's malicious mischief. The House just passed a bigger bailout bill that will give too-big-to-fail Wall Street banks access to $4 trillion dollars the next time they crash the economy. Congress must start again from scratch, and give us real reform. Washington needs to get back in the driver's seat, and voters need to make Congress steer straight this time by calling and writing representatives and senators.
* In a control fraud, only insider agents prosper. The losers are financial institutions' shareholders and debtors, investors, borrowers, and the U.S. taxpayer. Banks covered-up indefensible lending--enabled by complicit rating agencies, "creative" accounting at related mortgage lenders, crooked CDO "managers," venal hedge funds, crony accountants, and captured regulators. They parked the risk on their own balance sheets, on the balance sheets of Fannie Mae or Freddie Mac, in off-shore vehicles, or on unwary investors around the globe. Sometimes banks "transferred" risk with credit derivatives backed by phony securities that harmed "sophisticated" insurers like AIG, Ambac, MBIA, FGIC, and ACA--all of which were either bankrupted or damaged.
Ilargi: No, inflation didn’t accelerate in the UK. The pound went down.
UK Should Mull Plea to IMF, Economist Stelzer Says
Conservative leader David Cameron should consider a “profoundly unpopular” move such as calling for aid from the International Monetary Fund if his party wins this year’s U.K. election, economist Irwin Stelzer said. “What would I do if I were David Cameron? I would look at the books” and “I would say: ‘Shock, horror, I’ve found it’s much worse than I thought and so Gordon Brown has forced me to call in the IMF,’” Stelzer said, speaking at an event in London late yesterday.
Such a move would be reminiscent of 1976 when then- Chancellor of the Exchequer Denis Healey sought an emergency loan from the IMF. Under Prime Minister Gordon Brown, the U.K. is now running the largest budget deficit since at least World War II, prompting Standard & Poor’s to lower its outlook on Britain’s AAA rating to negative from stable in May. “You need to do something profoundly unpopular,” said Stelzer, who is director of the economic policy studies group at the Washington-based Hudson Institute and an adviser to Rupert Murdoch. “If it takes undemocratic means, I would say you have no choice but to call in the IMF.”
The British economy is in a “terrible shape” and has “a serious structural deficit,” Stelzer said. Neither Brown’s Labour Party nor Cameron’s Conservatives has set out a credible plan to reduce the budget shortfall, he said. “When the rating agencies say they’re looking at your AAA rating, the markets are warning you that now is the time to have a credible plan to reduce the deficit,” Stelzer said, speaking at an event hosted by Politeia, a London-based research group. “The markets are saying: ‘This is it, fellas.’”
The U.K.’s budget deficit will equal 12.9 percent of gross domestic product this year, compared with a European Union average of 7.5 percent, according to European Commission forecasts published in November. The U.S. deficit will be 13 percent of GDP, while Greece’s will amount to 12.2 percent. The forecasts were published before Greece announced additional austerity measures to reduce its deficit. As the budget shortfall takes center stage in the fight for the election due by June, Brown has pledged to cut the deficit in half by April 2014 and Cameron says measures to reduce it should begin this year. Stelzer said Brown might not be the best candidate to lead Britain out of its predicament.
“Gordon got it right, I think, on fiscal stimulus. He got it right on saving the banks, whereas Cameron got it wrong on a lot of these issues,” Stelzer said. “But we are where we are right now, and the question is: Who do you trust to go on from here?” “I love Gordon, but I wouldn’t trust him to go on from the situation with this level of deficit,” Stelzer said. “His every instinct is to spend more because he believes in social justice” and “he wants the state to do nice things for people and that’s the wrong mindset for right now.” Bank of England policy makers unanimously agreed to pause their 200 billion-pound ($315 billion) bond-purchase plan this month on optimism that inflation will return to their 2 percent target, minutes of the Feb. 4 meeting published today showed. Inflation accelerated in January to the fastest in 14 months. The pound has fallen about 23 percent on a trade- weighted basis in the past three years, pushing up import costs.
Policy makers are debating whether more stimulus is needed as reports show the economy’s recovery from recession is patchy. While GDP expanded 0.1 percent in the fourth quarter, a report today showed unemployment claims unexpectedly jumped in January to the highest level since 1997. “We don’t really know whether quantitative easing is a useful recession fighting tool, or whether it’s simply storing inflation up for the future,” Stelzer said. “The markets are warning you and you’ve been saved by the pound depreciating, but I think there’s a limit to that because then you trigger inflation.”
UK house prices 'to slump as credit crunch returns'
A second mortgage credit crunch that will send UK house prices into a new tailspin is looming, economists and credit experts have warned. The squeeze on debt will begin to be felt in January next year, when lenders are due to start repaying £319bn borrowed from the Government during the original crisis in 2007 and 2008 – a quarter of the UK's entire £1.3 trillion stock of mortgages. To pay the money back, credit-rating agency Moody's said, banks and building societies may "limit their lending through tighter credit criteria" – in other words reducing availability and making mortgages more expensive. Capital Economics added: "The prospect of a fresh mortgage credit squeeze later this year or during 2011 hardly inspires confidence in the durability of the housing market recovery."
Credit is already tight. In 2009, societies removed £7.4bn from the mortgage market and approvals dropped to 1.3m, compared with 3.4m annually from 2005 to 2007. Lobby groups have called on the authorities to delay the timetable but, last week, Mervyn King, Bank of England Governor, confirmed that the main state-backed liquidity scheme, providing £185bn of funding, would end in January 2011 as scheduled. The full £319bn must be repaid by April 2014. Echoing a warning from the Council of Mortgage Lenders (CML) that removing Government support will choke off lending and raise mortgage costs, Moody's said yesterday: "If debt markets cannot take up some of the funding gap left by Government schemes, the impact on the UK mortgage market will be significant ... The contraction will put pressure on house prices."
The £319bn "funding gap" is the difference between the amount the banks hold in retail deposits and the sum they have lent. The gap used to be financed in the wholesale markets, which froze in August 2007. They have been replaced with emergency state schemes. Illustrating the scale of the crisis, CML data shows that UK lenders raised £130bn in the markets in the 12 months before the crunch but just £11.5bn in the past two years. Moody's added that the benign environment of low interest rates and "other Government stimulus [which] have helped borrowers" may just have been "transitory".
Rising bad debts would be particularly severe for building societies, which lost £7.6bn of deposits last year. Their credit ratings have also been slashed, effectively barring all but Nationwide, the largest society, from using the wholesale markets. "Building societies have been the main victims," Moody's said. "Without access to cheaper Government-backed funding, many will find it increasingly difficult to survive." Societies are in discussions with the Financial Services Authority about creating a new debt instrument to shore up their balance sheets. Called mutual ordinary deferred shares (MODS), the debt will not mature and will pay an annual coupon that can be axed to preserve capital in extreme circumstances. The FSA has not yet approved the instruments.
U.K. Unemployment Claims Jump to Highest Since 1997
U.K. jobless claims unexpectedly jumped in January to the highest level since Tony Blair led the ruling Labour Party to power almost 13 years ago as the recession destroyed work at businesses from carmakers to banks. The number of people receiving unemployment benefits rose by 23,500 from the previous month to 1.64 million, the highest since April 1997, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 27 economists was for a drop of 10,000. The jobless rate on that basis stayed at 5 percent.
The Bank of England said last week that employment is at risk of falling "significantly further" if the economy's recovery from the longest recession on record falters. Prime Minister Gordon Brown is counting on the pickup to gather momentum and help him to claw back voter support in time for an election due by June. "It's a concern given that we thought the labor market was improving," George Buckley, chief U.K. economist at Deutsche Bank AG in London, said in a telephone interview. "Firms are faced with the possibility that the level of economic activity is lower and weaker than they thought, and that raises the possibility that they'll decide to shed jobs in the future."
The pound was little changed after the release, trading at $1.5770 as of 10:55 a.m. in London, unchanged on the day. The yield on the two-year benchmark government bond rose 3 basis points today to 1.177 percent. A wider survey-based measure of unemployment based on International Labour Organization counting methods fell by 3,000 in the three months through December to 2.46 million. The 7.8 percent U.K. jobless rate on that basis is below the 9.7 percent figure in the U.S., 10 percent in the euro region. The rate is 5.1 percent in Japan.
General Motors Co.'s Adam Opel GmbH division said Feb. 9 it plans to cut 369 positions at the Luton, England plant for its Vauxhall brand vehicles. Lloyds Banking Group Plc, the U.K.'s biggest mortgage lender, said Jan. 21 it plans to eliminate 685 jobs in its wholesale and consumer divisions, resulting in a net reduction of 585 jobs across the U.K. Brown's Labour party is trying to eliminate the Conservatives' lead in opinion polls in an election campaign where arguments on measures to tame a record budget deficit and cement the recovery have taken center stage. A ComRes Ltd. poll published Feb. 14 gave the Conservatives 40 percent support, up 2 percentage points. Labour had 29 percent, a drop of 2 points. The party has been in power since May 1997.
"It would be completely barmy to be slashing public spending, just as the Conservatives are proposing right now," Work and Pensions Secretary Yvette Cooper told Sky News television today. Unemployment is lower than the government forecast a year ago, thanks to government support, she said. The Bank of England said last week more Britons may have kept their jobs during the slump because wage growth stayed low. Governor Mervyn King said it was "far too soon" to say that no more purchases will be needed through the bank's bond-buying program after policy makers paused the plan at 200 billion pounds ($315 billion) this month. Policy makers voted unanimously to keep the program unchanged on optimism that inflation will return to the 2 percent target, minutes of the Feb. 4 meeting released today in London showed.
"The weakness of earnings growth may have contributed to the resilience of employment during the downturn relative to the amount of lost output," the bank said in its quarterly Inflation Report. "There remains a risk that employment could fall significantly further" which "could happen if the recovery in demand is more sluggish than companies expect, causing them to shed staff." The statistics office said today its measure of average weekly pay including bonuses rose 0.8 percent in the fourth quarter, while excluding bonuses it increased by 1.2 percent.
Credit card holders face 'crippling' interest rates
Millions of borrowers are facing “crippling” debts after banks put up interest rates on credit cards to a 12 year high, it can be disclosed. The cost of paying on plastic has gone up by more than a quarter in just four years, new figures show. Almost seven million card holders saw their rates increas over the last year. The average rate of interest has now climbed to 18.8 per cent, the highest since 1998, with some card holders being forced to pay as much as 46 per cent in interest. Experts said the figures, uncovered by personal finance researchers Moneyfacts, reflect the growing squeeze on struggling households by Britain’s credit card operators and banks, who have also increased the profit margins on mortgages and lowered savings rates. They accused lenders of “sticking the knife in” on households who are already facing the most difficult financial circumstances in living memory.
The figures emerged as a separate report by price comparison website Moneysupermarket.com showed how two out of five borrowers are relying on their credit cards to buy even the most basic of everyday items, such as food and petrol. Having three or more credit cards is now standard practice for one in five Britons, with 17 per cent of credit card holders using their card at least once a day. Those aged over 70 are likely to hold the most credit cards; poor performing pensions is forcing many to work well into retirement.
In further evidence of the bleak financial situation of Britain’s households, experts at Moneysupermarket also disclosed that millions can no longer be bothered to save. Historically low savings rates mean many are failing to earn any real return on their money, once tax and inflation is taken into account. As many as 26 per cent now claim to have no interest in saving, while 51 per cent said they could not afford to save at all. Peter Harrison, a credit cards expert at Moneysupermarket, said: “We are a credit card nation. The British public’s reliance on credit cards, especially for day to day living, is deeply concerning. “Funding everyday items such as petrol or food, and still paying for it long after the product has been used, can be a dangerous habit to get into.”
James Daley, of consumer campaigners Which? said: “It’s hard to justify these increases when the Bank Rate has been at an all time low for a year. It comes at the worst time for consumers who are already suffering from higher unemployment, rising inflation and poor savings rates.” Phil Hammond, the shadow chief secretary to the Treasury, said: “For thirteen years Gordon Brown borrowed and spent as if there were no tomorrow – and encouraged householders to do the same by claiming he’d abolished boom and bust. “Now Britain has the highest level of household debt of any major economy, Gordon Brown’s recession has left millions struggling with crippling debts.”
The Government recently announced plans to clampdown on credit card companies in a bid to tackle consumer debt. The measures include forcing credit card companies to raise the minimum monthly repayments to encourage people to reduce their debts more quickly. The results of the consultation is due to be published within weeks. Total household debt has reached £1.46 trillion, of which £226 billion is consumer credit, which includes credit cards and unsecured loans, according to the Bank of England. It said there is £55 billion outstanding on credit cards. Credit card providers are increasing rates amid concerns about borrowers failing to repay their debts.
A quarter of the 30 million credit cards in Britain had their interest rates increased over the last year, according to the industry body the UK Cards Association. The typical credit card debt of £2,000 takes two years to clear, based on monthly repayments of £100. Fees for balance transfers, cash withdrawals and foreign transfers also continue to go up, meaning customers are paying more across the board. Michelle Slade, a spokesman for Moneyfacts, said: “Britain continues to suffer from a high level of unemployment and providers are worried about the increased risk of customers not repaying their debts. “This increased risk continues to be passed on to both new and existing credit card customers through higher rates.”
Credit card provider Capital One recently increased the rates on some of its credit cards by as much as 7 per cent, blaming economic uncertainty. Andrew Hagger, of personal finance website Moneynet, said: “Cardholders are having a tough enough time as it is at the present, without greedy card providers sticking the knife in. “The average rate is far from the real picture as applicants with a less than squeaky clean credit record will end up paying much more.
“Just because you sign up to a card with an attractive rate, it doesn’t mean it’s going to remain that way, with increasing numbers of customers receiving notification that their rate is being hiked even though they are adhering to the terms and conditions of their agreement. “With Britain suffering from a surge in unemployment and the potential of more job losses to come, it’s no surprise to see rates remain stubbornly high.” Consumer Minister Kevin Brennan said: "As a result of Government action, credit card companies now have to tell customers if they raise individual interest rates so they can, if they choose, pay off the debt at their existing rate. "We have asked credit and store card companies to get their act together and will shortly be announcing our plans to make sure consumers get a fairer deal."
'Lies, Damned Lies and Greek Statistics'
European Union finance ministers on Monday accepted Greece's austerity package, aimed at radically shrinking its budget deficit by the end of the year. But many would like to see Athens do more. German commentators doubt whether the correct strategy has been found. European finance ministers, meeting in Brussels on Monday and Tuesday, have rubberstamped a package of deep budget cuts and strict savings measures proposed by Greece in an effort to slash its budget deficit from its current level of 12.7 percent of gross domestic product to 8.7 percent by 2011.
Nevertheless, the agreement has done little to quell the ongoing debate in the European Union as to how best to deal with Greece and the dangers the country is posing to the common European currency, the euro. In a Tuesday interview with German radio, Luxembourg Prime Minister Jean-Claude Juncker, who heads the Eurogroup -- a body made up of finance ministers from countries in the euro zone -- said that the EU will impose further savings measures on Greece should the country fail to meet its budget deficit reduction targets. Others, though, were more pointed in their comments about Greece's savings package. Swedish Finance Minister Anders Borg demanded stricter measures, saying that "if (Greece) wants to build credibility in the market, they must surpass expectations and they have not done that so far."
Borg also called for a greater surveillance role for the International Monetary Fund in Athens -- an idea rejected by Juncker. Juncker called the proposal "absurd" and said it was "fuelled by Anglo-Saxon voices." Greece had been hoping that the meeting would provide details of the safety net agreed to by European Union leaders last week. So far, though, the EU has declined to outline exactly how it proposes to help should Greece prove unable to withstand speculators currently zeroing in on the country's weak finances. Greek finances have been placed under strict EU surveillance with a progress report due next month. Greece's public debt has ballooned in the last year and now stands at €300 billion, or 113 percent of GDP.
Just how aggressively the country will be able to pay down that debt, however, remains to be seen. A number of unions in Greece have called for strikes to protest the austerity measures announced by Athens, with the Greek customs workers' union staging a three-day walkout starting on Tuesday. Many countries in the European Union, though, are likewise facing restless populations, unimpressed with the apparent need to bail out Greece. The news that Athens worked together with American investment banks to hide state debt from the European Union has further angered Europeans. Fully 71 percent of Germans are against sending EU funds to Greece, according to a survey by the research group Emnid. A survey conducted for the tabloid Bild am Sonntag found that just over half of Germans would like to see Greece thrown out of the euro zone altogether. German commentators on Tuesday take a look at how the crisis currently facing the euro might best be solved.
Financial daily Handelsblatt writes:
"The debt crisis has developed a dangerous dynamic. Austerity measures have become the favored strategy for confronting threatening mountains of debt. It seems to have been forgotten, however, that savings is not a cure-all -- the economy must find its way back onto the path of growth. It wasn't all that long ago that politicians and economists were searching desperately for a strategy to scale back the state's role in the economy without disrupting fragile growth. This careful exit strategy, however, has now given way to mindless panic: Get out and save, is the new motto. Despite examples to the contrary, one cannot deny that a conflict exists between savings policies and growth strategies. The only way to get around that conflict is by coupling austerity measures with structural reforms aimed at improving economic efficiency. Competitive products must, however, find buyers. The Club Med of debt would be served better in the long term were Germany to buy their products instead of sending tax money."
The center-left Süddeutsche Zeitung writes:
"Historical revisionism related to the financial crisis is in high gear. Higher powers are blamed, Wall Street is ascribed supernatural influence and bankers have been credited with omnipotence. Indeed, high finance is now said to have lured Greece with a siren song of concealed debt, to Europe's vexation. But this mystification conceals reality. Those responsible for the Greek debt crisis can be found in Athens. The Greek government made promises to the country that it couldn't afford. That is why they worked with the investment bank Goldman Sachs to conceal the true dimensions of public debt from the European Union budget watchdogs. The adage currently circulating in Brussels is true: There are lies, damned lies and Greek statistics. Yes, Goldman helped in the deception and even profited from it. But the bankers weren't sirens. Competition mandated that they offer all of their financial products to those who were willing to pay for them -- including governments who were only interested in cheating."
The Financial Times Deutschland writes:
"The European common currency zone was not created to guarantee peace in Europe, despite what former German Chancellor Helmut Kohl liked to tell his citizenry. Rather, it was designed to insulate industry and trade from the unpredictable ups and downs of international currency markets. How should German automakers find success in the Italian, Spanish and French markets when they were constantly confronted with the drastic devaluation of the lira, peseta and franc? Without a currency union, it would have been impossible. But a common currency among countries that follow radically different economic policies cannot go well. That was clear even to Kohl and his Finance Minister Theo Waigel.
They devised the trick of placing euro zone countries in shackles. Governments were required to strictly limit their influence over the economy and a public debt ceiling was mandated.... In addition, economic policies were aligned.... But the real economies of euro zone countries have drifted apart. The actual purpose of the euro -- the creation of an economic and currency zone insulated from the vagaries of the financial markets -- was counteracted. In order to save the euro, (politicians) in Berlin and Brussels could do two things -- both of which contradict market principles. The simplest, though merely temporary in nature, would be to provide a nice large loan or loan guarantee to Greece (and other problem countries). Better, however, would be coordinated, expansive economic policies in the problem countries in order to spur investment. Following both paths would be the best of all strategies."
Spanish government struggles with crisis message
Could Spain be the next Greece? The government bristles at the very thought, and points out its debt burden isn't nearly as heavy. It's a stinging comparison nonetheless for a country that only a few years ago had burgeoning growth but is now lumped with other deficit-laden countries on a watch list for a Greek-style crisis. The collapse of a real estate- and consumer-fueled boom has left Spain with a eurozone high jobless rate of nearly 20 percent, and the government ran up a deficit that in 2009 equaled 11.4 percent of GDP. That is way over the eurozone limit of 3 percent and earned Spain a place as the letter "S" in the inelegant PIGS acronym coined by analysts (the others are Portugal, Ireland, and Greece).
Spanish officials argue they are better off in several respects. National debt as a proportion of GDP -- 66 percent this year and peaking at 74 percent in 2012 -- is well below the EU average and far under Greece's 113.4 percent for 2009.
It does not have credibility problems like Greece, which is accused of fudging its debt numbers, and its banking system is relatively sound compared with other countries that had to bail their banking systems out. Still, Spain has tried to spend its way out of recession with costly job-creation and stimulus measures, running up a budget shortfall that has spooked markets and lenders. Spanish sovereign debt has come under pressure, with creditors demanding a steeper interest rate to buy it and rates also rising for insurance against default.
Spain's economy is much larger than that of Greece, so it's a far bigger problem for the European Union and the euro if markets begin to doubt Spain's ability to pay. If there is an EU country next in line for troubles with financing itself, it is Spain, even if the likelihood of this is low for now, said Javier Diaz-Jimenez, an economist at Madrid-based IESE Business School. "Spanish public finances are under severe stress. Nobody in their sane mind can deny that," he said.
Spain's Socialist government rejects suggestions that the eurozone's fourth-largest economy, which had posted budget surpluses and robust growth as recently as 2007 but has suffered dearly following the collapse of a real estate bubble, has a debt mess similar to Greece's, which has driven down the euro and shaken the European Union. But Spain did see fit to dispatch a team led by Finance Minister Elena Salgado to London and Paris last week to meet with ratings agencies and investors in an effort to explain Spain's deficit-reduction plans and restore its credibility.
And at times the government has looked on the defensive. Last week it sent Brussels a document that raised the possibility of lowering most Spaniards' retirement pensions by changing the way it measures their working life. Amid a furious outcry from unions, hours later the government literally erased that paragraph from the document, saying it was not a firm proposal but rather an accounting simulation. This fueled long-standing criticism from opposition conservatives that the government lacks a coherent policy to confront the recession and just makes things up as it goes along. Polls say that if elections were held now, Prime Minister Jose Luis Rodriguez Zapatero would lose to the center-right Popular Party.
One of the government's most prominent spokesmen, Infrastructure Minister Jose Blanco, also raised eyebrows by saying that shadowy outside forces are ganging up on Spain. He said: "Spain is the victim of an international conspiracy designed to destroy the country's economic status and, then, the euro." The deficit-cutting blueprint calls for euro50 billion ($70 billion) in budget cuts over the next four years, with the goal of cutting the deficit to the EU limit of 3 percent in 2013. When Salgado announced it, she left out the deficit numbers for the intervening years, and markets were rattled when days later Spain released projections for them that were about two points higher than they had previously banked on.
There are also concerns that the plan is short on details and not aggressive enough. Ireland, by comparison, has slashed pay for state workers, cut welfare benefits and imposed new environmental taxes on fuel to try to contain its runway deficit. But Spain is not touching public-sector wages, most of the spending cuts have been assigned to regional governments that Madrid cannot control, and the only taxes due to rise are VAT and levies on capital income like stock dividends. This is not expected to make a big dent, and even then the rises do not kick in until July. Compared with Ireland's, or even Greece's deficit-cutting plans, Spain's ideas "look pretty paltry," said Ben May of Capital Economics Ltd. in London.
Another problem is that Spain's plan is predicated on forecasts of economic growth resuming relatively soon, thus raising tax revenue and easing the government's unemployment benefit payout load. However, the International Monetary Fund has said Spain will be the world's only major economy not to post year-on-year growth in 2010, and that its economy will expand only 0.9 percent in 2011. "I think it would be very unlikely that the deficit gets anywhere near 3 percent unless they implement further, significant fiscal measures," May said. Nuno Serafim of IG Markets said Spain and also Portugal need to serve up a bitter cocktail of higher taxes and deep spending cuts, but this is a hard sell because of the entitlement-heavy mentality of people in southern Europe. "Governments in southern Europe are less pragmatic than in northern Europe," he said. "Normally, they try to avoid unpopular policies because they are more prisoners of the political agenda and the electoral agenda."
Five Million US Workers to Exhaust Unemployment Benefits by June
Back in December, the qualification dates for existing tiers of unemployment benefits were extended for an additional two months. Time is up at the end of February.
Now another extension is needed or millions of workers will lose benefits over the next few months.
The National Employment Law Project (NELP) released a new report last week showing that ...1.2 million jobless workers will become ineligible for federal unemployment benefits in March unless Congress extends the unemployment safety net programs from the American Recovery and Reinvestment Act (ARRA). By June, this number will swell to nearly 5 million unemployed workers nationally who will be left without any jobless benefits.This table shows the NELP's projections:
Currently, 5.6 million people are accessing one of the federal extensions (34-53 weeks of Emergency Unemployment Compensation; 13-20 weeks of Extended Benefits, a program normally funded 50 percent by the states).Of the almost 1.2 million workers facing a cut off of benefits in March alone:The following graph is based on the January employment report and shows the number of workers unemployed for 27 weeks or more ...
380,000 workers will exhaust their 26 weeks of state benefits without accessing the temporary EUC extension program or the permanent federal program of Extended Benefits. Another 814,000 workers will not be eligible to continue receiving EUC past their current tier of benefits.
Click on graph for larger image in new window.
The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce.
According to the BLS, there are a record 6.31 million workers who have been unemployed for more than 26 weeks (and still want a job). This is a record 4.1% of the civilian workforce. (note: records started in 1948).
The current qualification dates extension being considered is for another three months. Cynics might argue that some Senators want to limit the extension to an additional three months, so they can use the popular benefit extension in May to once again extend the homebuyer tax credit - hopefully the cynics are wrong!
US mortgage rates poised to jump as Fed cuts funds
The Federal Reserve is poised to turn off a major money spigot that has helped sustain the ailing real estate sector, as an extraordinary program under which the Fed has pumped $1.25 trillion into the mortgage market is slated to end March 31. "Housing has been on government life support, and without it the crash would have been much more severe," said Mark Zandi, chief economist with Moody's Economy.com in Pennsylvania. "This spring and summer as those policy efforts unwind, we most likely will see mortgage rates move higher and more house-price declines."
Rather than being held by banks, today's mortgages are sliced, diced and resold on Wall Street to create liquidity - money that then can be lent in more mortgages. After the credit crunch beginning in the fall of 2008, investors lost their appetite for these mortgage-backed securities, so the Federal Reserve stepped in to purchase them to ensure that money would keep flowing to home purchasers. The Fed started buying securities backed by Fannie Mae, Freddie Mac and Ginnie Mae in January 2009 and originally planned to conclude the program by year's end. It extended it for three months to ease the impact on mortgage markets, although it didn't allocate more money. The program's ultimate cost won't be known until the Fed sells off the securities, something that officials said it will do gradually starting this year. It's conceivable that the program could end up generating a modest profit, breaking even or losing money, depending on what prices the securities go for.
While experts agree that the Fed's exit will cause mortgage rates to rise, the big unknown is how severe the effect will be. "There is no question rates have been kept artificially low by the Fed's heavy buying," said Guy Cecala, publisher of Inside Mortgage Finance. "My opinion is that rates will go up a full percentage point initially," meaning that 30-year fixed conforming loans, now hovering around 5 percent, would hit 6 percent. Keith Gumbinger, vice president of HSH Associates, which compiles mortgage loan data, thinks that rates will slowly rise to about 5.75 percent after the Fed withdraws. "Right now the Fed is acting as a sponge, absorbing about $12 billion a week of what you might consider excess supply," he said. "When they stop, the market will have to pick up some chunk of change."
Julian Hebron, branch manager at RPM Mortgage's San Francisco office, anticipates a bump up to around 5.5 percent by summer with rate volatility all year. "The Fed isn't going to start dumping mortgage bonds on April 1, they're just going to stop buying," he said. "By that time, improving economic data is likely to push the Fed toward a rate hike bias. This will contribute to higher mortgage rates, slowing refi activity, and less mortgage bond supply. So while the Fed won't be buying anymore, rates shouldn't spike immediately because there will be less supply for markets to absorb."
Christopher Thornberg, principal at Beacon Economics in Los Angeles, thinks the Fed's withdrawal will have a radical impact. "Clearly, when they stop printing all that money, it's going to be a shock to the system. I have to assume that when they pull back on it, it will cause a 100- to 200-basis-points rise" to rates of 6 percent or 7 percent, he said. "When they start selling off the stuff they purchased, which by my guess would come early next year, that would cause another 100- to 150-basis-points rise."
The Fed has indicated that it might resume buying mortgage-backed securities if mortgage rates spike. In written Congressional testimony released last week, Fed Chairman Ben Bernanke said the Fed eventually will take steps to forestall inflation that also are likely to result in higher interest rates for all loans. Several other government programs designed to prop up the housing market also are in play:
- The home buyers tax credit of $8,000 for first-time buyers and $6,500 for repeat buyers expires April 30. Although many experts think the program simply caused people to buy houses earlier than they had planned, its end is likely to cause a dip in home sales. "Higher interest rates without a tax credit means the cost of buying a home will rise significantly," Zandi said. "We should expect much weaker home sales in May, June and July." Cecala thinks that if home sales are anemic, Congress may extend the tax credit an additional six months, as it's already done once before.
- Federal Housing Administration loans, an increasingly important source of financing for many borrowers, especially those with low and moderate incomes, imposed more stringent lending criteria in January. As FHA delinquencies rise, the rules could tighten still more, eliminating some potential buyers. "The FHA portfolio has all sorts of bad debt in it," Thornberg said. "Eventually they'll have to pull back" on lending.
- Home Affordable Modification Program, the government-backed plan to get banks to help troubled homeowners, has kept the market from being flooded with foreclosures, as hundreds of thousands of borrowers are negotiating with their lenders for lower payments. Eventually, observers say, much of that backlog will wind up in foreclosure because homeowners simply don't have the income or ability to make modified payments. A new surge of bargain-basement foreclosures would undermine home prices. "We have a boatload of homes that ultimately will find their way to a foreclosure sale, and that will put pressure on house prices," Zandi said. "The more that distressed home sales rise, the more home prices get pushed down."
Redoing the Kitchen While the House Burns Down
by John Rubino
Wall Street Journal columnist Thomas Frank is by far the most interesting part of that paper’s dull gray Op Ed page. Back in January he suggested that the world’s governments smack down those wing-nut gold bugs by selling all the gold in their central bank vaults — a plan that most gold bugs found hilarious, since they doubt that central banks have much gold left to sell.
And last week he explained that our current troubles were due, get this, to a lack of trust in government’s ability to solve our problems. A few excerpts:Once in office, the strategic thinking went, Democrats could slowly brighten the antigovernment mood by setting up various transparency and accountability programs. And they could turn that frown upside-down simply by doing what Democrats do, namely, by using government to solve big public problems, beginning with the grotesquely expensive health-care system.
But as the drama played out, these clever flanking maneuvers failed. Now it seems unlikely that Democrats will ever get their chance to change the public’s attitude toward government in this indirect way; the antigovernment animus struck first, bringing the health-care debate to an end with a summer of unanswered town-hall protests and a voter revolt in Massachusetts.
Bruised by the backlash, President Barack Obama came before the nation last month to address the problem. “We face a deficit of trust,” Mr. Obama observed in his State of the Union address, “deep and corrosive doubts about how Washington works that have been growing for years.”
But what will the president do to assuage those doubts? In his speech, he mentioned a crackdown on earmarks, implementing government transparency measures, and banning lobbyists from his administration’s high positions. They are all good and necessary reforms, of course. But one suspects they will do little to allay the grandiose fears of the broader antigovernment set.
A more daring course would be finally to confront the antigovernment catechism directly, to attack his opponents where they are strongest. For decades, conservatives have explained every episode of government failure by shrugging: What do you expect? That’s just the way government is. When government fails to do the job—even when it’s a government presided over by conservatives themselves—it automatically reinforces core assumptions of the right.
Although this explanation is hollow and a little bit poisonous, it carries the day even in the unlikeliest circumstances. So the Bush administration screws up emergency operations in the aftermath of Hurricane Katrina, and conservatives use the episode to call for the privatization of federal emergency operations. Government didn’t work because government never works.
And yet the toxic truth is staring us right in the face: The reason government has failed so spectacularly in our time is because it’s been run into the ground by antigovernment politicians. Government agencies failed because they were often turned over to industry lobbyists. Government regulators didn’t regulate because they were starved for resources. The government work force had no esprit de corps because it was constantly being insulted by its bureaucrat-denouncing bosses. According to a story that ran in the Washington Post last week, government workers earn 26% less than private-sector workers in comparable jobs.
The debate is coming soon, whether liberals like it or not. The most colossal government failure in many years may be the next big issue in Washington, as Congress turns to proposals for re-regulating the financial industry.
No one denies that federal bank regulators dropped the ball during the housing boom of the last decade. Conservatives, for their part, will fit that failure neatly into their usual story line, asserting that those regulators need to take the blame for the deeds of the nation’s mortgage lenders, bond-rating agencies, and financial innovators. The answer, conservatives will say, is not more regulation but less. They will wave their rattlesnake flags. They will holler for freedom. They will pocket contributions from Wall Street.
And unless the president and the Democrats in Congress are prepared to steel their nerves and speak forthrightly for once about the causes of government failure, the Democrats will lose again. Nothing will be done. And failure this time around won’t just look bad at the polls, it may well set the stage for another financial disaster.
This is classic stuff: “And they could turn that frown upside-down simply by doing what Democrats do, namely, by using government to solve big public problems, beginning with the grotesquely expensive health-care system.” ; “The reason government has failed so spectacularly in our time is because it’s been run into the ground by antigovernment politicians.”
But it’s classic not just because it’s out-of-left-field absurd. It’s classic because it reflects the dominant view of both major parties that a policy fix is possible, that there is a combination of spending programs, tax rates, foreign policy initiatives and such that would set things right. So we have this non-stop debate over universal health care, the Afghan troop surge, cap-and-trade, and a “spending freeze”, all of which are sold as crucial to “getting us back on track”.
All, without exception, are irrelevant. If, through some grand compromise, the entire wish list of both left and right is enacted tomorrow, it won’t make a bit of difference. And if legislative gridlock stops anything from passing for the next ten years, the outcome will be pretty much the same.
Think of the U.S. as a family that’s busily renovating the kitchen while their house burns down.
Debt, of course, is the fire in this analogy. The U.S. has borrowed more it can ever hope to pay off, and for a country as for a family, when you owe too much your life changes in unpleasant, sometimes catastrophic ways. By now virtually everyone who cares has seen a debt-to-GDP chart, but I can’t help tossing up one more, because this single image conveys more useful information that a year’s worth of cable news talking heads or newspaper Op Ed columns.
No one really understands the U.S. balance sheet, of course, and because we own a printing press, the growing imbalances have yet to bite. Which is why the struggles of Greece are so enlightening. As part of the euro zone it doesn’t own the printing press that makes its currency. And now that it can’t borrow to fund its deficits, it has to decide — very publicly — how to live within its means.
As numerous analysts have concluded, that can only be achieved by cutting every citizen’s income by a painful amount. But the resulting drop in consumer spending will push the government budget even further into the red, requiring more cuts, which will lower spending even more, and so on. You see the problem: Without a printing press a bloated public sector can’t function.
The Greeks aren’t debating how many new soldiers to commit to their many foreign adventures or how to expand entitlements to cover everyone all the time. That’s because they’ve smelled the smoke and seen the flames. Now they’re standing in the front yard, garden-hoses in hand, trying to save some small part of what they’ve spent the past generation building.
America—A Country of Serfs Ruled By Oligarchs
by Paul Craig Roberts
The media has headlined good economic news: fourth quarter GDP growth of 5.7 percent ("the recession is over"), Jan. retail sales up, productivity up in 4th quarter, the dollar is gaining strength. Is any of it true? What does it mean? The 5.7 percent growth figure is a guesstimate made in advance of the release of the U.S. trade deficit statistic. It assumed that the U.S. trade deficit would show an improvement. When the trade deficit was released a few days later, it showed a deterioration, knocking the 5.7 percent growth figure down to 4.6 percent. Much of the remaining GDP growth consists of inventory accumulation.
More than a fourth of the reported gain in Jan. retail sales is due to higher gasoline and food prices. Questionable seasonal adjustments account for the rest. Productivity was up, because labor costs fell 4.4 percent in the fourth quarter, the fourth successive decline. Initial claims for jobless benefits rose. Productivity increases that do not translate into wage gains cannot drive the consumer economy. Housing is still under pressure, and commercial real estate is about to become a big problem.
The dollar’s gains are not due to inherent strengths. The dollar is gaining because government deficits in Greece and other EU countries are causing the dollar carry trade to unwind. America’s low interest rates made it profitable for investors and speculators to borrow dollars and use them to buy overseas bonds paying higher interest, such as Greek, Spanish and Portuguese bonds denominated in euros. The deficit troubles in these countries have caused investors and speculators to sell the bonds and convert the euros back into dollars in order to pay off their dollar loans. This unwinding temporarily raises the demand for dollars and boosts the dollar’s exchange value.
The problems of the American economy are too great to be reached by traditional policies. Large numbers of middle class American jobs have been moved offshore: manufacturing, industrial and professional service jobs. When the jobs are moved offshore, consumer incomes and U.S. GDP go with them. So many jobs have been moved abroad that there has been no growth in U.S. real incomes in the 21st century, except for the incomes of the super rich who collect multi-million dollar bonuses for moving U.S. jobs offshore.
Without growth in consumer incomes, the economy can go nowhere. Washington policymakers substituted debt growth for income growth. Instead of growing richer, consumers grew more indebted. Federal Reserve chairman Alan Greenspan accomplished this with his low interest rate policy, which drove up housing prices, producing home equity that consumers could tap and spend by refinancing their homes. Unable to maintain their accustomed living standards with income alone, Americans spent their equity in their homes and ran up credit card debts, maxing out credit cards in anticipation that rising asset prices would cover the debts. When the bubble burst, the debts strangled consumer demand, and the economy died.
As I write about the economic hardships created for Americans by Wall Street and corporate greed and by indifferent and bribed political representatives, I get many letters from former middle class families who are being driven into penury. Here is one that recently arrived:"Thank you for your continued truthful commentary on the 'New Economy.' My husband and I could be its poster children. Nine years ago when we married, we were both working good paying, secure jobs in the semiconductor manufacturing sector. Our combined income topped $100,000 a year. We were living the dream. Then the nightmare began. I lost my job in the great tech bubble of 2003, and decided to leave the labor force to care for our infant son. Fine, we tightened the belt. Then we started getting squeezed. Expenses rose, we downsized, yet my husband's job stagnated.
After several years of no pay raises, he finally lost his job a year and a half ago. But he didn't just lose a job, he lost a career. The semiconductor industry is virtually gone here in Arizona. Three months later, my husband, with a technical degree and 20-plus years of solid work experience, received one job offer for an entry level corrections officer. He had to take it, at an almost 40 percent reduction in pay. Bankruptcy followed when our savings were depleted.
We lost our house, a car, and any assets we had left. His salary last year, less than $40,000, to support a family of four. A year and a half later, we are still struggling to get by. I can't find a job that would cover the cost of daycare. We are stuck. Every jump in gas and food prices hits us hard. Without help from my family, we wouldn't have made it. So, I could tell you just how that 'New Economy' has worked for us, but I'd really rather not use that kind of language."
Policymakers who are banking on stimulus programs are thinking in terms of an economy that no longer exists. Post-war U.S. recessions and recoveries followed Federal Reserve policy. When the economy heated up and inflation became a problem, the Federal Reserve would raise interest rates and reduce the growth of money and credit. Sales would fall. Inventories would build up. Companies would lay off workers. Inflation cooled, and unemployment became the problem. Then the Federal Reserve would reverse course. Interest rates would fall, and money and credit would expand. As the jobs were still there, the work force would be called back, and the process would continue.
It is a different situation today. Layoffs result from the jobs being moved offshore and from corporations replacing their domestic work forces with foreigners brought in on H-1B, L-1 and other work visas. The U.S. labor force is being separated from the incomes associated with the goods and services that it consumes. With the rise of offshoring, layoffs are not only due to restrictive monetary policy and inventory buildup. They are also the result of the substitution of cheaper foreign labor for U.S. labor by American corporations. Americans cannot be called back to work to jobs that have been moved abroad. In the New Economy, layoffs can continue despite low interest rates and government stimulus programs.
To the extent that monetary and fiscal policy can stimulate U.S. consumer demand, much of the demand flows to the goods and services that are produced offshore for U.S. markets. China, for example, benefits from the stimulation of U.S. consumer demand. The rise in China’s GDP is financed by a rise in the U.S. public debt burden. Another barrier to the success of stimulus programs is the high debt levels of Americans. The banks are being criticized for a failure to lend, but much of the problem is that there are no consumers to whom to lend. Most Americans already have more debt than they can handle.
Hapless Americans, unrepresented and betrayed, are in store for a greater crisis to come. President Bush’s war deficits were financed by America’s trade deficit. China, Japan, and OPEC, with whom the U.S. runs trade deficits, used their trade surpluses to purchase U.S. Treasury debt, thus financing the U.S. government budget deficit. The problem now is that the U.S. budget deficits have suddenly grown immensely from wars, bankster bailouts, jobs stimulus programs, and lower tax revenues as a result of the serious recession. Budget deficits are now three times the size of the trade deficit. Thus, the surpluses of China, Japan, and OPEC are insufficient to take the newly issued U.S. government debt off the market.
If the Treasury’s bonds can’t be sold to investors, pension funds, banks, and foreign governments, the Federal Reserve will have to purchase them by creating new money. When the rest of the world realizes the inflationary implications, the US dollar will lose its reserve currency role. When that happens Americans will experience a large economic shock as their living standards take another big hit. America is on its way to becoming a country of serfs ruled by oligarchs.
Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan’s first term