"Tavern on main street of potato town during harvest season. Merrill, Oregon"
Ilargi: In the past few weeks, I’ve provided you with a series of stats on financial institutions. I was drawn back to thinking about them when I saw a headline earlier today in the Daily Telegraph that said something in the vein of: "Wall Street recovers...", a headline based on the fact that the Dow and S&P were -temporarily- out of the red.
Since this to me represents a pretty gross misrepresentation of actual facts, I thought I’d get back to my numbers series, and add a few, in order for you to be able to understand still better what is really happening. A recovery it's not, not even close.
Here's from August 3:
The Next Bank Bailout Bloodbath is HereUS banks:
- Bank of America: -34.1% over the past 12 months, -34.51% over the past 6 months, -14.2% over the past month alone.
- Citigroup: -9.78% YoY, -22.64% over 6 months, -13.22% over the past month.
- Morgan Stanley: -24.23% YoY, -30.12% over 6 months, -12.33% over one month.
- Goldman Sachs: -13.95% YoY, -19.93% over 6 months, -3.53% over one month.
- JPMorgan: -3.21% YoY, -12.54% over 6 months, -4.38% over one month.
Foreign banks:
- Société Générale: -34.82% YoY, -36.39% over 6 months, -30.28% over one month.
- Crédit Agricole: -30.9% YoY, -31.66% over 6 months, -30.8% over one month.
- Deutsche Bank: -31% YoY, -17.61% over 6 months, -16.48% over one month
- RBS: -35.61% YoY, -25.12% over 6 months, -17.73% over one month
Ilargi: And this from August 16:
Europe on the Verge of Breaking
- Bank of America: +7.93% Aug 15, but -22.4% in past month, -34.95% in past 3 months
- Citigroup: +4.76% Aug 15, but -18.53% in past month, -24.71% in past 3 months
- Morgan Stanley: +6.10% Aug 15, but -15.03% in past month, -25.74% in past 3 months
- Goldman Sachs: +2.28% Aug 15, but -8.28% in past month, -15.79% in past 3 months
- Société Générale: +2.06% Aug 15, but -28.53% in past month, -41.23% in past 3 months
Ilargi: The reason why I wanted to revisit the stats is that it's important to understand to what extent what we see happening is a structural, rather than an incidental or circumstantial turn of events. To wit:
The Domino Effect of Europe Bank Woes
by John Carney - CNBC.comThere’s also the problem with hedge funds trying to hedge exposure to European banks. The short-selling ban on European banks makes hedging exposure more difficult. One response by some hedge funds will be to short U.S. banks as a proxy.
Ilargi: I'm sure you can agree that that is funny, no matter how tragic it is.
The tragedy that's unfolding is shed in an even clearer light when we expand the stats series to include the longer term, in this case 5 years.
In the past 5 years (dating back to August 25 2006, a date I took from Google Finance), these are the loss numbers for financials, as taken at noon, August 19 2011:
- Bank of America : - 86.68%
- Citigroup: -94.33%
- Morgan Stanley: -70.72%
- Keycorp: -83.46%
- Fifth Third Bancorp: -76.06%
- Barclays: - 76.85%
- RBS: -96.83%
- Société Générale: -83.57%
- BNP Paribas: 60.64%
- Crédit Agricole: -81.39%
- UBS: -75.27%
- Credit Suisse: -52.92%
- Deutsche Bank: -65.26%
The numbers are made even more poignant when we look at losses at the Dow and the S&P in the same time period.
- Dow Jones: -3.97%
- S&P 500: -12.81%
Ilargi: Now we can see where the real problem really is: in the financial world. Banks are down way more than other companies. As we've long known, the sole and only reason many banks are still standing is that they have been given your money. But we can also see where the money you have so graciously donated to them has led.
Namely, to more and further gigantic losses, into the deep dark hole of a bottomless pit where not a penny shall ever return from -and you can disregard any statements from any politician claiming that the money is being repaid-. Sure, it may be on paper, but when you lose 80%-90% of your market cap, as Bank of America, Société Générale and Citigroup have done, that is but a meaningless gesture, good only for propagandistic purposes.
Now there will be those who say that market cap is not the same as cash flow, but that is only partly relevant. Once your share price dives down into penny stock territory, it's your market cap that is very relevant. To put it in a somewhat humorous way, Reuters had this today:
Apple is worth as much as all 32 biggest euro zone banksTechnology company Apple is now worth as much as the 32 biggest euro zone banks.
That's the stark result from a steep fall in the share price of banks including Spain's Santander, France's BNP Paribas, Germany's Deutsche Bank and Italy's Unicredit, compared to a steady rise in Apple's valuation, according to Thomson Reuters data.
Earlier on Friday the DJ STOXX euro zone banks index fell 4 percent, valuing its 32 members at $340 billion. That's based on the market capitalization of their free-float shares, which for some French banks in particular is less than 100 percent.
The index has crashed by a third since the start of July, hammered by fears banks will lose billions from their holdings of euro zone government bonds and a failure of policymakers to stop a euro zone debt crisis from spreading. The euro zone banks have lost three-quarters of their value since peaking in May 2007.
Ilargi: Look, yeah, we can talk cash flow here, but we'd be better off talking sheer survival. How will France, Britain and the US keep their banks afloat? After transferring trillions of dollars to them in a period during which they have lost ever more of their market value?
Recent developments throw a wrench into every single bail-out deal agreed on over the past few years. These deals all use certain valuations in order to come up with the numbers deemed necessary for a deal to be struck. And now the numbers just ain't there anymore. The name of the game will turn into "margin calls". The banks will only be able to meet these calls by holding up their hands to governments.
But the people who elected these governments will look much less favorably upon the next bail-out, if only because the prior ones have not worked at all. That is to say, they have kept banks alive a bit longer, but they haven't solved any of the underlying issues. Which thus and therefore always keep coming back.
So, when you see the Dow temporarily out of the red, that has zilch to do with recovery. Markets never only go in one direction. It's one step up and two steps back. But, as the numbers above show unequivocally, the numbers that count are going down, fast, over the medium and longer term. Just like we at The Automatic Earth have been saying for years now.
We’ll do a gloating chest-thumping session of schadenfreude one of these days. But not today. Still, it's crucial that you latch on to the themes of deflation and the flight into US dollars and Treasuries as they play out on the back of the plunging stock markets. Just as we said they would.
As evidenced by Ambrose Evans-Pritchard for the Telegraph:
Bond markets signal 'Japanese' slump for US and EuropeThe global credit markets are braced for deflation and perhaps depression.
Panic flight to safety has pushed the yield on 10-year US Treasuries below 2pc for the first time in modern American history, exceeding the extremes of the Lehman crisis and the banking crash of the 1930s.
The Bank for International Settlements said German, Dutch, Swiss and British banks together have a US dollar funding gap of around $1 trillion.
The global dollar gap is $5 trillion, reflecting the continued use of the greenback as the base for international finance. This means that severe market stress sets off a scramble for dollars, akin to a global margin call . "It won't take much for the interbank market to collapse," said Lars Frisell from Sweden's Riksbank. "It is extremely important that we don't see a repeat of the situation in 2008."
Ilargi: And Larry Kudlow for the National Review:
The Deflationary M2 ExplosionAmidst the financial flight-wave to safety, with stocks plunging, gold soaring, and Treasury bond rates collapsing — and all the European banking fears which go with that — there’s an important sub-theme developing: An almost-forgotten monetary indicator, M2, which is mostly cash, demand-deposit checking accounts, savings deposits, and retail money-market funds, has been soaring.
According to the St. Louis Fed, M2 is up 24.2 percent at an annual rate over the past two months. Almost out of the blue, that comes to a near $500 billion increase. In rough terms, the M2 explosion breaks down to $165 billion in demand deposits and $335 billion in savings deposits.
What’s going on here? There’s a flight to government-guaranteed accounts. Some people believe Europeans are withdrawing from their own banking system and parking their money in the U.S. banking system, guaranteed by Uncle Sam. Kelly Evans reports in her Wall Street Journal column of a $30 billion outflow from equity mutual funds that has probably gone into cash.
This is a very disconcerting development. Normally, big M2 growth would signal a faster economy, and maybe even higher inflation. But as economist Michael Darda points out, the velocity, or turnover, of money seems to be plunging.
"The recent pickup in broad money in the U.S. looks like a dash for risk-free cash assets," writes Darda. He also notes that widening corporate-credit risk spreads and shrinking government-bond rates signal a recession risk, not a coming boom.
So contrary to monetarist theory, the M2 explosion seems more closely related to a deflation/recession risk. Economist-blogger Scott Grannis writes, "The recent growth of M2 surpasses even the explosive safe-haven demand for money that accompanied 9/11 and the financial crisis of late 2008. Something big is going on, and it can only be the financial panic that is sweeping Europe as money flees a banking system that is loaded to the gills with PIIGS debt."
Grannis concludes, "In short, it looks like there is a run on the European banks and the U.S. banking system is the safe-haven of choice."
Ilargi: This is your reality. Not inflation, or hyperinflation. And not a flight FROM US Treasuries and the US dollar, but a flight TOWARDS them. Yes, gold is higher; a totally predictable knee-jerk reaction. Once the bank stocks lose another 10%-20%-30%, which could happen in a manner of days at the rate we're going, that will change too.
That is because the plummeting bank stocks represent the vanishing into nothingness of what I've named "zombie money". In other words, it's not a matter of people, investors, talking their money out of one place, asset, and into the other, it's instead a matter of -virtual- money disappearing. That will take down the price of gold. An important issue to wrap your brains around. More about that later.
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The Bigger Picture: Primer Guide Update
Bond markets signal 'Japanese' slump for US and Europe
by Ambrose Evans-Pritchard - Telegraph
The global credit markets are braced for deflation and perhaps depression.
Panic flight to safety has pushed the yield on 10-year US Treasuries below 2pc for the first time in modern American history, exceeding the extremes of the Lehman crisis and the banking crash of the 1930s.
Investors scrambled to buy the bonds of strongest industrial states on Thursday on fears of a double-dip recession on both sides of the Atlantic and a European banking crash, driving down their returns to investors. German yields fell to 2.08pc and Switzerland's 3-month rates have turned deeply negative.
Markets were stunned by a plunge in the manufacturing index of the Philadelphia Federal Reserve to minus 30.7 in August from plus 3.2 in July, one of the most violent falls ever recorded. "It is a catastrophic collapse," said Rob Carnell from ING. "Markets are in a fearful state right now, and data like this gives them plenty of excuses to panic."
Andrew Roberts, credit strategist at RBS, said investors are haunted by fears that European banks may have lost full access to America's $7 trillion markets, leaving them at imminent risk of a dollar squeeze.
An unidentified European lender had to tap $500m from the European Central Bank's (ECB) swap line with the Federal Reserve, indicating that it had been shut out of the markets. US investors have brought down the guillotine since the EMU debt crisis spread to Italy and Spain, and Germany vetoed any form of eurobonds or fiscal union. "This is what has kicked [off] the latest turbulence," Mr Roberts said.
Ewald Nowotny, Austria's central bank governor and an ECB member, told newspaper Wirtschaftsblatt there was a "growing reluctance" within US money market funds to finance the Europeans, though he blamed the cut-off on a change in US banking regulations.
Mr Nowotny said a global double-dip recession was unlikely but said nobody should be complacent because "we have learned painfully from history" that a global slump can strike unexpectedly. His personal fear is an insidious slide towards "Japanese" stagnation in Europe.
The Bank for International Settlements said German, Dutch, Swiss and British banks together have a US dollar funding gap of around $1 trillion.
The global dollar gap is $5 trillion, reflecting the continued use of the greenback as the base for international finance. This means that severe market stress sets off a scramble for dollars, akin to a global margin call . "It won't take much for the interbank market to collapse," said Lars Frisell from Sweden's Riksbank. "It is extremely important that we don't see a repeat of the situation in 2008."
Morgan Stanley warned that both Europe and America are "dangerously close to recession". The banks said a repeat of the Lehman meltdown in 2008 is unlikely since households and companies have healthier debt levels today, but the risk is there if the eurozone drifts into a policy blunder and allows the default of a sovereign state. "This could bring down the whole financial system," it said.
Elga Bartsch, the bank's Europe economist, said euroland remains the "weakest link" in the global chain. "The risks of another shock pushing the region over the edge are significant," she said.
The southern European states cannot resort to emergency stimulus to cushion the downturn and may have tighten fiscal policy to satisfy the bond vigilantes. Ms Bartsch said the ECB may have to reverse its tightening cycle and start cutting interest rates in early 2012. European bank shares were crushed in a cascade of selling, with Societe Generale off 12pc, Commerzbank 10pc, and Intesa Sanpaolo 9pc, Credit Agricole 7pc, and Deutsche Bank 6pc. Curbs imposed by several exchanges on the short-selling of equities appears to have had no relevant effect.
Andreas Schmitz, head of the German banking federation, called on Europe's leaders to stop dithering and accept that there will have to be changes to the Lisbon Treaty and a profound reform of the Maastricht system if monetary union is to survive. "In the end it comes down to the question of whether we're willing to move to a 'transfer union', or whether we let the euro break down or we retreat to core-euro. Monetary union is not going to collapse because of the weaker members, but because of the stronger one," he said in a thinly-veiled criticism of German leadership.
Jacques Delors, the ex-president of the European Commission and the euro's "godfather", pleaded for a "partial mutualisation of debts" to save the European Project and prevent the EU degenerating into a "mere free-trade zone". "Open our eyes: the euro and Europe are on the brink of the abyss. From the start of the crisis Europe's leaders have refused to face reality," he told Belgium's Le Soir, saying it was staggering European leaders had gone on holiday after the EU's July summit without activating the emergency measures agreed.
Mr Delors said French policy had been reduced to "trying to stop Germany abandoning ship: but the oversized ego of Nicolas Sarkozy is proving an impediment." "Besides, it has to be admitted that Europe is no longer a motivating issue for the French," he said.
The Deflationary M2 Explosion
by Larry Kudlow - National Review
Fears over the safety and solvency of European government debt and banks are haunting the stock market.
Amidst the financial flight-wave to safety, with stocks plunging, gold soaring, and Treasury bond rates collapsing — and all the European banking fears which go with that — there’s an important sub-theme developing: An almost-forgotten monetary indicator, M2, which is mostly cash, demand-deposit checking accounts, savings deposits, and retail money-market funds, has been soaring.
According to the St. Louis Fed, M2 is up 24.2 percent at an annual rate over the past two months. Almost out of the blue, that comes to a near $500 billion increase. In rough terms, the M2 explosion breaks down to $165 billion in demand deposits and $335 billion in savings deposits.
What’s going on here? There’s a flight to government-guaranteed accounts. Some people believe Europeans are withdrawing from their own banking system and parking their money in the U.S. banking system, guaranteed by Uncle Sam. Kelly Evans reports in her Wall Street Journal column of a $30 billion outflow from equity mutual funds that has probably gone into cash.
This is a very disconcerting development. Normally, big M2 growth would signal a faster economy, and maybe even higher inflation. But as economist Michael Darda points out, the velocity, or turnover, of money seems to be plunging.
"The recent pickup in broad money in the U.S. looks like a dash for risk-free cash assets," writes Darda. He also notes that widening corporate-credit risk spreads and shrinking government-bond rates signal a recession risk, not a coming boom.
So contrary to monetarist theory, the M2 explosion seems more closely related to a deflation/recession risk. Economist-blogger Scott Grannis writes, "The recent growth of M2 surpasses even the explosive safe-haven demand for money that accompanied 9/11 and the financial crisis of late 2008. Something big is going on, and it can only be the financial panic that is sweeping Europe as money flees a banking system that is loaded to the gills with PIIGS debt."
Grannis concludes, "In short, it looks like there is a run on the European banks and the U.S. banking system is the safe-haven of choice."
On the other hand, all may not be lost — at least from the standpoint of the American economy. Economist Conrad DeQuadros, who acknowledges the precautionary demand for high cash balances in the current financial uncertainty, believes that the economic data do not yet signal recession. DeQuadros points out that jobless claims, hours worked, retail sales, and industrial production are all picking up. He also notes that profits are still rising, even though their growth is slowing. And C&I business loans have grown at an 8 percent annual rate over the past three months.
I would just add to all this: The biggest problem for the plunging stock market is coming out of Europe. Fears over the safety and solvency of European government debt and banks are haunting the stock market. I still don’t believe it’s 2008. But yes, like everyone else, I’m worried.
That said, we are awash with liquidity everywhere. U.S. banks and companies have more cash than they know what to do with. The problem is they are immobilized by fiscal policy run amok. We desperately need a regulatory rollback and flat-tax reform to boost asset prices and to get banks to loan, companies to invest, and America back to work.
The Domino Effect of Europe Bank Woes
by John Carney - CNBC.com
Concerns over the health of European banks are rattling markets Thursday. So it’s worth taking a closer look at which dominos are likely to start tumbling.
Investors are still quite spooked about the financial sector. When bad news about banks hits the headlines, there is a knee-jerk tendency to sell shares, redeem funds with exposure to the banks, and seek safe-haven.
Today’s Wall Street Journal story said that officials at the Federal Reserve have been in talks with the heads of European banks with U.S. businesses. This could be taken as a reassuring sign that regulators are proactively attempting to address potential problems. Lots of investors are probably going to take the most conservative view, however, viewing it as a sign of real problems.
This leads to selling, not just European bank shares, but U.S. bank shares. Why? Part of the reason is that we just don’t know how interconnected various financial institutions are with each other. But 2008 taught us that just because we don’t see the connections, it doesn’t mean they aren’t there.
There’s also the problem with hedge funds trying to hedge exposure to European banks. The short-selling ban on European banks makes hedging exposure more difficult. One response by some hedge funds will be to short U.S. banks as a proxy.
Large depositors are also likely to flee, withdrawing money out of European banks and putting them in U.S. banks. There’s no evidence of anything like a bank run underway, though at the margin, it’s likely the European banks are seeing withdrawals.
Then we have the prime money-market funds . The yield on these funds is so small right now that some smart people on Wall Street wonder why anyone has money in them at all. If you are being paid 0.04 percent for any amount of risk, why not just stick it in a risk-free account, perhaps a money-market fund that owns only Treasury bonds, or just buy Treasury bonds directly.
Yet there still is a lot of money in prime funds. Some of that is likely to be withdrawn by investors concerned about the exposure of the funds to the financial sector. Money-market funds are ordinarily a big source of short-term funding for both U.S. and European banks with dollar obligations. So fears about Europe or the financial sector translate into redemptions at money-market funds.
Imagine for a moment that you are a corporate Treasurer at a company sitting on $100 million. The Wall Street Journal lands on your CFO's desk. Now he wants to know what the company's exposure to Europe is. Do you want to tell him you have tens of millions in funds that may be exposed to Europe, and that those millions are earning you pennies? Not if you want to keep your job.
So you do the rational thing. You redeem out of prime funds. You put the money in the bank. Or in government funds. Or maybe you go buy some Treasury bills. The good news is that money-market funds have a lot of liquidity right now. The U.S. banking sector is so flush with cash that it doesn’t really need to borrow short term. And the funds have been decreasing their exposure to European banks.
In fact, there’s a bit of circularity to this. Money-market funds concerned about redemptions move to assets with very short durations in order to stay liquid. This drives up the funding costs of European banks, who decide to just run down their reserves at the Fed instead. The running down of reserves worries investors with money in the prime funds, which leads to redemptions.
Fortunately, this is unlikely to become a death spiral. The liquidity positions of the prime funds are solid. The reserves of the banks are enormous. There’s a lot of room for a credit crunch to run behind the scenes before it actually threatens the health of any but the weakest financial institutions.
European banks: new funding fears
by Lex - FT
The eurozone’s sovereign debt crisis knows no bounds. The European Central Bank’s disclosure that it had provided $500m to a bank – the biggest sum since October 2010 – shows that one eurozone institution is struggling to raise dollars.
No wonder the Federal Reserve Bank of New York wants to check how big European banks fund their US operations. If traditional funding sources have been spooked by their eurozone debt exposure, the banks might struggle to meet their US obligations. The New York Fed’s concern should remind eurozone politicians that their failure to resolve the sovereign debt crisis is a risk to global financial stability.
US money market funds, although a small proportion of overall European bank funding, give an idea of the risk: they have reduced both maturities and funding lines. BBVA and Santander, Spanish banks with US retail units, had a foretaste last year when they struggled to raise dollar funds. This year, as investors fret about Italy’s sovereign risk, it is Italian lenders that are looking for alternative short-term funding as US sources hug the sidelines.
In July alone, their usage of ECB repo lines increased by €40bn to compensate, Morgan Stanley notes. French banks are also big users of US money funds (perhaps €50bn for BNP Paribas and €38bn for Société Générale, the broker estimates) but their ECB usage rose by much less, suggesting they could roll over dollar funding, but perhaps only at shorter maturities.
Italian and French banks are outliers in terms of their overall funding needs. Europe’s big banks have, on average, raised 90 per cent of their 2011 requirement, but need €80bn more. Italian banks, led by Intesa Sanpaolo and UniCredit, need the most (€16.4bn). French banks, led by BPCE and Crédit Agricole, are €14.9bn short; the UK’s Lloyds Banking Group and Royal Bank of Scotland need €14bn.
The Fed – and investors in bank shares – are right to be worried about funding. Eurozone politicians are still dithering, so it looks as if the ECB’s job has only just begun.
Fed Eyes Cash European Banks Have in U.S.
by David Enrich and Carrick Mollenkamp - Wall Street Journal
Federal and state regulators, signaling their growing worry that Europe's debt crisis could spill into the U.S. banking system, are intensifying their scrutiny of the U.S. arms of Europe's biggest banks, according to people familiar with the matter.
The Federal Reserve Bank of New York, which oversees the U.S. operations of many large European banks, recently has been holding extensive meetings with the lenders to gauge their vulnerability to escalating financial pressures. The Fed is demanding more information from the banks about whether they have reliable access to the funds needed to operate on a day-to-day basis in the U.S. and, in some cases, pushing the banks to overhaul their U.S. structures, the people familiar with the matter say.
Officials at the New York Fed "are very concerned" about European banks facing funding difficulties in the U.S., said a senior executive at a major European bank who has participated in the talks. Regulators are seeking to avoid a repeat of the 2008 financial crisis, when the global financial system began to seize up. This time the worry is that the euro-zone debt crisis could eventually hinder the ability of European banks to fund loans and meet other financial obligations in the U.S. While signs of stress are bubbling up, the problems aren't yet approaching the severity of past crises.
Some of Europe's biggest banks—including France's Société Générale SA, Germany's Deutsche Bank AG and Italy's UniCredit SpA—have major operations in the U.S. and rely heavily on borrowed funds to finance those operations. There is no indication that regulators are focused in particular on those banks.
Foreign banks that lack extensive U.S. branch networks have a handful of ways to bankroll U.S. operations. They can borrow dollars from money-market funds, central banks or other commercial banks. Or they can swap their home currencies, such as euros, for dollars in the foreign-exchange market. The problem is, most of those options can vanish in a crisis.
Until recently, that hasn't been a problem. Thanks partly to the Federal Reserve's so-called quantitative-easing program, huge amounts of dollars have been sloshing around the financial system, and much of it has landed at international banks, according to weekly Fed reports on bank balance sheets. Fed officials recently have held meetings with U.S.-based executives from top European banks to discuss their funding positions, according to the people familiar with the matter. Officials also are in contact with regulators in the countries where the European banks are headquartered.
The New York Fed has also been coordinating with New York's superintendent of financial services, Benjamin M. Lawsky, to monitor the foreign banks' funding positions, said people familiar with the matter. The state regulator supervises the New York outposts of many major European banks, and it has the power to force them to keep more money on hand in the U.S. Mr. Lawsky's office has been getting near-daily updates from examiners embedded in European banks' New York offices about their funding positions.
Regulators are trying to guard against the possibility European banks that encounter trouble could siphon funds out of their U.S. arms, these people said. Regulators recently have ramped up pressure on European banks to transform their U.S. businesses into self-financed organizations that are better insulated from problems with their parent companies, a senior bank executive said.
In one sign of how European banks may be having trouble getting dollar funding, an unidentified European bank on Wednesday borrowed $500 million in one-week debt from the European Central Bank, according to ECB data. The bank paid a higher cost than what other banks would pay to borrow dollars from fellow lenders. It was the first time for that type of borrowing since Feb 23.
Anxiety about European banks' U.S. funding comes amid broader concerns about whether Europe's struggling banks will be able to refinance maturing debt in coming years. Investors, wary of many European banks' holdings of debt issued by troubled euro-zone governments, are shunning large swaths of the sector. While top European banks already have satisfied about 90% of their funding needs for 2011, they still need to raise a total of roughly €80 billion ($115 billion) by the end of the year, according to Morgan Stanley.
Part of what is unsettling regulators and bankers is the speed at which funding can reverse direction. This spring, foreign banks were able to build up ample cash cushions, thanks largely to quantitative easing—the Fed's $600 billion bond-buying program, which brought more money into the banking system in the U.S., including foreign banks' coffers.
In July 2010, non-U.S. banks had $418.7 billion on reserve and collecting interest at the Fed, according to Fed data. By July 13 of this year, the total had more than doubled, to about $900 billion. Some major European banks were among the main drivers of this trend, according to their U.S. regulatory filings.
On June 30, 2010, for example, Société Générale had $55 million in cash reserves in its main New York branch. A year later, that amount had soared to $24.6 billion. At Deutsche Bank, cash reserves at its U.S. arm rose to $66.8 billion from $178 million.
In recent weeks, though, the cash piles at foreign banks' U.S. arms have diminished. While individual banks haven't reported data after June 30, foreign banks' overall U.S. cash reserves fell to $758 billion as of Aug. 3, the latest data available. That is down 16% from three weeks earlier, though it's still up sharply from the beginning of the year. The latest Fed data "could be telltale signs that foreign banks are in need [of dollars] again, or institutional investors are getting concerned about foreign bank credit," said George Goncalves, a rates strategist for Nomura Securities.
Why we cannot inflate our way out of debt
by Raghuram Rajan - FT
We are experiencing financial panic. A downgrade of US debt has triggered a flight to liquidity towards the very assets downgraded. Ultimately, the cure for market paranoia is strong economic growth. Several commentators propose a sharp, contained bout of inflation as a way to reenergise growth in the US and the industrial world. Are they right?
To understand the prescription, we must understand the diagnosis. Recoveries from crises that result in over-leveraged balance sheets are slow, and are typically resistant to traditional macroeconomic stimulus. Over-leveraged, households cannot spend, banks cannot lend and governments cannot stimulate. So why not generate higher inflation for a while?
This will surprise fixed income lenders who agreed to lend long term at low rates; bring down the real values of debt; eliminate debt "overhang"; and spur growth. Yet there are concerns. Can central banks with anti-inflation credibility generate sharply higher inflation in an environment of low rates? Will it work as intended? What could be the unintended consequences? And are there better alternatives?
Japan’s central bank tried and failed to generate higher inflation. Banks were too willing to hold the reserves that the central bank put out as it bought back bonds. Perhaps if a central bank announced a higher inflation target, and an asset purchase programme financed with unremunerated reserves, to continue until the target were met, it could have some effect. More likely though, any target would lose credibility once it became changeable. Market participants might conjecture that the programme would be abandoned once it reached an alarming size, and well before the target is reached.
Moreover, the central bank needs a rapid, sizeable inflation to reduce real debt values quickly. A slow increase will have very limited effect because lenders will demand both higher nominal rates and an inflation risk premium to roll over claims. But a sizeable inflation may be hard to contain: if a central bank abandons its inflation target for growth, will markets believe it has the stomach for high, growth-killing interest rates to reduce inflation?
Turn next to whether it will work. Inflation will do little for entities with floating rate liabilities (many households that borrowed near the peak of the boom) or relatively short term liabilities (banks). The US government, with debt duration of about 4 years, is unlikely to benefit much from a surprise inflation unless it is huge; and the bulk of its promises are social security and healthcare that cannot be inflated away. Even distressed households that have borrowed long term could be worse off – with unemployment likely to subdue nominal wage growth, and higher food and fuel prices cutting disposable income.
Moreover, inflation will clearly make debt holders worse off. Who are they? Rich people, but also pensioners who moved into bonds as the stock market scared them away, banks that will have to be recapitalised, state pension funds that are already deeply underwater, and some insurance companies that will have to default on their claims.
Will inflation just shift the problem, ensuring the malaise persists? In the best of worlds, it would be foreigners with ample reserves who suffer the losses, but they may be needed to finance future deficits. Of course, if central banks regain credibility for being anti-inflation hawks soon after subjecting investors to a punishing inflation, there is no problem, but …
This does not mean nothing can be done. The US experienced periodic debt crises during the 19th century and Great Depression. Its response was to offer targeted, expedited debt relief – often by enacting temporary bankruptcy legislation. In this vein, a recent proposal* to facilitate mortgage debt renegotiation could help reduce the household debt overhang and avoid value-destroying foreclosures without government subsidies. It is less clear that shifting the burden of bank and government debt to others will help the economy.
Too many of our problems come from impatience with the pace of past recoveries and overconfidence in adventurous macro-policy responses. Rather than grand macroeconomic plans, we need many microeconomic actions. Unfortunately, they are disregarded because, as Daniel Burnham said, they have little ability to stir people’s blood.
* A Loan Modification Approach to the Housing Crisis, Eric Posner and Luigi Zingales, University of Chicago
The writer is professor of finance at the University of Chicago and author of ‘Fault Lines: How Hidden Fractures Still Threaten the World Economy’
Global markets take fright at the return of the zombie banks
by Larry Elliott - Guardian
Two and a half years ago, financial markets rallied strongly on the assumption that the worst of the slump was over – now the talk is over a double-dip recession
The activities of financial markets are often irrational. Prices go up for no apparent reason and then suddenly the mood changes. What's worrying about the latest spasm that has convulsed bourses in Europe, Asia and North America is that the sell-off is grounded in real and ever-more pressing concerns. Make no mistake, something serious is going on here.
That something can be divided into three parts. The first cause for anxiety is the global economy, and in particular the United States. The report released on Thursday by the Philadelphia Federal Reserve covers only a small part of the Eastern US but it has a good track record for charting the ups and downs of the world's biggest economy. The Philly Fed's barometer has just plunged deep into recession territory.
There are also simultaneous slowdowns going on in the rest of the world. Europe's economy has slowed to stall speed, the UK is still operating way below its pre-recession level and activity has come off the boil in China, even though to western eyes growth still looks amazingly strong in China.
Two and a half years ago, financial markets rallied strongly on the assumption that the worst of the slump was over. There was relief that Great Depression 2 had been avoided. Now the talk is over a double-dip recession.
Concern number one has re-ignited fears about the health of the global financial system. Again, markets have been operating for the past couple of years on the assumption that large dollops of financial help from the taxpayer and a return to growth have made the global banking system immune from a fresh collapse. This always looked questionable, and now that activity is slowing markets suspect that some banks may go under.
In the 1990s, the Japanese government prevented its financial system from collapse but only at the expense of creating zombie banks, neither alive nor dead but kept functioning thanks to the largesse of the state. The reason the sell-off in financial stocks has been more pronounced than the fall in stock markets as a whole is that investors believe Europe and North America now have their own zombie banks.
Reports that US regulators are taking a close interest in European banks and comments from Sweden's chief financial regulator that it wouldn't take much for European interbank markets to freeze only serve to bring back memories of the long descent from credit crunch in August 2007 to the collapse of Lehman Brothers in September 2008.
At least then, though, governments were in a position to ride to the rescue. Today, governments are seen not as the solution but as part of the problem. The debt burden accumulated by the banks was, in effect, nationalised during the crisis. It was hoped this would prove temporary, but the persistence of weak growth means that a private debt crisis has now become a sovereign debt crisis. What's more, the markets sense that policymakers have run out of bullets to fire. They can't cut official interest rates, they find it hard to justify more quantitative easing when inflation is at current levels and almost every Western government is currently trying to cut its budget deficit.
Put all that together and you get the full Japanese package: weak growth, weak banks, weak policy response. That is not a good recipe for shares. Today Tokyo's Nikkei market is at less than 25% of its level at the peak of the stock market boom in the late 1980s.
Euro-Style Anxiety Spreads
by Eric Dash and Jack Ewing - New York Times
European banks are continuing to show signs of strain, making investors increasingly skittish about American financial institutions.
.Regulators, bank executives and others continued to play down the risks on Thursday, emphasizing that this would not be a repeat of the 2008 financial crisis. In Europe, political leaders have vowed to prevent a Lehman-like collapse of a major bank, while American firms are better insulated from potential shocks than they were three years ago.
But on Thursday, shares of some big Wall Street banks sank to levels nearly as low as that in the months after the downfall of Lehman Brothers. Among investors, anxiety has been intensifying over the soundness of European banks despite repeated efforts to contain the sovereign debt crisis. The latest fears flared up after an unspecified lender tapped an emergency borrowing program set up by the European Central Bank to ensure that firms had ample funds in dollars.
On Wednesday the bank, which officials would not identify, borrowed $500 million, considered a relatively modest sum in global finance. But the move was widely viewed as a sign that Europe’s financial problems were deepening, given that it was the first time a European bank had used the dollar pipeline since February. Investors are also nervous that the world economy may tip back into a recession, putting new pressure on big American banks just as they appear to be finding their footing.
After a few fleeting days of relief, stress levels across the industry are once again rising. Credit-default swaps on major banks, which pay out in the event of a financial collapse, have again widened in the last few days. Borrowing costs are notching slightly higher. Tension on trading floors is palpable — especially for the usually relaxed month of August.
To be sure, fears are nowhere near the levels reached at the depths of the financial crisis. Still, even measures taken to stave off another crisis are feeding the panic. Here in the United States, news reports of heightened regulatory scrutiny have further eroded confidence and caused investors to dump their bank shares. In Europe, temporary bans on short-selling of financial stocks, imposed last week by regulators in France and several other European countries, provided only a bit of relief.
Traders say the measures have caused them to place some negative bets on bank stocks in countries that did not impose such measures, like the United States and Britain. "There’s a general climate of apprehension," said Jean-Pierre Lambert, a senior bank analyst with Keefe, Bruyette & Woods in London. "When you have doubts about names, it can turn into a vicious circle."
On Thursday, Citigroup shares plunged 6.26 percent, to $27.98. Bank of America was down 6 percent, to $7.01. Morgan Stanley and Goldman Sachs shares sink 4.76 percent and 3.51 percent, respectively. Bank stocks are down about 30 percent since January, and have swung wildly over the last few weeks.
The pounding was even more pronounced in Europe, where talk about the short-term financing challenges of the banks swirled through the stock market. Shares in Dexia, a large Belgian bank, dropped 14 percent. Société Générale fell 12 percent. Two British giants, Royal Bank of Scotland and Barclays, each had sharp declines.
American regulators have stepped up scrutiny of both United States and European lenders over the summer, with officials holding more frequent conference calls with individual firms alongside their counterparts at other central banks, according to people briefed on the phone calls.
William C. Dudley, the president of the Federal Reserve Bank of New York, described the inquiries as routine bank supervision. "We’re always scrutinizing European banks, U.S. banks and foreign banks in terms of how they’re doing, capital, liquidity, credit quality — so this is standard operating procedure," he said in remarks at a New Jersey business conference, according to The Star-Ledger of Newark.
For now, American banks appear to be sound, and are probably in better financial shape than they were on the eve of the 2008 crisis. But the fear is that the troubles brewing among European lenders could ripple across the Atlantic.
European banks have amassed vast holdings of government and corporate bonds from Italy and Spain, two countries whose debts have worried investors. Doubts about the stability of these European institutions, in turn, are generating concerns about American banks, which are among their biggest lenders and trading partners. That is prompting investors on both sides of the Atlantic to unload their shares while also ratcheting up bank borrowing costs.
The short-term credit markets, where European banks turn for billions of dollars in financing, have been under serious strain, although nowhere near the levels of three years ago. Most European banks can borrow dollars only overnight or as long as a week; banks elsewhere can take out loans for as long as several months or more.
"Currently many banks cannot access term-funding markets at reasonable rates," Morgan Stanley analysts wrote in a report on European banks. "If these term-funding stresses continue well into the fall, the risks are rising that a lack of credit availability could dent domestic demand growth further."
Still, several short-term credit traders and analysts said that suggested little has changed while the talk has been flying. A crucial barometer of bank stress — the rate banks charge each other to swap euro-denominated assets into dollars — is at roughly the same level it was a week ago. "A lot of this concern around the European banks is overstated," said Alex Roever, a short-term fixed income analyst at JPMorgan. "We are not looking at another 2009, although investors are obviously being cautious."
Investors in bank stocks have been pummeled by the bad news. Weak data for the housing and job markets suggests loan growth will not pick up anytime soon. Consumer confidence has plunged to record lows, while big corporations are so nervous that analysts expect many to delay hiring and expansion plans. On Thursday, Morgan Stanley economists warned that both the United States and Europe were "hovering dangerously close to a recession."
The prospect of twin recessions is perhaps the biggest worry for analysts who follow large American banks. JPMorgan Chase had about $49 billion of loans and other commitments to customers in France, Italy, Spain and several peripheral countries, according to research from Barclays. Citigroup had about $44 billion, while Bank of America had about 20 billion.
"The banks’ loans and commitments to European customers appear manageable," said Jason Goldberg, the Barclays analyst who did the analysis. "To the extent issues in Europe lead to a slowdown in global economic growth, the U.S. banks aren’t immune."
A Shaken Europe Looks for Bolder Fixes
by Charles Forelle - Wall Street Journal
A dramatic selloff in European financial markets on Thursday renewed fears that Europe's banks are too weak to withstand the Continent's debt crisis, increasing the chances that the region's leaders will be forced to pursue radical steps toward fiscal union in order to preserve their common currency.
For more than a year and a half, the euro zone's strategy has been to buy time for its weak nations to regain the confidence of financial markets, while taking tentative steps toward closer cooperation on the bloated budgets that got them in trouble.
That strategy was on full display on Tuesday in Paris, where the leaders of Germany and France presented the latest in a series of initiatives aimed at bolstering the euro zone's architecture. Investors immediately criticized the plan, which included steps toward tax harmonization and stricter budget controls, as inadequate. The Franco-German proposals, critics complained, laid bare the political inertia within the euro zone that has allowed the crisis to fester for months.
If the region's banks remain under pressure, however, the countries at the euro zone's core, in particular Germany and France, will be left with no choice but to embrace the deeper fiscal union that they have rejected for more than a year. If they don't, the common currency could collapse, thrusting the Continent into political and economic chaos. "There remains an ongoing tension between a quick fix regarding the debt crisis on the one hand and on the other the policy makers that are working on a step-by-step process," said Nick Matthews, economist at Royal Bank of Scotland. "You are going to have market dynamics forcing the action."
That realization has in recent days prompted Germany, the region's economic powerhouse and an opponent of fiscal union, to reconsider proposals that would force it to accept responsibility for the debts of its neighbors. Thursday's markets rout, the worst in Europe in more than two years, suggests Berlin and Paris may have to act quickly. If investors lose confidence in the region's banks, Europe's financial system could seize up, tipping the euro zone into another recession.
The soundings on Thursday were bad across the board. Morgan Stanley cut its euro-zone growth forecasts for this year and next. Plans for the second Greek bailout, once thought firm, were jostled by demands from Finland, Austria and others that Athens post collateral for its rescue borrowings. The benchmark indexes in Paris and Frankfurt both fell more than 5%; each suffered its steepest one-day percentage drop since late 2008. The Milan bourse fell 6.1%. Some of the worst carnage hit Europe's banks. France's Société Générale SA fell 12%. Germany's Commerzbank AG fell 10%. In Italy, Intesa Sanpaolo lost 9%.
That is particularly dangerous. Weakening banks could choose to hoard cash, crimping liquidity. In the extreme, banks could require money for recapitalization from their governments. (The cost of massive bank recapitalization doomed Ireland last year.) With the euro zone's weaker countries scrambling to find low-cost financing, the currency union can't afford either of those things.
Economists and analysts say the bloc is running out of small steps. The shockingly sudden rise in the yields of Italian government bonds earlier this month made clear how quickly an indebted country could unravel if markets freeze it out of financing. For now, the European Central Bank is propping up bond markets in peripheral countries by stepping in to buy government bonds. But the ECB has made clear it won't do this indefinitely.
Among potential steps debated in Europe is a system of centralized borrowings by all 17 members of the euro zone, with debt issued by an EU agency and every member vouching to stand behind the bonds used by its peers. Such euro bonds would dispel concerns Italy or Spain might not be able to get the financing they need, as it would be provided centrally. As a unit, the euro zone has relatively attractive fiscal prospects: Government deficit of 4.3% of gross domestic product is expected this year and debt of 88% of GDP.
But euro bonds would come with a huge political cost. French President Nicolas Sarkozy on Tuesday rejected them, saying they would lead to strong countries being "in the position of guaranteeing debt they do not control." That, Mr. Sarkozy said, would be politically difficult to justify in strong countries—but also ineffective at curbing the fiscally imprudent. As they could borrow freely at low cost, there would be little incentive to stop. Thus, Mr. Sarkozy said, a euro-bond system would need to come with strictures: each government saying to its peers what it can and can't borrow, and thus what it can and can't spend.
Butpowers of taxation and spending are prerogatives of national governments, and, Mr. Sarkozy said, European institutions "don't have the democratic legitimacy" to forbid individual states from spending. Without a euro bond, European policy makers must craft a solution that achieves three aims: Removing the need for the ECB to buy bonds continually on secondary markets; ensuring that troubled countries have access to financing; preventing the strong countries from being dragged down by the weak.
A number of solutions are under consideration but all of them carry risks. In Europe's wealthier northern tier, discontent over paying for the profligate south could give rise to populist far-right parties that reject putting Europe's needs above national interests. And Europeans in the south would likely bristle at being forced to relinquish national sovereignty over government spending as a condition to receiving support.
A Trail of Turbulence
Euro-zone efforts to buy time for weaker nations have fallen short.
- July 21 European leaders agree to a second bailout of Greece after insisting that private-sector banks shoulder some of the costs, which will likely lead to a default rating for Greece.
- July 29 Under pressure for more economic reforms, Spanish Prime Minister José Luis Rodríguez Zapatero sets early elections for November.
- Aug. 2 Yields of Italian bonds reach crisis highs compared with German benchmarks.
- Aug. 3 Italian Prime Minister Silvio Berlusconi disappoints investors with an economic speech that sets out little new action to repair Italy's finances.
- Aug. 4 The European Central Bank restarts its dormant bond-buying program, but excludes Spanish and Italian bonds. It also extends lending programs for banks until at least the end of 2011.
- Aug. 5 U.S. loses triple-A rating from S&P, raising concerns that Europe's triple-A countries such as France could be at risk, too. Italian 10-year bond yields hit euro-era high.
- Aug. 5 Mr. Berlusconi, in a bid to shore up confidence, pledges to balance the Italian budget a year earlier than planned.
- Aug. 7 The ECB agrees to buy Spanish and Italian bonds.
- Aug. 9 The cost of insuring German bonds against default rises above the cost of insuring U.K. bonds for the first time.
- Aug. 16 Data show German and euro-zone economic growth slowed sharply in the second quarter, adding to worries about the economic outlook. French-German summit yields no action on euro bonds, disappointing investors.
- Aug. 10 Shares of French bank Société Générale lose 15%.
- Aug. 18 Stock markets plunge on concerns over the global economy, European banks and the debt crisis.
Source: WSJ research
Greece growth to be worse than thought
by Kerin Hope - FT
Greece’s finance minister has warned the country is sinking deeper into recession, with revised forecasts indicating negative growth of close to 5 per cent this year.
The new projection came as experts from the European Union and International Monetary Fund started assessing progress with fiscal and structural reforms before a decision is taken on releasing another €8bn slice of bail-out funding.
Evangelos Venizelos said in an interview on Friday with an Athens radio station: “There’s now a range of forecasts suggesting growth could shrink by above 4.5 per cent – and we have yet to see where it will stop.” “The truth is that a mix of domestic and external factors is intensifying the recession and this is our biggest problem,” Mr Venizelos said.
Earlier EU-IMF projections, used as the basis for Greece’s revised fiscal programme approved by parliament in June, assumed the economy would shrink this year by about 3.8 per cent and show modest positive growth of some 0.8 per cent in 2012. Economists at Kepe, a Greek state thinktank, warned at the time the forecasts were over-optimistic given plunging domestic demand. They said the contraction would be at least 4.5 per cent followed by flat growth next year.
Mr Venizelos also warned that while €45bn of funding is still available from Greece’s first EU-IMF loan package, a second more complex bail-out agreed with European partners last month would not be ready before “the first or second week in October.” “If it’s not complete, there’ll be a transitional arrangement,” Mr Venizelos said in a bid to calm fears in Athens that the government may not be able to meet debt-servicing and other payments due at the end of September.
EU officials had expected the new package, which includes bond buy-backs as well as debt rollovers and swaps to be agreed with private bondholders, would be in place in time for next month’s planned disbursement. Mr Venizelos played down Greece’s bilateral deal with Finland to provide collateral in return for its share of the new loan, saying,”this has still to be discussed at the political (EU) level.”
But Greece’s worsening economic position may encourage other eurozone countries to seek similar arrangements, analysts said. A flash annual growth estimate for July showed output contracted by 6.9 per cent. Revenues fell by 6.4 per cent in the first seven months on an annual basis, according to the Greek statistical authority.
Yet Mr Venizelos said Greece could still achieve its target of cutting the budget deficit by three percentage points of gross domestic product this year, without having to take additional measures. “We’ve already voted through measures that, if they yield the full results, would ensure that we can out-perform this target….And we are also moving to address the spending side,” he said, signalling that further cuts would be made in public investment to bring the budget back on track.
The Great Debt-Brake Swindle
by Stefan Simons and Carsten Volkery - Spiegel
Germany and France want all the euro-zone countries to enact balanced-budget amendments. While that might sound sweet to Angela Merkel's conservative coalition, the plan is triggering massive resistance in southern euro-zone countries. Even if they get their bombshell wish, it could ultimately be a dud.
German Chancellor Angela Merkel calls it a "debt brake" in dry, technical terms. French President Nicolas Sarkozy raves about the "golden rule" of a balanced budget. As they announced on Tuesday, the two leaders want all of the 17 countries in the euro zone to enshrine binding balanced-budget clauses into their constitutions by mid-2012. Obligatory applause came from Brussels. Debt brakes would strongly commit politicians to making public finances sustainable over the long term, said European Commission President José Manuel Barroso and EU Economic and Monetary Affairs Commissioner Olli Rehn.
But the reactions to the German-French proposal among EU member states were much more reserved. Of course, most of them weren't as over-the-top as the one found in Britain's Daily Mail, which ranted about a "Fourth Reich" and commented that Germany was once again subduing the Continent -- this time under the pretext of debt brakes.
Still, it will be a tough battle to get all of the euro-zone countries' parliaments to adopt balanced-budget amendments. In France, the Socialist opposition has already signalled its resistance. Martine Aubry, a presidential candidate for the Socialist Party, calls the proposal a "propagandistic smoke grenade" and "a vague rule that doesn't really regulate anything." François Hollande, a rival candidate within the party, warns that the debt brake is "maybe a trap."
Indeed, Sarkozy plans to make the Socialists look like fools in the presidential campaign. To pass an amendment to France's constitution, he will need some opposition votes to obtain the necessary two-thirds majority. "If the Socialists vote for the 'golden rule,' we will look like Sarkozy supporters," says Manuel Valls, yet another presidential hopeful for the Socialists. "If we vote against it, we will seem dangerously irresponsible." As economic expert Christophe Borgel put it in the French news magazine Marianne, the real issue for Sarkozy is "juxtaposing a left of spendthrifts with a right of good administrators."
Too Tough for Spain and Italy ?
The amendment's chances of success in Spain are equally uncertain. As the daily El Pais sees it, the debt brake is the "most controversial proposal" to come out of the summit Merkel and Sarkozy held in Paris earlier this week. The paper also predicts that battles over whether to adopt the amendments could drag on in the parliaments of euro-zone states. The issue is complicated even more in Spain given upcoming elections in November. If the past is anything to go by, such issues can paralyze a parliament for months.
Given these circumstances, Merkel and Sarkozy's goal of having debt brakes enshrined in national constitutions by mid-2012 seems rather ambitious. Nevertheless, Guntram Wolff, deputy director of the Brussels-based economic think tank Bruegel, thinks the message itself is already important and that just having a discussion on the behaviour of heavily indebted countries like France and Italy has already made a noticeable difference. What's more, he believes that having nationally anchored debt brakes will have a "disciplining effect" in budget debates at the national level.
Indeed, the Berlusconi government has already announced that anchoring a debt brake in Italy's constitution is part of the country's most recent cost-cutting plan. Still, there is some question over just how serious the Italians will be about remaining true to the letter of the law. Indeed, the amendment would have major effects on Italy and force its entire political culture to radically change. As one commentator in the daily La Repubblica put it: "The proposed implementation of the balance budget 'golden rule' would be tantamount to a brutal detox for many of the chronic deficit offenders in the euro zone."
'Pure Symbolism'
Merkel and Sarkozy are betting that pressure from the financial markets will be able to eliminate political resistance by mid-2012. But even if debt brakes find their way into state constitutions, they might quickly prove to be dull weapons. Indeed, economists point out that the astronomically high levels of state debt in many euro-zone countries would make having a debt brake completely meaningless. "Under current conditions, the debt brake is pure symbolism," says Thomas Straubhaar, director of the Hamburg Institute of International Economics (HWWI). "Debts have a momentum of their own. Their size makes it impossible to decree them away with political announcements."
Indeed, the IMF estimates that, even with severe belt-tightening, Italy's debts will still amount to 110 percent of GDP in 2016. At that time, it also predicts that Spain and France will continue to have a debt level of about 60 percent of GDP, the upper limit set by the Stability and Growth Pact.
For this reason, Straubhaar views Merkel and Sarkozy's call for euro-zone countries to present a plan by the end of 2011 for how they will push their state-debt level under the 60 percent mark as complete eyewash. "The governments will present their plans," he says, "but none of them will stick to it." He also points out that the Maastricht Treaty already dictated that euro-zone countries maintain balanced budgets and that the first to violate these stipulations were Germany and France. "Countries will always invoke extraordinary circumstances to take on more debt," he says.
Austrians, Dutch follow Finns, seek Greek collateral
by Sylvia Westall and Gilbert Kreijger - Reuters
Austria, the Netherlands and Slovakia said Thursday they want collateral on loans to Greece after Finland secured a commitment, raising question marks over a second bailout agreed for Athens last month.
The three countries said their positions were not new and echoed the view of some other euro zone states. They and the Finns account for only something like 11 percent of the new Greek bailout which totals 109 billion euros ($153.5 billion). But new signs of discord will do nothing to encourage markets that euro zone politicians are getting on top of the debt crisis, after a blueprint from the leaders of Germany and France underwhelmed investors earlier this week.
"With more of Greece's euro zone partners asking for collateral for their contribution to the second rescue package, the available pool of money becomes smaller, rendering the success of the second package more difficult," said Theodore Krintas, head of wealth management at Attica Bank in Greece.
Athens and Helsinki agreed on a deal for collateral this week -- proposing that Greece offers Finland a cash deposit to back loans made under the July 21 bailout deal. Finland has said the deposit plus interest would be comparable to the contribution it makes to Greece via Europe's temporary bailout fund.
Francois Cabau, economist at Barclays Capital, said Finland's insistence on collateral could threaten the process. "By agreeing to (collateral) ... you actually do the opposite of what you originally set out to do, withdrawing cash from ... somewhere that doesn't have any," he said. "This is likely to provoke some annoying political noise in the market."
The Finnish finance ministry said officials from euro zone countries' finance ministries would discuss the plan at a meeting in Brussels Thursday and Friday. Austria's Finance Ministry said it had made its position clear before and that its latest comments were in line with what euro zone leaders agreed at the July 21 summit. "If there is to be a model for collateral, Austria would also make a claim," spokesman Harald Waiglein said.
"Unbelievable Pandering"
The Netherlands took a similar line. "Even if it was not a hard demand from parliament we, together with some other countries, have always indicated to Brussels and Finland that if Finland gets collateral our credit ranking position cannot worsen, and that we ourselves also want a collateral agreement," a finance ministry spokesman said.
Analyst Sassan Ghahramani at SGH Macro Advisers took a skeptical view. "There was an explicit carve out agreed at the July 21 summit. For them to now put their hand up and say we kind of wanted it all along is unbelievable pandering to their domestic base. It must be frustrating, Brussels has to draw the line, crack the whip," Ghahramani said. A Greek finance ministry official declined to comment and referred to upcoming talks on the Greek-Finland deal in a working group.
The July summit of euro zone leaders, which sought to prevent market instability spreading through the region, agreed to give Europe's financial rescue fund new powers to help Greece to overcome its debt crisis. But since then euro zone states have squabbled over measures to stabilize the region. Bold plans from France and Germany this week to move toward fiscal union in 2012 got a cool response from Austria, Finland and Ireland.
And the failure by Nicolas Sarkozy and Angela Merkel to address burning issues such as common euro zone bond issuance or beefing up the bloc's rescue fund left investors cold, although the European Central Bank's reluctant agreement to buy the bonds of Italy and Spain has tempered the latest market onslaught.
Waiglein said Slovenia, Slovakia and the Netherlands shared Austria's view on Greek collateral during expert talks. In Ljubljana, the Slovenian finance ministry said only it aimed to ensure its share of guarantees within the joint euro zone framework in talks about possible insurance mechanisms. Slovakia's finance ministry was not immediately available for comment but Bratislava has previously made clear that it would want collateral.
Sarkozy, Merkel Propose a Euro-Zone Chief
by Nathalie Boschat, Bernd Radowitz and Gabriele Parussini - Wall Street Journal
The leaders of France and Germany said Tuesday they would propose electing a permanent head of the euro zone to shore up governance of the monetary union, but stopped short of more fundamental steps toward refashioning the area into a federal entity with its own debt agency. "We want to state our absolute will to defend the euro," said French President Nicolas Sarkozy after a meeting in Paris with German Chancellor Angela Merkel.
The debt crisis that left Greece, Ireland and Portugal seeking financial assistance from the European Union and the International Monetary Fund has exposed fundamental flaws in the euro-zone construction: 17 countries share the same currency but have limited oversight over each other's budget spending policies. As a result, a profligate nation can run into budget woes and damage trust in the common currency.
Market jitters have recently spread to Italy and Spain, where governments now rely on assistance from the European Central Bank to raise debt at affordable costs. Investor attention has also moved toward the core of the euro zone, with economic growth stalling in Germany and France in the second quarter and questions being raised about the financial health of the large French banks and of France's own triple-A credit rating.
Some economists say the time has come to recast the architecture of the euro zone and accelerate the pace toward deeper fiscal integration by creating a single entity that can issue debt on a euro-zone level and keep a tight leash on national finances. The entity would mirror the ECB in a similar fashion to the Federal Reserve's relationship with the U.S. Treasury.
The Franco-German tandem, which has a track record of finding breakthroughs at times of gridlock in the region, both said they were convinced that the euro zone must move toward deeper integration but added that it was too early to introduce euro-zone bonds. Mr. Sarkozy said any such move would have to "crown" the euro-zone integration process, but couldn't constitute a foundation.
"Again and again, I feel that people are looking for the one event, the one method with which all comes good again and we get out of the crisis," said Ms. Merkel. "I don't think that we are dependent on the last-resort measure, nor do I believe that we can solve problems" using a magic wand.
Mr. Sarkozy said the euro-zone heads of state and government would meet more often and would represent "veritable euro-zone economic governance." He said that the group would meet twice a year, and more if necessary, under a single leader; the Franco-German leaders proposed EU council President Herman Van Rompuy to lead the council for a period of 2.5 years.
The leaders said their finance ministers will propose in September a plan to European institutions for a tax on financial transactions, and they also said they would make proposals to align corporate-tax regimes between France and Germany. "We want France and Germany to move closer in terms of fiscal integration," Ms. Merkel said. Also, finance ministers from both countries will get together twice a year to make sure that the hypotheses underlying the presentations of their respective budgets are consistent. "France and Germany must converge, the status quo is impossible," said Mr. Sarkozy.
The two countries will also push for all 17 euro-zone members to adopt a "golden rule"—the obligation to balance their public finances—before next summer. The Franco-German proposals will be included in a letter to be sent to Mr. Van Rompuy on Wednesday. In turn, Mr. Van Rompuy will sound out other euro-zone members.
Paranoid in Paris: France Fears Loss of Top Rating
by Stefan Simons - Spiegel
With rumors of a downgrade, the French are deeply worried about the potential loss of their top credit rating. The market turmoil and share price losses last week show how nervous investors have become. Does France have the political will to impose the strict austerity measures needed to save its rating?
They are gamblers in the service of the state. Their open-plan office is similar to that of an investment bank: The telephones have a direct line to the financial centers, and monitors flicker with columns of numbers. Specialists at the Agence France Tresor, as the treasury in Paris' Rue de Bercy is called, manage the French government's assets and liabilities, "in the best interest of the taxpayers."
There is growing concern not just in the treasury, but in the whole of France, about the solidity of the country's finances. Since doubts about France's creditworthiness surfaced in financial markets, the "historic earthquake," as French daily Le Point has called the euro debt crisis, has also engulfed Paris. Speculation that France might be facing a downgrading of its top AAA rating has shaken the trust of investors, and rumors about a possible bank bankruptcy have caused deep plunges in French share prices.
Ever telegenic and prepared to offer up a soundbite, President Nicolas Sarkozy broke off his summer vacation and rushed back to the Elysee Palace to lead a crisis meeting on Aug. 10 attended by ministers and the head of the French central bank. It had been intended to calm markets, but it achieved the exact opposite.
There is nothing new about doubts over France's willingness to implement tough savings, and the Organization for Economic Cooperation and Development and the International Monetary Fund have repeatedly warned that the country needs to take extra steps to reduce its deficit. Despite pithy political rhetoric, nothing has changed in terms of France's structural problems: weak economic growth, a chronically negative trade balance and a creeping loss of competitiveness.
A €1.7 Trillion Mountain of Debt
During the past four years, France's budget deficit rose from €50 billion to €137 billion, with its mountain of national debt climbing from €1.2 trillion to a lofty €1.7 trillion between 2007 and 2011. The labor market, business climate and other indicators are all in the red zone.
Just how highly sensitive the markets have been to these developments was highlighted last week in the case of Societe Generale. Share prices in the French bank collapsed after the British Daily Mail tabloid reported over the weekend that the bank was in a "perilous state" and possibly on the "brink of disaster." In less than two hours, shares in France lost €3.8 billion in market capitalization.
The hysteria twittered its way throughout the financial sector until other Parisian financial institutions were also gripped by paranoia. But the reason for the shock had actually been an incorrect report. A Daily Mail journalist had mistaken a summer novel in the culture section of the French daily Le Monde as a real, reported article. The London tabloid issued a correction and apologized for the error, but in this case it was fiction that could become reality soon enough.
France is expected to approve austerity measures by the end of August, but only eight months ahead of the next presidential election, it remains questionable whether Sarkozy will be willing to risk his re-election by imposing tax increases or cuts in social spending -- especially given that a recent poll showed that more French people trust German Chancellor Angela Merkel to steer them out of the current crisis than their own president.
Instead of radical cuts to the health care system, pensions or social spending, the most likely path for 2012 cuts will be the elimination of superfluous tax breaks. "Perhaps additional efforts will be necessary," conceded French Budget Minister Valerie Precress. Meanwhile, China's state-owned rating agency has already taken action: Last year, it downgraded France to AA-.
European markets hit by eurozone Robin Hood tax plans
by Graeme Wearden - Guardian
Plans for a new Robin Hood-style tax on financial dealings hit shares in stock exchange operators on Wednesday, as the financial markets balked at the latest proposals to rescue the eurozone.
The prospect of tax rate harmonisation and a new financial transaction tax, as pledged by German chancellor Angela Merkel and French president Nicolas Sarkozy, did not ease fears over the stability of the region. The FTSE 100 fell 77 points in early trading to 5279, with other European markets also losing ground.
Shares in the FTSE 250-listed London Stock Exchange fell by 6% at the start of trading, with Germany's Deutsche Bourse and pan-European exchange NYSE Euronext suffering similar falls. The three exchanges would all be affected if traders were forced to pay a small fee every time they bought and sold stocks or currencies.
Sarkozy and Merkel pledged to create a "true European economic government" following their mini-summit in Paris on Tuesday. As well as a transaction tax, the pair agreed to harmonise taxes across their two countries and push for tougher deficit reduction across the eurozone. Euro bonds, though, remained off-limits – to the disappointment of some analysts who believe that European countries must combine their borrowing needs to get through the financial market turbulence.
Michael Hewson, market analyst at CMC Markets, said the measures announced in Paris were "all profoundly disappointing". "The tax harmonisation plan will not go down well with other European Union countries, particularly Ireland where it has been a red-line issue. There was no talk about boosting the European financial stability fund and no talk about euro bonds, all rather disappointing, but not altogether surprising, given the political obstacles against them," said Hewson.
"The main concern is about where future growth will come from, if Germany as the main heartbeat and cash generator of Europe catches a cold," he added. GDP data released on Tuesday showed that the German economy barely grew in the second quarter of 2011.
Robin Hood on the horizon
Tax expert Richard Murphy welcomed the commitment to a transaction tax, calling it "a welcome and overdue move that needs replication way beyond the eurozone if the feral banking economy is to be brought under control".
The Robin Hood Tax campaign was set up in the aftermath of the financial crash, and it lobbies for a small levy on each financial transaction to fund public spending in the UK and development work abroad. Max Lawson, the campaign's spokesman, said the UK should now respond to France and Germany's lead.
"This is a major step forward which leaves the UK increasingly isolated in insisting that a financial transaction tax must be global to work. Rather than standing on the sidelines, David Cameron should join Sarkozy and Merkel to make banks pay their fair share," said Lawson. "Europe now has an historic opportunity to make the financial sector work in our interests and help millions of people here and in poor countries who have been hurt by a crisis they did nothing to cause," he added.
Irish finance minister Michael Noonan said that any such tax should be imposed across the EU rather than just the eurozone. He also argued that the Franco-German plan to harmonise their corporation tax levels would not affect Ireland's current rate of just 12.5%.
Swiss franc in demand
Investors continued to flock to safe havens such as the Swiss franc, which gained 2% against the euro despite the Swiss central bank pledging to take steps to lower the currency's value.
Jane Foley, senior currency strategist at Rabobank, said the markets should have learned that the eurozone crisis would not be solved quickly, particularly as domestic political pressure prevented Merkel from moving swiftly into full fiscal union across the zone.
"Chancellor Merkel remains tied down by moral hazard. Even if she recognises that significant fiscal integration will be needed to save European monetary union she cannot openly admit this at this point," said Foley.
In Defence of PIGS
by Ambrose Evans-Pritchard - Telegraph
Readers have asked for a quick verdict on the Merkel-Sarkozy deal.
I have nothing to say. There was no deal. It was a vacuous restatement of clauses that already exist in the Lisbon Treaty, or an attempt to pass off retreads such as the Tobin Tax and harmonization of the corporate tax base as if they were new. No eurobonds, no fiscal union, no boost to the EFSF rescue fund, no change of policy on the ECB’s mandate. Zilch. More fiscal austerity for laggards, without even the Marshall Plan we had on July 21. It is all a step backwards into the black hole.
As for appointing EU president Herman van Rompuy head of a eurozone panel, I find it remarkable that anybody should take this seriously (much as I like the poet Van Rompuy, among the best of the lot). There is already a Eurogroup, headed by Jean-Claude Juncker. The emptiness of the summit – coupled with Sarkozy’s deliciously absurd theatrics – tells us all we need to know. Neither Merkel nor Sarkozy seem capable of rising to the occasion. Europe is drifting towards its existential crisis.
The ECB can hold the line for now by purchasing €20bn of Spanish and Italian bonds each week. But once the ECB nears €150bn or so, the markets will brace for the next crisis. Italy alone has to raise or roll-over €68bn by the end of September. You can be sure that a great number of investors will take advantage of ECB intervention between now and then to lighten their holdings, and switch the risk to eurozone taxpayers. The ECB may have to buy at least €100bn of Italian bonds alone by late September to cap the 10-year yield at 5pc.
Perhaps the Chinese and Gulf states will keep buying. Perhaps not. So enough on the summit.
What is exercising me more is an interview by George Soros in the German press calling for Greece and Portugal to prepare for an "orderly exit" from the eurozone. "The EU and the euro would get over it," he said. ("Mit dem griechischen Problem ist so grundlegend falsch umgegangen worden, dass jetzt ein möglichst geordneter Ausstieg vielleicht wirklich der beste Weg wäre. Das gilt auch für Portugal. Die EU und der Euro würden es überleben").
This is of course music to German ears. It conforms to the Bild Zeitung narrative that Europe’s crisis is a morality tale, a debacle caused by Greco-Latin debt addiction and fecklessness. It is the Big Lie of EMU. Mr Soros does Portugal an injustice. The country has behaved OK over the last eight years (having had its credit bubble in the late 1990s when the EMU effect caused rates to drop from 16pc to 3pc, destroying Portugal’s economy).
It has worn a hairshirt for since 2003, no little avail. By then the country was trapped in slump with chronically low productivity, the victim of an intra-EMU currency misalignment against the German bloc and an extra-EMU misalignment against the Chinese yuan. Yes, Portugal made plenty of mistakes – didn’t we all – but it did not violate the Maastricht rules or lie about its budget figures or persistently break the EU Stability Pact.
Nor did Spain violate Maastricht. It ran a fiscal surplus of 2pc of GDP during the boom (So did Ireland). It had modest public debt. The Bank of Spain tried heroically to stop the ECB’s uber-loose monetary policy (double-digit M3 growth) from fuelling a property and credit bubble. It pioneered `dynamic provisioning’.
Italy has a primary budget surplus, mid-level total debt at 250pc of GDP, and a reformed pensions system. The European Commission estimates that on current policies Italy will have the lowest public debt to GDP ratio in Euroland by the middle of the century. I kid you the not. The lowest.
We all agree that these countries should have shaken up their labour markets. No doubt the boom-busters (Greece, Ireland, Spain) could have done more to "lean against the wind" – ie, by copying Hong Kong, which gets around the problems of the dollar peg by slashing mortgage ratios to choke property booms – but neither the ECB nor the European Commission pushed particularly hard for such measures, if at all.
The complacency was endemic in the entire EMU system. So there is something unpleasant about the attempt to blame the victims now. The German claim that Euroland’s crisis is caused by Club Med profligacy is intellectual chutzpa. None of us should give this self-serving argument any credence.
The problem is deep and structural. These countries were thrown together into monetary union by high-handed politicians before there was any meaningful convergence of productivity, growth patterns, wage bargaining, inflation proclivities, legal systems, or sensitivity to interest rates. The Maastricht rules targeted one variable (debt) but missed all the others.
The damage was compounded by the ECB. It ran a loose monetary policy in the early Noughties, breaching its own M3 and inflation targets year after year, in order to help Germany when Germany was in trouble (for cyclical reasons, obviously)
This greatly aggravated the credit bubbles in Ireland and the South. There are no innocents in this story. All countries share blame. Germany is a sinner in all kinds of ways, not least because it seems to think it can lock in a permanent structural trade surplus, and then order others to stop running deficits.
Dr Merkel, you have a PhD in nuclear physics. You must know there cannot be good imbalances (your surplus) and bad imbalances (the Spanish, Italian, French, Portuguese deficits). The maths have to add up within a currency union.
In the old days these intra-EMU imbalances would have corrected naturally. The D-Mark would have risen. The lira and peseta would have crashed. The drachma would have crashed even more. Problem solved. That corrective mechanism has been jammed by political forces.
We now have a remarkable situation where Merkel is pushing Southern debtors into drastic fiscal tightening without offering any offsetting stimulus in the North. This is so stupid (within a currency union) it leaves you breathless. German policy risks a self-feeding implosion of the whole system, much like the early 1930s Gold Standard – unless the ECB counters this with QE a l’outrance, which is also against German policy.
Yes, I know, a lot of readers favour fiscal austerity as an end in itself. Fine up to a point. But don’t conflate the morality of family finances (saving is good) with the entirely different imperatives of macro-economics (too much saving is extremely bad, and leads to depression).
Sarkozy has not shown much imagination or leadership. Instead of acting as Chancellor Merkel’s sidekick, he might usefully take charge of the crisis and lead a Latin liberation. If all else fails, he should draft a letter from the leaders of France, Italy, Spain, Portugal, Ireland, Cyprus (plus Belgium, Malta and Slovenia, if they want) requesting the withdrawal of Germany and its satellites from monetary union. Germania would get the strong currency it wants and needs.
If the German bloc thought the new super-Mark would rise too far – and cause huge losses to Teutonic banks with Club Med exposure – they could peg the currency to the Latin euro at a 30pc premium and use capital controls until things calm down.
My guess is that Europe would start to recover remarkably fast once the boil had been lanced. The Latin bloc would become the growth region, and eat Germany’s lunch for a decade or so. The debt crisis would fade away like a forgotten nightmare. Sarkozy would walk tall, so to speak.
Germania can accept this or keep stumping up rescue loans and pay transfers for year after year until their citizens revolt. What they cannot expect is to have it all their way by retaining export share through a rigged currency system forever.
Ah, but what if Germany refuses either to back fiscal union or leave EMU?
Götterdämmerung.
Let Greece, Ireland, Portugal Default So Spain, Italy Won’t, Kashkari Says
by Joe Ragazzo and Margaret Brennan - Bloomberg
European politicians should let Greece, Ireland and Portugal default while taking steps to ensure Italy and Spain won’t, according to Pacific Investment Management Co.’s Neel Kashkari.
"They are delaying and denying as long as possible because the medicine to actually put out this crisis tastes so bad," Kashkari, head of new investment initiatives at Pimco, said in an interview on "InBusiness With Margaret Brennan" on Bloomberg Television. "They are always behind, always trying to play catch-up, and the crisis is always getting worse."
Germany, France, the International Monetary Fund and the ECB should unveil a "massive" bailout package and announce it’s available to the entire euro zone, except for Greece, Ireland and Portugal, effectively letting them default, according to Kashkari.
That would create a firewall protecting Italy and Spain, said Kashkari, who joined Pimco in December 2009 after serving as head of the U.S. Treasury Department’s bank-rescue program. Pimco, based in Newport Beach, California, operates the world’s biggest bond fund.
"One, two or three countries may have to take a sabbatical; this is where we are going," Mohamed El-Erian, chief executive officer of Pimco, said in a Bloomberg Television interview on "Surveillance Midday" with Tom Keene. "You cannot converge financial variables without converging economic variables. The most important compromise is to stabilize the core."
Euro Bonds
German Chancellor Angela Merkel and French President Nicolas Sarkozy yesterday ruled out steps such as the issuance of euro bonds or expanding the bailout fund in their latest strategy to counter the euro debt crisis.
Sarkozy and Merkel spoke after a two-hour meeting in Paris as investors called for signs that they would do more to end the debt storm after reports showed an unexpected slowdown in their economies. Unprecedented bailouts by governments and the European Central Bank have failed to stamp out concerns that began in Greece almost two years ago and rattled markets in AAA- rated France last week.
Greece "has too much debt and is not competitive enough," said El-Erian of Pimco, which runs the world’s biggest bond fund. "It’s difficult to see Greece overcome these issues within the euro zone."
Rescue Fund
According to Kashkari, a system in which AAA-rated countries such as Germany ultimately guarantee the debt of higher-risk governments is a solution that is "elegant conceptually, hard politically." Merkel and Sarkozy also rejected an expansion of the 440 billion-euro ($633 billion) rescue fund yesterday, a decision Kashkari said was the wrong one.
"If we tripled the fund, then at the next press conference you would ask us why didn’t you multiply it by four," Sarkozy said. "We’re trying to manage it seriously and reasonably. We believe the fund is sufficient."
The announcement from the German and French leaders came after a report showed the euro-area economy grew 0.2 percent in the second quarter, the worst performance since emerging from recession in 2009. "How do you get the German taxpayers to write these checks?" Kashkari said. "It may be easier politically to have the Germans bail out the ECB than the Greeks and the Irish, but that may ultimately be what happens, and the economic effects may be similar."
The ECB’s shouldering of the burden of the region’s debt and being bailed out by Germany is a more likely scenario than the issuance of euro bonds, Kashkari said. "Some people will say it will never happen," El-Erian said in reference to a smaller euro zone. "I suspect it will be bilateral. We will have an ad hoc way to do it because that’s going to be what’s in the interest of the euro zone, but ultimately also in the interest of a country like Greece."
The Price of the Pact - What Will a European Economic Government Entail?
by Stefan Kaiser - Spiegel
German Chancellor Angela Merkel and French President Nicolas Sarkozy want to create a European economic government. The idea sounds good, but it is unclear exactly what it means. If the proposal is serious, it will lead to significant changes -- especially for Germany.
The words sound mighty enough: A "true economic government" will be created to coordinate economic and finance policies in the euro zone in future to make the currency union more resistant to crises. That's what German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed to at their summit on Tuesday afternoon. But neither leader offered much more than that during their joint press conference, and they left completely open precisely what this economic government is meant to do.
That's little wonder, either. After all, the term "economic government" can be interpreted in different ways. The French have been using it for years to describe government intervention in the economy through, for example, state holdings in important companies. But the German chancellor appears to have an altogether different understanding of the term. "The member states of the euro zone need to ensure, with a greater degree of commitment, that they adhere to the existing Stability and Growth Pact," Merkel said after her meeting with the French president.
In fact, Tuesday's agreement does seem to largely take into account German concerns over stability. The proposal calls for the 17 euro-zone member states to anchor balanced-budget provisions into their constitutions, and to take account of European Commission concerns when setting their national budget plans. Of course, the idea isn't entirely new. Already back in March, the euro-zone states agreed to the so-called "Euro Plus Pact," which would lead to closer coordination of budget, tax and social policies -- albeit non-binding.
Jean-Claude Juncker Would Be Stripped of Power
"Up until now, the term had been a pretty empty one," said Henrik Enderlein, professor of political economy at the Hertie School of Governance in Berlin. He said it was now a task for the euro-zone countries to fill the term with meaning. "What is needed is a change in mentality. The governments have to see that they can no longer create national economic policies, but rather only European ones in the future."
Enderlein said he could imagine a kind of European finance minister who would monitor and coordinate the policies of euro-zone states. "There has to be someone who tells the individual governments: What you are doing right now is damaging to the euro zone. Unfortunately, an institution like that doesn't exist yet."
Until now, the Euro Group has been in charge of coordinating economic policy among the 17 euro nations and checking whether they are adhering to the Stability Pact. It consists of the finance ministers of the euro countries as well as representatives of the European Commission and the European Central Bank. Its chairman is the prime minister of Luxembourg, Jean-Claude Juncker.
According to the plans presented on Tuesday by Merkel and Sarkozy, the future economic government would comprise the 17 heads of government and would meet twice a year. It is set to be chaired by Herman Van Rompuy, the current president of the European Council. "The proposal for an economic government is an attempt to sideline Jean-Claude Juncker," says Enderlein. "That is a pretty open snub."
Germany Must Strengthen Domestic Consumer Demand
The new economic government will have to do more than the Euro Group did, analysts believe -- and more than Merkel has indicated so far. "It wouldn't be much if a European economic government only watched out for stronger budget discipline," says Gustav Horn, director of the IMK economic institute, which has links with German trade unions. "This is really about imbalances in the current accounts."
The imbalances are regarded as one of the main reasons for the crisis. Countries like Germany have run very high trade surpluses for years, while other countries like Greece, Portugal or Spain are less internationally competitive and import far more than they export. If they had their own currencies, they could even out these differences through interest rate policies and currency fluctuations.
But in a monetary union, such imbalances aren't tenable in the long run. That would be a job for the economic government, says Horn. "Countries with current account deficits would have to commit themselves to a more restrictive fiscal policy." That means they would have to cut government spending, raise taxes or limit wage increases. "How the countries do that should be left up to them."
But countries with surpluses, like Germany, would also have to adjust their policies. Horn says these countries would have to strengthen their domestic demand through higher wages or benefits, or via tax cuts.
If Merkel and Sarkozy are serious about an economic government, they will have to sign up to something else too. "In the medium term in a common economic area, one will have to levy joint taxes and have a significant common budget," says Enderlein.
France and Germany have made a start: They plan to harmonize their corporate taxes and introduce a pan-European tax on financial transactions. But that can only be the first step on the road to an economic government.
The signs are clear: No more stimulus
by Neil Reynolds - Globe and Mail
Harry Koza figured that the market crash of 2008 was coming when U.S. banks started to write 110 per cent loan-to-value mortgages. This, he said, was the financial equivalent of "running with scissors." He figured the crash was imminent when California licensed 500,000 new real estate agents in a single year. In other words, he read the signs. When the housing bubble burst, he surveyed "the wreckage of the worst credit mania in history" and figured that the next mania was already taking shape: the great stimulus mania.
Mr. Koza, senior market analyst for Thomson Reuters in Toronto, concedes that he can sound a bit pessimistic. (He once said that he regarded economist Nouriel Roubini – the celebrated "Dr. Doom" – as "kind of a Pollyanna.") But if so, Mr. Koza says, that’s where the signs directed him. And he is a serious student of signs. It was early in 2009, in a paper he wrote for the Halifax-based Atlantic Institute for Market Studies (AIMS), that he anticipated the next mania.
To understand the future, Mr. Koza wrote, you need to appreciate the fact that people relive the same Master Mania – "like Bill Murray in Groundhog Day" – over and over again, though, perhaps, with progressively darker consequences. This mania rests on the assumption that governments can reverse the business cycle. "They can’t," Mr. Koza wrote. "[Yet] each crisis is met with the same policy prescriptions that begat the last bubble and that will beget the next one." "The same folk that helped create the mess are now vowing to cure it," he said, "by doing even more of the stuff that created the problem in the first place." In other words, the solution to excessive debt is more debt.
Mr. Koza enumerated the easy-money credit bubbles of the last generation, each one coming fast on the heels of the one before. Since 1980, he said, nine credit bubbles had burst: (1) the LDC (less-developed country) crisis of 1983; (2) the crash of 1987; (3) the S&L crisis of 1989; (4) the Japanese bubble of 1990; (5) the Mexican bubble of 1994; (6) the "Asian contagion" of 1997; (7) the LTCM (Long-Term Capital Management) crisis of 1998; (8) the "tech wreck" of 2000; and finally (9) The great debt bubble of 2006 – and beyond.
Were these crises the product of market failure? Mr. Koza thought not. He cited one sign that strongly suggested otherwise: the ratio of private sector income (wages, earnings, dividends) compared with public sector income. Before the Great Depression, the ratio was 12:1. During the New Deal, the ratio was 5:1. During the debt bubble, the ratio was 3:1. What would the ratio be in the days ahead? Would it be 2:1? Or 1:1? Or worse? Mr. Koza speculated that it would soon be 1:3 – the reverse of the ratio only five years earlier. One day soon, he said, the public sector would dwarf the private sector.
"Governments seem to view a recession as a pause in a never-ending pattern of economic growth, a pause which they are compelled to attempt to shorten," Mr. Koza wrote. "But a recession is, in fact, a time when excess debt is wrung out of an oversaturated economy. Bailouts, subsidies and government fiscal stimulus programs retard this process."
By consensus now, the U.S. Federal Reserve has done almost as much damage as it can do. In 2008-09, it injected $1.7-trillion (U.S.) in quantitative easing (euphemistically designated Monopoly money, really) into the global economy. This was QE1. In 2010-11, it injected another $600-billion: QE2. Now Fed chairman Ben Bernanke is apparently contemplating another round, QE3. This time, the markets are more skeptical. Morgan Stanley’s Stephen Roach neatly expressed this sober consensus the other day: "QE1 didn’t work," he told CNBC. "QE2 didn’t work. QE3 will not work. And QE12 will not work."
Even The Economist, an advocate of stimulus spending and QE manipulation, agrees: "Governments in the rich world," the magazine said, "have painted themselves into a corner." Harry Koza read the signs perfectly two years ago. He was right: The world didn’t need more money. It needed less debt. Mr. Koza, master semiotician, gave good advice: Stop. Let it be.
EMU crisis deepens as slump reaches Europe's AAA core
by Ambrose Evans-Pritchard - Telegraph
The German economy slowed drastically over the early summer and may be on the cusp of a double-dip recession, dashing hopes that Europe's industrial engine would eventually lift EMU's southern bloc out of slump.
Growth in both Germany and The Netherlands fell to 0.1pc in the second quarter as exports faltered. France reported earlier this week that growth in its economy had sputtered out altogether. German Chancellor Angela Merkel insisted the economy was doing fine and needs no extra support. "I think we're on the right track," she said. The sudden downturn replicates the pattern seen before the Lehman Brothers crisis in 2008 and threatens to play havoc with the debt dynamics of vulnerable countries. It also marks ominous new turn in the eurozone crisis.
Europe's survey data point to a manufacturing contraction over the early autumn, making it even harder for the struggling debtors of southern Europe to claw their way back to viability. The two fear gauges in the credit markets – the iTraxx Crossover index and the Euribor/OIS spread – are both issuing warning signals. "We have reached the tipping point," said Andrew Robert, credit strategist at RBS. "All the props have been knocked away from global growth, the eurozone and Europe's banking system. The risks of global recession is far higher than markets are discounting."
The grim data came as Chancellor Merkel and French President Nicolas Sarkozy emerged empty-handed from their Paris summit, offering nothing concrete to restore crumbling confidence in the eurozone project. The two leaders ruled out eurobonds and refused to boost the firepower of the eurozone bail-out fund beyond €440bn (£386bn). Mr Sarkozy said eurobonds could be "imagined one day" but have no democratic legitimacy at this stage and would not work without much deeper EMU integration.
The two leaders called for eurozone states to include a "debt-brake" in their constitutions and pushed ahead with plans for a financial transactions tax, but these measures do nothing to convince markets that Germany is willing to throw its full weight behind the monetary union. "Today's meeting produced nothing," said Kathleen Brooks from Forex.com. "The markets are likely to be highly underwhelmed. The only thing we do know is that Sarkozy and Merkel aren't willing to ditch the eurozone and let the peripheral nations drown just yet."
A chorus of critics say the European Central Bank (ECB) has misread the economic landscape and shares blame for aborting Europe's fragile recovery. The bank may have repeated the error in made in mid-2008 when it raised interest rates into the teeth of the crisis after the underlying economy had already buckled.
Simon Ward from Henderson Global Investors said the eurozone's M1 money supply data has been flashing red warning signs for months, especially in Italy. "The ECB should never have tightened when real M1 deposits were contracting, not only in the eurozone periphery but in the core as well. A rapid reversal is now required to prevent a eurozone recession, and ideally they need to start quantitiative easing too. It's not too late," he said.
Nobel laureate economist Paul Krugman said the Europe's authorities had lost the plot. "It really is a race between America and Europe: who can make the worst of a bad situation. And both competitors are giving it their all," he said.
Christine Lagarde, the head of the International Monetary Fund, hinted that Europe's headlong dash towards budget cuts was making matters worse. "Slamming on the brakes too quickly will hurt the recovery and worsen job prospects. Fiscal adjustment must be neither too fast nor too slow. Shaping a Goldilocks fiscal consolidation is all about timing," she wrote.
An International Monetary Fund study of austerity policies around the world published earlier this year showed that such strategies are almost always "contractionary" unless offset by very easy money and a big devaluation. Neither have occurred in the eurozone.
The debate over eurobonds continued to rage in Germany yesterday, with key members of Angela Merkel's Chrisitan Democrats (CDU) opening the door to some form of EMU debt pool in the long run. "It makes no sense to wage a black-and-white debate," said CDU lawmaker Johann Wadephul. The party's group in the European Parliament said Germany must stop blocking everything and focus on what conditions might be acceptable.
However, the coalition's Free Democrats (FDP) and Bavarian Social Christians (CSU) continued to dig in their heels, leaving it unclear whether the government could survive if Chancellor Merkel were to yield to European pressure for concessions at a later date. Rainer Brüderle, the FDP's group leader in the Bundestag, lambasted eurobonds a "form of rate socialism".
Nobel Laureate Joseph Stiglitz said that if Germany is not willing to embrace eurobonds and some form of fiscal union, then it should consider withdrawal from monetary union as the least damaging way to resolve the crisis.
Sarkozy and Merkel call for 'true economic government' to save eurozone
by Polly Curtis - Guardian.
France and Germany have set out plans to create the first "true European economic government" headed by a single appointed leader, as part of major moves to synchronise tax and spending to save the failing eurozone.
The French president, Nicolas Sarkozy, and German chancellor, Angela Merkel, announced the dramatic proposals after a two-hour mini-summit. They also called for the imposition of tighter restrictions on member country's deficits and announced a synchronising of the tax policies of their own two countries. Sarkozy has also secured the support of Merkel for a Tobin tax – a financial tax on all international transactions – to raise funds to ease the crisis engulfing the European economy.
The establishment of an economic government for the eurozone will be regarded by eurosceptics as a political power grab for Europe. On Tuesday night, the British government gave a cautious welcome to the move, saying they would adopt a "watch and see" policy. A treasury source said: "This looks like the right direction but we need to see how it pans out. We will continue to advance UK interests at every opportunity." The government has no formal position on the Tobin tax, but has stressed that any such tax would need to be truly international to be successful and not disadvantage participating countries.
The proposals, on the day of dire growth figures for Germany, normally considered one of Europe's safest economies disappointed the markets. Sarkozy said the most important element was the plan "to create a real economic government for the eurozone". Merkel said "there has to be a stronger coordination of financial and economic policy" to protect the euro, adding: "We will regain the lost confidence. That is why we go into a phase with a new quality of cooperation within the eurozone."
The European Council president, Herman van Rompuy, will be asked to head the new economic government, and will set and enforce a deadline for all 17 eurozone members to reduce their deficits, putting pressure on countries such as Greece and Portugal to shore up public spending.
Merkel said they had rejected for now the idea of euro bonds, which would have pooled the members states' governments' debts to reduce the overall risk of the eurozone,but neither leader ruled their use out in the future. George Osborne has raised euro bonds as a possible mechanism for shoring up the eurozone, but the idea was politically unpalatable in the German coalition. There was also no movement on the expansion of the zone's €440 billion rescue fund, the European financial stability facility, seen by some as crucial to the future of the zone.
Merkel said all countries in the eurozone should enshrine balanced budgets in their constitutions. "I do not really think we can solve problems with stop-gap solutions," she said. "We are looking at real, realistic step-by-step measures that we can use to gain back the trust that has been lost, and I do not think that euro bonds would help us in this. "It's quite right that 17 countries need to make a step-by-step progress."
Raw Data on Economic Growth Paints Fuzzy Picture
by Binyamin Appelbaum - New York Times
When the government announced in April that the economy had grown at a moderate annual pace of 1.8 percent in the first quarter, politicians and investors saw evidence that the nation was continuing its recovery from the depths of the financial crisis. The White House called the news "encouraging" and the stock market extended its bull run.
Three months later, the government announced a small change. The economy, it said, actually had expanded at a pace of only 0.4 percent in the first quarter. Instead of chugging along in reasonable health, the United States had been hovering on the brink of a double-dip recession.
How can such an important number change so drastically? The answer in this case is surprisingly simple: the Bureau of Economic Analysis, charged with crunching the numbers, concluded that it had underestimated the value of vehicles sitting at dealerships and the nation’s spending on imported oil. More broadly, politicians and investors are placing a great deal of weight on a crude and rough estimate that has never been particularly reliable.
"People want the best information that we have right now. But people need to understand that the best information that we have right now isn’t necessarily very informative," said Tara M. Sinclair, an assistant professor of economics and international affairs at George Washington University. "It’s just the best information that we have."
The growth rate that the government announces roughly one month after the end of each quarter — news much anticipated in Washington and on Wall Street — has been off the mark over the period from 1983 to 2009 by an average of 1.3 percentage points, compared with more fully analyzed figures released years later, according to federal data.
The second and third estimates, announced at subsequent one-month intervals, are no more reliable. The first quarter this year offers a typical example. The government estimated the annual growth rate at 1.8 percent in May and 1.9 percent in June before issuing its most recent estimate of 0.4 percent.
Perhaps more important, the government underestimated the depth of the recession by a wide margin, initially calculating that the economy contracted by an annual rate of 3.8 percent in the last quarter of 2008. It now estimates the contraction rate at 8.9 percent. Instead of an annual growth rate of 0.2 percent from the fourth quarter of 2007 through the first quarter of 2011, the government now estimates that the economy contracted at an annual rate of 0.2 percent during that period.
The basic problem is easy to understand: More than half of the ingredients in the first estimate are based in whole or in part on projections from past months. The government doesn’t actually know how much people spend on their cellphone bills or how much companies spend on construction. It simply makes an educated guess based on past spending. Even in the third estimate, 22 percent of the data still comes from projections.
If basic assumptions start changing rapidly — business failures during a recession, start-ups during a recovery — the estimates can quickly lose touch with economic reality. "When we most want timely information is when they’re least able to give it to us," said Professor Sinclair. "That’s exactly when those historical patterns are breaking down."
The Bureau of Economic Analysis, an arm of the Commerce Department, makes some efforts to warn users about these problems. It emphasizes transparency and is uncommonly open to public questions. It says it provides a valuable public service, but that the data reflects only the best available information. But policy makers, investors and the public continue to treat the data as highly significant.
"These are really not much more than educated guesses and yet the marketplace puts enormous weight on them because financial markets are high-frequency trading places based on immediate data," said Madeline Schnapp, director of macroeconomic research at TrimTabs Investment Research.
A growing number of economists say that the government should shift its approach to measuring growth. The current system emphasizes data on spending, but the bureau also collects data on income. In theory the two should match perfectly — a penny spent is a penny earned by someone else. But estimates of the two measures can diverge widely, particularly in the short term, and a body of recent research suggests that the income estimates are more accurate.
Justin Wolfers, a professor of business and public policy at the Wharton School of the University of Pennsylvania, publicly predicted earlier this summer that the government would sharply reduce its estimate of first-quarter growth, simply by looking at the income estimate buried inside the bureau’s initial release.
The income data also captured the depth of the recession much sooner. "It is appalling how little attention we economists pay to measurement issues," Professor Wolfers said. "The expenditure data looked bad but not dreadful. The income data was dreadful. And it subsequently turned out the absence of urgency among policy makers was largely a result of looking at faulty data."
Professor Wolfers said that in his native Australia, the government estimates growth by averaging the two techniques with a third, related approach. Private firms use similar methods.
Officials at the bureau have said that measuring expenditures has proved to be a more reliable methodology. The estimates are very accurate in one important respect: it is exceedingly rare for the bureau to estimate that the economy is shrinking when it is actually growing, or that it is growing when it is actually shrinking. The bureau meets that standard 98 percent of the time.
What went wrong in the first quarter? The largest change was because of an annual event. The Census Bureau completed an estimate of the value of vehicles awaiting sale in 2010, based on data collected directly from dealers.
Until July, the bureau had relied on an estimate from a private company, Ward’s, which counts vehicles but estimates their values. Based on that data, the bureau estimated that inventories had declined by $30.3 billion in the fourth quarter as sales outpaced the arrival of new cars.
Last month, based on new data, it concluded that inventories fell by only $17.9 billion. The bureau estimates that inventories shrank by an even smaller amount in the first quarter — although it won’t get equally accurate data until next July — but the effect of the revision was to reduce the difference between the two quarters, and thus to reduce the rate of growth.
The bureau estimates that this change alone is responsible for nearly half the difference between its initial estimate of 1.8 percent first-quarter growth and its current 0.4 percent estimate. A second major change involves the value of imported oil. The bureau announced a permanent change to its methodology last month to improve the way that it calculates the value of oil, and it concluded that spending on imported oil was higher than it had originally estimated. The details are byzantine but the result is clear enough: roughly 0.5 percentage points of growth vanished.
Europe need not wait for Germany
by Martin Sandbu - FT
Size matters. That is the lesson to draw from Washington’s debt ceiling debate and the downgrade of its sovereign credit rating by Standard & Poor’s, neither of which drove up US bond yields. It is also the lesson to draw from Japan, which combines the world’s lowest bond yields with one of its largest public debt stocks.
This lesson has a plain implication for eurozone countries: they should pool their debts – with or without Germany’s participation. The benefits from creating a debt market of a size to rival those of the US and Japan would clearly outweigh the costs.
Size underpins the affordability with which these states can borrow. The total stock of US government securities outstanding is $9,500bn (€6,600bn). For Japan the figure is Y875,000bn (€7,900bn). Even adjusting for the share of obligations held by the two countries’ public sectors (especially Japan), the tradable stock is enormous. Indeed, it is virtually impossible for investors to avoid these bonds. So they do not: they are currently willing to fund Washington for 10 years at 2.3 per cent and Tokyo at 1 per cent a year.
Compare this with Europe’s nationally fragmented sovereign debt market. At the end of 2010, Italy had €1,500bn of bonds outstanding; Germany, €1,400bn; France, €1,300bn. (UK debt securities amounted to £960bn, or €1,100bn.) These are still sizeable markets. But investors can abandon them much more easily than they can US or Japanese bonds. Put differently, a given size of investor outflow from a European country’s bonds will be far more disruptive than from bigger markets.
This has two effects. One is to make most, if not all, European states pay higher yields than they would as a single entity. The other is to make them far more vulnerable to market panic once investors begin to worry about refinancing risk. That, more than anything, accounts for the toppling of Irish and Portuguese debt markets and contagion to Spanish and even Italian and French bonds.
When such panic threatens, only draconian fiscal steps can reassure markets, such as those the UK took pre-emptively last year, and eurozone members have been forced to take since. But since these depress the economy, they are far from certain to work. Prolonged stagnation worsens public debt burdens and undermines creditworthiness as effectively as fiscal incontinence.
If you are big enough, however, this self-fulfilling dynamic can be put in reverse. The US and Japan retain fiscal space for short-term demand stimulus. They can use this fiscal space to restart growth, which would in turn improve the fiscal outlook.
This option is also available to eurozone countries, if they choose to avail themselves of it. Replacing all national sovereign bonds (although not loans) with common eurobonds would create a market worth €5,500bn. It would be backed by governments that together owe less debt, run a lower combined deficit and have greater tax-raising capacity than the US and Japan. It would almost certainly lead to lower yields than the current eurozone average and virtually eliminate the possibility of a bond buyers’ strike.
So what is the eurozone waiting for? The formal answer is that since eurobonds require joint and several guarantees, they are politically unfeasible. Also – so the argument goes – they are economically risky, since prudent and profligate states would pay the same yields, and since they add to the liabilities of core countries that still enjoy relative safety. But these objections are less impressive than they seem.
There are all sorts of ways to limit the joint guarantees’ riskiness. Total Eurobond issuance could be decided by a suitable supermajority. National constitutions could enshrine priority of Eurobond obligations. The stock of common debt could be capped, for instance along the lines of the "blue" (common) and "red" (national) bonds proposed by Bruegel, the think-tank. Debt service costs could easily be differentiated by charging states as a function of their borrowing share.
The true answer is that Europe is waiting for Germany, whose public is allergic to anything like a "transfer union" and whose leaders think the state would pay higher yields on eurobonds than Bunds.
The solution is to leave Berlin behind. Take the eurozone without Germany and its most like-minded partners – the Netherlands, Austria, Finland and Slovakia. Also exclude Greece, which in any case needs special treatment. The remaining 11 countries can create a €3,500bn bond market with macroeconomic figures only marginally worse than those for the eurozone as a whole.
There is no economic hindrance to gaining the advantages of size in this way, nor any insurmountable legal obstacles. Willing states presumably would need to sign a new treaty that was compatible with their duties in respect of monetary union as set out in the Lisbon treaty. This need not run afoul of the "no bail-out" clause: to agree to borrow jointly is not to assume another country’s debt.
That leaves the politics. It would fly in the face of Brussels etiquette for a subset of the eurozone to go it alone. But it is no less contrary to the European spirit for those willing to pool sovereignty to protect their well-being to be held up by German recalcitrance. This would be justified if Berlin had to pay for the project – but the point is that it would not.
How would such a move go down in Germany? Economically, Berlin may find its borrowing advantage eroded if investors see an alternative euro-denominated bond market that is bigger and economically attractive. Politically, voters may fear being left behind by European integration even more than they fear becoming the paymasters of Europe. If so, the power is really in the hands of the eurozone’s other members. They should use it.
The Sinister Power of the Rating Agencies
by Michaela Schiessl, Christoph Schult and Thomas Schulz - Spiegel
As the debt crisis worsens, governments fear the rating agencies, which have the power of life and death over whole economies. The Big Three helped to cause the 2008 financial crisis and are now accused of worsening the euro zone's woes. But a look behind the scenes shows that there are few alternatives to the mighty agencies.
The man who will decide on the financial health of entire countries this summer wears dark suits and square wire-rimmed glasses. He has graying hair, but his face is youthful. He speaks in a sonorous baritone tinged with a southern German accent. Yes, this ratings guru is from Germany.
His name is Moritz Kraemer and he makes a friendly and relaxed impression. But when his critics talk about Kraemer's work, they characterize him as "highly dangerous" and a "firebrand," one of those murderous men "who destabilize all of Europe." His powerful opponents include the German chancellor, the president of the European Commission and the French head of state, to name just a few.
Kraemer is the head of the European sovereign credit ratings unit at Standard & Poor's. Together with his colleagues at the rating agency, he has helped ensure that Greek government bonds are now seen as "junk" and those from Portugal and Ireland are rated only slightly better. Being saddled with such a low rating makes it far more difficult for these countries to take out additional loans.
Kraemer and his team have repeatedly downgraded Greece's credit rating over the past two years -- and each step down the rating ladder has escalated the European debt crisis. "That was really rough," Kraemer admits in a surprisingly calm manner, "but we're simply obligated to promptly inform investors of our opinion of the risks involved." Kraemer assesses the creditworthiness of countries and addresses the question of how likely it is that they will become insolvent.
Working with his colleagues, he takes hundreds of pieces of data, combines this with people's views and opinions, and finally distills this to a rating. The highest rating, AAA, has become the ultimate seal of approval. From there it goes downhill over nearly two dozen rungs to D, for default. Germany is rated AAA. Greece is hovering just above D.
Repercussions for Whole Continents
Kraemer's job is normally a rather low-profile position that is only important for bond dealers, central bankers and other financial professionals. But these are no ordinary times. The currency market is teetering on the brink of disaster and suddenly everything Kraemer does has repercussions for entire countries -- and even continents.
Ever since he and his colleagues downgraded the US government's AAA sovereign credit rating on the Friday before last, shockwaves have been reverberating around the globe. Stock markets are plunging and politicians are dashing from one crisis summit to the next. When the rating agencies give the thumbs-down, the markets are obliged to follow. Indeed, most investors have no choice but to rely on the assessments of rating agencies. Their role is enshrined in countless statutes and regulations stating that institutions such as banks, insurance companies and pension funds may only invest in companies, financial securities and government bonds that are classified as practically risk-free. If the rating falls, they are forced to sell.
This gives enormous power to this tiny sector. The agencies' verdict decides whether, and at what price, a country can raise money on the capital markets -- and if the crisis will continue to escalate. If a country is downgraded, this price rises, which exacerbates its plight -- which could in turn lead to the next downgrading.
The governments of the euro zone, which are struggling to find a way out of the crisis, are forced to watch helplessly from the sidelines as the rating agencies make life more difficult for them. When they moved to have private-sector creditors shoulder part of the burden of a new aid package for Greece, the rating agencies threatened to give Greece a "default" rating, which would have caused renewed turmoil in the markets. It took intense negotiations to hammer out a compromise.
To make matters worse, all of this power lies largely in the hands of three private companies that have their headquarters in the US: Standard & Poor's (S&P), Moody's and Fitch (which has dual headquarters in New York and London). They form the infernal trio of the financial world.
Is it acceptable for so much power to be concentrated in private companies whose objective is not a stable financial system, but their own profit? Or is this precisely what global public finances need: an independent oversight that forces governments to tighten their belts and keep their budgets in order? Americans are only beginning to truly ask these questions now. The debate has been raging in Europe for months, however. European politicians across the political spectrum have harshly condemned the agencies, arguing that they are a threat to the global financial system and that they fuel the bloodletting on the markets.
These critics contend that in the run-up to the 2008 crash, the agencies helped spark the crisis by giving far too lenient ratings to American mortgage-backed securities. Now, they say that the agencies are being too harsh -- and are thus again responsible for widespread misery.
b<>'You Need to Have a Thick Skin'
What effect does this have on Kraemer? Can he still sleep at night? And when he sees protests and street battles in Greece and Spain, does he feel partly responsible? "No," says Kraemer. "You need to have a thick skin in that respect. Countries don't have to trim their budgets for our sake, but because they have accumulated too many debts."
Kraemer's office is located on the 27th floor of the Frankfurt Main Tower. The view extends all the way to the Taunus mountain range, but Kraemer is rarely here. Instead, he spends much of his time traveling around the world. "At least once a year we send a team to every country that is rated by S&P," he explains.
Many doors are opened for Kraemer, right up to the heads of government: "Ministers brief us on policy guidelines." He says that this dialogue with the governments is part of the rating process. "We of course listen to what they have to say -- anything else would be unreasonable." At the same time, he adds, the rating agency doesn't rely too much on the plans and data presented during these visits. "We make our own analytical decisions."
'There Were No Calculation Errors'
That's hardly surprising. After all, many official figures are questionable. It's been common knowledge for some time that Greece's deficit figures were unrealistic. But how do you rate a country in such cases? "If the flow of information is too slow, we don't pull a rating out of a hat," says Kraemer, explaining that S&P withdrew its rating for Libya for this very reason. In the case of Greece, he adds, "there was, in our opinion, sufficient information available for an assessment."
Apparently, the information didn't shed a positive light on the country: In only 500 days, S&P downgraded its rating of Greece by seven notches. "The situation in Greece deteriorated much faster and more dramatically than was initially apparent," says Kraemer. "From today's perspective, though, no one would say that these steps were exaggerated."
Generally speaking, Kraemer also sees very few problems with the work of his agency -- not even with the fact that S&P initially apparently misinterpreted the US federal deficit. When analysts decided to lower the long-term sovereign credit rating for the first time from AAA to AA+, the US Treasury immediately sounded the alarm and contended that S&P had made a $2 trillion (€1.4 trillion) error in its calculations of the country's future debt. The agency asked for a few hours to think it over. It then confirmed the downgrade, but the reason had suddenly changed. Now, instead of highlighting its financial calculations, the agency cast doubt on the country's political leadership.
"There were no calculation errors," Kraemer says. "We only used an alternative scenario to examine the anticipated growth in expenditure." The reaction from politicians is not surprising, he says: "If there is bad news, they often first try to play it down and discredit the analysis." The US Treasury sees things differently: "They (S&P) have handled themselves very poorly and they've shown a stunning lack of knowledge about basic US fiscal budget math," said Treasury Secretary Timothy Geithner.
History of Past Mistakes
It wouldn't be the first mistake made by the Big Three. They have made errors time and again in the past, not only in evaluating countries, but also with companies and securities, which are their main business.
This hasn't harmed the growth of this miniscule industry, however. Ever since John Moody began to publish systematic ratings of railway bonds in 1919, things have gone mostly uphill. The more the world was dominated by numbers, the more important the ratings became. And sometimes they were completely wrong.
Shortly before the collapse of the Lehman Brothers investment bank, for example, the agencies gave it an A rating, which is in the third-best category of ratings and well within investment grade. The American International Group (AIG), which required an enormous bailout from the US government, was rated as safe. A Senate investigations panel has concluded that the rating agencies were primarily responsible for triggering the financial crisis. S&P is "the last place anyone should turn for judgments about our nation's prospects," Nobel laureate economist Paul Krugman recently wrote.
But they are continually being asked to do just that -- including by the investors around the world who stock up on US government bonds. Nearly one-third of all US debt is held abroad, mainly in China.
Hunger for Capital
The insatiable cross-border hunger for new capital is the reason why rating agencies began to play a role in the fortunes of entire nations. From the Great Depression of the 1930s until the 1970s, there was virtually no international market for government bonds. American bonds were held by American institutions. For most countries, it was impossible to acquire money abroad. It was only when developing countries began to raise money on global bond markets, and investors had to assess which countries to grant loans to, that the agencies came into play.
"There was a huge increase in ratings because international finance changed significantly and created enormous demand," says Vincent Truglia. Back in the early 1970s, Truglia was already working for large banks doing country risk analysis. He came fresh from university. They needed him not so much for his degree in economics but for his linguistic abilities. In addition to English, he also spoke German, Italian, French and even Greek.
Truglia had to fly around the world to gather information. "There was almost no data. You had to guess what debt levels were. They were considered secret," Truglia recalls. "Nobody knew how to do sovereign risk analysis. So I created a sovereign risk department." Truglia became one of the world's leading experts. He went to work for Moody's and from 1996 to 2008 served as the global head of the agency's Sovereign Risk Unit, which was responsible for evaluating over 100 countries.
Today, Truglia is a principal in an investment firm in Manhattan. It only takes about 45 minutes to travel by ferry to the small coastal town in New Jersey where he lives, only 50 meters (165 feet) from the beach, in a four-storey house full of heavy, leather furniture. Back then, when he was a Moody's man, he could meet anyone, including "presidents, heads of government and heads of central banks," he says. "But most governments came to us," he explains. They came to New York, where the agency has its headquarters.
"Access to people was remarkable," he says. "But in all those decades I never got a single thing from a government that was not publicly available." Rather, he says, governments explained their point of view.
'You Can't Allow Yourself to Get Emotionally Attached'
Did they also perhaps mention the consequences that a downgrade could have for millions of people? Truglia says he had "never given it a thought or consideration." He says that you can't allow yourself to get emotionally attached to a rating. "Ratings do not judge whether a country is good or bad. They just assess creditworthiness." This isn't decided by a large team of experts, but rather just a handful of people: "When I left, there were 22 or 23 of us." Each lead analyst works with a junior analyst at his side and handles 10 to 12 countries.
At Moody's, ratings are not determined by the country analysts alone, but by a more or less spontaneously assembled committee that varies in size and membership -- and usually consists of eight to 15 analysts. The only ground rule is that the majority of participants have to be responsible for a region that differs from the one where the country being assessed is located. In the end, a vote is held and decisions are passed by a simple majority.
The criteria for classifying a country are also far from clear at Moody's. There is no uniform basis for decisions. "It will vary from country to country," says Truglia. "When it comes to an emerging market, you have to pay close attention to current account balances, debt service ratios, international reserves, the net liquidity position of the country and its banks, and exchange rate policies, to name just a few aspects."
It's another story altogether when rating industrialized countries: "The more important drivers for advanced industrial countries were always the domestic numbers, what was the nature of general government debt," he says.
Screaming and Yelling
But which criteria are ultimately decisive? "The rating committees were going on for hours, screaming and yelling at each other with passion" says Jerome Fons, who also once had a position high up in the hierarchy at Moody's. Until 2007, his job included serving as chair of Moody's Standing Committee on Rating Symbols and Practices, which established the methodology. Now, risk consultant Jules Kroll has hired him to help establish a new agency.
Most other rating committees would need maybe half an hour for their meetings, Fons recalls. "But the sovereign rating committees would be these calamitous affairs." This was despite the fact that country ratings don't bring in much money for the agencies: Each country pays between €50,000 and €200,000 for a rating. Usually these are developing and emerging countries. Western industrialized nations such as Germany and the US don't have to pay anything, but they are powerless to influence the ratings.
Fons says that there exists a clear methodology for many rating categories that is "highly modeled and technical," with defined variables, ratios and formulas. He says that he told them he also wanted to see a clean methodology from them. But they weren't able to agree on anything, he says.
This is precisely what is lacking in the agency's decisions: confirmability. That, at least, is the opinion of Michel Barnier, the EU commissioner responsible for financial services. "We need more transparency and tighter regulation of the agencies," says the 60-year-old bureaucrat. He is sitting in the back of his official limousine on the way from Strasbourg to the southwestern German town of Schwanau, juggling two iPhones and ranting about the rating agencies.
He says that the agencies are "one of the reasons for the crisis," and that they "have failed in their mission." The EU commissioner welcomes plans to establish a competing European agency. For over a year, Roland Berger, a German consulting firm, has been lobbying banks, insurance companies and financial service providers to support the plan. But setting up the necessary analytical structures is expensive, and €300 million will have to be raised for it to become reality.
The proposal has not been enthusiastically received by either the financial industry or experts. After all, it is highly probable that such a European agency would become a political instrument -- or at least be perceived as one by financial markets, and not be taken seriously as a result.
Driving Up the Fever
The case of Greece has shown just how much Europe's political leadership is willing to ignore reality when it suits their purposes: They have striven to delay the country's bankruptcy as long as possible and blatantly demanded that the agencies back them up with sympathetic ratings.
Now, by taking a hard line with the US, Standard & Poor's has proven that it won't allow politicians to dictate anything. European Commissioner Barnier also wants a new agency to be free of any political influence: "It cannot be a public agency." He says it's equally important that the inspectors themselves be inspected, in other words, that there is clear regulation of existing agencies. This will be the responsibility of the Paris-based European Securities and Market Authority (ESMA), which was established at the beginning of this year. Barnier says that's not enough, though. He wants to submit a draft law with tighter regulations in November.
Brussels wants to force the agencies to disclose their data and methods. The ratings should "be reduced to the essentials," he says. Barnier is even considering having ratings banned for countries that are drowning in debt and currently benefiting from a bailout package. He says that it is "not normal and not fair when countries are downgraded while they are being monitored by the European Central Bank and the International Monetary Fund."
He has a nice analogy for the excessive power of the agencies: "If the thermometer is driving up the fever, something is wrong." But nothing can be sold on the bond market without some kind of rating system. After all, a total lack of any rating is primarily a sign to investors that they should avoid something like the plague.
Too Closely Linked
The main problem is that, for far too long, lawmakers themselves have promoted this link between ratings and every form of financial investment. As early as the 1930s, in response to the Great Depression, policymakers began to integrate ratings into financial market regulations -- as a security measure to primarily force large financial institutions to make less risky investments.
This idea has long since become an accepted practice everywhere. For decades, lawmakers around the world have made rating certificates an integral part of an increasing number of financial market regulations. Their importance has steadily grown, but the accuracy of the ratings has not always kept pace with developments.
The most obvious solution -- perhaps even the only solution -- to break the power of the agencies without also destabilizing the entire financial system would be to remove the rating stipulations from the regulations. This would allow investors to seek alternative sources of information without being bound, for better or for worse, to the agencies' opinions.
Surprisingly, support for this idea comes from the Big Three: "It wasn't our desire for the ratings to be so tightly entwined with regulations," says S&P's Moritz Kraemer. "Politicians have forced this importance upon us. We perceive it as a burden, one that our ratings weren't designed to handle."
Switzerland Increases Efforts to Weaken Franc With Flood of Bank Liquidity
by Simone Meier and Klaus Wille - Bloomberg
The Swiss central bank toughened its fight to counter what it called a "massively overvalued" franc by boosting liquidity. The franc gained.
The Swiss National Bank decided to expand liquidity to the money market, expanding banks’ sight deposits to 200 billion francs ($253 billion) from 120 billion francs, it said in an e- mailed statement from Zurich today. It will also continue to repurchase outstanding SNB Bills and use foreign-exchange swap transactions to create liquidity.
The franc has been pushed to a record against the euro, reflecting investor concern that the euro region’s fiscal crisis may continue to worsen. While the SNB trimmed borrowing costs to zero on Aug. 3, the currency continued to appreciate. SNB Vice President Thomas Jordan has said policy makers are assessing "a whole range of options" to protect the economy.
"Markets are relatively disappointed," said Caesar Lack, head of economic research at UBS AG’s Wealth Management Research in Zurich. "They hoped for an intervention or a currency peg. We didn’t share that assessment, however."
Tax the super-rich or riots will rage in 2012
by Paul B. Farrell - MarketWatch
6 reasons we can’t stop coming economic meltdown
What a year. Rage in London, Egypt, Athens, Damascus. All real. Just a metaphor in the new "Planet of the Apes" film? No, much more. Warning: More rage is dead ahead. Across our planet a new generation is filled with rage. High unemployment. Raging inflation. Dreams lost. Hope gone. While the super -rich get richer and richer.
Listen to that hissing: The fuse is rapidly burning, warning us. Wake up before the rage explodes in your face. This firestorm is endangering America’s future. From forces outside, yes. But far more deadly, from deep within our collective psyche. We have lost our moral compass. We are self-destructing.
Crackpot warning? No. This warning comes from the elite International Monetary Fund. A recent IMF report looked at "the causes of the two major U.S. economic crises over the past 100 years, the Great Depression of 1929 and the Great Recession of 2007," writes Rana Foroohar, an economics editor at Time magazine.
"There are two remarkable similarities in the eras that preceded these crises. Both saw a sharp increase in income inequality and household-debt-to-income ratios." And in each case, "as the poor and middle-class were squeezed, they tried to cope by borrowing to maintain their standard of living."
But the rich "got richer, by lending, and looked for more places to invest, bidding up securities that eventually exploded in everyone’s face. In both eras, financial deregulation and loose monetary policies played roles in creating the bubble. But inequality itself — and the political pressure not to reverse it, but to hide it — was a crucial factor in the meltdown. The shrinking middle isn’t a symptom of the downturn. It’s the source of it." Today the consequences of the meltdown still haunt us — there’s more to come.
The next bubble
There’s a new bubble blowing. No one can stop it ... soon it will explode.
Get it? There’s enormous "political pressure not to reverse" inequality till it "explodes in our faces." We deny the inequality between rich and the other 99%. The rich are addicts. More is never enough. They thrive on greed, blind to the needs of others. Worse, they have no commitment to America as a nation. From Forbes billionaires and signers of "no new taxes" pledges, to Mitch McConnell’s un-American willingness to sabotage the economy to deliver on his main promise to make Obama a one-term president.
Yes folks, the new "Rise of the Planet of the Apes" film delivers a powerful warning paralleling the IMF red flags. Listen to reviewer Zaki Hasan in HuffPost. Here’s the scenario. What’s ahead for America as the inequality gap gets bigger, the job market stagnates, inflation rages, a double-dip recession nears. Hasan’s vision goes beyond metaphor. We see a psychological profile of America as an addict lost in an addiction. And like all addicts, we cannot see, nor stop, our self-destructive behavior:
"The Apes series has always been about self-inflicted wounds — the idea that man’s unquenchable hubris inevitably leads to catastrophic consequences both for himself and those around him, whether manifested through cruelty to animals or cruelty to himself." In the new film, our world is facing "the twin threats" of genetic engineering and a super-virus. But the central theme remains: "Man’s downfall comes as a result of his own actions."
The original "Planet of the Apes" went deeper, speaking more to America’s fatally flawed mind: "Beware the beast Man, for he is the Devil’s pawn." In this early scene, Dr. Cornelius, the anthropologist, an orangutan, is reading aloud from the ancient sacred scrolls of the Apes: "Alone among God’s primates, he kills for sport or lust or greed." Yes, that reminds us of Goldman’s war to dominate the great Wall Street jungle.
He keeps reading from the scrolls: "Yea, he will murder his brother to possess his brother’s land. Let him not breed in great numbers, for he will make a desert of his home and yours. Shun him; drive him back into his jungle lair, for he is the harbinger of death."
Yes, evolution is reversing. Here a prophecy comes true. The Apes knew our brains were saboteurs, destroying our rightful place at the top of the jungle’s food chain: "Man is a nuisance. He eats up his food supply in the forest, then migrates to our green belts and ravages our crops. The sooner he is exterminated, the better." Warning: The rage is sweeping London, Damascus, Tripoli, the spreading Sahara desert. Is America next?
Tax the super-rich, or revolution will overrun America next
Yes, tax the super-rich. Tax them now, before the other 99% rise up, trigger a new American Revolution, another meltdown, a new Great Depression. Historically, revolutions build over long periods, bubbles growing to critical mass. Then, "something happens." Suddenly. Unpredictably. A flashpoint triggers ignition. Nobody saw it coming in Egypt. A suicide in a remote village uploaded on a young Google executive’s Facebook page. Goes viral, raging out of control. Cannot be stopped. So think hard about these six warnings blowing a new mega-bubble that will soon explode in our collective faces:
1. Warning: High unemployment is a global ticking time bomb
An earlier special report in Time, "Poor vs. Rich: A New Global Conflict," warns that a "conflict between two worlds — one rich, one poor — is developing, and the battlefield is the globe itself." Just 25 developed nations with 750 million citizens "consume most of the world’s resources … enjoy history’s highest standard of living." But now they face 100 poor nations with 2 billion people, many living in poverty, all demanding "an ever larger share of that wealth." A British leader calls this a "time bomb for the human race."
2. Warning: Tax cuts for the rich increase youth unemployment
In a New York Times column, Matthew Klein, a 24-year-old Council on Foreign Relations researcher, saw the parallel between the 25% unemployment among Egypt’s young and the 21% for young Americans: "The young will bear the brunt of the pain" as governments rebalance budgets. "Taxes on workers will be raised, spending on education will be cut while mortgage subsidies and entitlements for the elderly are untouchable." And more tax cuts for the rich.
3. Warning: Rich get richer on commodity inflation, poor get angrier
USAToday’s John Waggoner warned: "Soaring food prices send millions into poverty, hunger." The "rise in food prices means a descent into extreme poverty and hunger, warns the World Bank." One Pimco manager warns that commodity inflation exposes "the underlying inequalities and issues related to the standard of living that boil beneath the surface."
4. Warning: The super-rich are blinded by their addiction to money
In "Free Lunch: How the Wealthiest American Enrich Themselves at Government Expense (And Stick You with the Bill)," David Cay Johnston warns that the rich are like addicts, and to "the addicted, money is like cocaine, too much is never enough." Recent data: 300,000 Americans in "the top tenth of 1% of income had nearly as much income as all 150 million Americans who make up the economic lower half of our population."
5. Warning: Politicians are corrupted by this super-rich addiction to greed
In "Washington’s Suicide Pact," Newsweek’s Ezra Klein warns: "Congress is careening toward the worst of all worlds: massive job losses and an exploding deficit." And the debt-ceiling drama just made things a lot worse. Millions of jobs were lost during Bush years, his wars, tax cuts for the rich. Yet, today the GOP is in total denial of that legacy, blinded by an obsession to destroy Obama’s presidency, no matter the consequences.
6. Warning: Soon the revolutionaries will rage, then dominate ‘Third World America’
Yes, we are ripe for a surprise revolution. In "Third World America" Arianna Huffington warns: "Washington rushed to the rescue of Wall Street but forgot about Main Street." Now Bernanke’s promise of cheap money through 2013 is just one more "free lunch" to the richest 1%. Meanwhile, "one in five Americans unemployed or underemployed. One in nine families unable to make the minimum payment on their credit cards. One in eight mortgages in default or foreclosure. One in eight Americans on food stamps. Upward mobility has always been at the center of the American Dream … that promise has been broken… The American Dream is becoming a nightmare."
Wake up folks. Super-rich addicts are destroying the American Dream for everyone. They’re destroying the American economy. They don’t care about you. Yes, they hear the ticking time bomb. They’re stockpiling cash. Don’t say you weren’t warned. The IMF sees a new collapse sweeping across the planet. Open your eyes. You’re not watching a film. This is not a metaphor. Plan now for the revolution, class warfare, market crash, economic collapse, plan for another depression.
Daylight Robbery, Meet Nighttime Robbery
by Naomi Klein - The Nation
I keep hearing comparisons between the London riots and riots in other European cities—window smashing in Athens or car bonfires in Paris. And there are parallels, to be sure: a spark set by police violence, a generation that feels forgotten.
But those events were marked by mass destruction; the looting was minor. There have, however, been other mass lootings in recent years, and perhaps we should talk about them too. There was Baghdad in the aftermath of the US invasion—a frenzy of arson and looting that emptied libraries and museums. The factories got hit too. In 2004 I visited one that used to make refrigerators. Its workers had stripped it of everything valuable, then torched it so thoroughly that the warehouse was a sculpture of buckled sheet metal.
Back then the people on cable news thought looting was highly political. They said this is what happens when a regime has no legitimacy in the eyes of the people. After watching for so long as Saddam and his sons helped themselves to whatever and whomever they wanted, many regular Iraqis felt they had earned the right to take a few things for themselves. But London isn’t Baghdad, and British Prime Minister David Cameron is hardly Saddam, so surely there is nothing to learn there.
How about a democratic example then? Argentina, circa 2001. The economy was in freefall and thousands of people living in rough neighborhoods (which had been thriving manufacturing zones before the neoliberal era) stormed foreign-owned superstores. They came out pushing shopping carts overflowing with the goods they could no longer afford—clothes, electronics, meat. The government called a "state of siege" to restore order; the people didn’t like that and overthrew the government.
Argentina’s mass looting was called El Saqueo—the sacking. That was politically significant because it was the very same word used to describe what that country’s elites had done by selling off the country’s national assets in flagrantly corrupt privatization deals, hiding their money offshore, then passing on the bill to the people with a brutal austerity package. Argentines understood that the saqueo of the shopping centers would not have happened without the bigger saqueo of the country, and that the real gangsters were the ones in charge.
But England is not Latin America, and its riots are not political, or so we keep hearing. They are just about lawless kids taking advantage of a situation to take what isn’t theirs. And British society, Cameron tells us, abhors that kind of behavior.
This is said in all seriousness. As if the massive bank bailouts never happened, followed by the defiant record bonuses. Followed by the emergency G-8 and G-20 meetings, when the leaders decided, collectively, not to do anything to punish the bankers for any of this, nor to do anything serious to prevent a similar crisis from happening again. Instead they would all go home to their respective countries and force sacrifices on the most vulnerable. They would do this by firing public sector workers, scapegoating teachers, closing libraries, upping tuitions, rolling back union contracts, creating rush privatizations of public assets and decreasing pensions—mix the cocktail for where you live. And who is on television lecturing about the need to give up these "entitlements"? The bankers and hedge-fund managers, of course.
This is the global Saqueo, a time of great taking. Fueled by a pathological sense of entitlement, this looting has all been done with the lights left on, as if there was nothing at all to hide. There are some nagging fears, however. In early July, the Wall Street Journal, citing a new poll, reported that 94 percent of millionaires were afraid of "violence in the streets." This, it turns out, was a reasonable fear. Of course London’s riots weren’t a political protest. But the people committing nighttime robbery sure as hell know that their elites have been committing daytime robbery. Saqueos are contagious.
The Tories are right when they say the rioting is not about the cuts. But it has a great deal to do with what those cuts represent: being cut off. Locked away in a ballooning underclass with the few escape routes previously offered—a union job, a good affordable education—being rapidly sealed off. The cuts are a message. They are saying to whole sectors of society: you are stuck where you are, much like the migrants and refugees we turn away at our increasingly fortressed borders.
David Cameron’s response to the riots is to make this locking-out literal: evictions from public housing, threats to cut off communication tools and outrageous jail terms (five months to a woman for receiving a stolen pair of shorts). The message is once again being sent: disappear, and do it quietly.
At last year’s G-20 "austerity summit" in Toronto, the protests turned into riots and multiple cop cars burned. It was nothing by London 2011 standards, but it was still shocking to us Canadians. The big controversy then was that the government had spent $675 million on summit "security" (yet they still couldn’t seem to put out those fires). At the time, many of us pointed out that the pricey new arsenal that the police had acquired—water cannons, sound cannons, tear gas and rubber bullets—wasn’t just meant for the protesters in the streets. Its long-term use would be to discipline the poor, who in the new era of austerity would have dangerously little to lose.
This is what David Cameron got wrong: you can't cut police budgets at the same time as you cut everything else. Because when you rob people of what little they have, in order to protect the interests of those who have more than anyone deserves, you should expect resistance—whether organized protests or spontaneous looting. And that’s not politics. It’s physics.
China feels after-effects of economic stimulus
by David Pierson - Los Angeles Times
Housed in a five-story glass cube with a multiplex cinema and western brands like Gap and Sephora, the Care City Shopping Mall in southwest Beijing has all the ingredients for a great retail experience — except actual shoppers.
The visitors milling around on a recent muggy afternoon appeared most interested in the free air-conditioning and the food court. Salesclerks had little to do but nap, yawn or fiddle with their cellphones. "It gets better on weekends," said a hair-clip vendor flipping through a magazine.
Opened last year amid a nationwide construction frenzy, this sleepy mall may ultimately prove successful. But for now, the project shows why China won't be spending big in the event of another global recession: It's still paying for the last one.
To shield its economy from the fallout of the 2008 financial crisis, Beijing orchestrated a massive economic stimulus. It invested billions in infrastructure projects and encouraged banks to open the credit spigot to fund construction of apartments, office towers and retail centers.
The strategy catapulted China past Japan to become the world's second-largest economy; its growth helped keep the global slump from deepening. China splurged on Australian iron ore, Chilean copper and Saudi Arabian oil to fuel its construction boom. While the U.S. economy was mired in recession, with negative year-over-year growth in gross domestic product in 2008 and 2009, China's economy expanded by more than 9% annually over the same period.
But like taking steroids, there were side effects. The burst of credit has fueled inflation, which is proving painful for average Chinese. Soaring prices for pork, vegetables and other staples have authorities worried about the potential for social unrest. So has a property bubble that has put home ownership out of reach of millions, exacerbating the gulf between rich and poor.
Meanwhile, the nation's debt levels have reached new heights. A national audit released in June found outstanding loans to local governments, among the biggest players in the building binge, amounted to $1.65 trillion, or nearly a third of China's GDP.
There are also serious questions about how much new investment China needs. Although the construction blitz created millions of short-term jobs, there is slack demand for some of the resulting projects. Apartment towers in some cities are largely empty, as are malls and skyscrapers in others. China's steel industry is saddled with so much extra capacity that it has been accused of dumping product overseas.
"If all this investment remains unprofitable for the long term, there will be serious risk to the banking system," said Yi Xianrong, a researcher at the Chinese Academy of Social Sciences, a government think tank. "The problem is it's become a tool for local government officials to compete and a hotbed for corruption."
Faced with these risks, China has been trying to gradually cool its economy by hiking interest rates and tightening lending standards. Signs of a slowdown are already emerging in lower auto sales, factory closures and scuttled real estate deals.
But the big concern inside and outside of China is a so-called hard landing. If Europe and the U.S. fall back into recession and demand for Chinese-made goods declines, Beijing won't be able to juice its economy like it did the last time around.
"It's a lesson on the limits of stimulus. The more you do it, the less and less you'll get out of it," said Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management in Beijing. "You've already tapped all the good investments out there. A second time, you'd just be shoveling money out the door.... It will just compound their problems."
The best solution for China, analysts said, is to turn its own citizens into shoppers whose buying power can drive the economy forward. Personal consumption accounts for about 40% of GDP in China, compared with about 70% in the U.S.
But closing that gap won't be easy, given that China's development model favors industry over consumers.
Beijing has deliberately kept the value of the country's currency, the yuan, weak to keep its exports cheap and give Chinese factories an edge over foreign competitors. But a weak currency exacerbates inflation and erodes the buying power of Chinese households.
Consumption in China is growing — at a robust 8% a year. Crowds at Apple stores and Pizza Hut outlets in the country's biggest cities point to pent-up demand. China's newly minted millionaires are attracting luxury brands including Porsche and Cartier.
Yet China's per capita annual income of $7,600 ranks below Angola and Albania. Although disposable income is rising, most households remain obsessed with saving because the social safety net is so flimsy. Individuals must shoulder most of the expense for their own healthcare, education and retirement.
A recent uptick in the value of the yuan against the dollar has some observers speculating that China is moving more aggressively to fight inflation and ease trade tensions with the West.
The country may be better able to weather any global recession when ordinary citizens such as Cheng Yaohua start opening their wallets at the Care City Shopping Mall instead of using it as a place to cool off on summer afternoons.
A migrant from central Henan province, Cheng earns $300 a month. He admired the styles on display in the window of the Gap store. But he shops in flea markets instead.
"The clothes over there cost a tenth of my monthly salary," said Cheng, a 22-year-old cellphone salesman, nodding at the multi-story Gap. "After I paid for rent and food, I'd have nothing left if I bought something there."
Chinese Hunger for Corn Stretches US Farm Belt
by Scott Kilman and Brian Spegele - Wall Street Journal
China's struggle to meet the growing demands of its middle class is fueling a sudden surge in demand for corn, sending vast ripples across the U.S. farm belt and potentially upending the grain's trade flows around the world.
China's need for corn—which forms the basis of sweeteners, starch and alcohol as well as feed for livestock—was on stark display in July when the nation ordered 21 million bushels of U.S. corn in one hit, more than the U.S. government thought the country would buy in a year. The purchase surprised the market and came as an intense July heat wave was shrinking the potential size of the Midwest crop. China bought another 2.2 million bushels of U.S. corn early this month.
Corn prices, which have nearly doubled over the past year, climbed another 1% Tuesday. The corn futures contract for December delivery at the Chicago Board of Trade rose 7.5 cents to settle at $7.275 a bushel. China's influence on corn demand underlines how its fast-growing economy is reshaping global commerce. The nation, with its growing population of 1.3 billion people, has been a major player in commodities markets in recent years.
China already buys about a quarter of all U.S. soybeans. But its sudden demand for corn caught many off guard. China, which hadn't been a net importer of corn for 15 years until last year, has a vast corn belt of its own and for many years strove to be self-sufficient. And because China is secretive about the levels of commodities it holds in its strategic reserves, the rest of the market can only guess what its supply needs are.
Many attribute the larger-than-expected demand to a growing middle class that is changing its tastes more quickly than anticipated. As the Chinese population becomes wealthier, for example, it is eating more pork. And the Chinese government is pushing its farmers to adopt Western methods of raising their pigs, including feeding them more corn. Citizens are also slurping up juices and other products that include corn-based sweeteners: Coca-Cola Co. said that its volume in China spiked 21% in the second quarter.
Ma Liangfeng, a 69-year-old retired engineer living in Shanghai, says the array of packaged products lining store shelves was "unthinkable" just 30 years ago. Back then, families had to reserve staple meats like pork for special occasions.
The changes have created big shifts throughout the food chain, including U.S. companies and farmers putting in place infrastructure that will enable massive shipments of grains and other products to Asia.
Many U.S. traders and economists believe the recent purchases signal U.S. sales will grow so rapidly that China could become the biggest foreign buyer of U.S. corn within five to 10 years, dethroning Japan, which bought about 610 million bushels of U.S. corn last year. "We think this is the inflection point," says Brian Schouvieller, a grain marketing executive at CHS Inc., the U.S.'s biggest farmer-owned cooperative. "We believe that, from now, China is going to be a steady buyer."
To be sure, Western executives have been wrong before about China's appetite for foreign corn. A sudden surge of Chinese buying in the mid-1990s sparked talk of a trade boon for U.S. farmers, but it was a blip. While China's middle class is far bigger now, and its gross domestic product grew a blistering 9.5% in the second quarter, economists predict turbulence. Much of China's breakneck growth is fueled by government-led investment, not entrepreneurs, and China's housing market appears to be overheating.
Still, the threat of instability might well work in the favor of U.S. farmers. China's ruling Communist Party worries in particular about food inflation, which could put social stability at risk. In an effort to preserve domestic supplies, the government has already stopped construction of factories that convert Chinese corn into ethanol fuel. But rising pork prices, thanks in part to higher demand and the rising cost of feed, accounted for more than a quarter of the 6.5% jump in China's consumer price index in July from a year earlier.
In the eastern province of Zhejiang, pig farmer Qian Fanghua's operation has grown to about 2,000 animals today, from less than 200 pigs four years ago. Mr. Qian's hogs require about 4,000 kilograms of corn-based feed each day. His growing farm, and others dotted around the country, is one of the reasons domestic corn prices have climbed so high as to make U.S. corn seem affordable.
This year, China is expected to use about five billion bushels of corn to make feed, a growth of 20% from five years ago, according to the U.S. Department of Agriculture. The USDA now forecasts that China will import 79 million bushels of corn from all sources for the 2011-2012 crop year. But some grain traders are much more optimistic. They said in interviews that they think China wants to buy 200 million bushels of corn from the U.S. alone.
U.S. companies are already investing with China's ever-expanding appetite in mind. Decatur, Ill., grain exporter Archer-Daniels-Midland Co. said in July that it would build a shuttle-loading grain elevator near St. Cloud, Minn., with the capability of loading trains that are 110 cars long. And Minneapolis-commodity processing giant Cargill Inc. is expanding its corn sweetener factory in Pinghu.
A port terminal in Longview, Wash., scheduled to open this fall is the nation's first in at least two decades for loading ocean-going ships with grain. Grain giant Bunge and two Asian partners invested $200 million to build it. "The Asia market is the fastest growing market in the world," says Larry Clarke, the venture's chief executive. "We're working to get our infrastructure ahead of it."
Biotechnology giant Monsanto Co. has had talks about deepening ties with Sinochem, the state-owned chemicals conglomerate with which it has had a corn seed-breeding venture in China since 2001.
Ron Litterer, a Greene, Iowa, farmer, says he's paying close attention to China's growth and while he hasn't yet decided to increase his corn planting, that could change. Mr. Litterer raises 1,000 acres of corn and 500 acres of soybeans. "It just makes sense to think they will have to depend more and more on [food] imports," says Mr. Litterer.
For now, the amount of Chinese business confirmed by Washington is relatively small alongside America's total foreign sales. The U.S. exports about 1.8 billion bushels of corn globally. While nobody in the West knows for sure how much corn China will want to import and how soon, the possibilities fascinate grain traders. According to Michael Swanson, a Wells Fargo & Co. economist, doubling of per-capita meat consumption in China so that it matches the U.S. level would require the country to use an additional 24 billion bushels of corn, or about twice what the U.S. produces in a year.
"There's not enough grain in the world for them to do that," Mr. Swanson says. "But just moving in the direction is staggering to consider."
UK unemployment jumps as economy falters
by Heather Stewart - Guardian
• Nearly 2.5 million people unemployed
• Benefit claimants rise to 1.56 million
• Number of women out of work highest since 1988
• Record number are self-employed or working part time
• Youth unemployment pushes back towards 1 million
Britain's lacklustre economic recovery is taking its toll on the labour market, with unemployment increasing by 38,000 over the three months to June - the largest jump since spring 2009, when the UK was in recession.
Official figures released on Wednesday revealed that 2.49 million people were out of work on the government's preferred International Labour Organisation measure. The number of people claiming jobseeker's allowance also rose by 37,100, to 1.56 million in July.
With GDP growth sliding to just 0.2% in the second quarter of the year, analysts had been warning for some time that weaker growth and fragile confidence could deter firms from hiring new workers and lead to a renewed rise in unemployment. "Business confidence clearly needs to rise before employment growth will pick up again, but at the moment the surveys suggest that companies remain worried about economic growth both at home and abroad and are generally erring towards cost-cutting rather than expansion," said Chris Williamson, chief economist at Markit.
Women continue to bear the brunt of layoffs, many of which are concentrated in the public sector. Of the 38,000 increase in unemployment over the quarter, 21,000 were women. The number of women out of work is now 1.05 million, the highest since the spring of 1988. A record number of people – 1.26 million – are now self-employed or working part-time, not because they want to, but because they cannot find a full-time job. This total increased by 83,000 over the three months to June.
For those who have managed to stay in work, there was some evidence that pay deals are starting to creep up, with average earnings growing at an annual rate of 2.6%, up from 2.3% in the three months to May. Youth unemployment is also rising again, after dropping in recent months, the Office for National Statistics revealed. A total of 949,000 16 to 24-year-olds, or 20.2% of the young workforce, were unemployed. Excluding those in full-time education looking for a job, the total is 671,000, or 18.8% of the workforce.
Britain's Society Broken by Greed
by Thomas Hüetlin - Spiegel
The blazing infernos which took hold in the UK's biggest cities have shocked British society. It wasn't a desire to protest that drove the brutal looters onto the streets, but pure consumer greed. Bankers, politicians and media moguls have made this greed socially acceptable.
Ashraf Haziq is 20 years old, a student from Malaysia. He was fasting during Ramadan and had the misfortune to be cycling on his bike in Barking, an area in East London, last week. First there was a gang of kids. They threatened him with knives, broke his jaw and stole his bike. As he sat dazed on the sidewalk, staring at the blood that was dripping from his face onto the ground, the next gang appeared. Its members were older; some were masked. One helped him to his feet and supported him, but this supposed aid was merely a diversion as another helped himself to the contents of the injured man's rucksack at the same time; throwing away some of what he stole and pocketing the rest. He grinned broadly, prancing with joy.
It was pictures like these that disproved the theory that the riots were protests, or a youth rebellion like those that have taken place in other European countries against government austerity packages.
It was nothing of the sort. The events which unfolded on the streets of London and other English cities last week were brutal and full of an enthusiasm to inflict the greatest possible damage, even on mere passers-by who had the bad luck to get in the way. It was as if the gang from Stanley Kubrick's classic film "A Clockwork Orange" had left the screen and become real, only this time armed with BlackBerrys.
The victims included, for example, three sons of Pakistani immigrants who had stood on a sidewalk in Birmingham in order to protect a friend's gas station, but who were then mown down by a car and killed. There were other victims, like the 68-year-old man in a plaid shirt who had tried to put out a fire started by rioters and who was subsequently so badly beaten that he later died from his injuries. Then there was the old black woman who, standing on a litter-strewn East London street at night with her back to a wall smeared with obscene graffiti, scolded the rioters: "You lot piss me the fuck off! I'm ashamed to be a Hackney person. 'Cause we're not all gathering together and fighting for a cause -- we're running down Foot Locker."
A Sale from Hell
In other words, it was like a sale from Hell. The greedy paid not in pounds, but with the destruction of their own neighborhoods.
Above all, the rioters zeroed in on brand name products, and if they could attack a policeman or two while they were at it, all the better. "Everyone up and roll to Tottenham," someone calling themselves "English Frank" wrote on Twitter. "Fuck the 5-0 (police). I hope 1 dead tonight (sic)." Meanwhile, someone called "Sonny Twag" tweeted: "Want to roll Tottenham to loot. I do want a free TV. Who wudn't (sic)."
No sooner tweeted than done. But the looting could get even more expensive than that. In the London borough of Camden, a mob broke through the windows of an O2 shop and stole mobile phones, singing as if they were at a soccer match: "O2, O2, O2, O2." In Manchester, phone store T-Mobile, clothes shops French Connection and Miss Selfridge, department store Marks and Spencer, jeweller Swarovski and the newly-opened boutique owned by former Oasis singer Liam Gallagher were all looted. In Clapham in South London, an entire shopping center was taken apart -- the only business that was spared was a bookstore. Not because they wanted to protect the books, but because they had absolutely no interest in them.
People with a romanticised ideal of revolution couldn't believe their eyes. This was not "destroy what is destroying you", but the Marxist idea of commodity fetishism in its most toxic form. Some even tried on looted clothes before stuffing them into their designer bags.
As the inferno raged, politicians, the media and commentators rubbed their eyes in disbelief. At the same time, there were critics who had heard David Cameron declare, before he became Prime Minister, that Great Britain in the first decade of the new millennium had become a "broken society." Once he was in power, however, he didn't want to know.
Education grants for children from low-income families -- abolished. Also abolished in many areas were youth centers and help centers for the unemployed and pregnant. In the Lewisham area alone, five libraries were closed. What happens next? Where does it end? What is the limit? There is none. In the London borough of Haringey, which includes Tottenham, 75 percent of funding for youth services will be cut over the next three years.
So can the " broken society " be repaired? There is an awful lot to be done. Great Britain, a country where the gap between rich and poor is wider than almost anywhere else in the Western world, can still be a miserably tough place to live, especially for the children of the poor. According to a UNICEF study, the UK is ranked as the most child-unfriendly of 21 major industrialized nations. There are 3.4 million children living below the poverty line in Britain, a seriously distressing number. And for anyone who has the misfortune of growing up in a bad neighborhood, beatings and assaults are merely part of everyday life. Some 60 percent of children between the ages of 10 and 15 become a victim of crime at least once.
"Fists to Knives and Knives to Guns"
The average age of those for whom such a violent confrontation is deadly has declined form 24 to 19 in recent years. The escalation of violence among teenagers in inner cities is "like evolution", according to one veteran gangster from Nottingham, "from fists to knives, from knives to guns."
The causes are inane. Often it is to do with drugs, a cell phone or simply a pair of sneakers. This dramatically lower threshold for violence can affect anyone including innocent bystanders, like for example the young man who found it unacceptable that youths had thrown a half-eaten chocolate bar into his sister's car. He confronted them, and was promptly stabbed.
The list of such incidents goes on and on, and it is hardly surprising that the British police already advise people to avoid confronting violent youths. Those who do it anyway, like London writer Andrew Anthony, not only suffer the rage of the thugs attacking them, but also the anger of other passers-by. Anthony had intervened when he saw ten girls attacking the face of another youth with a broken bottle. When the gang had taken flight, he asked another bystander why they had not done anything. The answer came back: "Leave me alone, you pompous arse. Why should I get involved? This whole thing has nothing to do with me."
"No One has Ever Given Me a Chance"
This miserable life of drugs, loitering and weapons in neighborhoods which were devastated by the policies of Margaret Thatcher in the 1980s and never fixed by Tony Blair or Gordon Brown, is the fate of those dubbed "NEETs" in the UK. It stands for "not in education, employment or training", and there are about 1.2 million people who fit the description. They rule their local areas under the law of the jungle, with a deep sense of uselessness in a world where almost every recreational activity costs money; money which they don't have.
Louis James is one of these "NEETs", and reporters from the New York Times spoke to him after he had stolen a pullover worth 120 pounds during the looting. James, 19, lives in North London. The state pays his rent, and he gets 77 pounds jobless benefit every two weeks. He has given up looking for work, he left school at 15 and has only been able to read for the past three years. His mother has barely enough money for herself and her other children, and his father, a heroin addict, is dead. "No one has ever given me a chance; I am just angry at how the whole system works," James said. "They give me just enough money so that I can eat and watch TV all day."
The values that once made Britain an example for the rest of the world were never instilled in James: personal responsibility, individuality, common sense, stoicism, understatement, discipline. Who could have taught him them? His parents? His friends? The elites, who shut themselves off in expensive private schools, then get 70 percent of the well-paid jobs and would probably prefer to visit a leper colony than Tottenham?
The true public tone of the past 30 years has been set by one man: Rupert Murdoch, the Australian media mogul who has shaped modern Britain more than any British politician, businessman or intellectual. Murdoch and Margaret Thatcher together broke the power of the trade unions in the 1980s and forged ahead with the liberalization of the markets. Flanked by the resurgent financial sector in the City of London, Murdoch made greed socially acceptable and turned the Britons into a nation of shoppers in which only one thing counted: "Loads of Money."
Everyone Afraid of Murdoch
Everyone was swept up in this loud, raucous consumer culture. The bankers, of course, with their yachts and helicopter landing pads, but many politicians as well, as the scandal over MP expenses a couple of years ago showed. Labour MPs claimed expenses for glittering toilet seats and silk pillows. It led to the first resignation of a Speaker of the House of Commons since 1695 -- because he had claimed 4,000 pounds worth of taxi trips which his wife had used to go shopping.
They were all scared, not of the voter but of Murdoch and his media empire. When former Prime Minister Gordon Brown was told by the editor of The Sun newspaper that it would run a dubiously-researched article about his son's serious disease the next day, he and his wife spent an afternoon in tears. But after that it was back to business as usual with the Murdochs.
"Get rich quick." "You are what you buy." That was the swirling, money-driven nihilism that descended on London like the infamous fog of former times. Few managed to escape its lure; not the royal family, not parliament, not the police, not the talented singer Amy Winehouse. She too embraced the Paparazzi; fame was an additional drug for her.
"Consumer society relies on your ability to participate in it," says Alex Hiller, a marketing expert at Nottingham Business School. "What we recognise as a consumer now was born out of shorter hours, higher wages and the availability of credit. If you're dealing with a lot of people who don't have the last two, that contract doesn't work." So they just went shopping anyway, like the Beckhams. Except they were wielding a flamethrower rather than a black American Express card.
Financial world dominated by a few deep pockets
by Rachel Ehrenberg - Science News
Economic "superentity" controls more than one-third of global wealth
A central core of extremely powerful actors (red dots) dominates international corporate finance, a new mathematical analysis finds.
Conventional wisdom says a few sticky, fat fingers control a disproportionate slice of the world economy’s pie. A new analysis suggests that the conventional wisdom is right on the money.
Diagramming the relationships between more than 43,000 corporations reveals a tightly connected core of top economic actors. In 2007, a mere 147 companies controlled nearly 40 percent of the monetary value of all transnational corporations, researchers report in a paper published online July 28 at arXiv.org. "This is empirical evidence of what’s been understood anecdotally for years," says information theorist Brandy Aven of the Tepper School of Business at Carnegie Mellon in Pittsburgh.
The analysis is a first effort to document the international web of relationships among companies and to examine who owns shares — and how many — in whom. Tapping into the financial information database Orbis, scientists from ETH Zurich in Switzerland examined transnational companies, which they defined as having at least 10 percent of their holdings in more than one country.
Then the team looked at upstream and downstream connections, yielding a network of 600,508 economic actors connected through more than a million ownership ties. This network takes on a bowtie shape, with a large number of diffuse actors in the wings and a few major players tangled up in the tie’s knot. So while it’s true that ownership of publicly held corporations is broadly distributed, says complex systems scientist James Glattfelder, a coauthor of the new work, "take a step back and it’s all flowing into the same few hands."
While any man on the street may have predicted this outcome, the economic literature portrays markets as so dynamic that they lack hot spots of control, Glattfelder says. Researchers aren’t sure what to make of the core’s interconnectedness. On the one hand, it could expose the whole network to risk. "Imagine a disease spreading," says Aven. "If you have a high school where everyone’s sleeping together and one person gets syphilis, then everyone gets syphilis."
But on the flip side, she notes, interconnectedness can lead to better self-policing and positive behaviors, such as fair labor practices or environmentally friendly policies. And even though the status of many players in the analysis has changed drastically since 2007 (now-defunct Lehman Brothers is a key element of the core), the analysis shows that ownership is becoming increasingly concentrated and increasingly transnational, says Gerald Davis of the University of Michigan in Ann Arbor.
Because interpreting and analyzing these kinds of data is difficult, he says, the analysis serves more as "an impression of the moon’s surface you get with a telescope. It’s not a street map." Ownership can be difficult to study internationally because holding shares in a mutual fund doesn’t necessarily mean the same thing in the U.S. as it does in communist China. And even within a single country ownership can be hard to tease out, says economist Matthew Jackson of Stanford University. For example, when an individual invests in a mutual fund or even purchases shares through an institution like Merrill Lynch, the firm is often still the official owner of the assets. And even when shareholders do have voting rights, they may not exercise them.
"This becomes worrisome if everyone is like me and says I’ll let Vanguard do the voting," says Jackson. "Maybe we should be a little bit worried. I don’t know if we should be."
U.S. Inquiry Is Said to Focus on S.&P. Ratings
by Louise Story - New York Times
The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to two people interviewed by the government and another briefed on such interviews.
The investigation began before Standard & Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.
In the mortgage inquiry, the Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.
It is unclear if the Justice Department investigation involves the other two ratings agencies, Moody’s and Fitch, or only S.& P.
During the boom years, S.& P. and other ratings agencies reaped record profits as they bestowed their highest ratings on bundles of troubled mortgage loans, which made the mortgages appear less risky and thus more valuable. They failed to anticipate the deterioration that would come in the housing market and devastate the financial system.
Since the crisis, the agencies’ business practices and models have been criticized from many corners, including in Congressional hearings and reports that have raised questions about whether independent analysis was corrupted by the drive for profits.
The Securities and Exchange Commission has also been investigating possible wrongdoing at S.& P., according to a person interviewed on that matter, and may be looking at the other two major agencies, Moody’s and Fitch Ratings.
Ed Sweeney, a spokesman for S.& P., said in an e-mail: “S.& P. has received several requests from different government agencies over the last few years. We continue to cooperate with these requests. We do not prevent such agencies from speaking with current or former employees.” S.& P. is a unit of the McGraw-Hill Companies, which is under pressure from some investors and has been considering whether to spin off businesses or make other strategic changes this summer.
The people with knowledge of the investigation said it had picked up steam early this summer, well before the debt rating issue reached a high pitch in Washington. Now members of Congress are investigating why S.& P. removed the nation’s AAA rating, which is highly important to financial markets.
Representatives of the Justice Department and the S.E.C. declined to comment, as is customary for those departments, on whether they are investigating the ratings agencies.
Even though the Justice Department has the power to bring criminal charges, witnesses who have been interviewed have been told by investigators that they are pursuing a civil case.
The government has brought relatively few cases against large financial concerns for their roles in the housing blowup, and it has closed investigations into Washington Mutual and Countrywide, among others, without taking action.
The cases that have been brought are mainly civil matters. In the spring, the Justice Department filed a civil suit against Deutsche Bank and one of its units, which the government said had misrepresented the quality of mortgage loans to obtain government insurance on them. Another common thread — in that case and several others — is that no bank executives were named.
Despite the public scrutiny and outcry over the ratings agencies’ failures in the financial crisis, many investors still rely heavily on ratings from the three main agencies for their purchases of sovereign and corporate debt, as well as other complex financial products.
Companies and some countries — but not the United States — pay the agencies to receive a rating, the financial market’s version of a seal of approval. For decades, the government issued rules that banks, mutual funds and others could rely on a AAA stamp for investing decisions — which bolstered the agencies’ power.
A successful case or settlement against a giant like S.& P. could accelerate the shift away from the traditional ratings system. The financial reform overhaul known as Dodd-Frank sought to decrease the emphasis on ratings in the way banks and mutual funds invest their assets. But bank regulators have been slow to spell out how that would work. A government case that showed problems beyond ineptitude might spur greater reforms, financial historians said.
“I think it would have a major impact if there was a successful fraud case that would suggest there would be momentum for legislation that would force them to change their business model,” said Richard Sylla, a professor at New York University’s Stern School of Business who has studied the history of ratings firms.
In particular, Professor Sylla said that the ratings agencies could be forced to stop making their money off the entities they rate and instead charge investors who use the ratings. The current business model, critics say, is riddled with conflicts of interest, since ratings agencies might make their grades more positive to please their customers.
Before the financial crisis, banks shopped around to make sure rating agencies would award favorable ratings before agreeing to work with them. These banks paid upward of $100,000 for ratings on mortgage bond deals, according to the Financial Crisis Inquiry Commission, and several hundreds of thousands of dollars for the more complex structures known as collateralized debt obligations.
Ratings experts also said that a successful case could hamper the agencies’ ability to argue that they were not liable for ratings that turned out to be wrong.
“Their story is that they should be protected by full First Amendment protections, and that would be harder to make in the public arena, in Congress and in the courts,” said Lawrence J. White, another professor at New York University’s Stern School of Business, who has testified alongside ratings executives before Congress. “If they mixed business and the ratings, it would certainly make their story harder to tell.”
The ratings agencies lost a bit of ground on their First Amendment protections in the recent financial reform bill, which put the ratings firms on the same legal liability level as accounting firms, Professor White said. But that has yet to be tested in court.
People with knowledge of the Justice Department investigation of S.& P. said investigators had made references to several individuals, though it was unclear if anyone would be named in any potential case. Investigators have been asking about a remark supposedly made by David Tesher about mortgage security ratings, two people said. The investigators have asked witnesses if they heard Mr. Tesher say: “Don’t kill the golden goose,” in reference to mortgage securities.
S.& P. declined to provide a comment for Mr. Tesher.
Several of the people who oversaw S.& P.’s mortgage-related ratings went on to different jobs at McGraw-Hill, including Joanne Rose, the former head of structured finance; Vickie Tillman, the former head of ratings; and Susan Barnes, former head of residential mortgage bond ratings. Investigators have told witnesses that they are looking for former employees and that has proved difficult because so many crucial people still work at the company.
One former executive who has been mentioned in investigators’ interviews is Richard Gugliada, who helped oversee ratings of collateralized debt obligations. Calls to his home were not returned.
Is the SEC Covering Up Wall Street Crimes?
by Matt Taibbi
A whistleblower claims that over the past two decades, the agency has destroyed records of thousands of investigations, whitewashing the files of some of the nation's worst financial criminals.
Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – "Hey, chief, didja know this guy had two wives die falling down the stairs?" No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record.
That, it now appears, is exactly how the Securities and Exchange Commission has been treating the Wall Street criminals who cratered the global economy a few years back. For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed.
By whitewashing the files of some of the nation's worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – "18,000 ... including Madoff," as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.
Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency's records – "including case files relating to preliminary investigations" – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term "Orwellian," devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation.
Amazingly, the wholesale destruction of the cases – known as MUIs, or "Matters Under Inquiry" – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission's internal website. "After you have closed a MUI that has not become an investigation," the site advised staffers, "you should dispose of any documents obtained in connection with the MUI."
Many of the destroyed files involved companies and individuals who would later play prominent roles in the economic meltdown of 2008. Two MUIs involving con artist Bernie Madoff vanished. So did a 2002 inquiry into financial fraud at Lehman Brothers, as well as a 2005 case of insider trading at the same soon-to-be-bankrupt bank. A 2009 preliminary investigation of insider trading by Goldman Sachs was deleted, along with records for at least three cases involving the infamous hedge fund SAC Capital.
The widespread destruction of records was brought to the attention of Congress in July, when an SEC attorney named Darcy Flynn decided to blow the whistle. According to Flynn, who was responsible for helping to manage the commission's records, the SEC has been destroying records of preliminary investigations since at least 1993. After he alerted NARA to the problem, Flynn reports, senior staff at the SEC scrambled to hide the commission's improprieties.
As a federally protected whistle-blower, Flynn is not permitted to speak to the press. But in evidence he presented to the SEC's inspector general and three congressional committees earlier this summer, the 13-year veteran of the agency paints a startling picture of a federal police force that has effectively been conquered by the financial criminals it is charged with investigating.
In at least one case, according to Flynn, investigators at the SEC found their desire to bring a case against an influential bank thwarted by senior officials in the enforcement division – whose director turned around and accepted a lucrative job from the very same bank they had been prevented from investigating. In another case, the agency farmed out its inquiry to a private law firm – one hired by the company under investigation. The outside firm, unsurprisingly, concluded that no further investigation of its client was necessary. To complete the bureaucratic laundering process, Flynn says, the SEC dropped the case and destroyed the files.
Much has been made in recent months of the government's glaring failure to police Wall Street; to date, federal and state prosecutors have yet to put a single senior Wall Street executive behind bars for any of the many well-documented crimes related to the financial crisis. Indeed, Flynn's accusations dovetail with a recent series of damaging critiques of the SEC made by reporters, watchdog groups and members of Congress, all of which seem to indicate that top federal regulators spend more time lunching, schmoozing and job-interviewing with Wall Street crooks than they do catching them. As one former SEC staffer describes it, the agency is now filled with so many Wall Street hotshots from oft-investigated banks that it has been "infected with the Goldman mindset from within."
The destruction of records by the SEC, as outlined by Flynn, is something far more than an administrative accident or bureaucratic fuck-up. It's a symptom of the agency's terminal brain damage. Somewhere along the line, those at the SEC responsible for policing America's banks fell and hit their head on a big pile of Wall Street's money – a blow from which the agency has never recovered.
"From what I've seen, it looks as if the SEC might have sanctioned some level of case-related document destruction," says Sen. Chuck Grassley, the ranking Republican on the Senate Judiciary Committee, whose staff has interviewed Flynn. "It doesn't make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what time frame and to what extent its actions were consistent with the law."
How did officials at the SEC wind up with a faithful veteran employee – a conservative, mid-level attorney described as a highly reluctant whistle-blower – spilling the agency's most sordid secrets to Congress? In a way, they asked for it.
On May 18th of this year, SEC enforcement director Robert Khuzami sent out a mass e-mail to the agency's staff with the subject line "Lawyers Behaving Badly." In it, Khuzami asked his subordinates to report any experiences they might have had where "the behavior of counsel representing clients in... investigations has been questionable."
Khuzami was asking staffers to recount any stories of outside counsel behaving unethically. But Flynn apparently thought his boss was looking for examples of lawyers "behaving badly" anywhere, including within the SEC. And he had a story to share he'd kept a lid on for years. "Mr. Khuzami may have gotten something more than he expected," Flynn's lawyer, a former SEC whistle-blower named Gary Aguirre, later explained to Congress.
Flynn responded to Khuzami with a letter laying out one such example of misbehaving lawyers within the SEC. It involved a case from very early in Flynn's career, back in 2000, when he was working with a group of investigators who thought they had a "slam-dunk" case against Deutsche Bank, the German financial giant. A few years earlier, Rolf Breuer, the bank's CEO, had given an interview to Der Spiegel in which he denied that Deutsche was involved in übernahmegespräche – takeover talks – to acquire a rival American firm, Bankers Trust. But the statement was apparently untrue – and it sent the stock of Bankers Trust tumbling, potentially lowering the price for the merger. Flynn and his fellow SEC investigators, suspecting that investors of Bankers Trust had been defrauded, opened a MUI on the case.
A Matter Under Inquiry is just a preliminary sort of look-see – a way for the SEC to check out the multitude of tips it gets about suspicious trades, shady stock scams and false disclosures, and to determine which of the accusations merit a formal investigation. At the MUI stage, an SEC investigator can conduct interviews or ask a bank to send in information voluntarily. Bumping a MUI up to a formal investigation is critical, because it enables investigators to pull out the full law-enforcement ass-kicking measures – subpoenas, depositions, everything short of hot pokers and waterboarding.
In the Deutsche case, Flynn and other SEC investigators got past the MUI stage and used their powers to collect sworn testimony and documents indicating that plenty of übernahmegespräche indeed had been going on when Breuer spoke to Der Spiegel. Based on the evidence, they sent an "Action Memorandum" to senior SEC staff, formally recommending that the agency press forward and file suit against Deutsche.
Breuer responded to the threat as big banks like Deutsche often do: He hired a former SEC enforcement director to lobby the agency to back off. The ex-insider, Gary Lynch, launched a creative and inspired defense, producing a linguistic expert who argued that übernahmegespräche only means "advanced stage of discussions." Nevertheless, the request to proceed with the case was approved by several levels of the SEC's staff. All that was needed to move forward was a thumbs-up from the director of enforcement at the time, Richard Walker.
But then a curious thing happened. On July 10th, 2001, Flynn and the other investigators were informed that Walker was mysteriously recusing himself from the Deutsche case. Two weeks later, on July 23rd, the enforcement division sent a letter to Deutsche that read, "Inquiry in the above-captioned matter has been terminated." The bank was in the clear; the SEC was dropping its fraud investigation. In contradiction to the agency's usual practice, it provided no explanation for its decision to close the case.
On October 1st of that year, the mystery was solved: Dick Walker was named general counsel of Deutsche. Less than 10 weeks after the SEC shut down its investigation of the bank, the agency's director of enforcement was handed a cushy, high-priced job at Deutsche.
Deutsche's influence in the case didn't stop there. A few years later, in 2004, Walker hired none other than Robert Khuzami, a young federal prosecutor, to join him at Deutsche. The two would remain at the bank until February 2009, when Khuzami joined the SEC as Flynn's new boss in the enforcement division. When Flynn sent his letter to Khuzami complaining about misbehavior by Walker, he was calling out Khuzami's own mentor.
The circular nature of the case illustrates the revolving-door dynamic that has become pervasive at the SEC. A recent study by the Project on Government Oversight found that over the past five years, former SEC personnel filed 789 notices disclosing their intent to represent outside companies before the agency – sometimes within days of their having left the SEC. More than half of the disclosures came from the agency's enforcement division, who went to bat for the financial industry four times more often than ex-staffers from other wings of the SEC.
Even a cursory glance at a list of the agency's most recent enforcement directors makes it clear that the SEC's top policemen almost always wind up jumping straight to jobs representing the banks they were supposed to regulate. Lynch, who represented Deutsche in the Flynn case, served as the agency's enforcement chief from 1985 to 1989, before moving to the firm of Davis Polk, which boasts many top Wall Street clients.
He was succeeded by William McLucas, who left the SEC in 1998 to work for WilmerHale, a Wall Street defense firm so notorious for snatching up top agency veterans that it is sometimes referred to as "SEC West." McLucas was followed by Dick Walker, who defected to Deutsche in 2001, and he was in turn followed by Stephen Cutler, who now serves as general counsel for JP Morgan Chase. Next came Linda Chatman Thomsen, who stepped down to join Davis Polk, only to be succeeded in 2009 by Khuzami, Walker's former protégé at Deutsche Bank.
This merry-go-round of current and former enforcement directors has repeatedly led to accusations of improprieties. In 2008, in a case cited by the SEC inspector general, Thomsen went out of her way to pass along valuable information to Cutler, the former enforcement director who had gone to work for JP Morgan. According to the inspector general, Thomsen signaled Cutler that the SEC was unlikely to take action that would hamper JP Morgan's move to buy up Bear Stearns.
In another case, the inspector general found, an assistant director of enforcement was instrumental in slowing down an investigation into the $7 billion Ponzi scheme allegedly run by Texas con artist R. Allen Stanford – and then left the SEC to work for Stanford, despite explicitly being denied permission to do so by the agency's ethics office. "Every lawyer in Texas and beyond is going to get rich on this case, OK?" the official later explained. "I hated being on the sidelines."
Small wonder, then, that SEC staffers often have trouble getting their bosses to approve full-blown investigations against even the most blatant financial criminals. For a fledgling MUI to become a formal investigation, it has to make the treacherous leap from the lower rungs of career-level staffers like Flynn all the way up to the revolving-door level at the top, where senior management is composed largely of high-priced appointees from the private sector who have strong social and professional ties to the very banks they are charged with regulating. And if senior management didn't approve an investigation, the documents often wound up being destroyed – as Flynn would later discover.
After the Deutsche fiasco over Bankers Trust, Flynn continued to work at the SEC for four more years. He briefly left the agency to dabble in real estate, then returned in 2008 to serve as an attorney in the enforcement division. In January 2010, he accepted new responsibilities that included helping to manage the disposition of records for the division – and it was then he first became aware of the agency's possibly unlawful destruction of MUI records.
Flynn discovered a directive on the enforcement division's internal website ordering staff to destroy "any records obtained in connection" with closed MUIs. The directive appeared to violate federal law, which gives responsibility for maintaining and destroying all records to the National Archives and Records Administration. Over a decade earlier, in fact, the SEC had struck a deal with NARA stipulating that investigative records were to be maintained for 25 years – and that if any files were to be destroyed after that, the shredding was to be done by NARA, not the SEC.
But Flynn soon learned that the records for thousands of preliminary investigations no longer existed. In his letter to Congress, Flynn estimates that the practice of destroying MUIs had begun as early as 1993, and has resulted in at least 9,000 case files being destroyed. For all the thousands of tips that had come in to the SEC, and the thousands of interviews that had been conducted by the agency's staff, all that remained were a few perfunctory lines for each case. The mountains of evidence gathered were no longer in existence.
To read through the list of dead and buried cases that Flynn submitted to Congress is like looking through an infrared camera at a haunted house of the financial crisis, with the ghosts of missed prosecutions flashing back and forth across the screen. A snippet of the list:
One MUI – case MNY-08145 – involved allegations of insider trading at AIG on September 15th, 2008, right in the middle of the insurance giant's collapse. In that case, an AIG employee named Jacqueline Millan reported irregularities in the trading of AIG stock to her superiors, only to find herself fired. Incredibly, instead of looking into the matter itself, the SEC agreed to accept "an internal investigation by outside counsel or AIG." The last note in the file indicates that "the staff plans to speak with the outside attorneys on Monday, August 24th [2009], when they will share their findings with us." The fact that the SEC trusted AIG's lawyers to investigate the matter shows the basic bassackwardness of the agency's approach to these crash-era investigations. The SEC formally closed the case on October 1st, 2009.
The episode with AIG highlights yet another obstacle that MUIs experience on the road to becoming formal investigations. During the past decade, the SEC routinely began allowing financial firms to investigate themselves. Imagine the LAPD politely asking a gang of Crips and their lawyers to issue a report on whether or not a drive-by shooting by the Crips should be brought before a grand jury – that's basically how the SEC now handles many preliminary investigations against Wall Street targets.
The evolution toward this self-policing model began in 2001, when a shipping and food-service conglomerate called Seaboard aggressively investigated an isolated case of accounting fraud at one of its subsidiaries. Seaboard fired the guilty parties and made sweeping changes to its internal practices – and the SEC was so impressed that it instituted a new policy of giving "credit" to companies that police themselves. In practice, that means the agency simply steps aside and allows companies to slap themselves on the wrists. In the case against Seaboard, for instance, the SEC rewarded the firm by issuing no fines against it.
According to Lynn Turner, a former chief accountant at the SEC, the Seaboard case also prompted the SEC to begin permitting companies to hire their own counsel to conduct their own inquiries. At first, he says, the process worked fairly well. But then President Bush appointed the notoriously industry-friendly Christopher Cox to head up the SEC, and the "outside investigations" turned into whitewash jobs. "The investigations nowadays are probably not worth the money you spend on them," Turner says.
Harry Markopolos, a certified fraud examiner best known for sounding a famously unheeded warning about Bernie Madoff way back in 2000, says the SEC's practice of asking suspects to investigate themselves is absurd. In a serious investigation, he says, "the last person you want to trust is the person being accused or their lawyer." The practice helped Madoff escape for years. "The SEC took Bernie's word for everything," Markopolos says.
At the SEC, having realized that the agency was destroying documents, Flynn became concerned that he was overseeing an illegal policy. So in the summer of last year, he reached out to NARA, asking them for guidance on the issue.
That request sparked a worried response from Paul Wester, NARA's director of modern records. On July 29th, 2010, Wester sent a letter to Barry Walters, who oversees document requests for the SEC. "We recently learned from Darcy Flynn... that for the past 17 years the SEC has been destroying closed Matters Under Inquiry files," Wester wrote. "If you confirm that federal records have been destroyed improperly, please ensure that no further such disposals take place and provide us with a written report within 30 days."
Wester copied the letter to Adam Storch, a former Goldman Sachs executive who less than a year earlier had been appointed as managing executive of the SEC's enforcement division. Storch's appointment was not without controversy. "I'm not sure what's scarier," Daniel Indiviglio of The Atlantic observed, "that this guy worked at an investment bank that many believe has questionable ethics and too cozy a Washington connection, or that he's just 29." In any case, Storch reacted to the NARA letter the way the SEC often does – by circling the wagons and straining to find a way to blow off the problem without admitting anything.
Last August, as the clock wound down on NARA's 30-day deadline, Storch and two top SEC lawyers held a meeting with Flynn to discuss how to respond. Flynn's notes from the meeting, which he passed along to Congress, show the SEC staff wondering aloud if admitting the truth to NARA might be a bad idea, given the fact that there might be criminal liability. "We could say that we do not believe there has been disposal inconsistent with the schedule," Flynn quotes Ken Hall, an assistant chief counsel for the SEC, as saying.
"There are implications to admit what was destroyed," Storch chimed in. It would be "not wise for me to take on the exposure voluntarily. If this leads to something, what rings in my ear is that Barry [Walters, the SEC documents officer] said: This is serious, could lead to criminal liability." When the subject of how many files were destroyed came up, Storch answered: "18,000 MUIs destroyed, including Madoff."
Four days later, the SEC responded to NARA with a hilariously convoluted nondenial denial. "The Division is not aware of any specific instances of the destruction of records from any other MUI," the letter states. "But we cannot say with certainty that no such documents have been destroyed over the past 17 years." The letter goes on to add that "the Division has taken steps... to ensure that no MUI records are destroyed while we review this issue." Translation: Hey, maybe records were destroyed, maybe they weren't. But if we did destroy records, we promise not to do it again – for now.
The SEC's unwillingness to admit the extent of the wrong doing left Flynn in a precarious position. The agency has a remarkably bad record when it comes to dealing with whistle-blowers.
Back in 2005, when Flynn's attorney, Gary Aguirre, tried to pursue an insider-trading case against Pequot Capital that involved John Mack, the future CEO of Morgan Stanley, he was fired by phone while on vacation. Two Senate committees later determined that Aguirre, who has since opened a private practice representing whistle-blowers, was dismissed improperly as part of a "process of reprisal" by the SEC. Two whistle-blowers in the Stanford case, Julie Preuitt and Joel Sauer, also experienced retaliation – including reprimands and demotions – after raising concerns about superficial investigations. "There's no mechanism to raise these issues at the SEC," says another former whistle-blower. Contacting the agency's inspector general, he adds, is considered "the nuclear option" – a move "well-known to be a career-killer."
In Flynn's case, both he and Aguirre tried to keep the matter in-house, appealing to SEC chairman Mary Schapiro with a promise not to go outside the agency if she would grant Flynn protection against reprisal. When no such offer was forthcoming, Flynn went to the agency's inspector general before sending a detailed letter about the wrongdoing to three congressional committees.
One of the offices Flynn contacted was that of Sen. Grassley, who was in the midst of his own battle with the SEC. Frustrated with the agency's failure to punish major players on Wall Street, the Iowa Republican had begun an investigation into how the SEC follows up on outside complaints. Specifically, he wrote a letter to FINRA, another regulatory agency, to ask how many complaints it had referred to the SEC about SAC Capital, the hedge fund run by reptilian billionaire short-seller Stevie Cohen.
SAC has long been accused of a variety of improprieties, from insider trading to harassment. But no charge in recent Wall Street history is crazier than an episode involving a SAC executive named Ping Jiang, who was accused in 2006 of enacting a torturous hazing program. According to a civil lawsuit that was later dropped, Jiang allegedly forced a new trader named Andrew Tong to take female hormones, come to work wearing a dress and lipstick, have "foreign objects" inserted in his rectum, and allow Jiang to urinate in his mouth. (I'm not making this up.)
Grassley learned that over the past decade, FINRA had referred 19 complaints about suspicious trades at SAC to federal regulators. Curious to see how many of those referrals had been looked into, Grassley wrote the SEC on May 24th, asking for evidence that the agency had properly investigated the cases.
Two weeks later, on June 9th, Khuzami sent Grassley a surprisingly brusque answer: "We generally do not comment on the status of investigations or related referrals, and, in turn, are not providing information concerning the specific FINRA referrals you identified." Translation: We're not giving you the records, so blow us.
Grassley later found out from FINRA that it had actually referred 65 cases about SAC to the SEC, making the lack of serious investigations even more inexplicable. Angered by Khuzami's response, he sent the SEC another letter on June 15th demanding an explanation, but no answer has been forthcoming.
In the interim, Grassley's office was contacted by Flynn, who explained that among the missing MUIs he had uncovered were at least three involving SAC – one in 2006, one in 2007 and one in 2010, involving charges of insider trading and currency manipulation. All three cases were closed by the SEC, and the records apparently destroyed.
On August 17th, Grassley sent a letter to the SEC about the Flynn allegations, demanding to know if it was indeed true that the SEC had destroyed records. He also asked if the agency's failure to produce evidence of investigations into SAC Capital were related to the missing MUIs.
The SEC's inspector general is investigating the destroyed MUIs and plans to issue a report. NARA is also seeking answers. "We've asked the SEC to look into the matter and we're awaiting their response," says Laurence Brewer, a records officer for NARA. For its part, the SEC is trying to explain away the illegality of its actions through a semantic trick. John Nester, the agency's spokesman, acknowledges that "documents related to MUIs" have been destroyed. "I don't have any reason to believe that it hasn't always been the policy," he says. But Nester suggests that such documents do not "meet the federal definition of a record," and therefore don't have to be preserved under federal law.
But even if SEC officials manage to dodge criminal charges, it won't change what happened: The nation's top financial police destroyed more than a decade's worth of intelligence they had gathered on some of Wall Street's most egregious offenders. "The SEC not keeping the MUIs – you can see why this would be bad," says Markopolos, the fraud examiner famous for breaking the Madoff case. "The reason you would want to keep them is to build a pattern. That way, if you get five MUIs over a period of 20 years on something similar involving the same company, you should be able to connect five dots and say, 'You know, I've had five MUIs – they're probably doing something. Let's go tear the place apart.'" Destroy the MUIs, and Wall Street banks can commit the exact same crime over and over, without anyone ever knowing.
Regulation isn't a panacea. The SEC could have placed federal agents on every corner of lower Manhattan throughout the past decade, and it might not have put a dent in the massive wave of corruption and fraud that left the economy in flames three years ago. And even if SEC staffers from top to bottom had been fully committed to rooting out financial corruption, the agency would still have been seriously hampered by a lack of resources that often forces it to abandon promising cases due to a shortage of manpower. "It's always a triage," is how one SEC veteran puts it. "And it's worse now."
But we're equally in the dark about another hypothetical. Forget about what might have been if the SEC had followed up in earnest on all of those lost MUIs. What if even a handful of them had turned into real cases? How many investors might have been saved from crushing losses if Lehman Brothers had been forced to reveal its shady accounting way back in 2002? Might the need for taxpayer bailouts have been lessened had fraud cases against Citigroup and Bank of America been pursued in 2005 and 2007? And would the U.S. government have doubled down on its bailout of AIG if it had known that some of the firm's executives were suspected of insider trading in September 2008?
It goes without saying that no ordinary law-enforcement agency would willingly destroy its own evidence. In fact, when it comes to garden-variety crooks, more and more police agencies are catching criminals with the aid of large and well-maintained databases. "Street-level law enforcement is increasingly data-driven," says Bill Laufer, a criminology professor at the University of Pennsylvania. "For a host of reasons, though, we are starved for good data on both white-collar and corporate crime. So the idea that we would take the little data we do have and shred it, without a legal requirement to do so, calls for a very creative explanation."
We'll never know what the impact of those destroyed cases might have been; we'll never know if those cases were closed for good reasons or bad. We'll never know exactly who got away with what, because federal regulators have weighted down a huge sack of Wall Street's dirty laundry and dumped it in a lake, never to be seen again.
Editor’s Note: The online version of this article has been amended from the print version to reflect that the SEC’s case against Deutsche Bank proceeded beyond a Matter of Inquiry to a full-blown investigation.
260 comments:
«Oldest ‹Older 201 – 260 of 260agree with CarolS...wholeheartedly!.At some stage of the game of civilization we forgot there will always exist a small percentile of the population that have no "soul"..or a sour little nasty POS that they use for one.
Empathy for another,being able to say "But for the grace of fate,there walk I",is the most challenging thing for those who were born to wealth.And it is re-enforced over and over in that group...When all your friends say "forget the poor,forget society...the only thing that matter is YOU...hell when the media chants it,your parents chant it,...it is not positive re-enforcement...it is what brings into being more pain and cruelty to people than anything elses I can imagine.
At one time,their existed a "Noble obligation",usually expresses in french,of the thought that "To whom much is given,much is expected",in the way of helping the rest of society.That societal control mechanism is dead as hoop skirts and tophats.Instead the tune is How much can I consume...how much power can I wield...How much can I,I,I.
Clarification...
I think what we will see is a collapse of "federalism",with the "revolt"being more of a disintegration of existing power structures...helped along by a enraged population...
That is about time to play like a smart squirrel and head for your hole.
Carol,mankind is a pretty tough weed,and barring the temp at the arctic shooting past 200f,I think we'll get by as a species.
Industrial civilization...thats another matter.
One interesting thought, when that old revolutionary Castro needed to figure out a way to advance Cuba from its post-revolutionary state...with no money to speak of,he chose biology and life science as a bases for a lot of research,and what little funds he had.We,here in the USA have always used "sledgehammer science"primarily for the military...We will not have that ability in the future.My guess is as the planned demolition of the economy continues,there will still be some basic research continued at universities,but low dollar,locally focused...
time to go be productive ,as my wife would say
Bee good,or
Bee careful
snuffy
."At some stage of the game of civilization we forgot there will always exist a small percentile of the population that have no "soul".."
Power structures reward and thus breed this behavior.
""Frankly you do seem to be long on deprecating words and short on helpful ideas.""
It's pretty simple IM. Which, I thought would be clear from the history of my posts.
Capitalism is the problem(though I know you are hung up on the inherent flaw in human nature) - so if you want to do something productive besides suggesting ways to insolate yourself from the natural gravitation of it's destruction and all the bad behavior it will and is creating - talk about it's end and what comes after. Move on from the morning stage.
So, yeah, the status-quo psychological prisons masking as counter cultures have become toxic to me and I get a little caustic in their soul and intelligence -sucking presence. mea culpa
What's interesting to me is all the creative ways the collapse watchers avoid this simple truth - and thus, avoid real causal mechanisms while holding up the banner of "You just can't handle the truth".
But thanks for the advice
The Grandprobuscusd'or beetle.
Dominant sociopathy, its a big idea.
SA,
I have heaped up a helluva pile of comments on this blog. Quite a few of them have been devoted to what I think will replace the current paradigm. I have no doubt you don't like them because they paint a dark picture that probably looks even worse through your rose tinted glasses.
Yes, I do give a lot of consideration to human flaws and what they mean in the scheme of things. Capitalism has failed because of them just as they have brought down every other political ISM. Capitalism happens to be the system that was in place when we entered the population stream. That's just an accident of history. It will die soon and then you can bemoan the evils of whatever replaces it. Whatever that is, it will not be decided by the likes of you and me.
Unlike you I am not anxious to see capitalism end. Its end will almost certainly mean my end. But that will happen soon enough anyway. So I don't care that deeply about it as it will probably outlive me.
Secular Animist you say:
My rationale is lying irrational panicky money flows don't create honesty.
No kidding!:)
"Regardless, gold seems to be a panic meter that, personally, I don't think will hold up in the medium term. It seems a bit bubbly and the gold bugs seems to have reached a new height fanaticism."
Agree, lots of volatility, but I don't think that is because of any fanaticism , at least of those who have long term interest in gold. They know that an orderly climb is much better than that brought by the fanatic, or better termed 'frenetic newbie, who fears , and rightly so, being left behind! Incidently, many who stay out of that market are often seen to be making comments along the line of "I don't care!" So better watch it, your green is showing.
:)
On more thing on trails.
@DIYer
"I haven't seen any convincing (to me) evidence in those videos of anything other than H2O and some related pollutants."
Oh, come on! Did the planes turn off their engines in mid-flight to get intermittent trails? Then the trails cant be contrails formed by engine exhaust; engine exhaust vapours are not causing the trails in those videos.
Fuel dump creating intermittent trails? Fuel is released from the wingtips, and no dump could be that prolonged and leave visibly persistent trails.
You must not live in a heavy spraying zone, to be so sceptical. Between the radar images, the videos of trails switching off in mid-flight, and the stuff I see every few days in my skies, the evidence seems pretty conclusive.
Deliberate spraying does happen.
I mentioned the topic yesterday because it was a heavy spraying day around here, or conditions particularly favorable for abberant contrail formation existed, and I was wondering in regards to Ant Whisperers assertion, if any hard proof of deliberate spraying would be directly equivalent to proof of deliberate poisoning. With reasonable foreknowledge of any toxicity or pathogenity of any deliberately sprayed materials, it is so directly.
I agree with the assertion that there is established motive and means for clandestine spraying, whereas proven opportunity must negate the singular alibi of contrails.
Incidental mentioning of these themes isn't bad, serving a psychosocial need, but intensive conspiracy-favored expositions would detract from the motivatory economic theme, and scare off people who might mistake this place for another tinfoil fringe-site.
Therefore I'll discontinue making my case.
Do the practices of Capitalism, Corporatism, Imperialism, Stalinism, Eugeniscism, any totalitarian-isms or bestial-isms, derive their anti-social machinations directly from the institutional structures of dominant sociopathy?
Is dominant sociopathy the definitve criminological framework to understand the failure of bigsystem philosophy?
p01
Don't get yourself in an uproar. It's bad for your digestion. Just spin your scroll wheel until he takes his Thorazine.
While you have been battling with your keyboards.
Glass is being broken in Tripoli.
The carpetbaggers with money in their pockets will soon descend upon Tripoli to get gold, oil and water.
We will soon see if a gold bracelet will buy a loaf of bread.
Chevez will be able to get his gold delivered.
jal
I. M. Nobody
Capitalism would be fine if it were simply used as a means of keeping accounts straight, but unfortunately it has become a way of beggaring one's neighbour while accumulating great wealth personally.
If one goes back to a more primitive time, 'before money' (BM ...aka 'Bummer', and so confused by some with the term 'without money' or WM which is a bummer) to a time when obligations and favours done, could be held in memory keeping accounts was fairly simple. Once we left the tribal level we needed some method of remembering or recording debts and credits, thereupon, up popped the invention of money and so forth, which toddled right along to Capitalism. The only problem, right from that primative start, was that some of us cheat! On a Tribal level you get little cheats while on our level of complexity one gets great frothing heaving slimeball crooks ... Moody's 2.0.
What we need is not the end of capitalism as a system of accounting, but a change of social values to keep it in it's place.
Ash
"What we have here with the NWO crowd, IMO, is a set of intelligent and informed people who still fail to grasp the "biggest" possible picture, or at least one of them. "
First. the NWO was a term that the elites themselves gave to their end game plan. Most of the top puppet masters behind the curtain are biologically derived from the Old World Order. The NWO just applies to (IMO) the idea that they are in their end game plan to achieve an Orwellian global control. As to what extent they will succeed in their plans remains to be seen.
Well, assuming I am one of "the NWO people", we do have a difference of a opinion about the bigger picture. Sometimes one can attempt such a big picture that one misses what is right in front of one's nose. This is my big difference with you with your Hegelian - Marxist interpretation and Stoneleigh who models more on thermodynamics. I see a lot of similarity between the two, and since I was trained as a chemist before I moved up to plumberhood, it is easier for me to deal with the latter.
The thermodynamic model says that one can understand the evolution of a system if you know the combined statistical averages of the system at any one point. When it was developed during the second half of the 19th century, one of its advantages was that it didn't even rely on the atomic theory which was still somewhat controversial . It ignored individual interactions between players (atoms and molecules) and developed statistical averages which it denoted as state functions. The theory goes that if one has clear enough measurements and data on the state function and a strong model of how a system will evolve from that point in time, then individual interactions may be ignored.
This tends to be a rather deterministic mind set. To give a graphic example, one has a beaker filled with reagents. Then one measures the state functions such a temperature, pressure, enthalpy, entropy, etc. and one can predict how things will evolve. We conspiracy theorist, however, say that there is an evil chemist standing over that beaker, tweaking the reactions. Adding a dash of methyl bromide here, some powered platinum there, with a teaspoon of acetic anhydride for good measure. The chemist cannot overrule the laws of thermodynamics, of course, but he has a limited ability to add reagents, heat or cool the reaction, and distill fractions off of it. These changes of course would register in the thermodynamic model measurements, but could not be predicted by them, because they are changes not envisioned when the original set of state functions were measured. There was no variable put in place that the system could be manipulated by a quasi-monopolistic conscious control.
In short, while it is important to keep abreast of what is going on in the stew, one is losing a tremendous amount of useful information if one cannot see the evil chemist tweaking the brew and then to try to get some idea of what the outcome is which he is seeking.
So in my opinion, as I mentioned before, by seeking the biggest picture, you are not only missing valuable data, but missing that which is right in front of your nose.
J'al
http://www.kitco.com/charts/livegold.html
slave revolt, and reaction
http://www.bbc.co.uk/news/world-latin-america-14609778
@ el G
Re: Russo /Rockefeller
Thanks for you interpretation on this topic. It is similar to my conclusion a while back when I watched some old Russo clips.
While I have nothing against a NWO, per se, I have everything in the world against an NWO that fails to recognize the free will of all Free Will Awareness Units.
Occasionally, I find myself contemplating the scenario that mankind might yet wake up and smell the coffee, then take drastic and focussed action to correct our problems. And then I read some website’s comment section like ZH, and I am yanked back to reality.
-- Victor (A commentor on the Nature Bats Last (NBL) blog)
I couldn't have said it better myself, which is why I stole it from Victor. ;)
An amusing contribution to the NWO/capitalism/whatever conversation.
http://tinyurl.com/3r73jdl
Mostly it's the condescending explanation from an academic econoastrologer:
"Dr. Seuss’s “The Lorax,” about the destruction of a forest by a greedy industrialist, “assumes that there is no economic system in place,” Mr. Conant said. In a modern capitalist economy, he said, the trees “would get very valuable as they got scarce, and the person with the property rights would harvest them at an economically reasonable rate.”
Wow. Magical thinking at its finest. And it explains why the bluefin tuna are doing so well.
@ muchtooloose
Yep! I aware of those prices.
The question is how much will the carpet baggers give to the little old lady in Tripoli from the ex regime.
jal
I assert that the institutional practices of Capitalism, Corporatism, Imperialism, Stalinism, Eugenicism, any totalitarian-isms, murder-isms or bestial-isms, do derive their anti-social machinations from the institutionally self-selective system of dominant sociopathy.
Dominant sociopathy is the definitive criminological framework to understand the failure of bigsystem philosophy, and why corruption is the system so forcibly.
I can conceive of only one criminological narrative that may adequately explain the holocaust and similar tribal genocides of unnatural magnitude, involving the oversaturation of insitutionally dominant sociopaths and psychopaths, thereby enabling propagation of subjugate sociopathy into the general population by means of institutionally conductive evil.
That all [..] institutions are, or can be made to be, more conductive to evil than to good, may be shown as true.
El G,
I certainly wasn't referring to anyone here when I said the "NWO crowd". I should have been more specific, but who I was referring to was people of the Alex Jones mentality, who typically believe climate change, peak oil, financial crises and just about every systemic predicament we face is orchestrated by a higher order group of "evil chemists", as you describe them. They also tend to believe that our founding fathers (or at least the "anti-federalists") were part of a movement that established a fair and just Constitutional republic, which was then progressively corrupted by the elite families in an unholy union with big government fascists and socialists. For those reasons, I certainly believe they are missing the "biggest" picture. Personally, I recognize there is a lot of objective evidence pointing towards the existence of at least one group of evil chemists in our system, but I also recognize the natural thermodynamic properties of the beaker as a complex evolutionary system (under the socioeconomic framework of Marx, of course). My contention is that the "NWO crowd" is almost completely missing the latter, and focusing entirely on the former, which is simply not a comprehensive framework. In contrast, I see the latter as being a natural evolutionary outcome of the former. So, in that sense, the evil chemists were a deterministic (but not predictable) outcome of the system, which may be an issue we disagree over, but I am certainly not denying their existence.
Seems like a lot of heat on the blog today. Happy Rebels. Maybe now the price of oil will come down some more ... or maybe not. I'm glad the fighting is over for them. I wish it was over for us.
I have flown at high altitude quite a bit. If the temperature and dew point are close enough the jet exhaust creates condensation trails and sometimes the temp/dp change along the way and the con trail stops forming. This may be a couple miles of clear air and sometimes the con trail persists for hours. When we were sitting on alert we hoped that if we had to go to war we would get to the target country at night without con trails because the fighters at that time were plenty fast enough but did not have the high tech airborn radar that they have now.
J'al
"
The question is how much will the carpet baggers give to the little old lady in Tripoli from the ex regime."
Judging by what they are giving little old ladies under our present regime all I can do is LOL for poor l.o.l.'s everywhere.
When I first heard President Bush talk of a NWO I almost did a bad in my pants. Previously the only NWO I was farmiliar with is described here by President Roosevelt.
Thought at the time it was some sort of bad joke, but I guess the joke, if any humour in it, was on us.
@ Supergravity,
What we have here is a poor German to English translation. In the video, the word duppel is translated to "chemical trail". Duppel really translates to "chaff". Once we understand that the report is talking about chaff, the claim no longer holds any water.
"Chaff- Chaff, originally called Window by the British and Düppel by the World War 2 era German Luftwaffe is a radar countermeasure in which aircraft or other targets spread a cloud of small, thin pieces of aluminum."
Re: NWO debate
1. I prefer BFC (Big Finance Capital) to NWO because it is more descriptive, IMHO.
2. The Communist / Capitalist axis is a false one. Communism has never existed on a large scale. Stalin wasn't communist. Mao wasn't communist. They were heads of oligarch dictatorships. The minute all the control of wealth is aggregated into a few hands, the dictating begins, almost always followed by murder of anyone who opposes it. Over 100 million were murdered by Stalin and Mao.
Dictatorships have been mislabeled as "communism."
3. In the same way, America isn't a capitalist country. It is an "insider crony capitalist financial dictatorship." The distinction is critical and not non-trivial.
4. Nobody says that fixing the NWO will fix everything. What they've done is put society's threats into a mental Pareto chart and the NWO came out in first place - so that's what gets the attention.
It would be irrational to do otherwise. Read some history - Stalin was the biggest threat to Russians. Hitler was the biggest threat to Germans. Mao was the biggest threat to the Chinese. And on and on and on...
The root cause to humanity's ills is exactly as the Bible elucidates...
Selfishness.
What is the golden rule?
To care for others EQUAL to ourselves.
What is the fault - failing to care for others equal to ourselves, AKA, selfishness.
The systems are bad.
We are bad.
Not just the powerful, although power has been shown to amplify selfishness.
But everyone.
How many people care enough about their children to invest serious effort to make the world a better place for their grandchildren, let alone a stranger?
Not many, hence, the children get their genitals groped by strangers in order to fly.
But that's not even the worst.
The American Central State appears to be the world's largest murderer, widow maker and orphan maker on the planet - and how many care enough to do anything?
Even to vote out the establishment parties that promote never ending, state bankruptcy war?
They vote for the happy face presented by the media and the bombs and limbs continue to fly.
Until one day they are aimed at generic *you*.
THEN... generic *you* begins to care.
but not before.
We are part of the problem, too.
"The world is a dangerous place to live; not because of the people who are evil (selfish), but because of the people who don't do anything about it (selfish)."
Skilo,
"Nobody says that fixing the NWO will fix everything. What they've done is put society's threats into a mental Pareto chart and the NWO came out in first place - so that's what gets the attention."
Well, quite a few people think AGW and peak oil are [surprisingly scientifically established] hoaxes orchestrated by the NWO elites or "BFC", and, similarly, they believe financial crises are completely a function of top-down decisions by these same people, effectively ignoring the endogenous dynamics of a financial capitalist system. Those bubble/bust dynamics are capable of emerging regardless of the specific monetary system being used, although gold-backed and pure credit-backed systems operated through a central banking network tend to be much more effective than something like a sovereign money system.
I think the best way to describe the NWO is as an extremely virulent strain of capitalist class warfare that has crystallized and become most influential (damaging) in the dying phases of that system. It may have been initially formulated earlier, but it was most effectively transmitted and adopted after WWII with the natural trend of globalization. Basically, it is a last ditch attempt to save the system at all costs, and one that should neither be under-estimated as a threat nor placed in some all-powerful supernatural realm of systemic control.
A while back I got this book.
http://www.amazon.com/Artisan-Bread-Five-Minutes-Revolutionizes/dp/0312362919/ref=sr_1_1?ie=UTF8&qid=1313979521&sr=8-1
This afternoon I made a couple loaves of hard crust bread and gave one to our neighbor. If I can do it, you can certainly do it. Cost maybe 25 cents for two loaves.
If you don't like the world you have and you want to change it, it all starts with you so try this. Goodness happens too.
Not only that, when TSHTF you have a skill.
So reading about the victory of the rebels in taking over Tripoli, I cannot help being skeptical. The images of these rebels running around with what looks like really crappy weaponry and taking over Tripoli makes me thing that either Gaddafi never really had much of an army to begin with, or that they all turned against him and joined forces with the rebels.
I expected him to put up a better fight against these rebel forces.
Wondering if anyone else has been following this story and educate me on what is going on in Libya.
Hi to the board,
I probably won't be piping up too much, but since everyone is straining their eyes at the horizon for black swans, I have suggestions for your consideration.
It worked for Germany, Italy and Japan once upon a time: I'm going to guess that the world is not far from seeing a much larger version - your black swan to be some kind of made-up messiah.
As for TPTB and how that would help them and why, look at the likely agenda. One, in the quest for total control getting rid of the "free" literate would be a top priority. Since the one area where critics are able to be as outspoken and diligent as they please pretty well defines the sphere of JudeoChristendom (of nearly 14 million Jews, almost half are in the US) - well you can see where the handiest targets would be for those biowarfares some people keep promising us. Shut those mouthy ones up. Remember not everyone on the planet can just tune into the internet and post anything they like.
Two, control of money. Here again you're dealing with a core group who, whether adherents to the book or not, have a legacy against things like taking a chip in the hand. Another reason to focus on the aforesaid group once the decision is made to go ultimately digital. Cash money is a problem for them - they don't like people living off the financial grid.
Three, TPTB are clearly Malthusian in intent, and there is no doubt that they mean to thin populations. So it is a question of figuring out which are the most expendable and whose demise might best expedite their agenda.
People forget that the Islamic world is expecting the Mahdi, and that a whole lot of populations also could fall under the sway of anyone who would parcel out JudeoChristendom's wealth - and let's face it, those have been the wealthiest societies on the planet, the mendacity of whose currencies the armies defend. Someone could make a religious claim on such putative wisdom as dispensing with the afforementioned sector of humanity.
While I've been advised to keep it secular here, in thirty years of researching Jewish history, I admit that a lot of these images are well detailed in the book of this target people of TPTB wrath. All those pampered minions of the so-called democracies.
Religion meet state. When the coup comes, and it will, the new head of totalitarian state is probably going to make Michael Jackson look reserved.
@Ash,
Why has temperature remained flat over the last decade when over 300 BILLION tons of man made CO2 have been emitted if man made CO2 is the *driver* of global temperature increases as advocated by AGW?
Given that temperatures did not increase (essentially flat lined) over a decade where over 300 billion tons of CO2 have been emitted by humans, how do you conclude that AGW has been "scientifically established?"
The scientific prediction was for a hockey stick... the result was a flat line.
When the reality has been completely different than the hypothesis, doesn't the hypothesis have to be questioned?
FrankSchoenburg:
I haven't seen Century of Challenges, but based on what I've read by stoneleigh and like-minded people, I'm pretty confident that it's because she's referring to total debt, not just government debt. In other words, it's what you get when you add government and household debt. check out: http://gailtheactuary.files.wordpress.com/2011/07/united-states-debt2.png
a figure from the post http://ourfiniteworld.com/2011/07/11/the-link-between-peak-oil-and-peak-debt-part-1/
It puts debt at around $50 trillion, which is about 350% of GDP.
@ Asim: You are right, they look pretty ratty. Then again, they had absolute control of the sky through NATO. If a command and control bunker started to give orders, it was located and put out of business very quick. Though an Air Force can never control the ground, fighting without an Air Force is an impossible battle for very long.
re: Revolutions
Groov'nor,
I agree with you. There is no possibility of any revolution taking place in the USA or the UK - France is another matter.
I have some experience of revolutions as I was born when Egypt had a king and a "revolution" took place two years later. I was largely formed in an "revolutionary" society. In retrospect, it is clear that it was really a coup d'état - the young officers took over and retired their superiors on full-pension. These officers were very popular as the country was really being run from London. These officers received a lot of material and ideological support from Yugoslavia's Tito - i.e. indirectly from Moscow. Despite all its popular support, it needed help from abroad. Also, Egypt had recently been thrashed by a much smaller Jewish army (before Israel came into being) in 1948. Plenty of reasons there for people to be pissed off. The leader of this coup d'état made his name for beating off a Jewish military attack.
In 1978, I had been living in Tehran for 4 years. I saw a real revolution in close-up and technicolour and in Dolby. Here, once again, people were massively pissed off with a ruling elite that got its orders this time from Washington.
Endless promises were made and massive fortunes were stolen and salted abroad. Lot of people were deceived by the rhetoric and moved their fortunes from abroad into Iran. I met one guy later in London (we shared the same boarding-house in Knightsbridge in 1981). He was quite broke and turning alcoholic. He was an Iranian Jew and used to own a string of properties in that exclusive part of London. He sold his portfolio and moved his money to Iran - just in time to lose it all and have to flee - I think he owed his banks there a lot of money.
The revolution was successful because pretty well all the middle-classes were behind it. Of course, they all had different ideas as to what they wanted to replace it. The Shah and his Israeli/American-trained and much-feared SAVAK, had been pretty thorough at destroying all centres of opposition. The big landowners had lost their lands to the American-inspired White Revolution - the Shah/State grabbed it and bits were given to the peasants. Let's not forget these landowners had their own private militias. BTW, the Wikipedia article was clearly written by people close to these "reforms" so do not take it too literally.
The only two sources of organised opposition to the Shah were the (Stalinist) communist party of Iran and the religious leaders (Mullahs). These two evils made a deal to cooperate. Of course, as soon as things were going their way, the Mullahs (Khomeini) turned on the communists and executed them en masse. The communists had revealed themselves so they were now an easy target.
I hardly need mention that the phrase "out of the frying-pan and into the fire" means what it really says. Be careful of what you wish for ...
@jal
I have often thought of the Manhattan situation that you described above as a good example of human resourcefulness overcoming energy/growth constraints. From what I understand of the period, and this dovetails with what you were saying, NYC was dealing with manure piles on the streets that would grow to upwards of 20 feet and remain un-cleared throughout the summer months. Moving towards 1900, there were concerns that NYC was destined to fail as a city because it’s transport system relied upon horses, and the city was unable to adequately clear the refuse from the system. There were a number of opinion pieces written during this period that argued NYC was destined to be a failed experiment. However, in just a few years time the automobile replaced the horse as the primary means of commercial/human transport in the city and the doomers were put to rest.
This problem was really an energy problem; how to feed 4 million closely cohabitating humans on a small island using technology (horses) that have externalities accelerating past the extent in which they could be mitigated. The answer: technology. Of course, far more people are killed in automobile accidents (per year / adjusting for population) in NYC than were killed by infectious diseases…
For a while, this story was like a warm blanket that I could snuggle up to when thinking about our current energy crunch. Sure, fossil fuels aren’t perfect; replacing one set of problems with another….but they allowed the NYC of the 20th Century to occur.
However, as has been demonstrated on this site through the tireless work of I&S, there just isn’t a magic bullet in the pipeline that will relieve our current energy crunch.
In any case, thanks for reminding me about that small part of the American experiment.
1st comment
Skilo,
"Why has temperature remained flat over the last decade when over 300 BILLION tons of man made CO2 have been emitted if man made CO2 is the *driver* of global temperature increases as advocated by AGW?"
What data are you looking at?
http://www.nasa.gov/topics/earth/features/2010-warmest-year.html
http://www.nasa.gov/pdf/509796main_GISS_annual_temperature_anomalies_running.pdf
Take some time out to study this website and ask yourself, does it really make more sense to believe that AGW is the greatest conspiracy ever perpetrated on mankind, or the inevitable (though complex and non-linear) consequence of burning billions upon billions of tons of stored carbon. And do keep in mind the simple and undeniable fact that this planet is warm enough to sustain life as we know it BECAUSE the gases that comprise our atmosphere trap heat. Change the composition of these gases and there will be effects on the heat-trapping qualities of the atmosphere. I think we can all agree that TPTB are some devious bastards, but conning the vast, vast majority of national academies of sciences, peer reviewed journals, university climate scientists, etc into participating in an concerted effort to subvert the pursuit of objective scientific knowledge in exchange for ? seems a bit of a stretch. I am by no means the last one to challenge conventional wisdom and mainstream thinking, but if AGW was really some elaborate hoax, unsupported by the observable, measurable data- wouldn't we expect that thousands of scientists would be willing to pursue the ridiculously more generous paychecks that can be earned shilling for the American Petroleum Institute?
If you are going to challenge AGW with assertions that fly in the face of the broadly accepted scientific consensus, perhaps you could provide us with some unimpeachable data?
SecularAnimist -
I'd find it easier to understand the points you are trying to make if you spend less time on ridicule and explain more. If you are trying to be persuasive or convey information, it's not working for me. Your emotion comes across loud and clear - your disdain, disrespect for others, and extensive use of ridicule - but this communication style almost completely clouds whatever interesting things you are trying to communicate.
For example, issues of overpopulation are interesting to me. I was interested to hear whatever points you might have to make, but all you did was ridicule the other poster rather than explain why he was wrong. As a result, I learned nothing from the post.
If you are going to challenge AGW with assertions that fly in the face of the broadly accepted scientific consensus, perhaps you could provide us with some unimpeachable data?
progressivepopulist,
How do you explain the following?
The Earth is Cooling
BTW, I doubt if the American Petroleum Institute is particularly interested in this debate since every barrel of oil seems to have a willing buyer.
@progressive populist...
re: Argument that people won't tend to vote their economics and the media isn't a complete puppet that would play along...
Not only isn't it not likely, I expect it.
Did you know that al Qaeda's most active operative dined with the Secretary of the Army at the Pentagon shortly after 911? Surely, if it happened, you would know, right?
Do you know this?
http://www.telegraph.co.uk/news/worldnews/northamerica/usa/8079397/Cleric-linked-to-al-Qaeda-dined-at-Pentagon-after-September-11.html
You do know that the Libyan rebels are comrpised of al Qaeda and there is no effort to eliminate them, right?
http://www.telegraph.co.uk/news/worldnews/africaandindianocean/libya/8391632/Libya-the-West-and-al-Qaeda-on-the-same-side.html
You do know that the military is protecting the trillion dollar heroin trade in Afghanistan, right?
http://www.youtube.com/watch?v=6A6SfyBCPNI&feature=player_embedded
Do you have any idea how much effort it takes to grow and transport a trillion dollars of heroin within a few years?
Did you know the government made a deal to allow tons and tons of cocaine into the US - a "free pass" as it were?
http://www.elpasotimes.com/ci_18608410
Did you know the government was handing out guns like candy to the very same drug cartel they allow to traffic in tons of cocaine?
http://www.uncoverage.net/2011/07/fast-and-furious-report-says-sinaloa-cartel-has-enough-u-s-guns-to-be-an-army/
Did you know Bayer knowingly sold contaminate Factor 8 into Europe for years - with HIV and hepatitis.
http://www.youtube.com/watch?v=wg-52mHIjhs
When you throw around billions of dollars and get people dependent on the cash, yes, I expect people to sing to your tune.
And the media does its job, lying to the people in order to please the "higher ups..."
http://www.youtube.com/watch?v=eZkDikRLQrw
http://www.youtube.com/watch?v=5x7o0sNrulg&feature=player_embedded
I need to see the original data as NASA has been caught manipulating temperature data in the past.
http://uk.answers.yahoo.com/question/index?qid=20100925164503AAsj561
I will look into the temperature data some more. I thought I had seen some graphs that showed temps about flat lining over the last 10 years. If NASA contests that, I have some homework to do.
As for conspiracies... our entire government is founded on them. What do you think lobbying is all about?
@Nassim,
Thanks for the link - that is more in-line with the temp data I have stored in my head.
I wouldn't call it "declining," but it isn't rising either - hence the "flatlining in the face of 300 billion tons of CO2 thrown in its face.
As for consensus, that's a media fabrication as far a my research has revealed.
This documentary is very good - and when I ask AGW adherents for comment they have never do it...
http://www.garagetv.be/video-galerij/blancostemrecht/The_Great_Global_Warming_Swindle_Documentary_Film.aspx
It shows how AGW is being used to justify keeping certain population in abject poverty, often leading to an early death for these people.
And guess who owns the carbon market?
http://www.roadoutofbabylon.com/2009/11/rothschilds-own-carbon-market/
http://euro-med.dk/?p=13656Chicago Carbon Exchange?
Based on this article...
http://www.guardian.co.uk/science/2011/aug/18/aliens-destroy-humanity-protect-civilisations
I think some of the AGW "scientists" need to establish their sanity before "hiding the decline," as it were.
BTW, my position is that the system is too complex to reasonably understand at this point and giving Al Gore and Lord Rothschild our money won't reduce the temperature - especially when they give waivers to their BFC front corporations...
http://www.theblaze.com/stories/surprise-ge-scores-first-exemption-from-obama-greenhouse-gas-regulations/
...but you business will not get a waiver...
Nice way to create a monopoly with monopoly pricing, no?
Even better is to get the people to demand it!
These people are good. Very, very good. Unfortunately, good at being evil.
@Skilo
Interesting links, but....
To Quote Supergravity:
"Randomly associating conspiracy-flavored themes, such as the fluoride plot, in reaction to this serious evidence is rather disingenuous, a favored rhetorical tool of misdirection and negative association to discredit validity, you must have used it by accident or internalised it to enable denial."
Come to read the post,charts and data points with intelligent narrative.
Stay for the intelligent,reasoned comments,that always stretch the mind a bit,and increases my understanding of where we be.
Very,very few places on the net where this happens. Hoping the .com will continue whats going on here...
The discussion on revolution/revolt plausibility,as well as everyone's view on the topic was gold.Though I would hope for a different outcome than the most likely postulated,it is easy to see truth in all responses to this topic.
Tired..
Bee good,or
Bee careful
snuffy
Temperature-Co2 relation in geological time;
http://www.biocab.org/carbon_dioxide_geological_timescale.html
http://www.geocraft.com/WVFossils/Carboniferous_climate.html
Such graphs, while increasingly uncertain going backwards, do indicate there's no linear relationship between Co2 and temperature over geological time. Atmospheric Co2 has very likely been as high as several thousand ppm in some eras while allowing a stable and thriving biosphere, at comfortable sub-tropical temperatures, although oxygen may have been higher too, and other atmospheric constituents and temperature-related variables may have been significantly different from now.
We seem to be about at the lowest temperature in a few hundred million years right now, still in an interglacial period, while co2 is still almost at its bare minimum over geological time.
Of course the rate of increase also matters, very high rates of increase would logically be more disruptive, but in several epochs levels seem to have risen relatively rapidly with no correlated temperature rise or extinction events.
Thats not to say a sufficiently rapid co2 rise, such as by vulcanic expulsions, couldn't disrupt things, but its just not evident that co2 increase alone, rapid or no, usually causes temperature rises or mass extinctions. According to extrapolated correlations, Co2 rises generally seem to be a delayed effect of temperature increases, rather than the cause of them, but there may be exceptions, and different dynamics to these interglacial periods without much precendent in geological time.
skilo said...
The root cause to humanity’s ills is exactly as the Bible elucidates...
Selfishness.
Buddhists disagree. The root cause of humanity’s ills is ignorance.
Of what? Ignorance of the basic factors of human existence, to wit: 1) all phenomena arise due to causes and conditions and cease when the causes and conditions change; 2)everything is interdependent; 3) nothing is permanent; 4) suffering is a basic part of life; and 5) our very strong sense of a permanent self is a delusion.
This ignorance is fostered through the duality of language/thought and is reinforced via our limited perceptual apparatus. Our ability to extract from experience and remember is both our gift and our downfall. A gift because it prevents our friends from eating the bad
mushroom that killed our brother; our downfall because our limited perceptions--so
evident lately on these pages--prevent us from truly understanding the vast, knotted net of cause and effect.
skilo also said:
We are bad.
Buddhists would also disagree with this. It is only delusional thinking that makes us so. Or rather, it is delusional thinking that makes us unskillful. Good and bad are impotent terms in Buddhism. Unskillful behavior is defined as behavior that leads to unnecessary suffering; skillful behavior is defined as behavior that leads to “peace.” Free will is an essential part of Buddhist thought; free will
permits an unskillful person to make a shift towards the path of skillful living at any point. Even Snidely Whiplash has the potential to “wake up” from his sleep-walking life of unskillful ways!
Long timescales lose resolution, for a look at recent interglacial patterns, the co2 400k and co2 50k graphs are useful;
http://www.geocraft.com/WVFossils/last_400k_yrs.html
http://www.geocraft.com/WVFossils/last_50k_yrs.html
These do show a stronger correlation between temperature and co2 in recent times, although its mentioned that "during the Ordovician Period 460 million years ago CO2 concentrations were 4400 ppm while temperatures then were about the same as they are today."
Such estimates have some degree of uncertainty, but its likely about right. Oceanic acidification may have had different dynamics back then, we do seem to find fossils of shelled sea creatures from that time, yet at thousands of ppm co2.
Compared to the last 50,000 years, the recent rapid rise from ~270ppm to 380ppm is highly anomalous, but when relating to longer timescales, 380ppm itself doesn't seem to be overly high; the rate of increase may be unusual but not unique. The biosphere could be marginally disrupted and some minor extinctions triggered, or entire ecosystems reshuffeled, but even rapid changes are generally not a problem for the biosphere in totality.
There have been more violent fluctuations of co2 than the latest change without a hint of coinciding mass extinctions in fossil record, yet sedentary civilization may have particular difficulty adapting to such changes, being especially vulnerable to crop viability and freshwater availablity in a way that other ecosystems just dont care about, perhaps causing a bias in the perception of severity to these fluctuations.
Bosuncookie
Yes.
Aaron Russo interview excellent and inspiring. Thanks for the link.
Natural climate fluctuations, whether gradual or rapid, are a primary evolutionary driver.
In the hypothetical event that the current changes could be proven as completely natural and non-anthropogenic in origin, then would we have a right, as a single species, to block such natural changes, to unnaturally fix the climate in its current configuration just to avoid disruptions to the growth of cities, but thereby removing an evolutionary driver and so interfering with the otherwise natural development of life?
Allegedly, social engineers stated decades ago that they intended to use the idea of climate change, anthropogenic or not, as a tool of social control, mainly by virue of its associated guilt complexes, which some parties are definitely doing, although it doesn't mean the entire field is fraudulent.
I appreciate the sceptic standpoint, though they might doubt too much, yet I do abhore eco-fascism, which is the other end of the spectrum, they're less likable than the average climate sceptic, and often extremist in application of policy.
Disruptive climate change may indeed cause misery and dehumanising conditions, water shortages, crop failures, yet the eco-facsist solutions are dehumanising directly, and with more certainty of ill effects, whereas AGW may still be partially or even completely disproven, depending on how many datasets could reasonably have been falsified, models misalligned, scientists corrupted or misled, if any alternative explanation of the observed co2 rise is tenable, and whether correlations to temp. may be less linear.
Although its certain co2 has risen for some reason or combination of reasons, our combustions, deforestations, or even for entirely non-human reasons, its not certain whether temperature has risen as a result of this, or whether its still rising at all. 0,2 degrees is still pretty close to a statistical error, and many sensors are located in urban heatsinks, or so I've heard.
Sealevels dont seem to be rising much either, its even rumored that levels have actually dropped slightly since measurements began, after rising at first, but again small margins for error at tenths of millimeters change.
Climategate does show the existence of perverse profit motivations for corrupting the scientific process, but it may not be a general pattern in climatology to falsify datasets in exchange for grants. Peer-pressure conformity may also have distorted the validity of the science, as has happened many times before in various fields.
There has been a sudden phase-change of the Gadhaffi loyalists, the rebels have seized Tripoli with little resistance, some thousands dead. After intensive Nato bombing, the demoralised troops must have abandoned the Ghadaffi power structure.
This comes as a suprise, there were indications that the regime was failing, but I hadn't expected such a swift seige. I thought Tripoli might be an obstacle for those rebels, but Nato did bomb the humanity out of the city lately, and weakened the regime enough to collapse command functions, although the majority of people there might rather be called neutral or still pro-Ghadaffi, rather than revolutionary.
There might still be a civil bloodbath or political cleansings, violence between the tribes, as the rebels dont seem the best kind of reformers, and many people might remain loyal to the fallen regime for some time, and antagonistic to western interference.
Nato has engaged in warcrimes there, western 'advisors' for the transitional government might not be fully welcome.
Hi Supergravity
This is the machine at work and Gadaffi was a fool to think that he had a chance.
The Greek people protested but it did not help.
I think we have no choice but to shut our mouths
These people go to all length to achieve their goals.
They do do have casualties but the person on top is safe.
Here is one causality
From all signs he was working for the that group.
This is true story
http://www.youtube.com/watch?v=jJy_smL_vfY
Ok; one more time about climate change.
I've been an invited speaker at 3 international climate change conferences; starting in 1988, where it was called "climate change".
I know all the people - intimately; and have for over 20 years now.
Do you know how the wealthy people of the world decide "what is true"? And I'm totally serious here.
X is true if a trusted person tells you they believe it. All the data and logic in the world does not work nearly so well. That is how they decide what to do with their money and other resources. Always.
I know the people in the climate change world. I trust and believe the 99% who say it's really, human caused, and yes it's mostly carbon dioxide.
Anyone who tells you the consensus is fake, and the data is fake, is, in my non-humble opinion, either a fool or a paid disinformation agent- or a human who wants to believe that.
There is; proven; a vast and ongoing, persistent campaign of increasingly sophisticated disinformers. They have no qualms about telling their graphs are the true ones, while lying through their teeth; and most effectively, they find people who got C- grades in science who they can persuade; who then become exceedingly convincing prosyletizers; because they are also true believers and sell with the conviction of faith.
You can go to my blog and decide if I'm a real person or not. Then go from there.
Hi Greenpa
I have heard that if we were to stop all the planes and cars and everything the ice we have in the north pole will melt and the damage has already been done.
Sometimes climate change happens naturally but from all signs we did this one
Jack: "the damage has already been done."
That is indeed the private/personal consensus on the inside. The other inside consensus; there are vast unknowns ahead of us; both known unknowns; and surprises.
I am agnostic on the AWG issue, but leaning toward the CO2 causation side. The most brilliant scientist I know, a guy who deals with the nuts and bolts of general relativity with more ease than I can balance my checkbook, doesn't believe in the CO2 hypothesis. OTOH, he is an ex-patriot Russian Jew and affiliated with neocon groups, so that has to be added into the equation.
There seems to be two major questions connected with global warming. The first is whether it is occurring at all. If one answers (1) with a yes, then the next question is whether it is caused by rising CO2 levels. It seems to me fairly indisputable that the rising CO2 levels of the past 100 years (a fact) is caused by the burning of fossil fuels. While there are other potential causes of it (hydrated methane in the ocean being released, volcanism, cow farts :-) none seems to be particularly active at the moment.
For me, global warming over the past 100 years is a fairly well established fact. My most intense experience with it was in the high Andes in Peru, when I went by horse and foot to the glaciers. The ones I saw had retreated a km in the last 20-30 years.
People who accept GW as a fact, then argue about the cause. The primary alternative cause to CO2 is increased solar output, and there is some pretty serious evidence that this is going on. This is the theory that my brilliant Russian neocon friend subscribes to. There is little question that a relationship between CO2 and warming involves lag times and is non-linear, making it that much more complex.
Also, one must bear in mind that like any catastrophe, real or imagined, the NWO has found a way to phuck us over manipulating it. As the current scumbag mayor of Chicago, in an unconscious parody of Naomi Klein put it, "Never let a good crisis go to waste." It seems that their screw job of choice is to attempt to impose a "carbon tax" on the entire planet and use the proceeds to further imprison us.
However, as I have said in relation to the population question, one should not allow the attempted manipulations of the elites confound one's critical thinking, other than putting one more on guard to potential fraud due to their vast financial resources.
As far a GW goes, there is not a God damn thing that is going to be done about it, other than the potential to further tax the pissants of the world, so any remediation is moot. Fighting against a carbon tax would be the primary political objective.
In summary, I think that GW is real and am agnostic whether it is caused by CO2 or an increase in solar activity.
re the military collapse of the Gadaffi regime. I have been following it fairly closely, and I must admit that I was surprised with its rapidity. I thought he would have a lot more armed support from the population at large. Since the "rebel" fighters are primarily al Qaeda, just reinforces the theory that al Qaeda is a subsidiary of the CIA. Anyway, onward and upward. Next target Syria. Then Pakistan with a real confrontation with China and Russia.
Krugman FTW!!!.
El. Gal: " guy who deals with the nuts and bolts of general relativity with more ease than I can balance my checkbook, doesn't believe in the CO2 hypothesis."
yup; likewise Freeman Dyson, who is not stupid.
But- I'm a very very serious student of the History of Science; with an emphasis on the human factor. And the history of science is abundantly supplied with brilliant senior scientists- who go to their graves adamantly believing things everyone else knows to be false. I collect examples; fantasizing about writing a book someday.
Fossil microbes discovered in Australia could be Earth's oldest known life form
http://www.guardian.co.uk/science/2011/aug/21/fossil-microbes-western-australia
Greenpa
"Some of the microbes are likely to have fed off pyrite, a sulphur-rich iron compound, and produced sulphate as a waste product. Others used this sulphate and produced hydrogen sulphide, the gas that smells like rotten eggs."
Since sulphate to sulphide is a reducing reaction, this would imply a whole different sort of photosynthesis other than chlorophyl which I would find unlikely. Comment?
Also,
The blogspot monster seems to be acting up again. Suggest that one writes his comments in a WP and then paste into the monster.
New post up.
A reality we wouldn't want to live in
.
@board
"falsify" has a technical meaning in science. To falsify a hypothesis (or theory) means to come up with empirical data that would not exist if the theory where correct. If a theory cannot be falsified, it is regarded as intrinsically bogus. eg. God created the whole universe yesterday, with a complete set of evidence, down to our memories, that everything had been here 'forever'. This theory is not falsifiable. It is also not taken seriously.
I have lived and gardened, later farmed, in the same place for 21 years now. My experience at this one dot on the map matches the global temperature graphs I've seen: A rapid rise from 1995-2005, followed by a plateau since then. Changes in the local flora and fauna have of course lagged, and have yet to stabilize. I'm still seeing new species.
So, clearly the global warming folks have an issue. The plateau is now long enough to need explanation. However, so do the "it's all sunspots" folks. Temperatures have stabilized, not headed down, and the rainfall pattern, cool wet springs, hot dry summers, has totally gone the AGW way, also for enough years to pay attention to.
Personally, I'm going with that good Dutchman, Henry Hudson. The Northwest Passage has been open for 4 years out of the last 500. The last 4. The anti-AGW folks are welcome to ping me the year it doesn't open.
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