Monday, November 28, 2011

November 28 2011: Are we there yet?

Russell Lee Are we there yet? June 1939
"Migrant children heading west in the back seat of the family car somewhere east of Fort Gibson in Muskogee County, Oklahoma"

Ilargi: Confused? No need to be. If you want to know who's right, follow these two easy steps:
  1. The bond markets are always right
  2. In case they seem to be wrong, refer back to 1)

The stock markets are giddily happy today, Wall Street up 2-3%, European exchanges as much as 5%. The bond markets don’t reflect this at all, they're at best divided.

10-year bond yields, Nov 28 11.00 AM EST:
  • Italy 7.20% down 0.817%
  • Spain 6.57% down 1.982%
  • Belgium 5.57% down 4.92%
  • Portugal 13.45% up 6.365%
  • Germany 2.31% up 2.089%
  • France 3.58% down 3.007%
  • Greece 30.90% up 3.439%
  • Hungary 9.03% down 5.544%
  • Austria 3.72% down 3.331%
  • Ireland 8.21% up 6.088%
  • US 2.03% up 3.45%.

Note: change percentages are not from zero, but from starting percentages. I’m sort of honored to have confused Dmitry Orlov with this. I think.

Basically, those peripheral countries that were battered last week (Italy, Spain, France) get a bit of a breather, while the rest (Portugal, Ireland) get hammered today, with Germany and the US thrown in for good measure.

And there's more to the story: Earlier today, Belgium sold €2 billion at a -euro era- record 5.66%, while Italy paid 7.2% on its €750 million 2023 bonds. They may both be down now from their earlier rates, but they paid the price alright.

Do the stock markets know something the bond markets don't? Fat chance. Call me tomorrow. The harder they come the harder they fall. And meanwhile refer back to 1). So why are stocks up, other than shorts that need to be covered?

Jill Schlesinger writes for CBS:
Stocks soar on Europe deal and strong holiday sales
European leaders are currently discussing a fiscal deal that would bring the countries even closer by making budget discipline binding and enforceable. The French budget minister described it "governance with real regulators and real sanctions."

In other words, instead of carrots only, the euro zone leaders are finally adding a few sticks. The hope is that with both carrots and sticks, the European Central Bank might be more interested in acting as the lender of last resort, much in the same way the Federal Reserve did during the financial crisis of 2008.

On top of the news out of Europe, it looks like the American consumer is NOT dead. Black Friday sales were up 6.6 percent over last year, according to ShopperTrak and the National Retail Federation said retail sales for the entire weekend were up over 16 percent, totaling $52 billion, or nearly $400 per person.

Ilargi: Last things first: Barry Ritholtz agrees to differ with those holiday sales numbers:
No, Black Friday Sales Were Not Up 16% (not even 6%)
If its the Monday after Black Friday, then its national hype the fabricated data day!

Every year around this time, we get a series of loose reports coincident with Black Friday and the holiday weekend. Each year, they are wildly optimistic. And like clockwork, the media idiotically repeats these trade organizations spin like its gospel. When the data finally comes in, we learn that the early reports were pure hokum, put out by trade groups to create shopping hype. [..]

Here is my challenge to the CEOs of the National Retail Federation and ShopperTrak: $1,000 to the charity of the winners choice that your forecasts for Black Friday, the Thanksgiving weekend and the entire holiday shopping season are wildly off. I bet you your forecasts miss the mark by at least 10%-20% (though I believe its closer to 40-50%).

Ilargi: Fun, nice, cute, but it's not surprising that numbers get tweaked in the US, where the National Association of Realtors perfected the sport during the housing bubble, and still has nothing on the national government and its number fubar.

Personally, I'm more intrigued by the first quote from Schlesinger's article, ”The hope is that with both carrots and sticks, the European Central Bank might be more interested in acting as the lender of last resort". I find that unsettling.

Central banks are supposed to be independent, right? From politics, and from all other -special- interests, right? Then how and why can European leaders be discussing political plans aimed at seducing their central bank into doing what the politicians want them to do? That doesn't seem right. At the very least.

In a very similar vein, Bob Ivry, Bradley Keoun and Phil Kuntz report the following for Bloomberg (which had to go to court to get the information):

'Fed committed $7.77 trillion to rescuing the financial system'
The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates [..]

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse. [..]

JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed’s Term Auction Facility "at the request of the Federal Reserve to help motivate others to use the system."

He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program’s creation.

Congress, at the urging of Bernanke and Paulson, created TARP in October 2008 after the bankruptcy of Lehman Brothers Holdings Inc. made it difficult for financial institutions to get loans.

Bank of America and New York-based Citigroup each received $45 billion from TARP. At the time, both were tapping the Fed. Citigroup hit its peak borrowing of $99.5 billion in January 2009, while Bank of America topped out in February 2009 at $91.4 billion.[..]

Lawmakers knew none of this. They had no clue that one bank, New York-based Morgan Stanley, took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages.

The firm’s peak borrowing occurred the same day Congress rejected the proposed TARP bill, triggering the biggest point drop ever in the Dow Jones Industrial Average. The bill later passed, and Morgan Stanley got $10 billion of TARP funds, though Paulson said only "healthy institutions" were eligible.

Had lawmakers known, it "could have changed the whole approach to reform legislation," says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size.

Ilargi: Huh? What? Is this my Mea Culpa? My moment to state I stand corrected? The Fed is independent after all!! To wit: they never told Congress what they were doing! The system works as it should work.....

Or does it? Is it truly within the legal intentions and limits of a central bank to put at risk, lend out, hand out, whatever you wish to call it, $7.7 trillion in taxpayer funds without telling either the taxpayers or their elected representatives about it? If so, why stop there? Why not make it $77 trillion?

If the independence of a central bank gives it unlimited access to anyone's money, with impunity, then we may have to rethink the entire undertaking. And that’s putting it extremely mildly.

No, it's complete nonsense of course, and what makes it possible regardless is that the Fed (and the ECB) are not just not independent from the political system (except when and where it suits them, apparently), they're most of all not independent from the banking system (which they're supposed to be watching and regulating, for crying out loud).

By now I'm really starting to wonder why the Fed stopped at $7.7 trillion, and getting worried about what else Bernanke may have up his sleeve. If it takes Bloomberg years to get the relevant information, and only then do Washington politicians come out and say they had no idea what went on, you need to ask yourself why they themselves didn't get the info, and what, if anything, they’ll do to make sure the tally won't eventually rise to $77 trillion.

Which in turn leads me to a ZeroHedge piece on derivatives:

$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months
[..] the Bank of International Settlements reported a number that quietly slipped through the cracks of the broader media.

Which is paradoxical because it is the biggest ever reported in the financial world: the number in question is $707,568,901,000,000 and represents the latest total amount of all notional Over The Counter (read unregulated) outstanding derivatives reported by the world's financial institutions to the BIS for its semi-annual OTC derivatives report titled "OTC derivatives market activity in the first half of 2011."

Indicatively, global GDP is about $63 trillion if one can trust any numbers released by modern governments. Said otherwise, for the six month period ended June 30, 2011, the total number of outstanding derivatives surged past the previous all time high of $673 trillion from June 2008, and is now firmly in 7-handle territory: the synthetic credit bubble has now been blown to a new all time high.

Another way of looking at the data is that one of the key contributors to global growth and prosperity in the past 10 years was an increase in total derivatives from just under $100 trillion to $708 trillion in exactly one decade. And soon we have to pay the mean reversion price.

What is probably just as disturbing is that in the first 6 months of 2011, the total outstanding notional of all derivatives rose from $601 trillion at December 31, 2010 to $708 trillion at June 30, 2011. A $107 trillion increase in notional in half a year. Needless to say this is the biggest increase in history. So why did the notional increase by such an incomprehensible amount?

Simple: based on some widely accepted (and very much wrong) definitions of gross market value (not to be confused with gross notional), the value of outstanding derivatives actually declined in the first half of the year from $21.3 trillion to $19.5 trillion (a number still 33% greater than US GDP).

Which means that in order to satisfy what likely threatened to become a self-feeding margin call as the (previously) $600 trillion derivatives market collapsed on itself, banks had to sell more, more, more derivatives in order to collect recurring and/or upfront premia and to pad their books with GAAP-endorsed delusions of future derivative based cash flows.[..]

There is much more than can be said on this topic, and has to be said, because an increase of that magnitude is simply impossible to perceive without alarm bells going off everywhere, especially when one considers the pervasive deleveraging occurring at every sector but the government. All else equal, this move may well explain the massive surge in bank profitability in the first half of the year.

It also means that with banks suffering massive losses, and rumors of bank runs and collateral calls, not to mention the aftermath of the MF Global insolvency, the world financial syndicate will have no choice but to increase gross notional even more, even as the market value continues to get ever lower, thus sparking the risk of the mother of all margin calls: a veritable credit fission reaction.

Ilargi: I may be wrong, but I still think I detect a notion of surprise and/or anguish in Tyler Durden's assessment. And as far as I can see, there is no need for any of that.

Let's just stick with CDS for now. They're the proverbial only game left in town. CDS (and some other derivatives) were invented for one main reason: for financial institutions to hide their debt and losses (or risk).

Whatever worthless paper they have in their books, they can take -virtually- out all the risk it poses by buying "insurance", for a fraction of the "value" of that paper. Works miracles for reserve requirements. That's why CDS exist. They free up "assets" to "invest" (take to the casino, everything on red). And why should the banks care about counterparty risk? That's for someone else to worry about (like the Fed and/or other regulatory bodies).

But yes, this game is running thin like so many others. Still, what can they do? Take all the crap on to their balance sheet? They don't have a choice. They need to keep on buying swaps, even if they highly doubt the solvability of the party they buy it from. That's not their responsibility: if the regulators allow that party to write the swaps, they're off the legal hook.

An underlying very interesting question is what part of existing swaps has been "solved". It can't be all that much. After all, the paper the swaps "insured" against will largely still be in the vaults; nobody wants it. Well, unless they sell it for a big loss. But that triggers all sorts of unintended consequences: increased reserve requirements, for one. Price discovery, for another.

Better to hang on to the initial swap then. That is, until it expires. And then you buy a new one, even if it costs far more. It's all OTC, so your buddy next door will give you a good deal. What, me, worry?

Most important: Look at what happened with AIG, and look at the numbers involved: nobody has that kind of money. Nobody. None of this stuff was ever issued with the idea in mind of an actual (forced) "credit event" pay-out. It was all just an accounting trick from the get-go. But in this case one that can blow the entire global financial system out of the water in one fell swoop. And in one fell day.

Meanwhile, as the mayhem increases, it hard to see how the OTC derivatives markets could be prevented from increasing with it. Simple, only game left in town.

What else? Steve Keen. And the debt jubilee.

There's a BBC Hardtalk video that many people have commented on. In it, Professor Keen talks a bout a plan to let the government hand out money to citizens, which they can use to first pay off their debts, and apply to other purchases once the debt is paid. Sort of a debt jubilee, but sort of different.

In what I have read so far, and I’ll be the first to concede that no matter how much I read, I’m sure to miss things too, the focus is on the jubilee idea. But what I took away from it is something else.

On the BBC page where the video is located , there's this text, which -curiously- is not part of the conversation itself:
Economist Steve Keen is one of the few economists to have predicted the global financial crisis and now he says we are already in a Great Depression.

He says the way to escape it is to bankrupt the banks, nationalise the financial system and pay off people's debt.

He admits what he is advocating is radical but says it is time governments gave money to debtors to pay down debt instead of to creditors such as banks who have held onto it.

Ilargi: He's not talking about a "simple" debt jubilee; Keen propagates nothing short of a revolution. The money he wants to hand out will be government issued money, which carries no interest. He wants to bankrupt the banks (and get rid of the Fed, presumably), and let money be issued by governments. No more money issued as debt. It's a miracle the BBC had him on in the first place...

Now, for starters, I don't really see how the somewhat romanticized biblical notion of a debt jubilee could be applied to our globalized financial system (I intend to talk a bit more about that soon, need to catch up on my Bible first...). Is Obama supposed to tell Americans, and their banks and other companies, that they won't have to honor their obligations to foreign creditors (yeah, Iceland comes to mind, but then, that's not even the size of Cleveland)? Or is the UN going to declare a planetary jubilee? It makes little sense to me.

Keen's plan does make sense, but it would wipe out the entire global banking system. Which may be a good idea, and much better than what we have today, but it would not be taken lightly or gently by those invested in that system. Who just happen to be the richest and most powerful people on the planet.

Yes, in theory it could be done. And it would solve a lot of the trouble that has become inevitable in the present system. But then again, that present system has all the political power needed to maintain the status quo, and then some. All the power brokers need to do for now is to make sure you're wrung and squeezed through the austerity wringer, and they'll be fine. Here's that Keen video:

Ilargi: It all also makes me think of a piece by Dr. Paul Craig Roberts (of Reagan administration fame) I read over the weekend. Roberts stipulates that the failed German bond auction last week is a sign of Goldman Sachs taking over Europe:

Bankers have seized Europe: Goldman Sachs Has Taken Over
On November 25, two days after a failed German government bond auction in which Germany was unable to sell 35% of its offerings of 10-year bonds, the German finance minister, Wolfgang Schaeuble said that Germany might retreat from its demands that the private banks that hold the troubled sovereign debt from Greece, Italy, and Spain must accept part of the cost of their bailout by writing off some of the debt.

The private banks want to avoid any losses either by forcing the Greek, Italian, and Spanish governments to make good on the bonds by imposing extreme austerity on their citizens, or by having the European Central Bank print euros with which to buy the sovereign debt from the private banks. Printing money to make good on debt is contrary to the ECB’s charter and especially frightens Germans, because of the Weimar experience with hyperinflation.

Obviously, the German government got the message from the orchestrated failed bond auction. As I wrote at the time, there is no reason for Germany, with its relatively low debt to GDP ratio compared to the troubled countries, not to be able to sell its bonds.

If Germany’s creditworthiness is in doubt, how can Germany be expected to bail out other countries? Evidence that Germany’s failed bond auction was orchestrated is provided by troubled Italy’s successful bond auction two days later.

Strange, isn’t it. Italy, the largest EU country that requires a bailout of its debt, can still sell its bonds, but Germany, which requires no bailout and which is expected to bear a disproportionate cost of Italy’s, Greece’s and Spain’s bailout, could not sell its bonds.

In my opinion, the failed German bond auction was orchestrated by the US Treasury, by the European Central Bank and EU authorities, and by the private banks that own the troubled sovereign debt.

My opinion is based on the following facts. Goldman Sachs and US banks have guaranteed perhaps one trillion dollars or more of European sovereign debt by selling swaps or insurance against which they have not reserved. The fees the US banks received for guaranteeing the values of European sovereign debt instruments simply went into profits and executive bonuses. This, of course, is what ruined the American insurance giant, AIG, leading to the TARP bailout at US taxpayer expense and Goldman Sachs’ enormous profits.

If any of the European sovereign debt fails, US financial institutions that issued swaps or unfunded guarantees against the debt are on the hook for large sums that they do not have. The reputation of the US financial system probably could not survive its default on the swaps it has issued.

Ilargi: Again: Fun, nice, cute, and I do see where Dr. Roberts is coming from. But I still don't get it. If Goldman is the all encompassing force this suggests, why would they go through such an overt way of showing off that force? A phone call to Merkel wouldn't suffice? We'll make sure nobody buys your paper if you don't do as we say? Nice little country you got there; wouldn’t want anything to happen to it, would you? I've said it often: power and visibility don't match.

And if Germany would have any initial reaction to the failed auction, if would be to shy away even further from Eurobonds or what have you, from any kind of plan that would force it to take on more peripheral debt, wouldn't it? If its own rating and its own bond interest rates are up for grabs, why would it be more, instead of less, likely to comply with the big bad Goldman?

Let's at the very least wait till the next German bond auction before we arrive at any conclusions. That the banking system has an extremely unhealthy grip on our societies is plain for everyone to see. But that's a reason to be more, not less, cautious when it comes to pointing to specific events and their meaning and causes.

One more. If you think that any sort of "solution" for Europe, and I'm sure we'll see many proffered as we go along, will make any difference for more than a fleeting moment, check out this article and graph from The Economist:

House of horrors, part 2
Many of the world’s financial and economic woes since 2008 began with the bursting of the biggest bubble in history. Never before had house prices risen so fast, for so long, in so many countries. Yet the bust has been much less widespread than the boom.

Home prices tumbled by 34% in America from 2006 to their low point earlier this year; in Ireland they plunged by an even more painful 45% from their peak in 2007; and prices have fallen by around 15% in Spain and Denmark.

But in most other countries they have dipped by less than 10%, as in Britain and Italy. In some countries, such as Australia, Canada and Sweden, prices wobbled but then surged to new highs. As a result, many property markets are still looking uncomfortably overvalued.

To assess the risks of a further slump, we track two measures of valuation. The first is the price-to-income ratio, a gauge of affordability. The second is the price-to-rent ratio, which is a bit like the price-to-earnings ratio used to value companies.

Just as the value of a share should reflect future profits that a company is expected to earn, house prices should reflect the expected benefits from home ownership: namely the rents earned by property investors (or those saved by owner-occupiers). If both of these measures are well above their long-term average, which we have calculated since 1975 for most countries, this could signal that property is overvalued.

Based on the average of the two measures, home prices are overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden. Indeed, in the first four of those countries housing looks more overvalued than it was in America at the peak of its bubble.

Ilargi: Watch that, and remember what all the reports and bailouts and plans are based on: the quintessential return to growth. Watch it once more, and realize that that is just very simply not going to happen.

Look at Canada, France, Sweden, Spain, Netherlands, Britain. And then process the fact that US home prices are supposed to be undervalued by 22% vs income, while we all know there are over 10 million empty US homes that are not even on the market yet. The US will have people walking, nay, living, on Mars before its real estate market makes up for that alleged 22% downfall.

Draw your own conclusions from there on in. This may help: New 40 Year Low Expected in UK House Sales for This Year. And no, it's not different this time in that particular country where you happen to be. This credit crunch is global.

Lastly, here's your Europe agenda for this week. It’s going to be so much fun, never a dull moment. We have entered a phase where the entire system is at risk. And reluctant though I am, I would suggest that perhaps, maybe, it might be an idea to get some cash out of your accounts and into your very own pockets. More so in Athens, Greece than in Athens, Georgia, but still. let’s just say: get out some cash for Christmas.

Tuesday November 29 :
• Italy bond sale - 2014, 2020, 2022 bonds (Total max. €8 billion)
• Nov 29-20 - Eurogroup and Ecofin meetings, Brussels

Wednesday November 30
• Italy bond maturations - €8.8 billion in 6-month bonds

Thursday December 1
• France bond sale - OAT, 2017, 1021, 2016, 2041 (Max. €4.5 billion)
• Spain bond sale - Maturity TBC

Ilargi: Are we there yet? No, but we won't be long now. And besides, where we're going there's no milk and honey, so enjoy the ride, enjoy your life, enjoy the day, while you still can.

Prepare for riots in euro collapse, Foreign Office warns
by James Kirkup - Telegraph

British embassies in the eurozone have been told to draw up plans to help British expats through the collapse of the single currency, amid new fears for Italy and Spain.

As the Italian government struggled to borrow and Spain considered seeking an international bail-out, British ministers privately warned that the break-up of the euro, once almost unthinkable, is now increasingly plausible. Diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis.

The Treasury confirmed earlier this month that contingency planning for a collapse is now under way. A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time. "It’s in our interests that they keep playing for time because that gives us more time to prepare," the minister told the Daily Telegraph.

Recent Foreign and Commonwealth Office instructions to embassies and consulates request contingency planning for extreme scenarios including rioting and social unrest. Greece has seen several outbreaks of civil disorder as its government struggles with its huge debts. British officials think similar scenes cannot be ruled out in other nations if the euro collapses.

Diplomats have also been told to prepare to help tens of thousands of British citizens in eurozone countries with the consequences of a financial collapse that would leave them unable to access bank accounts or even withdraw cash. Fuelling the fears of financial markets for the euro, reports in Madrid yesterday suggested that the new Popular Party government could seek a bail-out from either the European Union rescue fund or the International Monetary Fund.

There are also growing fears for Italy, whose new government was forced to pay record interest rates on new bonds issued yesterday. The yield on new six-month loans was 6.5 per cent, nearly double last month’s rate. And the yield on outstanding two-year loans was 7.8 per cent, well above the level considered unsustainable.

Italy’s new government will have to sell more than EURO 30 billion of new bonds by the end of January to refinance its debts. Analysts say there is no guarantee that investors will buy all of those bonds, which could force Italy to default. The Italian government yesterday said that in talks with German Chancellor Angela Merkel and French President Nicolas Sarkozy, Prime Minister Mario Monti had agreed that an Italian collapse "would inevitably be the end of the euro."

The EU treaties that created the euro and set its membership rules contain no provision for members to leave, meaning any break-up would be disorderly and potentially chaotic. If eurozone governments defaulted on their debts, the European banks that hold many of their bonds would risk collapse.

Some analysts say the shock waves of such an event would risk the collapse of the entire financial system, leaving banks unable to return money to retail depositors and destroying companies dependent on bank credit. The Financial Services Authority this week issued a public warning to British banks to bolster their contingency plans for the break-up of the single currency.

Some economists believe that at worst, the outright collapse of the euro could reduce GDP in its member-states by up to half and trigger mass unemployment. Analysts at UBS, an investment bank earlier this year warned that the most extreme consequences of a break-up include risks to basic property rights and the threat of civil disorder. "When the unemployment consequences are factored in, it is virtually impossible to consider a break-up scenario without some serious social consequences," UBS said.

House of horrors, part 2
by Economist

The bursting of the global housing bubble is only halfway through

Many of the world’s financial and economic woes since 2008 began with the bursting of the biggest bubble in history. Never before had house prices risen so fast, for so long, in so many countries. Yet the bust has been much less widespread than the boom.

Home prices tumbled by 34% in America from 2006 to their low point earlier this year; in Ireland they plunged by an even more painful 45% from their peak in 2007; and prices have fallen by around 15% in Spain and Denmark. But in most other countries they have dipped by less than 10%, as in Britain and Italy. In some countries, such as Australia, Canada and Sweden, prices wobbled but then surged to new highs. As a result, many property markets are still looking uncomfortably overvalued.

The latest update of The Economist’s global house-price indicators shows that prices are now falling in eight of the 16 countries in the table, compared with five in late 2010. (For house prices from more countries see our website). To assess the risks of a further slump, we track two measures of valuation. The first is the price-to-income ratio, a gauge of affordability.

The second is the price-to-rent ratio, which is a bit like the price-to-earnings ratio used to value companies. Just as the value of a share should reflect future profits that a company is expected to earn, house prices should reflect the expected benefits from home ownership: namely the rents earned by property investors (or those saved by owner-occupiers). If both of these measures are well above their long-term average, which we have calculated since 1975 for most countries, this could signal that property is overvalued.

Based on the average of the two measures, home prices are overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden (see table). Indeed, in the first four of those countries housing looks more overvalued than it was in America at the peak of its bubble.

Despite their collapse, Irish home prices are still slightly above "fair" value—partly because they were incredibly overvalued at their peak, and partly because incomes and rents have fallen sharply. In contrast, homes in America, Japan and Germany are all significantly undervalued. In the late 1990s the average house price in Germany was twice that in France; now it is 20% cheaper.

This raises two questions. First, since American homes now look cheap, are prices set to rebound? Average house prices are 8% undervalued relative to rents, and 22% undervalued relative to income (see chart). Prices may have reached a floor, but this is no guarantee of an imminent bounce. In Britain and Sweden in the mid-1990s, prices undershot fair value by around 35%. Prices in Britain did not really start to rise for almost four years after they bottomed. Some 4m foreclosed homes could come onto America’s market, which may hold down prices.

The second question is whether home prices in markets that are still overvalued are likely to fall. Some economists reject our measures of overvaluation, arguing that lower interest rates justify higher prices because buyers can take out bigger mortgages. There is some truth in this, but interest rates will not always be so low. The recent jump in bond yields in some euro-area countries has raised mortgage rates for new borrowers.

And low rates need to be balanced against the fact that tighter credit conditions make it harder for homebuyers to get mortgages. The average deposit needed by a British first-time buyer is now equivalent to 90% of average annual earnings, according to Capital Economics, a consultancy. It was less than 20% in the late 1990s.

Another popular argument used to justify sky-high prices in countries such as Australia and Canada is that a rising population pushes up demand. But this should raise both prices and rents, leaving their ratios unchanged.

Prices do not necessarily need to drop sharply to return to fair value. Adjustment could come through higher rents and wages. With low inflation, however, it could take a decade or more before price ratios return to their long-run average in some countries.

Jingle mail
American prices fell sharply, even though homes were less overvalued than they were in many other countries, because high-risk mortgages and a surge in unemployment caused distressed sales. In most other countries, lenders avoided the worst excesses of subprime lending, and unemployment rose by less, so there were fewer forced sales dragging prices down. America is also unusual in having non-recourse mortgages that let borrowers walk away with no liability.

An optimist could therefore argue that our gauges overstate the extent to which house prices are overvalued, and that if markets are only a bit too expensive they can adjust gradually without a sharp fall. It is important to remember, however, that lower interest rates and rising populations were used to justify higher prices in America and Ireland before their bubbles burst so spectacularly.

Another concern is that Australia, Britain, Canada, the Netherlands, New Zealand, Spain and Sweden all have even higher household-debt burdens in relation to income than America did at the peak of its bubble. Overvalued prices and large debts leave households vulnerable to a rise in unemployment or higher mortgage rates. A credit crunch or recession could cause house prices to tumble in many more countries.

$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months
by Tyler Durden - ZeroHedge

While everyone was focused on the impending European collapse, the latest soon to be refuted rumors of a quick fix from the Welt am Sonntag notwithstanding, the Bank of International Settlements reported a number that quietly slipped through the cracks of the broader media.

Which is paradoxical because it is the biggest ever reported in the financial world: the number in question is $707,568,901,000,000 and represents the latest total amount of all notional Over The Counter (read unregulated) outstanding derivatives reported by the world's financial institutions to the BIS for its semi-annual OTC derivatives report titled "OTC derivatives market activity in the first half of 2011."

Indicatively, global GDP is about $63 trillion if one can trust any numbers released by modern governments. Said otherwise, for the six month period ended June 30, 2011, the total number of outstanding derivatives surged past the previous all time high of $673 trillion from June 2008, and is now firmly in 7-handle territory: the synthetic credit bubble has now been blown to a new all time high.

Another way of looking at the data is that one of the key contributors to global growth and prosperity in the past 10 years was an increase in total derivatives from just under $100 trillion to $708 trillion in exactly one decade. And soon we have to pay the mean reversion price.

What is probably just as disturbing is that in the first 6 months of 2011, the total outstanding notional of all derivatives rose from $601 trillion at December 31, 2010 to $708 trillion at June 30, 2011. A $107 trillion increase in notional in half a year. Needless to say this is the biggest increase in history. So why did the notional increase by such an incomprehensible amount?

Simple: based on some widely accepted (and very much wrong) definitions of gross market value (not to be confused with gross notional), the value of outstanding derivatives actually declined in the first half of the year from $21.3 trillion to $19.5 trillion (a number still 33% greater than US GDP).

Which means that in order to satisfy what likely threatened to become a self-feeding margin call as the (previously) $600 trillion derivatives market collapsed on itself, banks had to sell more, more, more derivatives in order to collect recurring and/or upfront premia and to pad their books with GAAP-endorsed delusions of future derivative based cash flows.

Because derivatives in addition to a core source of trading desk P&L courtesy of wide bid/ask spreads (there is a reason banks want to keep them OTC and thus off standardization and margin-destroying exchanges) are also terrific annuities for the status quo. Just ask Buffett why he sold a multi-billion index put on the US stock market. The answer is simple - if he ever has to make good on it, it is too late.

Which brings us to the the chart showing total outstanding notional derivatives by 6 month period below. The shaded area is what that the BIS, the bank regulators, and the OCC urgently hope that the general public promptly forgets about and brushes under the carpet.

Try not to laugh. Or cry. Or gloss over, because when it comes to visualizing $708 trillion most really are incapable of doing so.

Total outstanding gross market value by 6 month period:

There is much more than can be said on this topic, and has to be said, because an increase of that magnitude is simply impossible to perceive without alarm bells going off everywhere, especially when one considers the pervasive deleveraging occurring at every sector but the government. All else equal, this move may well explain the massive surge in bank profitability in the first half of the year.

It also means that with banks suffering massive losses, and rumors of bank runs and collateral calls, not to mention the aftermath of the MF Global insolvency, the world financial syndicate will have no choice but to increase gross notional even more, even as the market value continues to get ever lower, thus sparking the risk of the mother of all margin calls: a veritable credit fission reaction.

But no matter what: the important thing to remember is that "they are all hedged" - or so they say, a claim we made a completely mockery of a few weeks back. So ex-sarcasm, the now parabolic increase in derivatives means that when the bilateral netting chain is once again broken, and it will be (because AIG was not a one off event), there will simply be trillions more in derivatives that no longer generate a booked cash flow stream for the remaining counterparty, until at the very end, the whole inverted credit0money pyramid collapses in on itself.

And for those wondering what the distinction is between notional and

Notional amounts outstanding: Nominal or notional amounts outstanding are defined as the gross nominal or notional value of all deals concluded and not yet settled on the reporting date. For contracts with variable nominal or notional principal amounts, the basis for reporting is the nominal or notional principal amounts at the time of reporting.

Nominal or notional amounts outstanding provide a measure of market size and a reference from which contractual payments are determined in derivatives markets. However, such amounts are generally not those truly at risk. The amounts at risk in derivatives contracts are a function of the price level and/or volatility of the financial reference index used in the determination of contract payments, the duration and liquidity of contracts, and the creditworthiness of counterparties.

They are also a function of whether an exchange of notional principal takes place between counterparties.
Gross market values provide a more accurate measure of the scale of financial risk transfer taking place in derivatives markets.

Well, no. It is logical that the BIS will advise everyone to ignore the bigger number and focus on the small one: just like everyone was told to ignore gross exposure and focus on net... until Jefferies had to dump all of its gross PIIGS exposure or stare bankruptcy in the face; so no - the correct thing to say is "gross market values provide a more accurate measure of the scale of financial risk transfer" if one assumes there is no counterparty risk. Because one the whole bilateral netting chain is broken, net becomes gross. And gross market value becomes total notional outstanding. And, to quote Hudson, it's game over.

As for the largely irrelevant gross market value, which is only relevant in as much as it will be the catalyst which will precipitate margin calls on the underlying notionals, all $700+ trillion of them:

Gross positive and negative market values: Gross market values are defined as the sums of the absolute values of all open contracts with either positive or negative replacement values evaluated at market prices prevailing on the reporting date.

Thus, the gross positive market value of a dealer’s outstanding contracts is the sum of the replacement values of all contracts that are in a current gain position to the reporter at current market prices (and therefore, if they were settled immediately, would represent claims on counterparties). The gross negative market value is the sum of the values of all contracts that have a negative value on the reporting date (ie those that are in a current loss position and therefore, if they were settled immediately, would represent liabilities of the dealer to its counterparties).

The term "gross" indicates that contracts with positive and negative replacement values with the same counterparty are not netted. Nor are the sums of positive and negative contract values within a market risk category such as foreign exchange contracts, interest rate contracts, equities and commodities set off against one another.

As stated above, gross market values supply information about the potential scale of market risk in derivatives transactions. Furthermore, gross market value at current market prices provides a measure of economic significance that is readily comparable across markets and products.

And here again, what they ignore to add is that the measure of economic significance is only relevant in as much as the world's banks don't begin a Lehman-MF Global tango of mutual margin call annihilation. In that case, no. They are not measures of anything except for what some banks plug into some models to spit out a favorable EPS treatment at the end of the quarter.

Expect to see gross market value declines persisting even as the now parabolic increase in total notional persists. At this rate we would not be surprised to see one quadrillion in OTC derivatives by the middle of next year.

And, once again for those confused, the fact that notional had to increase so epically as market value tumbled most likely means that the global derivative pyramid scheme (no pun intended) is almost over.

Source: OTC derivatives market activity in the first half of 2011 and Semiannual OTC derivatives statistics at end-June 2011

Greek Banks to Post Losses, Writedowns as Investors Face Wipeout
by Marcus Bensasson - Bloomberg

Greek banks, which are predicted to start reporting third-quarter losses today, may also disclose bond writedowns as they tussle with the government over terms of a debt swap related to the nation’s bailout package.

Alpha Bank SA, Greece’s third-biggest lender, may post a loss of 14 million euros ($18.6 million) after markets close, according to the median of seven estimates in a Bloomberg analyst survey. That compares with a 37 million-euro profit in the year-earlier quarter. National Bank of Greece SA, the nation’s biggest, may post a loss of 99 million euros tomorrow versus a 113 million-euro profit, an analyst survey shows.

The banks, which may disclose whether depositor flight is worsening, will also be pressed on how they plan to raise capital to offset the shortfall that will result from the bond writedowns, according to analysts including Panagiotis Kladis of National Securities SA. Greece may be poised to force some banks into a recapitalization that then-Prime Minister George Papandreou last month described as a "nationalization."

"Even under the best-case scenarios, we are talking about significant losses for the banks," said Kladis, who is based in Athens. "The quarterly results have become a bit irrelevant because we have a number of issues and uncertainties."

Stocks Plunge
Greece has funds earmarked for banks from its 130 billion- euro second bailout package. Recourse to the 30 billion-euro Hellenic Financial Stability Fund would be in exchange for common shares, a move that could wipe out existing shareholders. All bank stocks listed on the Athens exchange have lost more than 80 percent of their market value since Greece’s first 110 billion-euro bailout in May 2010.

Greek banks may eventually need to raise as much as 12 billion euros through measures such as asset sales to reach the core tier 1 capital ratio of 10 percent required under the bailout, according to Alexander Krytsis, an analyst at UBS AG. The ratio is a measure of financial strength. EFG Eurobank Ergasias SA also reports earnings after markets close today, while Piraeus Bank SA reports on Nov. 30.

"Whereas usually the focus would be on their respective operations, we feel that focus will be less on the numbers per se and more on where does the industry stand in a highly turbulent environment," Nikos Koskoletos, an analyst at Eurobank EFG Equities, said in an e-mailed note.

Greece’s five biggest banks held 53 billion euros of Greek government bonds at the end of 2010, about 15 percent of their total assets, according to the results of European Banking Authority stress tests. Lenders would get 50 cents for each euro the government borrowed under the terms of the swap.

BlackRock Review
A writedown that marked Greek banks (ASEDTR)’ bond holdings to market prices would cost them 18 billion euros, according to Krytsis. That may make accepting the government’s swap offer less painful by comparison. Greece’s 4 percent notes due in August 2013 now trade at about 33 cents on the dollar.

"The bigger the turmoil and volatility in Greece, the better the chance that Greek government bondholders will eventually tender" to the swap "so as to avoid a potential disorderly default," Dimitris Giannoulis and Carlos Berastain Gonzalez, analysts at Deutsche Bank AG, wrote in a report.

The country’s lenders lost 5.4 billion euros of deposits in September, the biggest one-month decline since Greece joined the euro, as doubts about the country’s ability to meet the terms of the bailout resurfaced.

Greeks drive hard bargain as creditor talks start
by Douwe Miedema - Reuters

Greece is demanding harsh conditions from its creditors as it starts talks with lenders about a proposed bond swap, a key part of Europe's plan to reduce its debt pile and save the euro, people briefed on the talks said.

Charles Dallara's Institute of International Finance (IIF) -- a bank lobby group -- has so far been the lead negotiator, but there are increasing doubts that he has enough support to secure enough take-up for the swap, which will cost banks billions. The country has now started talking to its creditor banks directly, the sources said.

"There are a number of people in the market who are saying why did (the IIF) take upon themselves this responsibility," one of the people said, asking not to be named. "In part for that reason, Greece has been talking to creditors individually, just to get their own sense of market sentiment," the person said.

The Greeks are demanding that the new bonds' Net Present Value, -- a measure of the current worth of their future cash flows -- be cut to 25 percent, a second person said, a far harsher measure than a number in the high 40s the banks have in mind.

Banks represented by the IIF agreed to write off the notional value of their Greek bondholdings by 50 percent last month, in a deal to reduce Greece's debt ratio to 120 percent of its Gross Domestic Product by 2020.

There are 206 billion euros of Greek government bonds in private sector hands -- banks, institutional investors and hedge funds -- and a 50 percent reduction would reduce Greece's debt burden by some 100 billion euros. But key details determining the cost for bondholders, such as the coupon and the discount rate, are still open. "The battle lines are being drawn," the second person said.

Squeeze Them Out
It is increasingly likely that Greece will force bondholders who do not voluntarily take part in the bond swap to accept the same terms and conditions, something that is possible because most of the bonds are written under Greek law. "Ask yourself the question. After launching this, after having told the private sector involvement is essential, are (the governments) going to be prepared to lend money (to Greece) to pay hold-outs?," the first source said.

European Union leaders from the outset had stressed the voluntary nature of the deal, in order to prevent a disorderly default of the country, which they feared could have a calamitous impact on financial markets. Athens could squeeze out bondholders by changing the law so that any untendered bonds would have the same terms as the new ones, if a majority of debtholders -- for instance 75 percent -- voted in favour of the exchange.

The European Central Bank (ECB) and the French government, who had originally been fiercely opposed to any form of forced squeeze-out, are not so against it now, even if this could trigger a pay-out of Credit Default Swaps (CDS).

One market participant said that the take-up might well be high even if the conditions were unfavourable. "There aren't many alternatives. If I were an investor, I'd think it was about time to take my loss. I don't see much more money coming in out of Europe, so that's where it stops," this person said, asking not to be named. "Every time (the plan) fails, something else will need to happen. And it's going to be a harsher step every time."

Only those investors, typically hedge funds, who had hedged themselves by buying CDS might opt out of the bond swap and cash in if that protection was triggered, the first person said. But that number was not particularly large. Greece is still working hard to garner support, as demonstrated by one well-connected hedge fund manager, who said the fund had recently received a phone call from the Greek government, asking him to put Athens in touch with other funds.

Athens hopes the funds, many of which are based in New York, and are under no political pressure to do a deal, can be persuaded to sign up to the swap, the U.S.-based source, speaking on the condition of anonymity, told Reuters.

The eurozone really has only days to avoid collapse
by Wolfgang Münchau - FT

In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough, the politicians finally act – eurobond, debt monetisation, quantitative easing, whatever. I am not so sure. The argument ignores the problem of acute collective action.

Last week, the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.

The banking sector, too, is broken. Important parts of the eurozone economy are cut off from credit. The eurozone is now subject to a run by global investors, and a quiet bank run among its citizens.

This massive erosion of trust has also destroyed the main plank of the rescue strategy. The European Financial Stability Facility derives its firepower from the guarantees of its shareholders. As the crisis has spread to France, Belgium, the Netherlands and Austria, the EFSF itself is affected by the contagious spread of the disease. Unless something very drastic happens, the eurozone could break up very soon.

Technically, one can solve the problem even now, but the options are becoming more limited. The eurozone needs to take three decisions very shortly, with very little potential for the usual fudges.

First, the European Central Bank must agree a backstop of some kind, either an unlimited guarantee of a maximum bond spread, a backstop to the EFSF, in addition to dramatic measures to increase short-term liquidity for the banking sector. That would take care of the immediate bankruptcy threat.

The second measure is a firm timetable for a eurozone bond. The European Commission calls it a "stability bond", surely a candidate for euphemism of the year. There are several proposals on the table. It does not matter what you call it. What matters is that it will be a joint-and-several liability of credible size. The insanity of cross-border national guarantees must come to an end. They are not a solution to the crisis. Those guarantees are now the main crisis propagator.

The third decision is a fiscal union. This would involve a partial loss of national sovereignty, and the creation of a credible institutional framework to deal with fiscal policy, and hopefully wider economic policy issues as well. The eurozone needs a treasury, properly staffed, not ad hoc co-ordination by the European Council over coffee and desert.

I am hearing that there are exploratory talks about a compromise package comprising those three elements. If the European summit could reach a deal on December 9, its next scheduled meeting, the eurozone will survive. If not, it risks a violent collapse.

Even then, there is still a risk of a long recession, possibly a depression. So even if the European Council was able to agree on such an improbably ambitious agenda, its leaders would have to continue to outdo themselves for months and years to come.

How likely is such a grand deal? With each week that passes, the political and financial cost of crisis resolution becomes higher. Even last week, Angela Merkel was still ruling out eurobonds. She was furious when the European Commission produced its owns proposals last week. She had planned to separate the discussion about the crisis from that of the future architecture of the eurozone. The economic advice she has received throughout the crisis has been appalling.

Her own very public opposition to eurobonds has now become a real obstacle to a deal. I cannot quite see how the German chancellor is going to extricate herself from these self-inflicted constraints. If she had been more circumspect, she could have travelled to the summit with the proposal of the German Council of Economic Advisers, who produced a clever, albeit limited and not yet fully worked-out-plan.

They are a proposing a "debt redemption" bond – another candidate for this year’s top euphemism award. The idea is to have a strictly temporary eurobond, which member states would pay off over an agreed time period. At least this proposal would be in line with the more restrictive interpretation of German constitutional law.
Ms Merkel’s hostility to eurobonds certainly resonates with the public. Newspapers expressed outrage at the commission’s proposal.

I thought both the proposal itself and its timing were rather clever. The Commission managed to change the nature of the debate. Ms Merkel can get her fiscal union, but in return she will now have to accept a eurobond. If both can be agreed, the problem is solved. It is the first intelligent official proposal I have seen in the entire crisis.

I have yet to be convinced that the European Council is capable of reaching such a substantive agreement given its past record. Of course, it will agree on something and sell it as a comprehensive package. It always does. But the halt-life of these fake packages has been getting shorter. After the last summit, the financial markets’ enthusiasm over the ludicrous idea of a leveraged EFSF evaporated after less than 48 hours.

Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.

Banks Build Contingencies for Euro Zone Breakup
by Liz Alderman - New York Times

For the growing chorus of observers who fear that a breakup of the euro zone might be at hand, Chancellor Angela Merkel of Germany has a pointed rebuke: It’s never going to happen.

But some banks are no longer so sure, especially as the sovereign debt crisis threatened to ensnare Germany itself this week, when investors began to question the nation’s stature as Europe’s main pillar of stability.

On Friday, Standard & Poor’s downgraded Belgium’s credit standing to AA from AA+, saying it might not be able to cut its towering debt load any time soon. Ratings agencies this week cautioned that France could lose its AAA rating if the crisis grew. On Thursday, agencies lowered the ratings of Portugal and Hungary to junk.

While European leaders still say there is no need to draw up a Plan B, some of the world’s biggest banks, and their supervisors, are doing just that. "We cannot be, and are not, complacent on this front," Andrew Bailey, a regulator at Britain’s Financial Services Authority, said this week. "We must not ignore the prospect of a disorderly departure of some countries from the euro zone," he said.

Banks including Merrill Lynch, Barclays Capital and Nomura issued a cascade of reports this week examining the likelihood of a breakup of the euro zone. "The euro zone financial crisis has entered a far more dangerous phase," analysts at Nomura wrote on Friday. Unless the European Central Bank steps in to help where politicians have failed, "a euro breakup now appears probable rather than possible," the bank said.

Major British financial institutions, like the Royal Bank of Scotland, are drawing up contingency plans in case the unthinkable veers toward reality, bank supervisors said Thursday. United States regulators have been pushing American banks like Citigroup and others to reduce their exposure to the euro zone. In Asia, authorities in Hong Kong have stepped up their monitoring of the international exposure of foreign and local banks in light of the European crisis.

But banks in big euro zone countries that have only recently been infected by the crisis do not seem to be nearly as flustered. Banks in France and Italy in particular are not creating backup plans, bankers say, for the simple reason that they have concluded it is impossible for the euro to break up. Although banks like BNP Paribas, Société Générale, UniCredit and others recently dumped tens of billions of euros worth of European sovereign debt, the thinking is that there is little reason to do more.

"While in the United States there is clearly a view that Europe can break up, here, we believe Europe must remain as it is," said one French banker, summing up the thinking at French banks. "So no one is saying, ‘We need a fallback,’ " said the banker, who was not authorized to speak publicly.

When Intesa Sanpaolo, Italy’s second-largest bank, evaluated different situations in preparation for its 2011-13 strategic plan last March, none were based on the possible breakup of the euro, and "even though the situation has evolved, we haven’t revised our scenario to take that into consideration," said Andrea Beltratti, chairman of the bank’s management board.

Mr. Beltratti said that banks would be the first bellwether of trouble in the case of growing jitters about the euro, and that Intesa Sanpaolo had been "very careful" from the point of view of liquidity and capital. In late spring, the bank raised its capital by five billion euros, one of the largest increases in Europe. Mr. Beltratti said that Italy, like the European Union, could adopt a series of policy measures that could keep the breakup of the euro at bay. "I certainly felt more confident a few months ago, but still feel optimistic," he said.

European leaders this week said they were more determined than ever to keep the single currency alive — especially with major elections looming in France next year and in Germany in 2013. If anything, Mrs. Merkel said she would redouble her efforts to push the union toward greater fiscal and political unity.

That task is seen as slightly easier now that the crisis has evicted weak leaders from troubled euro zone countries like Italy and Spain. But it remained an uphill battle as Mrs. Merkel continued this week to oppose the creation of bonds that would be backed by the euro zone.

Politically, even the idea of a breakaway Greece is increasingly considered anathema. Despite expectations that Greece — and the banks that lent to it — may receive European taxpayer bailouts for up to nine years, officials fear its exit could open a Pandora’s box of horrors, such as a second Lehman-like event, or even the exit of other countries from the euro union.

Europe’s common currency union was formed more than a decade ago and now includes 17 European Union members, creating a powerful economic bloc aimed at cementing stability on the Continent.

It ushered in years of prosperity for its members, especially Germany, as interest rates declined and money flooded into the union — until the Lehman Brothers bankruptcy sent global credit markets into chaos three years ago and the financial crisis took on new life with the near-default of Greece last year. The creation of the euro zone meant countless interlocking contracts and assets among the countries, but no mechanism for a country to leave the union.

But as the crisis leaps to Europe’s wealthier north, banks have been increasing their preparedness for any outcome. For instance, while it would certainly be legally, financially and politically complicated for Greece to quit the euro zone, some banks are nonetheless tallying how euros would be converted to drachmas, how contracts would be executed and whether the event would cause credit markets to seize up worldwide.

The Royal Bank of Scotland is one of many banks testing its capacity to deal with a euro breakup. "We do lots of stress-test analyses of what happens if the euro breaks apart or if certain things happen, countries expelled from the euro," said Bruce van Saun, RBS’s group finance director. But, he added: "I don’t want to make it more dramatic than it is."
Certain businesses are taking similar precautions.

The giant German tourism operator TUI recently caused a stir in Greece when it sent letters to Greek hoteliers demanding that contracts be renegotiated in drachmas to protect against losses if Greece were to exit the euro.

TUI took the action just days after Mrs. Merkel and President Nicolas Sarkozy of France acknowledged at a meeting earlier this month of G-20 leaders in Cannes, France, that Greece could well leave the monetary union. On Thursday, Greece’s central bank warned that if the country failed to improve its finances quickly, the question would become "whether the country is to remain within the euro area."

In a survey published Wednesday of nearly 1,000 of its clients, Barclays Capital said nearly half expected at least one country to leave the euro zone; 35 percent expect the breakup to be limited to Greece, and one in 20 expect all countries on Europe’s periphery to exit next year.

Some banks are now looking well beyond just one country. On Friday, Merrill Lynch became the latest to issue a report exploring what would happen if countries were to exit the euro and revert to their old currencies. If Spain, Italy, Portugal and France were to start printing their old money again today, their currencies would most likely weaken against the dollar, reflecting the relative weakness of their economies, Merrill Lynch calculated.

Currencies in the stronger economies of Germany, the Netherlands and Ireland would probably rise against the dollar, according to the analysis.

In Asia, banks and regulators view the situation with growing alarm. Norman Chan, the chief executive of the Hong Kong Monetary Authority, said on Wednesday that regulators had stepped up their surveillance of banks’ exposure to Europe.

Regulators have been working with bank managers on stress tests to determine how the banks’ financial stability might be affected by an increasingly severe financial dislocation in Europe, said a Hong Kong banker who insisted on anonymity.

The main danger of a euro breakup, said Stephen Jen, managing partner at SLJ Macro Partners in London, is "redenomination risk," the unpredictable effect that a euro breakup would have on financial assets as newly created currencies sought their own levels in the market and the value of contracts drawn up in euros came into question.

Most people hope that will not happen. "Remember when Lehman went bankrupt — nobody could anticipate what happened next," said the French banker who was not authorized to speak publicly. "That was a company, not a country. If a country leaves the euro — multiply the Lehman effect by 10," he said.

Changing the Rules in the Middle of the Game
by John Mauldin - Frontline Thoughts

Angela Merkel is leading the call for a rule change, a rewiring of the basic treaty that binds the EU. But is it both too much and too late? The market action suggests that time is indeed running out, and so we’ll look at the likely consequences. Then I glance over the other way and take notice of news out of China that may be of import. Plus a few links for your weekend listening "pleasure." There is lots to cover, so let’s get started.

Changing the Rules
I have been writing for a very long time about the changes needed to the EU treaty if Europe is to survive. Specifically, last week I noted that Angela Merkel has made it clear that the independence of the ECB must not be compromised. This week Sarkozy and the new prime minister of Italy, Mario Monti, agreed to stop their public calls for such changes (at least until their own crises get even worse, would be my guess). And Merkel has called for a new, stronger union with strict control of budgets as the price for further German aid for those countries in crisis. In seeming response:

"The European Commission on November 23 proposed a new package including budget previews at EU level, the establishment of independent fiscal councils and growth forecasts, closer surveillance of bailout recipients and a consultation paper on Eurobonds. There is also a growing consensus among EU policy makers on the need for the adoption of fiscal rules in national legislation.

However, it is far from clear whether EU countries would accept the implicit loss of sovereignty this would involve and agree to treaty changes enshrining legally enforceable fiscal oversight at EU level. The German Chancellor, Angela Merkel, is willing to support a change in Germany’s own constitution if the EU Treaty change to that effect is agreed first." (

But this means a major treaty change that must be approved by all member countries. Note that Merkel wants the treaty change first, or at least the language, before she takes it to German voters, which will certainly be required, since what she is suggesting is not allowed by the present German constitution.

Without the changes stated clearly and explicitly in advance, it is unlikely, as I read the polls, that German voters will go along. Merkel has made it clear that any proposed changes will be limited to fiscal issues and central control and not touch on the ECB’s independence. She is adamant against eurozone bonds and putting the German balance sheet at risk (see more below).

But will the rest of Europe go along with what would be a major alterations of their own individual sovereignty and their ability to adjust their own budgets, no matter what? And agree to all this in time to deal with the current crisis? Such changes will be controversial, to say the least. And they would require, if I understand, the yes votes of all 27 European Union members, or at a minimum the 17 eurozone members.

That is problematical. Will even German voters give up their independence and listen to an EU commission tell them what they can and cannot do with their own budget? A budget that is in theory controlled by the rest of Europe? The answer depends on whom you listen to last, as the answers range all over the board.

When Even Germany Fails
Let’s get back to the German balance sheet. This week the markets were greeted with a failed German bond offering. The German central bank had to step in and buy German bunds, at a recent-series-high rate. And while the "trade" has been to buy German bunds as a hedge, Germany is not precisely a model of balance and austerity, with high (above 4%) deficits and a rising debt-to-GDP ratio. And the market senses the contradictions here. When even German bond auctions fail, whither the rest of Europe?

As a quick aside, notice that German yields are not higher than those of UK debt at some points. The market is clearly signaling that the lack of a national central bank with a printing press is an issue. Go figure. But that is a story for another letter at another time.

Let’s look at some recent headlines. Greek 2-year bonds are now at 116%. You read that right. "Bond yields on short-term Italian debt rose above 8 per cent on Friday as Rome was forced to pay euro-era-high interest rates in what analysts called an ‘awful’ auction. A peak of 8.13 per cent was reached on three-year bonds, according to Reuters data, as Italian debt traded deeper into territory associated with bail-outs of Greece, Portugal and Ireland in the past 18 months.

"Italy raised its targeted €10bn in an auction of two-year bonds and six-month bills but at sharply higher yields. ‘Rates have skyrocketed. It’s simply not sustainable in the long run,’ said Marc Ostwald, strategist at Monument Securities in London.

"Investors demanded a yield of 7.81 per cent for the two-year bond, up from 4.63 per cent last month. The six-month bills saw yields of 6.50 per cent, up from 3.54 per cent. That was significantly higher than Greece paid for six-month money earlier this month when it issued bills at 4.89 per cent." (Reuters) Spanish bond yields are slightly lower but not by much, with both countries paying more for short-term debt than Greece.

And no one is really talking about Belgium, which I have been pointing to for some time. Belgium debt yield on its ten-year bonds went to 5.85%. Notice the recent trend, in the chart below. It looks like Greece in the not-very-distant past. (Chart courtesy of and Reuters data)


European Inverted Yield Curves
Let’s rewind the tape a little bit. Both the Spanish and Italian bond markets are close to or already in an "inverted" state. That is when lower-term bonds yield higher than longer-term bonds, which is not a natural occurrence. Typically, when that happens, the markets are sending a signal of something. (Charts below courtesy of my long-suffering Endgame co-author, Jonathan Tepper of Variant Perception, who lets me call him up late for data like this.)



Note that Greece (especially) and Portugal inverted when they began to enter a crisis. And shortly thereafter they went into freefall. Why did it happen so suddenly?
The short explanation is that once the market perceives there is risk, the debt in question has to collapse to the point where risk takers will step in. Do you remember two summers ago, when I related what I thought was a remarkable conversation with two French bond traders in a bistro in Paris after the markets had closed?

Greece was all the news. It was all Greece, all the time. And I asked them what their favorite trade was (as I like to do with all traders). The surprising answer (to me) was they were buying short-term Greek bonds. They walked me through the logic. I forget the yields, but they were sky-high. They figured they had at least a year and maybe two before the bonds defaulted, plenty of time to get a lot of yield and exit. And there were hedges.

Italian and Spanish yields are approaching that "bang!" moment. The only thing stopping them is the threat of the ECB stepping in and buying in real size. Which Merkel is against. And the market is starting to believe her, hence the move in yields.

Time to Review the Bang! Moment
One of the most important sections of Endgame is in a chapter where I review (and compare with other research) the book This Time is Different by Ken Rogoff and Carmen Reinhart, and include part of an interview I did with them. This chapter was one of real economic epiphanies for me. Their data confirms other research about how things seemingly bounce along, and then the end comes seemingly all at once. Which we’ll term the bang! moment.

Let’s review a few paragraphs from the book, starting with quotes from the interview I did:
"KENNETH ROGOFF: It’s external debt that you owe to foreigners that is particularly an issue. Where the private debt so often, especially for emerging markets, but it could well happen in Europe today, where a lot of the private debt ends up getting assumed by the government and you say, but the government doesn’t guarantee private debts, well no they don’t.

We didn’t guarantee all the financial debt either before it happened, yet we do see that. I remember when I was first working on the 1980’ Latin Debt Crisis and piecing together the data there on what was happening to public debt and what was happening to private debt, and I said, gosh the private debt is just shrinking and shrinking, isn’t that interesting. Then I found out that it was being "guaranteed" by the public sector, who were in fact assuming the debts to make it easier to default on."

Now from Endgame:
"If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is.

"Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are. Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short-term and needs to be constantly refinanced.

Debt-fueled booms all too often provide false affirmation of a government’s policies, a financial institution’s ability to make outsized profits, or a country’s standard of living. Most of these booms end badly. Of course, debt instruments are crucial to all economies, ancient and modern, but balancing the risk and opportunities of debt is always a challenge, a challenge policy makers, investors, and ordinary citizens must never forget."

And the following is key. Read it twice (at least!):
"Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence—especially in cases in which large short-term debts need to be rolled over continuously—is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!—confidence collapses, lenders disappear, and a crisis hits.

"Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public’s expectation of future events, which makes it so difficult to predict the timing of debt crises. High debt levels lead, in many mathematical economics models, to "multiple equilibria" in which the debt level might be sustained —or might not be.

Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite."

"How confident was the world in October of 2006? John was writing that there would be a recession, a subprime crisis, and a credit crisis in our future. He was on Larry Kudlow’s show with Nouriel Roubini, and Larry and John Rutledge were giving him a hard time about his so-called ‘doom and gloom.’ ‘If there is going to be a recession you should get out of the stock market,’ was John’s call. He was a tad early, as the market proceeded to go up another 20% over the next 8 months. And then the crash came."

But that’s the point. There is no way to determine when the crisis comes.

As Reinhart and Rogoff wrote:
"Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!—confidence collapses, lenders disappear, and a crisis hits."

Bang! is the right word. It is the nature of human beings to assume that the current trend will work itself out, that things can’t really be that bad. The trend is your friend … until it ends. Look at the bond markets only a year and then just a few months before World War I. There was no sign of an impending war. Everyone "knew" that cooler heads would prevail.

We can look back now and see where we have made mistakes in the current crisis. We actually believed that this time was different, that we had better financial instruments, smarter regulators, and were so, well, modern. Times were different. We knew how to deal with leverage. Borrowing against your home was a good thing. Housing values would always go up. Etc.

Until they didn’t, and then it was too late. What were we thinking? Of course, we were thinking in accordance with our oh-so-human natures. It is all so predictable, except for the exact moment when the crisis hits. (And during the run-up we get all those wonderful quotes from market actors, which then come back to haunt them.)

If it was just Europe and if the crisis could be contained there, then maybe we could focus on something else for a change. But Europe as a whole is critical to the world’s economy. A huge percentage of global lending is from euro-area banks, and they are all contracting their balance sheets. In a banking balance-sheet crisis, you reduce the debt you can, not the debt that is the most needed or reliable.

And some of the debt will be to foreign entities. As an example, Austria is now requiring its banks to cover their Eastern European loans with local deposits. Which is of course problematical, as the size of those loans relative to the bank balance sheets and the Austrian economy is huge. According to BIS statistics, Austrian banks’ total exposure to the region equates to around 67% of the country’s GDP, not including the Vienna-based Bank Austria, which is technically Italian.

We could find similar results for other European (mostly Spanish), as well as Latin American banks. And as I note below, this will reach into China and throughout Asia.

The Risk of Contagion in the US
And the US? I am constantly asked what my biggest worry is. What is the largest monster I think I hear in my closet of nightmares? And the answer has been the same for a long time: it is European banks.

Those who think this is all a non-event note (correctly) that US net exposure to European banks is not all that large, and that while it may not be a non-event, it’s not system-threatening. The problem is that little three-letter word net.

Gross exposure is huge, and we are starting to read that regulators and other authorities are becoming concerned. As well they should. The problem is that as a bank sells risk insurance, it can buy protection from another bank in Europe to hedge it. But who is the counterparty? How solvent are they? It was only a month before Dexia collapsed that authorities and markets assured us that the bank was fine, and then bang! it was nationalized.

That is the part we do not know enough about. If European banks are as bad as they appear to be, then that counterparty risk is large. Will sovereign nations step up and bail out US banks on the credit default swaps their banks sold? Care to wager your national economy on that concept selling in today’s political climate?

Contagion is the #1 risk on the minds of European leaders and regulatory authorities, and it should be in the US, too. This points to a massive failure in Dodd-Frank to regulate credit default swaps and put them on an exchange. This is the single largest error in the last few decades, as it was so predictable. At least with the repeal of Glass-Steagall it was the unintended consequences that got us. Dodd- Frank almost guarantees another credit and banking crisis. Don’t get me started.

Since the ECB is for now off the table as a source of unlimited funds (remember I said "for now"), there are calls for funds from a variety of sources. Some new supranational fund, more EFSF "donations," etc. The only semi-realistic one is IMF participation.

If that is seriously considered, then the US Congress should step in and protest. US funds should not be used for governments of the size of Italy and Spain. These are not third-world countries. This is a European issue of their own making and not the responsibility of US taxpayers, or for that matter taxpayers anywhere else. We should "just say no."

As I have been writing, there is no credible source other than the ECB for the amount of funds needed. Maybe something can be cobbled together under the pressure of a crisis, but for now there is no realistic option. Europe is at the end of the road unless Germany "blinks." The only thing we can do now is to see how it works out.
If the ECB can’t print, then the rules have to be changed, if the eurozone is to survive. And while a recession is underway.

"Maersk Line, the world's largest container shipper by volume, plans to cut its capacity on Asia-to-Europe routes, a senior executive said Friday, as the euro-zone debt crisis weighs on international trade. "Almost all carriers are losing money now ... and it looks like 2012 will going to be similarly challenging," Tim Smith, the company's North Asia chief, told reporters at a shipping conference."

Time is not on the Europeans’ side. Let’s hope they can figure it out, but prepare for what might happen if they don’t.

S&P 500 Has Worst Thanksgiving Week Since '32
by Kaitlyn Kiernan and Nikolaj Gammeltoft - Bloomberg

U.S. stocks tumbled in the worst Thanksgiving-week loss for the Standard & Poor’s 500 Index since 1932 as concern grew that Europe’s debt crisis will spread and American policy makers failed to reach agreement on reducing the federal budget.

Bank of America Corp., Hewlett-Packard Co. and Caterpillar Inc. dropped at least 7.6 percent to lead declines in the Dow Jones Industrial Average. Energy stocks fell the most in the S&P 500 as oil declined for a second week and as Chevron Corp. lost 5.7 percent after it was blocked from drilling in Brazil while the government probes a recent spill. Netflix Inc. slid 18 percent after raising $400 million to bolster cash. The S&P 500 slid 4.7 percent to 1,158.67, closing at the lowest level since Oct. 7. The Dow fell 564.38 points, or 4.8 percent, to 11,231.78 this week.

"We’ve resumed focus on the European debt issues," Terry L. Morris, senior equity manager at Wyomissing, Pennsylvania- based National Penn Investors Trust Co., said in a telephone interview. His firm manages about $2.2 billion. "The situation in Europe doesn’t seem to be improving, which makes the market defensive," he said. "Spending cuts kicking in in the U.S. will be a negative too because it will be a drag on economic growth."

The S&P 500 has fallen for seven days, the longest streak in four months, and has tumbled 7.6 percent so far in November. U.S. equities erased an early advance on the final session of the week as S&P lowered Belgium’s credit rating and Reuters reported that Greece is demanding private investors accept larger losses on their debt.

Debt Concerns
The cost of insuring European sovereign bonds against default rose to a record this week as Germany failed to find buyers for 35 percent of the bonds offered at an auction. German Finance Minister Wolfgang Schaeuble said market turbulence sparked by the euro region’s sovereign-debt crisis will last for "a few months."

Congress’s special debt-reduction committee failed to reach an agreement this week, setting the stage for $1.2 trillion in automatic spending cuts and fueling concern that economic- stimulus measures that are set to expire will not be renewed. Still, S&P reaffirmed it would keep the U.S.’s credit rating at AA+ after stripping the government of its top AAA grade on Aug. 5.

Stocks fell Nov. 22 as revised Commerce Department figures showed that gross domestic product climbed at a 2 percent annual rate from July through September, less than projected and down from a 2.5 percent prior estimate. U.S. stock exchanges were shut Nov. 24 for Thanksgiving and closed three hours early on Nov. 25.

'Macro Factors'
"The market’s not trying to distinguish between stocks right now, it’s focused almost exclusively on macro factors," John Linehan, director of U.S. equities and a portfolio manager at T. Rowe Price Associates Inc., said at a press briefing Nov. 22 in New York. " There’s a tremendous amount of volatility in the marketplace. The market’s on the gas pedal and the tires are spinning, but we’re really actually not going anywhere."

Companies most-tied to the economy fell, sending the Morgan Stanley Cyclical Index down 6.2 percent, the most since the week ending Sept. 23. Caterpillar, the world’s largest construction and mining-equipment maker, dropped 7.7 percent to $86.72.mAll 10 groups in the S&P 500 fell this week, led by a 6.2 percent slump in energy producers and a 5.8 percent drop in financial shares.

Bank of America declined 11 percent, the most in the Dow, to $5.17, while Citigroup Inc. decreased 10 percent to $23.63. Both are among lenders that may have to temper plans to raise dividends and buy back stock next year as the Federal Reserve toughens capitaltests for the biggest U.S. banks.

Netflix sank 18 percent, the most in the S&P 500, to $63.86. Technology Crossover Ventures will purchase $200 million in zero-coupon senior convertible notes due 2018 in the video- streaming and DVD subscription service, and T. Rowe Price Associates Inc. funds will buy $200 million in stock. The transactions suggest Netflix’s cash squeeze may last longer than it had anticipated, said Michael Pachter, an analyst with Wedbush Securities. The company needs to spend more to make its streaming content stand out against a growing list of competitors, he said.

Commodity producers declined as reports showed manufacturing contracted in Europe and may shrink by the most in more than two years in China. AK Steel Holding Corp. the third- largest U.S. steelmaker by volume, plunged 16 percent to $7.04. Alpha Natural Resources Inc., the coal producer that bought Massey Energy Co. for $7.1 billion in June, lost 15 percent to $18.81.

Chevron in Brazil
Chevron lost 5.7 percent to $92.29. The U.S. oil producer operating the $3.6 billion Frade oilfield off the coast of Brazil was blocked from drilling in the South American country while the government probes a recent spill.

Hewlett-Packard slipped 9.3 percent to $25.39 following profit forecasts that missed analysts’ estimates. Meg Whitman, who took over as chief executive officer two months ago, used her first earnings conference call to tell investors they need to lower their expectations. The first-quarter profit forecast and full-year earnings outlook both missed estimates -- a sign the company is still reeling from a technology-spending slump.

Groupon Inc. plunged 36 percent to $16.75, below its initial public offering price. The largest Internet daily-deal site was dragged down on concern that profit margins will be squeezed by surging marketing costs and competition from rivals such as, backed by Inc. Signs that Europe’s credit crisis may be worsening also fueled speculation that Groupon’s international operations will suffer.

Jefferies Group Inc. (JEF) jumped 4.8 percent to $10.65. Egan- Jones Ratings Co.’s analysis of Jefferies, including estimates of tumbling revenue, was "flat out wrong by a country mile," Chris Kotowski, an Oppenheimer & Co. analyst, said in a report entitled "Another Hack Attack." Sean Egan, president and founding principal of the ratings company, said the company stands by its analysis.

Banks brace for eurozone defection
by UPI

Banks in Europe say they are bracing themselves against the eurozone possibly losing one more member because of the ongoing sovereign debt crisis. "We cannot be, and are not, complacent on this front. We must not ignore the prospect of a disorderly departure of some countries from the eurozone," said Andrew Bailey, a regulator at Britain's Financial Services Authority, The New York Times reported Saturday.

Analysts in a research note at Nomura bank said, "The eurozone financial crisis has entered a far more dangerous phase -- a euro(zone) breakup now appears probable, rather than possible." Banks in Europe and the United States have been divesting their portfolios of tens of billions of dollars worth of European government bonds to minimize losses if one or more countries break away from the eurozone.

While that protects them from losses, it also pushes the eurozone deeper into crisis, as government borrowing becomes more expensive. There are 17 countries that share the euro as currency, which has created an enormous economic block that helps stabilize ups and downs in the marketplace.

The eurozone is listing, as Greece, Ireland and Portugal have required international loans to keep from going into default. Spain and Italy, with far lager economies, have fiscal problems that also put the euro in jeopardy. However, there is no Plan B -- rules that would make it possible for a faltering country to exit the eurozone and adopt a native currency in an orderly fashion.

An impasse threatens the credit rating of eurozone stalwarts such as France and Germany. Standard & Poor's Friday downgraded Belgium's credit rating from AA+ to AA, indicating its debt problems were not short term. Earlier in the week, credit ratings of Portugal and Hungary were reduced to junk status.

While pressure mounts for Europe to find a solution to the debt crisis, Germany remains consistent with the message the eurozone should hold together. Banks, however, are considering other possibilities, the Times said.

Ratings downgrade spurs Belgium to agree a budget after 18 months without a government
by Phillip Inman - Guardian

Move clears the way for a new government to be formed, amid fears of a fresh market panic after the country's credit rating was cut

Belgian politicians finally struck a budget deal yesterday, clearing the way for a new government to be formed, amid fears of a fresh wave of market panic after the country's credit rating was cut on Friday night.

Europe's spiralling sovereign debt crisis has claimed governments across the eurozone in recent months. But in Brussels the ratings downgrade by Standard & Poor's helped accelerate talks on forming a new coalition, 18 months after elections.

Yves Leterme, the interim prime minister, had urged negotiators to strike a deal before bond markets open on Monday morning, amid fears that the ratings downgrade would spark a fresh sell-off in Belgian bonds, driving up the country's borrowing costs to unsustainable levels.

A wave of other countries are expected to join Belgium in having their ratings downgraded in the coming months unless the eurozone crisis is rapidly resolved, with Austria next in the firing line. Analysts have warned that Austria is struggling to cope with slowing economic growth and bad debts in its banking sector.

Eurozone finance ministers are scheduled to discuss significant increases to the bailout packages for indebted countries in Brussels on Tuesday. But policymakers remain divided over the best way to finance the bailout schemes, including the EU's main rescue fund, the European financial stability facility (EFSF).

After crisis talks in October, Angela Merkel and Nicolas Sarkozy said they hoped to expand the €440bn (£377bn) EFSF to around €1 trillion: large enough to cope with the prospect of possible bailouts for Spain and Italy. But recent attempts to construct a bigger fund have failed, leaving ministers scrambling to find alternatives.

Some leaders want the European Central Bank to take an active role, but new central bank boss Mario Draghi has ruled out buying large amounts of Italian and Spanish government debt to stabilise their borrowing costs.

Rumours circulated over the weekend that Spain was preparing to make a bid for EFSF funds after Madrid saw the cost of its borrowing reach 6.7%. Sources close to the incoming government of Mariano Rajoy denied that he had made a request for bailout funds from Brussels, although they refused to say whether he was considering making such a request.

Sarkozy and Merkel agreed last week to examine ways to integrate eurozone economies to better manage the crisis.

The continued wrangling over how to resolve the crisis has drawn a wider group of nations into the spotlight. Stuart Thomson, chief economist at Ignis Asset Management, warned that several "semi-core" eurozone countries were vulnerable to further downgrades, a rise in bond yields and a flight of private investors. He said that Belgium, Austria and even France could follow Ireland, Greece and Portugal in needing a bailout.

Analysts say the situation is complicated by calls in Ireland and Portugal for a Greek-style debt write-off. Dublin and Lisbon are expected to take their case to the finance ministers' meeting on Tuesday, arguing that they should also enjoy the 50% reduction on their debts that was negotiated for Athens.

It is now becoming clear Germany has had enough of this euro mess
by Liam Halligan - Telegraph

The Anglo-Saxon world is feeling smug this weekend. UK and US policymakers are counting their blessings they’re not directly embroiled in the historic debacle that is the single currency.

This euro crisis is obviously very seriously undermining global investor sentiment. The negative impact on growth, both in Britain and the States, is clear. It is axiomatic that the financial chaos stemming from a fully-blown, market-induced "euroquake" would cause deep aftershocks everywhere, not least across the rest of the Western world.

There is palpable relief, though, in London and Washington that attention is now squarely on the eurozone’s woes. That makes life easier for the deeply indebted Anglo-Saxon governments – which is particularly welcome for Chancellor George Osborne, given that he is about to give his Autumn Statement.

Osborne’s speech writers will, no doubt, make much of the fact that UK government bond yields last week went below those of their German counterparts. That happened, though, not because the coalition’s debt-reduction plan became more credible. On the contrary, the upending of the UK’s growth assumptions has made it even less likely that Britain’s fiscal numbers will add up.

It is essential, despite political temptations, that Osborne doesn’t use Tuesday’s statement to misrepresent this recent gilt-yield respite. The UK’s deep fiscal problems remain. It’s just that, for now, the bond market vigilantes are focused on the eurozone – which isn’t surprising. For the single currency’s difficulties are compounding by the day.

The longer this eurozone crisis continues, the more likely it becomes that "contagion" threatens the fiscal stability of Germany itself, the region’s economic powerhouse. Anyone who doubted that received a stern wake-up call last week, when an auction of 10-year German sovereign bonds was seriously under-subscribed, with investors buying just €3.9bn (£3.34bn) of a €6bn offer. Bund yields spiked across the board, taking them above those in the UK.

Many observers seem to think such market pressure means Angela Merkel will "relent". With Berlin’s own credit-worthiness being openly questioned, the German chancellor is now apparently more likely to launch a massive "bail-out" fund for the eurozone laggards, while sanctioning overt QE "money-printing" by the European Central Bank.

I’d venture a different view. However much one particular branch of the German elite wants "the European project" to succeed, the vast majority of the German public are appalled at the idea of financing the rest of Europe. They resent not only the cost, but also (rightly) worry that one eurozone bail-out inevitably leads to another.

I reckon that surging bund yields make it less likely that Germany will agree to fund a bail-out, while letting the ECB let rip. German voters, and the country’s powerful parliament, will see rising borrowing costs as further proof of the harm the euro, in its current form, is doing. Merkel must answer to both.

Germany stood by and watched back in the 1990s, as the Exchange Rate Mechanism collapsed under the weight of its own incoherence. Since then, life has become much tougher for the big industrialised Western economies. While still head and shoulders above the rest of Europe, even Germany is now on the back foot.

The country’s bellwether manufacturing PMI Index fell from 49.1 to 47.9 this month, indicating a sharp economic contraction. Germany would be unlikely to entertain money-printing and paying for a eurozone bail-out at the best of times. Under current circumstances, the chances are even slimmer.

I also think that those foreseeing "fiscal union" are also deeply misguided. We’re told that this is what Germany will insist upon as a quid pro quo for financially backstopping Europe’s southern states. Really? Merkel last week blasted the European Commission’s proposed eurobond, the issuing of sovereign debt in the name of all eurozone members but ultimately backed by Germany, labelling the idea "extremely worrying and inappropriate".

There is clearly no hope of Germany stumping up any more bail-out cash without tighter controls on the "Club Med" countries’ purse strings. Such controls may be put in place. But that’s not "fiscal union". The only way a single currency can work in the long term is by pooling a large share of total tax revenues and having intra-regional fiscal transfers, as in the US. Yet that will never happen in Western Europe.

Anything less, though, a souped-up Stability and Growth Pact for instance, would be too weak to succeed. When it comes to the crunch, spending rules set at the European level will always be broken by politicians answerable to their own domestic electorates.

The notion that "fiscal union" of some kind is workable, and that Germany wants it, has gained ground because that is the only way certain financial analysts can keep predicting that "Merkel will print" and the end-of-year market rally will come.

The same deluded analysts also claimed the euro-crisis was easing last week because the spread between French and German government bond yields had narrowed, while failing to mention that was only because German borrowing costs had gone up. Portuguese debt has just been down-graded to "junk" status. Short-term Italian debt is now trading above 8pc, deep into bail-out territory.

While the eurozone endgame is impossible to know, I still think the most likely outcome is that several of the peripheral nations will leave, re-denominating their debts in pre-euro currencies, so allowing the core countries to stabilise. This, I believe, is what Germany really wants.

Scaling-back monetary union would take us to a better place, with the big eurozone economies no longer seemingly on the hook for everyone else’s debts. A downsizing would also be far more implementable, logistically and from a banking point of view, than dismantling the entire edifice. Attempting to do that, I fear, would end in financial chaos. It would also sow the seeds of recrimination and potential conflict across Europe for decades to come.

American TV pundits were gloating last week, as US Treasury yields fell to a six-week low. "Just goes to show the underlying strength of the good old American economy", the mantra went. The US has big fiscal problems of its own, of course, not least a $14,000bn (£9,068bn) debt burden, set to reach $18,000bn by 2016. The failure of the so-called

"Super Committee" to agree on a bipartisan deficit-reduction package highlights that America’s institutions have their own dysfunctional aspects. But, for now, Europe’s dysfunction is even worse, to the benefit of US bonds.

Yet Britain isn’t America. The pound isn’t the world’s reserve currency. The UK’s demography is far less favourable to fiscal retrenchment than that of the States. While Washington can probably keep thumbing its nose at its creditors for some time, that doesn’t apply to London.

Back in March, the Office for Budget Responsibility predicted that Britain would grow 1.7pc in 2011, and that the Government could "eliminate the structural deficit" by 2014-15. It’s now clear the UK will do well to grow by 1pc this year.

While we’ve seen some progress, Britain’s fiscal stance, for all the rhetoric to the contrary, remains incredibly loose. Central Government spending was higher in October than the same month last year. Public sector net debt was £966.6bn last month, up from £836.8bn in October 2010 – an astonishing 15pc rise, and that doesn’t include the bank bail-outs. And we’re told this is "fiscal austerity".

Be clear, Mr Osborne, as you put the finishing touches to your Autumn Statement, the markets don’t think the UK is out of the fiscal woods. Not by a long chalk. It’s just that, for now, the vigilantes’ sights are set elsewhere.

Fed committed $7.77 trillion to rescuing the financial system
by Bob Ivry, Bradley Keoun and Phil Kuntz - Bloomberg

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

'Change Their Votes'
"When you see the dollars the banks got, it’s hard to make the case these were successful institutions," says Sherrod Brown, a Democratic Senator from Ohio who in 2010 introduced an unsuccessful bill to limit bank size. "This is an issue that can unite the Tea Party and Occupy Wall Street. There are lawmakers in both parties who would change their votes now."

The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court case against the Fed and a group of the biggest U.S. banks called Clearing House Association LLC to force lending details into the open.

The Fed, headed by Chairman Ben S. Bernanke, argued that revealing borrower details would create a stigma -- investors and counterparties would shun firms that used the central bank as lender of last resort -- and that needy institutions would be reluctant to borrow in the next crisis. Clearing House Association fought Bloomberg’s lawsuit up to the U.S. Supreme Court, which declined to hear the banks’ appeal in March 2011.

$7.77 Trillion
The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he "wasn’t aware of the magnitude." It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

"TARP at least had some strings attached," says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. "With the Fed programs, there was nothing."

Bankers didn’t disclose the extent of their borrowing. On Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed "one of the strongest and most stable major banks in the world." He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day.

'Motivate Others'
JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed’s Term Auction Facility "at the request of the Federal Reserve to help motivate others to use the system." He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program’s creation.

Howard Opinsky, a spokesman for JPMorgan (JPM), declined to comment about Dimon’s statement or the company’s Fed borrowings. Jerry Dubrowski, a spokesman for Bank of America, also declined to comment.

The Fed has been lending money to banks through its so- called discount window since just after its founding in 1913. Starting in August 2007, when confidence in banks began to wane, it created a variety of ways to bolster the financial system with cash or easily traded securities. By the end of 2008, the central bank had established or expanded 11 lending facilities catering to banks, securities firms and corporations that couldn’t get short-term loans from their usual sources.

'Core Function'
"Supporting financial-market stability in times of extreme market stress is a core function of central banks," says William B. English, director of the Fed’s Division of Monetary Affairs. "Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses."

The Fed has said that all loans were backed by appropriate collateral. That the central bank didn’t lose money should "lead to praise of the Fed, that they took this extraordinary step and they got it right," says Phillip Swagel, a former assistant Treasury secretary under Henry M. Paulson and now a professor of international economic policy at the University of Maryland.

The Fed initially released lending data in aggregate form only. Information on which banks borrowed, when, how much and at what interest rate was kept from public view. The secrecy extended even to members of President George W. Bush’s administration who managed TARP.

Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak.

Big Six
The Treasury Department relied on the recommendations of the Fed to decide which banks were healthy enough to get TARP money and how much, the former officials say. The six biggest U.S. banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt calculated by Bloomberg using data obtained from the central bank. Paulson didn’t respond to a request for comment.

The six -- JPMorgan, Bank of America, Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley -- accounted for 63 percent of the average daily debt to the Fed by all publicly traded U.S. banks, money managers and investment- services firms, the data show. By comparison, they had about half of the industry’s assets before the bailout, which lasted from August 2007 through April 2010. The daily debt figure excludes cash that banks passed along to money-market funds.

Bank Supervision
While the emergency response prevented financial collapse, the Fed shouldn’t have allowed conditions to get to that point, says Joshua Rosner, a banking analyst with Graham Fisher & Co. in New York who predicted problems from lax mortgage underwriting as far back as 2001.

The Fed, the primary supervisor for large financial companies, should have been more vigilant as the housing bubble formed, and the scale of its lending shows the "supervision of the banks prior to the crisis was far worse than we had imagined," Rosner says.

Bernanke in an April 2009 speech said that the Fed provided emergency loans only to "sound institutions," even though its internal assessments described at least one of the biggest borrowers, Citigroup, as "marginal."

On Jan. 14, 2009, six days before the company’s central bank loans peaked, the New York Fed gave CEO Vikram Pandit a report declaring Citigroup’s financial strength to be "superficial," bolstered largely by its $45 billion of Treasury funds. The document was released in early 2011 by the Financial Crisis Inquiry Commission, a panel empowered by Congress to probe the causes of the crisis.

'Need Transparency'
Andrea Priest, a spokeswoman for the New York Fed, declined to comment, as did Jon Diat, a spokesman for Citigroup. "I believe that the Fed should have independence in conducting highly technical monetary policy, but when they are putting taxpayer resources at risk, we need transparency and accountability," says Alabama Senator Richard Shelby, the top Republican on the Senate Banking Committee.

Judd Gregg, a former New Hampshire senator who was a lead Republican negotiator on TARP, and Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee, both say they were kept in the dark. "We didn’t know the specifics," says Gregg, who’s now an adviser to Goldman Sachs. "We were aware emergency efforts were going on," Frank says. "We didn’t know the specifics."

Disclose Lending
Frank co-sponsored the Dodd-Frank Wall Street Reform and Consumer Protection Act, billed as a fix for financial-industry excesses. Congress debated that legislation in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival. It would have been "totally appropriate" to disclose the lending data by mid-2009, says David Jones, a former economist at the Federal Reserve Bank of New York who has written four books about the central bank.

"The Fed is the second-most-important appointed body in the U.S., next to the Supreme Court, and we’re dealing with a democracy," Jones says. "Our representatives in Congress deserve to have this kind of information so they can oversee the Fed." The Dodd-Frank law required the Fed to release details of some emergency-lending programs in December 2010. It also mandated disclosure of discount-window borrowers after a two- year lag.

Protecting TARP
TARP and the Fed lending programs went "hand in hand," says Sherrill Shaffer, a banking professor at the University of Wyoming in Laramie and a former chief economist at the New York Fed. While the TARP money helped insulate the central bank from losses, the Fed’s willingness to supply seemingly unlimited financing to the banks assured they wouldn’t collapse, protecting the Treasury’s TARP investments, he says. "Even though the Treasury was in the headlines, the Fed was really behind the scenes engineering it," Shaffer says.

Congress, at the urging of Bernanke and Paulson, created TARP in October 2008 after the bankruptcy of Lehman Brothers Holdings Inc. made it difficult for financial institutions to get loans. Bank of America and New York-based Citigroup each received $45 billion from TARP. At the time, both were tapping the Fed. Citigroup hit its peak borrowing of $99.5 billion in January 2009, while Bank of America topped out in February 2009 at $91.4 billion.

No Clue
Lawmakers knew none of this. They had no clue that one bank, New York-based Morgan Stanley, took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages. The firm’s peak borrowing occurred the same day Congress rejected the proposed TARP bill, triggering the biggest point drop ever in the Dow Jones Industrial Average. The bill later passed, and Morgan Stanley got $10 billion of TARP funds, though Paulson said only "healthy institutions" were eligible.

Mark Lake, a spokesman for Morgan Stanley, declined to comment, as did spokesmen for Citigroup and Goldman Sachs. Had lawmakers known, it "could have changed the whole approach to reform legislation," says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size.

Moral Hazard
Kaufman says some banks are so big that their failure could trigger a chain reaction in the financial system. The cost of borrowing for so-called too-big-to-fail banks is lower than that of smaller firms because lenders believe the government won’t let them go under. The perceived safety net creates what economists call moral hazard -- the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers.

If Congress had been aware of the extent of the Fed rescue, Kaufman says, he would have been able to line up more support for breaking up the biggest banks. Byron L. Dorgan, a former Democratic senator from North Dakota, says the knowledge might have helped pass legislation to reinstate the Glass-Steagall Act, which for most of the last century separated customer deposits from the riskier practices of investment banking.

"Had people known about the hundreds of billions in loans to the biggest financial institutions, they would have demanded Congress take much more courageous actions to stop the practices that caused this near financial collapse," says Dorgan, who retired in January.

Getting Bigger
Instead, the Fed and its secret financing helped America’s biggest financial firms get bigger and go on to pay employees as much as they did at the height of the housing bubble. Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data.

For so few banks to hold so many assets is "un-American," says Richard W. Fisher, president of the Federal Reserve Bank of Dallas. "All of these gargantuan institutions are too big to regulate. I’m in favor of breaking them up and slimming them down."

Employees at the six biggest banks made twice the average for all U.S. workers in 2010, based on Bureau of Labor Statistics hourly compensation cost data. The banks spent $146.3 billion on compensation in 2010, or an average of $126,342 per worker, according to data compiled by Bloomberg. That’s up almost 20 percent from five years earlier compared with less than 15 percent for the average worker. Average pay at the banks in 2010 was about the same as in 2007, before the bailouts.

'Wanted to Pretend'
"The pay levels came back so fast at some of these firms that it appeared they really wanted to pretend they hadn’t been bailed out," says Anil Kashyap, a former Fed economist who’s now a professor of economics at the University of Chicago Booth School of Business. "They shouldn’t be surprised that a lot of people find some of the stuff that happened totally outrageous."

Bank of America took over Merrill Lynch & Co. at the urging of then-Treasury Secretary Paulson after buying the biggest U.S. home lender, Countrywide Financial Corp. When the Merrill Lynch purchase was announced on Sept. 15, 2008, Bank of America had $14.4 billion in emergency Fed loans and Merrill Lynch had $8.1 billion. By the end of the month, Bank of America’s loans had reached $25 billion and Merrill Lynch’s had exceeded $60 billion, helping both firms keep the deal on track.

Prevent Collapse
Wells Fargo bought Wachovia Corp., the fourth-largest U.S. bank by deposits before the 2008 acquisition. Because depositors were pulling their money from Wachovia, the Fed channeled $50 billion in secret loans to the Charlotte, North Carolina-based bank through two emergency-financing programs to prevent collapse before Wells Fargo could complete the purchase.

"These programs proved to be very successful at providing financial markets the additional liquidity and confidence they needed at a time of unprecedented uncertainty," says Ancel Martinez, a spokesman for Wells Fargo.

JPMorgan absorbed the country’s largest savings and loan, Seattle-based Washington Mutual Inc., and investment bank Bear Stearns Cos. The New York Fed, then headed by Timothy F. Geithner, who’s now Treasury secretary, helped JPMorgan complete the Bear Stearns deal by providing $29 billion of financing, which was disclosed at the time.

The Fed also supplied Bear Stearns with $30 billion of secret loans to keep the company from failing before the acquisition closed, central bank data show. The loans were made through a program set up to provide emergency funding to brokerage firms.

'Regulatory Discretion'
"Some might claim that the Fed was picking winners and losers, but what the Fed was doing was exercising its professional regulatory discretion," says John Dearie, a former speechwriter at the New York Fed who’s now executive vice president for policy at the Financial Services Forum, a Washington-based group consisting of the CEOs of 20 of the world’s biggest financial firms. "The Fed clearly felt it had what it needed within the requirements of the law to continue to lend to Bear and Wachovia."

The bill introduced by Brown and Kaufman in April 2010 would have mandated shrinking the six largest firms. "When a few banks have advantages, the little guys get squeezed," Brown says. "That, to me, is not what capitalism should be." Kaufman says he’s passionate about curbing too-big-to-fail banks because he fears another crisis.

Can We Survive?'
"The amount of pain that people, through no fault of their own, had to endure -- and the prospect of putting them through it again -- is appalling," Kaufman says. "The public has no more appetite for bailouts. What would happen tomorrow if one of these big banks got in trouble? Can we survive that?"

Lobbying expenditures by the six banks that would have been affected by the legislation rose to $29.4 million in 2010 compared with $22.1 million in 2006, the last full year before credit markets seized up -- a gain of 33 percent, according to, a research group that tracks money in U.S. politics. Lobbying by the American Bankers Association, a trade organization, increased at about the same rate, reported.

Lobbyists argued the virtues of bigger banks. They’re more stable, better able to serve large companies and more competitive internationally, and breaking them up would cost jobs and cause "long-term damage to the U.S. economy," according to a Nov. 13, 2009, letter to members of Congress from the FSF.

The group’s website cites Nobel Prize-winning economist Oliver E. Williamson, a professor emeritus at the University of California, Berkeley, for demonstrating the greater efficiency of large companies.

'Serious Burden'
In an interview, Williamson says that the organization took his research out of context and that efficiency is only one factor in deciding whether to preserve too-big-to-fail banks. "The banks that were too big got even bigger, and the problems that we had to begin with are magnified in the process," Williamson says. "The big banks have incentives to take risks they wouldn’t take if they didn’t have government support. It’s a serious burden on the rest of the economy."

Dearie says his group didn’t mean to imply that Williamson endorsed big banks. Top officials in President Barack Obama’s administration sided with the FSF in arguing against legislative curbs on the size of banks.

Geithner, Kaufman
On May 4, 2010, Geithner visited Kaufman in his Capitol Hill office. As president of the New York Fed in 2007 and 2008, Geithner helped design and run the central bank’s lending programs. The New York Fed supervised four of the six biggest U.S. banks and, during the credit crunch, put together a daily confidential report on Wall Street’s financial condition. Geithner was copied on these reports, based on a sampling of e- mails released by the Financial Crisis Inquiry Commission.

At the meeting with Kaufman, Geithner argued that the issue of limiting bank size was too complex for Congress and that people who know the markets should handle these decisions, Kaufman says.

According to Kaufman, Geithner said he preferred that bank supervisors from around the world, meeting in Basel, Switzerland, make rules increasing the amount of money banks need to hold in reserve. Passing laws in the U.S. would undercut his efforts in Basel, Geithner said, according to Kaufman. Anthony Coley, a spokesman for Geithner, declined to comment.

'Punishing Success'
Lobbyists for the big banks made the winning case that forcing them to break up was "punishing success," Brown says. Now that they can see how much the banks were borrowing from the Fed, senators might think differently, he says.

The Fed supported curbing too-big-to-fail banks, including giving regulators the power to close large financial firms and implementing tougher supervision for big banks, says Fed General Counsel Scott G. Alvarez. The Fed didn’t take a position on whether large banks should be dismantled before they get into trouble.

Dodd-Frank does provide a mechanism for regulators to break up the biggest banks. It established the Financial Stability Oversight Council that could order teetering banks to shut down in an orderly way. The council is headed by Geithner. "Dodd-Frank does not solve the problem of too big to fail," says Shelby, the Alabama Republican. "Moral hazard and taxpayer exposure still very much exist."

Below Market
Dean Baker, co-director of the Center for Economic and Policy Research in Washington, says banks "were either in bad shape or taking advantage of the Fed giving them a good deal. The former contradicts their public statements. The latter -- getting loans at below-market rates during a financial crisis -- is quite a gift."

The Fed says it typically makes emergency loans more expensive than those available in the marketplace to discourage banks from abusing the privilege. During the crisis, Fed loans were among the cheapest around, with funding available for as low as 0.01 percent in December 2008, according to data from the central bank and money-market rates tracked by Bloomberg.

The Fed funds also benefited firms by allowing them to avoid selling assets to pay investors and depositors who pulled their money. So the assets stayed on the banks’ books, earning interest.

Banks report the difference between what they earn on loans and investments and their borrowing expenses. The figure, known as net interest margin, provides a clue to how much profit the firms turned on their Fed loans, the costs of which were included in those expenses. To calculate how much banks stood to make, Bloomberg multiplied their tax-adjusted net interest margins by their average Fed debt during reporting periods in which they took emergency loans.

Added Income
The 190 firms for which data were available would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported, the data show. The six biggest U.S. banks’ share of the estimated subsidy was $4.8 billion, or 23% of their combined net income during the time they were borrowing from the Fed. Citigroup would have taken in the most, with $1.8 billion.

"The net interest margin is an effective way of getting at the benefits that these large banks received from the Fed," says Gerald A. Hanweck, a former Fed economist who’s now a finance professor at George Mason University in Fairfax, Virginia.

While the method isn’t perfect, it’s impossible to state the banks’ exact profits or savings from their Fed loans because the numbers aren’t disclosed and there isn’t enough publicly available data to figure it out. Opinsky, the JPMorgan spokesman, says he doesn’t think the calculation is fair because "in all likelihood, such funds were likely invested in very short-term investments," which typically bring lower returns.

Standing Access
Even without tapping the Fed, the banks get a subsidy by having standing access to the central bank’s money, says Viral Acharya, a New York University economics professor who has worked as an academic adviser to the New York Fed. "Banks don’t give lines of credit to corporations for free," he says. "Why should all these government guarantees and liquidity facilities be for free?"

In the September 2008 meeting at which Paulson and Bernanke briefed lawmakers on the need for TARP, Bernanke said that if nothing was done, "unemployment would rise -- to 8 or 9 percent from the prevailing 6.1 percent," Paulson wrote in "On the Brink" (Business Plus, 2010).

Occupy Wall Street
The U.S. jobless rate hasn’t dipped below 8.8 percent since March 2009, 3.6 million homes have been foreclosed since August 2007, according to data provider RealtyTrac Inc., and police have clashed with Occupy Wall Street protesters, who say government policies favor the wealthiest citizens, in New York, Boston, Seattle and Oakland, California.

The Tea Party, which supports a more limited role for government, has its roots in anger over the Wall Street bailouts, says Neil M. Barofsky, former TARP special inspector general and a Bloomberg Television contributing editor. "The lack of transparency is not just frustrating; it really blocked accountability," Barofsky says. "When people don’t know the details, they fill in the blanks. They believe in conspiracies."

In the end, Geithner had his way. The Brown-Kaufman proposal to limit the size of banks was defeated, 60 to 31. Bank supervisors meeting in Switzerland did mandate minimum reserves that institutions will have to hold, with higher levels for the world’s largest banks, including the six biggest in the U.S. Those rules can be changed by individual countries. They take full effect in 2019.

Meanwhile, Kaufman says, "we’re absolutely, totally, 100 percent not prepared for another financial crisis."

Moody's Warns of Escalating Dangers From Europe's Debt Crisis
by Liz Alderman - New York Times

Moody's Investor Service warned on Monday that Europe’s rapidly escalating sovereign debt crisis may lead multiple countries to default on their debts or exit the euro, which would threaten the credit standing of all 17 countries in the currency union.

In a starkly worded report , the ratings agency said that while European politicians have expressed their commitment to holding the euro together and preventing defaults, their actions to address the crisis only seem to be taking place "after a series of shocks" force their hand.

As a result, more countries may be shut out of borrowing in financial markets "for a sustained period," Moody's said, raising the specter of additional taxpayer bailouts on top of the multi-billion euro lifelines currently supporting Greece, Ireland and Portugal.

"The probability of multiple defaults by euro-area countries is no longer negligible," Moody’s said. "A series of defaults would also increase the likelihood of one or more members not simply defaulting, but also leaving the euro area."

Gary Jenkins, the head of fixed income at Evolution Securities in London, said the consequences could be severe. "We do seem to be moving slowly towards more of a fiscal union," he wrote in a report to clients Monday. But it is "at a pace that may result in all the components being put in place after a complete meltdown of the financial system."

The Moody's report came as anxiety intensified over Italy, whose borrowing costs have shot back above 7 percent in recent days despite promises by Mario Monti, the new prime minister, to enact a new austerity plan designed to reduce a mountain of debt.

So nervous are investors that Italy might be on a slippery slope that the International Monetary Fund took the unusual step Monday of denying reports in the Italian press that it was in discussions with Italian authorities on a program for I.M.F. financing.

Political gridlock has worsened the financial environment, not only in Europe, but in the United States in recent months, as the inability of politicians to agree on measure to improve their national finances spooks financial markets.

In Europe, authorities have been slow to implement an expansion of the bailout fund, known as the European Financial Stability Facility, that was meant to raise money by issuing bonds backed by the stronger European countries and loan it to shakier countries facing high interest rates on their debt.

France last week bowed to pressure from Germany against the issuance of a common bond that would be backed by euro-zone countries, something investors said could help calm the crisis during the long time that it will take to expand the E.F.S.F.

Germany has also resisted calls to allow the European Central Bank to act as a lender of last resort to put out financial fires during the transition to a more federalist structure in the euro-zone.

In Washington, efforts by a special committee to reach an agreement to reduce America's deficit collapsed two weeks ago, amid rancorous disagreement between Republicans and Democrats on how to cut spending and raise taxes to address the United States’s mounting federal debt.

A standoff in July over raising the national debt ceiling led one ratings agency, Standard & Poor's, to cut America’s flawless credit rating by one notch, to AA — an event that was not supposed to roil financial markets, but wound up having pernicious effects at banks that held United States Treasury securities and caused alarm among America’s large trading partners, including China.

Moody’s said that the likelihood of "even more negative scenarios has risen" in Europe in the last several weeks. It cited political uncertainties in Greece and Italy, where the governments have just changed hands; the lack of clarity over losses that banks will take for their investments in Greece; and a continued deterioration of the economic landscape in the euro area.

On Monday, Deutsche Bank became the latest to warn that Europe was on the brink of falling into recession. It cut its forecast for the euro area next year to -0.5 percent from growth of 0.4 percent. "The failure of the E.U. authorities to find a solution to the sovereign debt crisis means the downside risks are materializing," the bank said.

Such conditions, Moody’s said, could lead to one of two scenarios — neither of which are palatable. Either "one or more defaults" occur in the euro-zone, or one or more countries exit the union, Moody’s said. Any country requiring support would be downgraded to a "speculative" rating, the agency said.

Several European countries hold bond auctions this week that could inflame nervousness among investors. Belgium, whose credit rating was downgraded Friday by Standard & Poor’s to AA from AA+, is selling a range of bonds on Monday. France and Spain are selling bonds on Thursday.

France, which together with Germany is facing a rising financial bill for its ambitions to hold the euro-zone together, has been beset by warnings from ratings agencies recently that its AAA rating could fall soon. While many investors are anticipating a revision, such an event is likely to increase nervousness in global financial markets, partly because some see it as the last bulwark before Germany’s own finances start being called into question.

Europe's banks feel funding freeze
by Tracy Alloway - FT

The funding hole for European banks is deepening following a sharp fall in bond issuance this year as market turmoil leads to a region-wide credit crunch.

European banks have sold $413bn worth of bonds this year, equivalent to just two-thirds of the $654bn that is due to be returned to investors in 2011 as the debts mature, according to data compiled for the Financial Times by Dealogic.

That leaves the banks with a $241bn funding gap in 2011, the first time European lenders have collectively been unable to replace their maturing debt with new bonds for at least the past five years.

Investors say they have been deterred from buying bank bonds because of uncertainty over the financial health of some banks, the fate of the eurozone and the impact of new financial regulation. The funding freeze has raised fears about the knock-on effects for companies reliant on bank funding and the broader economy.

"Some deleveraging after the financial crisis is clearly needed, but I think banks are being sent on a crash diet that will have wider implications," said Morgan Stanley analyst Huw van Steenis. "It's not just the risk of a European credit crunch, it will have a knock-on effect in Asia and the US."

Morgan Stanley estimates that banks will have to dispose of as much as $3,300bn worth of assets over the next few years to meet new regulations on the amount of capital buffers they hold and to address the funding shortfall.

The banks' funding difficulties and shrinking balance sheets are being monitored with mounting concern by the European Central Bank, which is considering a number of new supportive measures. It is worried about the implications for financial stability and the risk of a lending squeeze driving the eurozone deeper into recession.

Banks face an even greater redemption hump next year, when $720bn worth of debt is due to mature. The Dealogic bank data includes so-called senior unsecured issuance, traditionally the bread and butter of bank funding. It excludes covered bonds, the bundled packages of loans and mortgages that have become increasingly popular for banks to issue.

Including such debt, European banks sold $744bn worth of bonds this year, compared with $888bn worth of maturing debt, still leaving a $144bn shortfall.

Is this really the end?

Unless Germany and the ECB move quickly, the single currency’s collapse is looming

Even as the euro zone hurtles towards a crash, most people are assuming that, in the end, European leaders will do whatever it takes to save the single currency. That is because the consequences of the euro’s destruction are so catastrophic that no sensible policymaker could stand by and let it happen.

A euro break-up would cause a global bust worse even than the one in 2008-09. The world’s most financially integrated region would be ripped apart by defaults, bank failures and the imposition of capital controls (see article). The euro zone could shatter into different pieces, or a large block in the north and a fragmented south.

Amid the recriminations and broken treaties after the failure of the European Union’s biggest economic project, wild currency swings between those in the core and those in the periphery would almost certainly bring the single market to a shuddering halt. The survival of the EU itself would be in doubt.

Yet the threat of a disaster does not always stop it from happening. The chances of the euro zone being smashed apart have risen alarmingly, thanks to financial panic, a rapidly weakening economic outlook and pigheaded brinkmanship. The odds of a safe landing are dwindling fast.

Markets, manias and panics
Investors’ growing fears of a euro break-up have fed a run from the assets of weaker economies, a stampede that even strong actions by their governments cannot seem to stop. The latest example is Spain. Despite a sweeping election victory on November 20th for the People’s Party, committed to reform and austerity, the country’s borrowing costs have surged again. The government has just had to pay a 5.1% yield on three-month paper, more than twice as much as a month ago.

Yields on ten-year bonds are above 6.5%. Italy’s new technocratic government under Mario Monti has not seen any relief either: ten-year yields remain well above 6%. Belgian and French borrowing costs are rising. And this week, an auction of German government Bunds flopped.

The panic engulfing Europe’s banks is no less alarming. Their access to wholesale funding markets has dried up, and the interbank market is increasingly stressed, as banks refuse to lend to each other. Firms are pulling deposits from peripheral countries’ banks. This backdoor run is forcing banks to sell assets and squeeze lending; the credit crunch could be deeper than the one Europe suffered after Lehman Brothers collapsed.

Add the ever greater fiscal austerity being imposed across Europe and a collapse in business and consumer confidence, and there is little doubt that the euro zone will see a deep recession in 2012—with a fall in output of perhaps as much as 2%. That will lead to a vicious feedback loop in which recession widens budget deficits, swells government debts and feeds popular opposition to austerity and reform. Fear of the consequences will then drive investors even faster towards the exits.

Past financial crises show that this downward spiral can be arrested only by bold policies to regain market confidence. But Europe’s policymakers seem unable or unwilling to be bold enough. The much-ballyhooed leveraging of the euro-zone rescue fund agreed on in October is going nowhere.

Euro-zone leaders have become adept at talking up grand long-term plans to safeguard their currency—more intrusive fiscal supervision, new treaties to advance political integration. But they offer almost no ideas for containing today’s conflagration.

Germany’s cautious chancellor, Angela Merkel, can be ruthlessly efficient in politics: witness the way she helped to pull the rug from under Silvio Berlusconi. A credit crunch is harder to manipulate. Along with leaders of other creditor countries, she refuses to acknowledge the extent of the markets’ panic. The European Central Bank (ECB) rejects the idea of acting as a lender of last resort to embattled, but solvent, governments.

The fear of creating moral hazard, under which the offer of help eases the pressure on debtor countries to embrace reform, is seemingly enough to stop all rescue plans in their tracks. Yet that only reinforces investors’ nervousness about all euro-zone bonds, even Germany’s, and makes an eventual collapse of the currency more likely.

This cannot go on for much longer. Without a dramatic change of heart by the ECB and by European leaders, the single currency could break up within weeks. Any number of events, from the failure of a big bank to the collapse of a government to more dud bond auctions, could cause its demise. In the last week of January, Italy must refinance more than €30 billion ($40 billion) of bonds. If the markets balk, and the ECB refuses to blink, the world’s third-biggest sovereign borrower could be pushed into default.

The perils of brinkmanship
Can anything be done to avert disaster? The answer is still yes, but the scale of action needed is growing even as the time to act is running out. The only institution that can provide immediate relief is the ECB. As the lender of last resort, it must do more to save the banks by offering unlimited liquidity for longer duration against a broader range of collateral.

Even if the ECB rejects this logic for governments—wrongly, in our view—large-scale bond-buying is surely now justified by the ECB’s own narrow interpretation of prudent central banking. That is because much looser monetary policy is necessary to stave off recession and deflation in the euro zone.

If the ECB is to fulfil its mandate of price stability, it must prevent prices falling. That means cutting short-term rates and embarking on "quantitative easing" (buying government bonds) on a large scale. And since conditions are tightest in the peripheral economies, the ECB will have to buy their bonds disproportionately.

Vast monetary loosening should cushion the recession and buy time. Yet reviving confidence and luring investors back into sovereign bonds now needs more than ECB support, restructuring Greece’s debt and reforming Italy and Spain—ambitious though all this is. It also means creating a debt instrument that investors can believe in. And that requires a political bargain: financial support that peripheral countries need in exchange for rule changes that Germany and others demand.

This instrument must involve some joint liability for government debts. Unlimited Eurobonds have been ruled out by Mrs Merkel; they would probably fall foul of Germany’s constitutional court. But compromises exist, as suggested this week by the European Commission.

One promising idea, from Germany’s Council of Economic Experts, is to mutualise all euro-zone debt above 60% of each country’s GDP, and to set aside a tranche of tax revenue to pay it off over the next 25 years. Yet Germany, still fretful about turning a currency union into a transfer union in which it forever supports the weaker members, has dismissed the idea.

This attitude has to change, or the euro will break up. Fears of moral hazard mean less now that all peripheral-country governments are committed to austerity and reform. Debt mutualisation can be devised to stop short of a permanent transfer union. Mrs Merkel and the ECB cannot continue to threaten feckless economies with exclusion from the euro in one breath and reassure markets by promising the euro’s salvation with the next.

Unless she chooses soon, Germany’s chancellor will find that the choice has been made for her.

OECD warns of eurozone contagion risk
by Norma Cohen - FT

European leaders need to provide "credible and large enough firepower" to halt the sell-off in the eurozone sovereign debt market or they will risk a severe recession, according to the chief economist of the Organisation for Economic Co-operation and Development.

The warning came as the organisation slashed its half-yearly forecasts for growth within the world’s richest countries, and said activity in Europe would grind to a near-halt.

Pier Carlo Padoan said that Europe’s leaders had so far failed to put in place firm plans to address concerns about sovereign debt sustainability, which threaten to destabilise the region’s banking sector and tip it into a severe recession.

"The scenario so far is that Europe’s leaders have been behind the curve", Mr Padoan said. "We believe this could be very serious." He said that leaders need to put in place firm plans for fiscal integration.

"Everyone should be clear that the euro is at stake and everyone should do what is needed to avoid the worst," Mr Padoan said. While declining to single out any member state, Mr Padoan noted that Germany has had very clear benefits in the form of productivity improvements and a large surplus because of its participation in the common currency.

In its economic outlook, the OECD slashed its 2012 forecast for economic growth to 1.6 per cent for its 34 member states from 2.3 per cent six months ago and for Europe alone from 2.0 per cent to 0.2 per cent.

In the report’s introduction, the OECD notes that the global economy has deteriorated significantly since its previous report in May and that the euro area "appears to be in a mild recession". However, "recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption if not addressed," the report notes.

While there is some uncertainty about just how an unspecified "major negative event" might play out, what the OECD characterises as "a large negative event" – perhaps the break-up of the eurozone – "would likely send the OECD area as a whole into a recession, with marked declines in the US and Japan."

In particular, the eurozone’s rescue fund, the European Financial Stability Facility, will need to be given the financial resources to make it a credible institution with sufficient firepower to stop the contagion from spreading. "In view of the great uncertainty policymakers now confront, they must be prepared to face the worst," the OECD said.

However, there is a potentially positive outcome if eurozone leaders do take the necessary steps for stability. This would come in the form of a pick-up in confidence among households and businesses that is likely to translate into a rise in demand and economic activity.

In the UK, growth is expected to contract slightly in the fourth quarter of 2011 and the first quarter of 2012 and is not expected to pick up much until the fourth quarter of 2012.

For the year as a whole, growth is expected to be 0.5 per cent, down from 1.8 per cent forecast in May and for 2013 is expected to be 1.8 per cent. Unemployment is likely to rise to 9 per cent next year and stay there until at least the end of 2013.

Bankers have seized Europe: Goldman Sachs Has Taken Over
by Paul Craig Roberts - GlobalResearch

On November 25, two days after a failed German government bond auction in which Germany was unable to sell 35% of its offerings of 10-year bonds, the German finance minister, Wolfgang Schaeuble said that Germany might retreat from its demands that the private banks that hold the troubled sovereign debt from Greece, Italy, and Spain must accept part of the cost of their bailout by writing off some of the debt.

The private banks want to avoid any losses either by forcing the Greek, Italian, and Spanish governments to make good on the bonds by imposing extreme austerity on their citizens, or by having the European Central Bank print euros with which to buy the sovereign debt from the private banks. Printing money to make good on debt is contrary to the ECB’s charter and especially frightens Germans, because of the Weimar experience with hyperinflation.

Obviously, the German government got the message from the orchestrated failed bond auction. As I wrote at the time, there is no reason for Germany, with its relatively low debt to GDP ratio compared to the troubled countries, not to be able to sell its bonds.

If Germany’s creditworthiness is in doubt, how can Germany be expected to bail out other countries? Evidence that Germany’s failed bond auction was orchestrated is provided by troubled Italy’s successful bond auction two days later.

Strange, isn’t it. Italy, the largest EU country that requires a bailout of its debt, can still sell its bonds, but Germany, which requires no bailout and which is expected to bear a disproportionate cost of Italy’s, Greece’s and Spain’s bailout, could not sell its bonds.

In my opinion, the failed German bond auction was orchestrated by the US Treasury, by the European Central Bank and EU authorities, and by the private banks that own the troubled sovereign debt.

My opinion is based on the following facts. Goldman Sachs and US banks have guaranteed perhaps one trillion dollars or more of European sovereign debt by selling swaps or insurance against which they have not reserved. The fees the US banks received for guaranteeing the values of European sovereign debt instruments simply went into profits and executive bonuses. This, of course, is what ruined the American insurance giant, AIG, leading to the TARP bailout at US taxpayer expense and Goldman Sachs’ enormous profits.

If any of the European sovereign debt fails, US financial institutions that issued swaps or unfunded guarantees against the debt are on the hook for large sums that they do not have. The reputation of the US financial system probably could not survive its default on the swaps it has issued.

Therefore, the failure of European sovereign debt would renew the financial crisis in the US, requiring a new round of bailouts and/or a new round of Federal Reserve "quantitative easing," that is, the printing of money in order to make good on irresponsible financial instruments, the issue of which enriched a tiny number of executives.

Certainly, President Obama does not want to go into an election year facing this prospect of high profile US financial failure. So, without any doubt, the US Treasury wants Germany out of the way of a European bailout.

The private French, German, and Dutch banks, which appear to hold most of the troubled sovereign debt, don’t want any losses. Either their balance sheets, already ruined by Wall Street’s fraudulent derivatives, cannot stand further losses or they fear the drop in their share prices from lowered earnings due to write-downs of bad sovereign debts. In other words, for these banks big money is involved, which provides an enormous incentive to get the German government out of the way of their profit statements.

The European Central Bank does not like being a lesser entity than the US Federal Reserve and the UK’s Bank of England. The ECB wants the power to be able to undertake "quantitative easing" on its own. The ECB is frustrated by the restrictions put on its powers by the conditions that Germany required in order to give up its own currency and the German central bank’s control over the country’s money supply.

The EU authorities want more "unity," by which is meant less sovereignty of the member countries of the EU. Germany, being the most powerful member of the EU, is in the way of the power that the EU authorities desire to wield.

Thus, the Germans bond auction failure, an orchestrated event to punish Germany and to warn the German government not to obstruct "unity" or loss of individual country sovereignty.

Germany, which has been browbeat since its defeat in World War II, has been made constitutionally incapable of strong leadership. Any sign of German leadership is quickly quelled by dredging up remembrances of the Third Reich. As a consequence, Germany has been pushed into an European Union that intends to destroy the political sovereignty of the member governments, just as Abe Lincoln destroyed the sovereignty of the American states.

Who will rule the New Europe? Obviously, the private European banks and Goldman Sachs.

The new president of the European Central Bank is Mario Draghi. This person was Vice Chairman and Managing Director of Goldman Sachs International and a member of Goldman Sachs’ Management Committee.

Draghi was also Italian Executive Director of the World Bank, Governor of the Bank of Italy, a member of the governing council of the European Central Bank, a member of the board of directors of the Bank for International Settlements, and a member of the boards of governors of the International Bank for Reconstruction and Development and the Asian Development Bank, and Chairman of the Financial Stability Board.

Obviously, Draghi is going to protect the power of bankers.

Italy’s new prime minister, who was appointed not elected, was a member of Goldman Sachs Board of International Advisers. Mario Monti was appointed to the European Commission, one of the governing organizations of the EU.

Monti is European Chairman of the Trilateral Commission, a US organization that advances American hegemony over the world. Monti is a member of the Bilderberg group and a founding member of the Spinelli group, an organization created in September 2010 to facilitate integration within the EU.

Just as an unelected banker was installed as prime minister of Italy, an unelected banker was installed as prime minister of Greece. Obviously, they are intended to produce the bankers’ solution to the sovereign debt crisis.

Greece’s new appointed prime minister, Lucas Papademos, was Governor of the Bank of Greece. From 2002-2010. He was Vice President of the European Central Bank. He, also, is a member of America’s Trilateral Commission.

Jacques Delors, a founder of the European Union, promised the British Trade Union Congress in 1988 that the European Commission would require governments to introduce pro-labor legislation. Instead, we find the banker-controlled European Commission demanding that European labor bail out the private banks by accepting lower pay, fewer social services, and a later retirement.

The European Union, just like everything else, is merely another scheme to concentrate wealth in a few hands at the expense of European citizens, who are destined, like Americans, to be the serfs of the 21st century.

Should the Fed save Europe from disaster?
by Ambrose Evans-Pritchard - Telegraph

The dam is breaking in Europe. Interbank lending has seized up. Much of the financial system is paralysed, setting off a credit crunch just as Euroland slides back into slump.

The Euribor/OIS spread or`fear gauge’ is flashing red warning signals. Dollar funding costs in Europe have spiked to Lehman-crisis levels, leaving lenders struggling frantically to cover their $2 trillion (£1.3 trillion) funding gap.

America’s money markets are no longer willing to lend to over-leveraged Euroland banks, or only on drastically short maturities below seven days. Exposure to French banks has been slashed by 69pc since May.

Italy faces a "sudden stop" in funding, forced to pay 6.5pc on Friday for six-month money, despite the technocrat take-over in Rome.

German Bund yields have risen to 59 basis points above Swedish bonds since Wednesday’s failed auction. German debt has been relegated suddenly against Swiss, Nordic, Japanese, and US debt. As the Telegraph reported two weeks ago, Asian central banks and sovereign wealth funds are spurning all EMU bonds because they have lost confidence in a monetary system with no lender of last resort, coherent form of government, or respect for the rule of law.

Even if EU leaders could agree on fiscal union and joint debt issuance – which they can’t – such long-range changes cannot solve the immediate crisis at hand. The push for treaty changes has become a vast distraction.

Unless Germany agrees to the full mobilization of the European Central Bank very fast, the eurozone will spiral out of control. As The Economist put it, "The risk that the currency disintegrates within weeks is alarmingly high."

Theoretically, EMU can limp on though the Winter until the Italian debt auctions of €33bn in the last week of January, and €48bn in the last week of February. The reality is that sovereign contagion to the financial system may well bring matters to a head more swiftly.

If break-up occurs in a disorderly fashion, with Club Med states and Ireland spun into oblivion one by one, the chain reaction will cause an implosion of Europe’s €31 trillion banking nexus (S&P estimate), the world’s biggest and most leveraged. This in turn risks an almighty global crash – first class passengers included.

So the question arises, should the rest of the world take over management of Europe to prevent or mitigate disaster? Specifically, should the US Federal Reserve assume leadership as a monetary superpower and impose policy on a paralyzed ECB, acting as a global lender of last resort?

In essence, the US would do for EMU what it did in military and strategic terms for the Europe in the 1990s when Washington said enough is enough after squabbling EU leaders had allowed 200,000 people to be slaughtered in the Balkans. The Pentagon settled matters swiftly with "Operation Deliberate Force", raining Tomahawk missiles on the Serb positions. Power met greater power.

Personally, I have not made up my mind about the wisdom of a Fed rescue. It is fraught with dangers, and one might argue that resources are better deployed breaking EMU into workable halves with minimal possible damage.

However, debate is already joined – and wheels are turning in Washington policy basements – so let me throw this out for readers to chew over.

Nobel economist Myron Scholes first floated the idea over lunch at a Riksbank forum in August. "I wonder whether Bernanke might not say that `we believe in a harmonized world, that the
Europeans are our friends, and we know that the ECB can't print money to buy bonds because the Germans won't let them. And since the ECB will soon run out of money, we will step in and start buying European government bonds for them'. It is something to think about," he said.

This is not as eccentric as it sounds. The Fed’s Ben Bernanke touched on the theme in a speech in November 2002 – "Deflation: making sure it doesn't happen here" – now viewed as his policy `road map' in extremis. "The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations," he said.\

Berkeley’s Brad DeLong said it is time for Bernanke to act on this as the world lurches straight into 1931 and a Great Depression II. "The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash," he said.

The Fed could buy €2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world’s paramount monetary force might alone bring Italian and Spanish yields back down below 5pc, before one bent nickel is even spent.

One presumes that the Fed would purchase both the triple AAA core and Club Med in a symmetric blast of monetary stimulus across the board, avoiding the (fiscal) error of targeting semi-solvent states. In sense, the Fed would do quantitative easing for the Europeans, whether they liked it or not.

David Zervos from Jefferies has proposed an extreme variant of this, accusing Germany’s fiscal Puritans of reducing Europe’s periphery to "indentured servants" and driving the whole region into depression with combined fiscal and monetary contraction.

"We in the US need to snuff out these sado-fiscalists and fast, they are a danger to the world. The US can force monetisation at the ECB. We should back up the forklift and buy Euro area bonds. Lots of them," he said.

Some of the purchases could be achieved by tapping the Fed’s euro account at the ECB, flush with funds as a result of currency swaps provided by Washington to help Europe shore up its banks. Ultimately mass EMU bond purchases would cause a sudden and potentially dangerous spike in the euro against the dollar. There lies the rub. If the ECB failed to loosen monetary policy drastically to offset this, the experiment could go badly wrong.

A pioneering school of "market monetarists" - perhaps the most creative in the current policy fog - says the Fed should reflate the world through a different mechanism, preferably with the Bank of Japan and a coalition of the willing.

Their strategy is to target nominal GDP (NGDP) growth in the United States and other aligned powers, restoring it to pre-crisis trend levels. The idea comes from Irving Fisher’s "compensated dollar plan" in the 1930s.

The school is not Keynesian. They are inspired by interwar economists Ralph Hawtrey and Sweden’s Gustav Cassel, as well as monetarist guru Milton Friedman. "Anybody who has studied the Great Depression should find recent European events surreal. Day-by-day history repeats itself. It is tragic," said Lars Christensen from Danske Bank, author of a book on Friedman.

"It is possible that a dramatic shift toward monetary stimulus could rescue the euro," said Scott Sumner, a professor at Bentley University and the group’s eminence grise. Instead, EU authorities are repeating the errors of the Slump by obsessing over inflation when (forward-looking) deflation is already the greater threat.

"I used to think people were stupid back in the 1930s. Remember Hawtrey’s famous "Crying fire, fire, in Noah’s flood"? I used to wonder how people could have failed to see the real problem. I thought that progress in macroeconomic analysis made similar policy errors unlikely today. I couldn’t have been more wrong. We’re just as stupid," he said.

Needless to say, reflation alone will not make Euroland a workable currency area. Nor will fiscal union, Eurobonds, and debt pooling down the road. "Even if they do two years of fiscal transfers, and the ECB buys all the bonds, and the problems are swept under the carpet, we are still going to be facing a crisis at the end of it," said professor Scholes.\

None of the "cures" on offer tackle the 30pc currency misalignment between North and South, the deeper cause of this crisis. What Fed-imposed QE for Euroland can do is make a solution at least possible stoking inflation deliberately.

This means inflicting a boomlet on the German bloc, while allowing the South to take its fiscal punishment without crashing further into self-defeating debt deflation. It forces up prices in the North, compelling the neo-Calvinists to accept their share of the intra-EMU price readjustment.

The Germans will not like this. If inflation causes them rise up in revolt and leave EMU to the Latins, so much the better. That is the best solution of all. What we know for certain is that Europe’s current policy settings must lead ineluctably to ruin and perhaps to fascism. Nothing can be worse.

IMF readying '€600 billion rescue plan' for Italy
by AFP

The IMF could bail out Italy with up to 600 billion euros ($794 billion), an Italian newspaper reported on Sunday, as Prime Minister Mario Monti came under pressure to speed up anti-crisis measures.

The money would give Monti a window of 12 to 18 months to implement urgent budget cuts and growth-boosting reforms "by removing the necessity of having to refinance the debt," La Stampa reported, citing IMF officials in Washington.

The IMF would guarantee rates of 4.0 percent or 5.0 percent on the loan -- far better than the borrowing costs on commercial debt markets, where the rate on two-year and five-year Italian government bonds has risen above 7.0 percent.

The size of the loan would make it difficult for the IMF to use its current resources so different options are being explored, including possible joint action with the European Central Bank in which the IMF would be guarantor. "This scenario is because resistance from Berlin to a greater role for the ECB in helping states in difficulty -- starting with Italy -- could be overcome if the funds are given out under strict IMF surveillance," the report said.

The European Union and the ECB have sent auditors to check Italy's public accounts this month and the IMF is set to send experts soon under a special surveillance mechanism agreed at the G20 summit in France earlier this month.

Monti's predecessor Silvio Berlusconi said at that summit that he had turned down an offer of financial aid in the form of a precautionary credit line from the IMF, although IMF chief Christine Lagarde later denied the claim.

"IMF intervention is inevitable but not enough," Paolo Guerrieri, economist at the College of Europe in Bruges, was quoted by La Stampa as saying. "There is a grave risk of a liquidity crisis soon in the entire eurozone, including both sovereign states and banks," Guerrieri said. "Italy and Spain need the necessary time to carry out reforms," he added.

Italy's 1.9-trillion euro ($2.5-trillion) public debt and low growth rate have spooked the markets in recent weeks, prompting concern that it could have to seek a bailout like fellow eurozone members Greece, Ireland and Portugal.

Monti, an economics professor and former top EU commissioner who was installed on November 16 after a wave of market panic ousted Berlusconi, is under intense pressure to move quickly to implement long-delayed reforms.

Italian news reports said that a package of budget measures, which would still have to go before parliament for final approval, would be approved at a cabinet meeting on December 5 ahead of an EU summit on December 9.

The reports said the measures could include the re-introduction of a tax on first home buyers, as well as a one-off tax on property worth over a million euros, a reform to increase the pension age and infrastructure projects.

The EU's Economic Affairs Commissioner Olli Rehn during a visit to Rome on Friday called for an "ambitious timetable" for reforms, warning that Italy's high borrowing costs risked impacting the country's economic growth prospects.

IMF denies reports of Italy bailout deal
by Alex Hawkes - Guardian

Stock markets boosted by rumours of bailout deal for Italy, though IMF denies reports of aid package proposal

Rumours of an International Monetary Fund (IMF) bailout for Italy boosted markets on Monday morning, as Moody's warned that the escalating eurozone crisis threatens the credit rating of all EU states.

Italian newspaper La Stampa reported that the IMF was preparing an aid package for Italy, a claim swiftly denied by the international body: "There are no discussions with the Italian authorities on a programme for IMF financing," a spokesperson said.

La Stampa claimed that the IMF could provide up to €600bn (£515bn) at a rate of 4%-5%, giving Italy 18 months to sort its finances out. Italy has moved centre-stage in the eurozone crisis in recent weeks as the cost of its borrowing has soared. The yields on its 10-year bonds are comfortably above 7%, the threshold above which other eurozone countries have received bailouts.

Reuters reported on Monday morning that contact between the IMF and Rome have intensified recently, but that it was unclear what support Italy could be offered.

An IMF inspection team will be in Rome over the coming days. "Given that IMF chief Christine Lagarde recently said that the fund only had €285bn in emergency funds, this story seems rather implausible, however there does appear to be talk of some form of plan in the works, however it is not immediately clear how the IMF would be able to raise the money needed," said Michael Hewson, an analyst at CMC markets.

European stock markets rose in early trading despite the IMF denials. The FTSE 100 was up 42 points at 5,206, a 0.75% rise, while the French CAC and the German DAX were up 1.4% and 1.5% respectively. The euro rose 0.4% against the dollar.

The IMF rumours came just as credit ratings agency Moody's warned that all EU countries could be downgraded as a result of the growing eurozone crisis. "The continued rapid escalation of the euro area sovereign and banking credit crisis is threatening the credit standing of all European sovereigns," Moody's said.

Moody's said there was a possible positive scenario, in which the euro was preserved without widespread defaults: "Even this 'positive' scenario carries very negative rating implications in the interim period." The possibility of multiple defaults and the fragmentation of the euro area "would have negative repercussions for the credit standing of all euro area and EU sovereigns," Moody's said.

Belgium forms government as four eurozone states plan bond auctions
by David Gow - Guardian

• Belgians prepare to face €11bn in budget cuts
• Belgium, France, Italy and Spain aim to raise €17bn

A bond auction in Belgium will kick off another week of fear and loathing in the eurozone today as four key countries including France, Italy and Spain hope to raise €17bn in the coming days.

Elio Di Rupo, a Francophone socialist due to become the next prime minister of Belgium after a 600-day wait for a new government, said the €11.3bn (£9.3bn) of budget cuts agreed by six parties met EU demands in advance of Monday's auction.

Last week Germany failed to sell all its 10-year bunds on offer while yields, or interest rates, in weaker countries reached record levels. There are fears that market reaction will be hesitant or even hostile amid reports that France and Germany are plotting a new fiscal union for eight of the 17 eurozone countries. Another option is a fresh stability and growth pact to impose fiscal discipline.

The French and German finance ministers face a grilling over their secret plans at tomorrow's meeting of the eurogroup, the 17 eurozone finance ministers, and again at Wednesday's formal discussions among all 27 EU finance ministers.

A spate of reports suggesting that a new "hardcore euro" treaty could be in place by early 2012 will send shivers through Whitehall before tomorrow's autumn statement from George Osborne who, like David Cameron, is clamouring for close consultations with Britain over such plans. But EU officials insisted that, while Berlin and Paris might be "toying" with ideas such as drawing up a mini-accord that will not need a new treaty, they continued to talk to Brussels about "limited treaty change" involving the 17 eurozone nations or the 27 member states. Valérie Pécresse, the French budget minister, talked of a "new governance pact" for all zone members.

Nicolas Sarkozy, the French president, is expected to expand on Franco-German thinking at a speech on Thursday. Last week he and Angela Merkel, the German chancellor, promised a joint roadmap "within the next few days".

EU officials hope that the Belgian government's weekend deal, ending 18 months of vicious standoff, between prosperous Dutch-speaking Flanders and poorer French-speaking Wallonia, could help restore some calm to markets. It envisages a budget deficit of 2.8% next year and a balanced budget by 2015 along with structural reforms to reboot growth and was swiftly welcomed by Olli Rehn, the EU "stability" commissar.

The deal was provoked by Friday's downgrade of Belgian sovereign debt by ratings agency Standard & Poors from AA+ to AA. That, in turn, prompted a howl of protest in the country, with Le Soir, the leading Francophone daily, talking of a "rating of shame".

After federal Belgian police broke up an impromptu street "rave-party" near the premier's offices in Brussels to protest at the budget deal, trade unions joined forces to demand mass demonstrations against the budget cuts at the end of this week.

In Italy, where the cost of government borrowing rose above the level of sustainable solvency to 7.8% last week, Mario Monti, the new technocrat premier, is due to announce a sweeping programme of spending cuts on 5 December.

EU leaders hope to present a united front four days later at the EU-27 summit. This is due to endorse the boost to the main bailout fund, the EFSF, first agreed on 27 October. But the eurogroup is to be told tomorrow that plans to raise its firepower to €1tn are dead in the water, with as little as €500bn more likely. Last night EU officials poured cold water on a report that the IMF is preparing to bail Italy out with a €600bn "precautionary" loan to enable Monti to implement his reform programme.

Instead, eurozone leaders intend to present a plan that will "purchase" ECB intervention on a grand scale, including quantitative easing, via stricter budgetary discipline, including automatic sanctions, on "profligate" states and an agreed schedule for fiscal union.

Peter Bofinger, one of Merkel's five official economic advisers, told Ireland's RTE the EU and even the global financial system could collapse unless the ECB ignored Germany and agreed to act as the euro's lender of last resort. "This is not a rational debate [in Germany]. The Germans are simply scared," he said.

Italy again pays more to borrow
by Colleen Barry, AP

For the second time in as many market days, Italy paid sharply higher borrowing rates in an auction Monday, as investors continued to pressure the eurozone's third largest economy to come up with reforms urgently.

The interest rate Italy had to pay to get investors to part with their cash for 12 years skyrocketed to 7.20 percent, a full 2.7 percentage points higher than the last similar auction. In the auction, Italy raised euro567 million ($750 million). While there were enough bids to cover the maximum sought of euro750 million, the high borrowing rates persuaded the Italian Treasury to stick closer to the lower end of its planned issuance range.

The results will likely ramp up pressure on Premier Mario Monti, who is expected to announce additional austerity measures later this week. His government of technocrats is battling to persuade markets it can reduce debt and balance the budget by 2013.

A bigger test will come Tuesday when Italy plans to auction up to euro8 billion ($10.6 billion) in debt of three varying maturities, including the benchmark 10-year issues. Last Friday, Italy had to pay sharply higher rates in a pair of auctions, stoking renewed fears that Monti was running out of time to convince markets that his government has a strategy to get a grip on its debts.

Driving market fears is the knowledge that Italy is too big for Europe to bail out. Given the size of its debts — Italy must refinance euro200 billion by the end of April alone — the government is depending on investors in the markets for money. But when borrowing rates get too high that can fuel a potentially devastating debt spiral which could bankrupt the country and potentially bring down the euro.

Earlier Monday, the International Monetary Fund denied reports that it's readying a rescue fund for Italy. The Italian daily La Stampa reported that the IMF was preparing a euro600 billion ($794 billion) bailout fund for Italy, which is struggling to manage its enormous public debt of euro1.9 trillion, or nearly 120 percent of GDP.

An IMF spokesman said that there are "no discussions with Italian authorities on a program for IMF financing." And EU spokesman Amadeu Altafaj Tardio also said there have been no such discussion with the European Union. "Italy has not asked for any amount of money," Tardio said.

Italy has seen its borrowing costs on its debt rise steeply in recent weeks — with yields on benchmark 10-year bonds topping the 7-percent peril mark that has seen bailouts in other eurozone countries. Monti was appointed to replace Silvio Berlusconi, whose fractious conservative coalition squabbled for months over measures to inject growth into the flagging Italian economy.

Monti has pledged a two-track strategy: urgent austerity measures followed by deeper reforms that will be painful for voters to accept. They include revamps of the pension system, doing away with a class of privileged closed professions that discourage competition, cutting political costs, simplifying bureaucracy and selling off state assets.

Monti must obtain approval for the measures from the same Parliament that hamstrung Berlusconi. Facing the rising borrowing costs, both houses gave overwhelming approval for Monti's government of technocrats, but he will likely find it more difficult to push through individual measures. To make them more palatable, Monti intends to balance sacrifices from the various political camps — and has promised a spending review of political costs starting with the premier's office.

Dealers See Fed Buying $545 Billion Mortgage Bonds
by Daniel Kruger and Cordell Eddings - Bloomberg

The biggest bond dealers in the U.S. say the Federal Reserve is poised to start a new round of stimulus, injecting more money into the economy by purchasing mortgage securities instead of Treasuries.

Fed Chairman Ben S. Bernanke and his fellow policy makers, who bought $2.3 trillion of Treasury and mortgage-related bonds between 2008 and June, will start another program next quarter, 16 of the 21 primary dealers of U.S. government securities that trade with the central bank said in a Bloomberg News survey last week. The Fed may buy about $545 billion in home-loan debt, based on the median of the 10 firms that provided estimates.

While mortgage rates are already at about record lows, housing continues to constrain the economy, with the National Association of Realtors saying in Washington last week that the median price of U.S. existing homes dropped 4.7 percent in October from a year ago. Borrowers with a 30-year conventional mortgage would save $40 billion to $50 billion annually in aggregate if they could all refinance into a new loan with a 3.75 percent rate, according to JPMorgan Chase & Co.

"We need to see a bottom in home prices," said Shyam Rajan, an interest-rate strategist in New York at Bank of America Corp., a primary dealer, in a Nov. 22 telephone interview. "These are not numbers that are going to get down your unemployment rate," which has held at or above 9 percent every month except two since May 2009, he said.

New Urgency
The company forecasts the Fed will buy $800 billion of securities, which may include Treasuries.

Efforts to bolster the economy are taking on new urgency with $1.2 trillion in automatic government spending cuts slated to begin in 2013. The Commerce Department said last week that gross domestic product expanded at a 2 percent annual rate in the third quarter, less than the 2.5 percent it originally projected, and Europe’s worsening debt crisis threatens to further curb global growth.

The Fed is taking the view that "even if U.S. fundamentals look to be relatively okay, we’ve got to keep our eye on any contagion from the European stresses," Dominic Konstam, head of interest-rate strategy at primary dealer Deutsche Bank AG in New York, said in a Nov. 22 telephone interview. "It’s in that context that they’re willing to do more."

Treasuries rose last week on those concerns, with the 10- year yield falling five basis points, or 0.05 percentage point, to 1.97 percent, according to Bloomberg Bond Trader prices. The rate rose six basis points to 2.03 percent today as of 8:52 a.m. in London. The 2 percent security due November 2021 fell 17/32, or $5.31 per $1,000 face amount, to 99 3/4.

Inflation Outlook
Policy makers have scope to print more money to buy bonds in a third round of quantitative easing, or QE, as the outlook for inflation eases.

A measure of traders’ inflation expectations that the Fed uses to help determine monetary policy ended last week at 2.25 percent, down from this year’s high 3.23 percent on Aug. 1. The so-called five-year, five-year forward break-even rate, which projects what the pace of consumer-price increases will be for the five-year period starting in 2016, is below the 2.83 percent average since August 2007, the start of the credit crisis.

"There is a significant chance that QE3 will be deployed, especially in the form of MBS purchases, if inflation expectations fall enough," Srini Ramaswamy and other debt strategists at JPMorgan in New York wrote in a Nov. 25 report
Relative Growth
JPMorgan is one of the five dealers that don’t forecast the Fed will begin a third round of asset purchases to stimulate the economy. The others are UBS AG, Barclays Plc, Citigroup Inc. and Deutsche Bank.

After cutting its target interest rate for overnight loans between banks to a range of zero to 0.25 percent, the Fed bought about $1.7 trillion of government and mortgage debt during QE1 between December 2008 and March 2010, and purchased $600 billion of Treasuries between November 2010 and June through QE2. The moves have helped. At 2.2 percent, U.S. GDP will expand more next year than any other Group of Seven nation except Japan, separate surveys of economists by Bloomberg show.

"Monetary policy is in part a confidence game," said Chris Ahrens, head interest-rate strategist at UBS Securities LLC in Stamford, Connecticut. "At this point in time we don’t see the need for it, but if the situation were to evolve in a negative fashion they’re telling us they can come out and respond in a proactive fashion."

'Frustratingly Slow'
Minutes from the Nov. 1-2 meeting of the Fed’s Federal Open Market Committee showed some policy makers aren’t convinced the recovery will strengthen, saying the central bank should consider easing policy further.

"A few members indicated that they believed the economic outlook might warrant additional policy accommodation," the Fed said in the minutes released Nov. 22 in Washington. Bernanke, at a press conference after the meeting, said the "pace of progress is likely to be frustratingly slow," while on Nov. 17 Fed Bank of New York President William C. Dudley said if the central bank opted to buy more bonds, "it might make sense" for much of those to consist of mortgage-backed securities to boost the housing market.

Mortgages were at the epicenter of the financial crisis that began in 2007 and resulted in more than $2 trillion in writedowns and losses at the world’s largest financial institutions based on data compiled by Bloomberg. Sales of existing homes have averaged 4.97 million a month this year, little changed since 2008 and down from 6.52 million in 2007, according to the National Association of Realtors. The median price decreased to $162,500 in October from $170,600 a year earlier and from the record $230,300 in July 2006.

Housing Glut
At the current pace of sales it would take eight months to clear the inventory of available properties, compared with the average of 4.8 before 2007.

Fed purchases of mortgage bonds would dovetail with efforts by President Barack Obama, who has been promoting an initiative by the Federal Housing Finance Agency to let qualified homeowners refinance mortgages regardless of how much their houses have lost in value. The Home Affordable Refinance Program, or HARP, will eliminate some fees, trim others and waive some risk for lenders.

The difference between yields on Fannie Mae’s current- coupon 30-year fixed-rate securities, which influence loan rates, and 10-year Treasuries climbed to 121 basis points last week, from 84 basis points on Dec. 31, Bloomberg data show. The spread widened to 129 basis points in August, the most since March 2009.

'Powerful Wildcard'
"The prospect of the Fed buying MBS under a QE3 program is a powerful wildcard, and should limit the downside in the asset class," the JPMorgan strategists wrote in their report last week. "Given attractive spreads currently, we recommend heading into 2012 with an overweight," they said in reference to a strategy where investors own a greater percentage of a security or asset class than is contained in benchmark indexes.

Mortgage securities guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae have financed more than 90 percent of new home lending following the collapse of the non-agency market in 2007 and a retreat by banks. The agency mortgage-bond market accounts for $5.4 trillion of the $9.9 trillion in housing debt outstanding.

The Fed, which owns about $900 billion of the securities, said in September it will reinvest maturing housing debt into mortgage-backed bonds instead of Treasuries. MBS holdings represent about 40 percent of the Fed’s balance sheet, down from a peak of about 66 percent.

"If the Fed’s position in MBS grew under QE3 to half of its balance sheet, this would imply that they would have to purchase on the order of $500 billion," the JPMorgan strategists wrote in their report. The Fed’s "decision to reinvest paydowns back into the mortgage market suggests a comfort level with owning mortgages that seems to have grown," they wrote.

Germany mulls "elite bonds" with 5 nations
by Erik Kirschbaum - Reuters

The German government is considering the possibility of issuing joint bonds with five fellow triple A euro zone countries that are being referred to as "elite bonds" or "AAA bonds," newspaper Die Welt reported on Monday.

Chancellor Angela Merkel and her center-right government have repeated ruled out collectivizing debt and the introduction of common euro zone bonds. The conservative daily cited "high European Union diplomats" involved in fighting the sovereign debt crisis saying the Berlin government was nevertheless considering issuing bonds jointly with France, Finland, Netherlands, Luxembourg and Austria.

The joint bonds could be used not only to finance borrowing for those six countries but also could be used to raise funds under strict conditions for countries such as Italy and Spain, the newspaper reported.

The goal would be to stabilize the situation in the AAA countries as well as "building a credible firewall to calm the financial markets," Die Welt said. The interest rate for the bonds should be somewhere between 2 and 2.5 percent -- or only slightly above the level for German government bonds. The newspaper said the euro zone countries without AAA ratings should not be included initially.

ICAP Testing Trades In Greek Drachma Against Dollar, Euro
by Katy Burne - Dow Jones Newswires

ICAP Plc is preparing its electronic trading platforms for Greece's potential exit from the euro and a return to the drachma, senior executives at the inter-dealer broker said Sunday.

ICAP is the latest firm to disclose such preparations, joining the growing ranks of banks, governments and other key players in the global financial system whose officials are worried enough about the stability of the common currency to be making contingency plans for a possible break-up.

The firm has been testing systems that would allow dealer banks to trade the drachma against both the dollar and the euro, the ICAP executives said, cautioning that the measures taken in recent weeks were precautionary. They said the currency pairs would not be accessible for trading unless required by market events, and may never be used.

"What precipitated this were customer concerns about what would happen if a country pulled out of the common currency," said Edward Brown, executive vice president in business development and research at ICAP.

The U.K. Chancellor of the Exchequer George Osborne said Sunday that the government has stepped up its own planning measures in recent months to be prepared for a possible collapse of the euro zone. The U.K. isn't a member of the euro zone, but it is home to Europe's financial hub and is the world's biggest currency-dealing center.

ICAP operates the biggest electronic platform for matching currency trades, predominantly between banks. Its preparations have focused on defining the relationship between the drachma and other currencies, and discussing what the quoting conventions for those pairs might look like in a live trading environment.

Certain decisions, such as how many decimal places would be used when representing the drachma's exchange rate, have not been finalized. But ICAP said the currency templates could be tweaked depending on dealer requests, and that the project could be used as a roadmap for how to prepare for an outcome involving multiple currencies leaving the euro. So far, testing has only involved the drachma, no other currencies.

Launching new currency pairs is something ICAP does from time to time in response to demand from its dealer customers, for example if a bank wants to cross a standard currency with a more unconventional one.

ICAP has reloaded the drachma templates for spot foreign exchange and derivatives called nondeliverable forwards that were removed from the system when Greece's old currency was replaced by the euro in 2001.

"We have built out the currency pair on a contingency basis, coded and tested it," said David Rutter, chief executive of electronic broking at ICAP. "On the electronic side of the business, we have to plan far ahead and for various contingencies."

Banks have also been making preparations for how to handle the currency pairs after a trade has been executed, for example how to treat them in their risk-management systems and confirmation platforms.

Last week, Andrew Bailey, a senior regulator at the U.K. Financial Services Authority and executive director at the Bank of England, said banks have drawn up contingency plans for a possible breakup in the euro zone. CLS Bank International, which settles currency trades, said it has been running similar stress tests. A Barclays Capital research report last week showed that nearly half of 1,000 investors surveyed thought at least one country will leave the euro in 2012.

Separately, a Bank of America Merrill Lynch research report Friday titled: "Eurozone: thinking the unthinkable," said a partial union with only some countries exiting the euro was the "most probable scenario" out of all the breakup possibilities. But the researchers stressed that while the currency implications were "worth examining," a breakup of the euro was still a far-fetched event.

Euro Rescue Fund May Insure 30% of Bonds to Help Fight Crisis, Draft Shows
by Brian Parkin - Bloomberg

The European Financial Stability Facility may insure bonds of troubled countries with guarantees of between 20 percent and 30 percent of each issue to be determined in light of market circumstances, according to EFSF guidelines to be considered by finance ministers this week.

The insurance would be in the form of tradable partial protection certificates, to be issued by an independent Luxemburg-based special purpose vehicle, the guidelines show. The step is one of several new tools including setting up private funds with investors and selling short-term debt aimed at increasing the EFSF’s power to combat the debt crisis.

Euro-area finance ministers are due to meet in Brussels on Nov. 29 as governments bid to regain the confidence of financial markets. With bond spreads soaring to records, Germany failed to attract enough buyers for a sale of its benchmark bunds on Nov. 23 and two days later Belgium’s credit rating was cut one step to AA.

The proposal to attach guarantees of up to 30 percent of future EFSF bond issuances’ worth may create a threefold expansion of the 440 billion-euro ($583 billion) fund, according to the guidelines distributed to lawmakers in Berlin. The EFSF’s pool of potential aid would also be increased by setting up so- called credit investment funds with private investors to buy the bonds of euro-region states that struggle to sell their debt.

Leveraged Fund
French President Nicolas Sarkozy has said that the bailout fund might be worth $1.4 trillion after European governments agreed last month on steps to leverage existing guarantees as much as fivefold. European leaders are next due to hold a summit on Dec. 8-9.

The new instruments may need to be supplemented further, German Finance Minister Wolfgang Schaeuble told reporters in Berlin on Nov. 25 following talks with Dutch Finance Minister Jan Kees de Jager and Finnish Finance Minister Jutta Urpilainen.

Leaders will seek a "separate path" of help from the International Monetary Fund to boost the EFSF, Schaeuble said. IMF help must be "substantial enough to help Italy and Spain," de Jager told reporters, saying that talks on creating credit investment funds had run into "problems."

Slipping Backward on Transparency for Swaps
by Gretchen Morgenson - New York Times

Wall Street loves to do business in the shadows. Sunshine, after all, is bad for profits.

So it is perhaps unsurprising that players in the derivatives market want to thwart one of the worthier aims of the Dodd-Frank financial regulation: to bring transparency to the huge market for instruments known as swaps. Now some in Congress, on both sides of the aisle, are trying to block that goal, too.

Dodd-Frank focused on adding transparency to derivatives in a couple of ways. The area now under fire involves its directive that the Commodity Futures Trading Commission create rules to "promote pre-trade price transparency in the swaps market."

The idea is that customers should get a clear picture of prices. Right now, many swaps are traded one-on-one, over the telephone. The price is usually whatever the dealer says it is.
When markets are opaque, the risks grow that problematic positions, like those that felled the American International Group in 2008, might once again create financial turmoil and spread through the system. Dodd-Frank sensibly asked that market participants provide trade and position details to regulators so this arena could be monitored better.

That mission has pretty much been accomplished. But a lack of transparency in the market as it relates to swaps customers hasn’t been addressed. And it is here that many on Wall Street, as well as some in Congress, are pushing back.

Opacity hurts customers because they can’t see a wide array of prices. But dealers can — so they have an edge that plumps up their profits. One estimate from the Swaps and Derivatives Market Association puts transaction costs in the swap markets at $50 billion annually. These costs would decline by $15 billion a year, the group recently estimated, if pricing were transparent.

The C.F.T.C. is trying to get there. Dodd-Frank requires it to oversee so-called swap execution facilities that will trade or process derivatives transactions. Late last year, in the interest of price transparency, the commission proposed that entities applying to be S.E.F.’s must agree to provide market participants with the ability to post prices on "a centralized electronic screen" that is widely accessible. One-to-one dealings by phone would no longer be allowed.

Those on Wall Street who favor the status quo are upset, and have found some sympathy in Washington.

Representative Scott Garrett , a New Jersey Republican, has teamed up with Representative Carolyn B. Maloney, a New York Democrat, to introduce the Swap Execution Facility Clarification Act. It would bar the Securities and Exchange Commission and the C.F.T.C. from requiring swap execution facilities to have a minimum number of participants or mandating displays of prices. Both mechanisms promote transparency.

Mr. Garrett said the bill directed regulators "to provide market participants with the flexibility" they need to obtain price discovery. This means maintaining the old system that can keep prices in the shadows. On Nov. 15, a House subcommittee approved the bill by a voice vote. Because Mr. Garrett opposed Dodd-Frank, his efforts to stop the proposed rule are not surprising. But Ms. Maloney supported Dodd-Frank, so I wondered why she had lent her name to the bill.

In an interview last Wednesday, Ms. Maloney said she had heard concerns about the C.F.T.C. rule from financial firms in her district. "I just felt like that Congress intended multiple competing trade execution platforms and that included voice," she said. "If you say you can’t have any voice, aren’t you limiting the modes of trade execution?" She also said she was concerned about job losses on Wall Street.

Testifying in the House on Oct. 14 as a representative of the Wholesale Market Brokers Association was Shawn Bernardo, a senior managing director at Tullett Prebon, an institutional brokerage firm. Mr. Bernardo articulated the argument against screen-based trading that would show multiple bids and offers to swaps customers.

"Congress made clear in Dodd-Frank that S.E.F.’s may conduct business using, quote, ‘any means of interstate commerce,’ " he said. That includes methods that don’t require a centralized pricing platform, he said.

Wall Street firms want to keep providing prices to customers one-to-one. The S.E.C., which governs credit default swaps on single-name issuers, allows the practice. But those markets trade by appointment, compared with most swaps markets, which are overseen by the C.F.T.C.

While many on Wall Street have objected to the C.F.T.C.’s proposed rule, swaps customers like it. The Industrial Energy Consumers of America, a group of manufacturers with combined annual sales of $800 billion, calls transparency in the swaps market "critical." In a letter to the C.F.T.C. last May, the group urged the commission to be "vigilant in ensuring that swap execution facilities provide an open and competitive marketplace for discovering prices."

Better Markets, a nonprofit organization that promotes the public interest in financial markets, has also praised the C.F.T.C.’s proposed rule. "It is painfully obvious that the financial crisis, which brought us to the brink of international economic collapse, was in large part the result of a ‘shadow’ or nontransparent financial market," Dennis M. Kelleher, the chief executive of Better Markets, wrote in a comment letter. "The Dodd-Frank act requires that ‘business as usual’ must change."

Not if Wall Street can help it. And it is throwing money at Washington to ensure that its views are heard.

In an interview last week, Gary Gensler, the C.F.T.C. chairman, said he hoped to get the rule through early next year. "Economists for decades have shown that transparency lowers margins, leads to greater liquidity and more competition in the marketplace," Mr. Gensler said.

"Tens of thousands of companies that use these products, and their customers, the American public, can benefit from more competition in the pricing of these contracts. Transparent pricing is also a critical feature of lowering the risk at the banks, and at the derivatives clearinghouses as well."

But unenlightened investors can be mighty profitable. As Ferdinand Pecora, the Depression-era prosecutor, is supposed to have said of the events leading to the Wall Street crash of 1929: Pitch darkness was among the bankers’ stoutest allies.

New 40 Year Low Expected in UK House Sales for This Year
by Charles Raith - Remortgage

The supply of homes available for purchase on the market has fallen as homeowners with starter homes are staying put and not upgrading to larger properties. Without buyers in the market few homeowners expect to sell so they are staying put rather than having to take less than expected for their property. Hometrack has issued an expectation that the level of housing turnover will be the lowest in 40 years when 2011 closes out.

Hometrack expected 840,000 sales this year which is 50 per cent lower than the level seen in 2007 when the recession began. The latest housing survey revealed that in November the house prices had fallen 0.2 per cent from the previous month. For the year house prices are down 2.3 per cent when compared to last year and prices have fallen every month since July 2010 except in April 2011 when there was no change at all.

Remortgages have outnumbered house purchase mortgage lending. Since homeowners are finding it hard to put their property on the market and find a buyer they are choosing to remortgage and fund renovations and improvements on their own property. Not only does this create the property they would have liked to upgrade to but it is an investment into the property which will be more valuable once the housing market recovers.

Richard Donnell, director of research at Hometrack, said, "2011 looks set to register the lowest level of housing turnover for 40 years - a trend which Hometrack expects to continue into 2012. An expected 840,000 sales in 2011 is almost 50% lower than in 2007 and equates to the average private sector home changing hands every 26 years. This is creating a scarcity of housing and is acting as a support to pricing levels."

Ireland becomes poster child for implementing austerity programmes
by Larry Elliott - Guardian

Ireland has a young, skilled workforce and the republic does not have UK's hang-up about using industrial policy to boost growth

Ireland was the Icarus economy. It was the low-tax, Celtic tiger model that become the European home for US multinationals in the hi-tech sectors of pharma and IT. Ireland was open, export-driven and growing fast, but flew too close to the sun and crashed back to earth. The final humiliation came when it had to seek a bailout a year ago.

In a colossal property bubble, debt as a share of household income doubled, the balance of payments sank deeper and deeper into the red, the government finances become over-reliant on stamp duty from the sale of houses and the banks leveraged up to the eyeballs.

There was something of the Greek tragedy about it all. One bank in particular, Anglo Irish, was the lender of choice for property developers and when the ghost estates started to spring up it was in effect insolvent. The bank was not systemically important and in normal times should have been allowed to go to the wall.

But September 2008 was no normal time. Lehman Brothers went bust and there were fears — almost certainly correct — that the failure of any bank could send the dominoes tumbling across Europe. So the Irish government was prevailed on (to put it mildly) by its European partners to take the bullet for everybody else, and in bailing out the banks it doubled its national debt.

Policymakers had already sensed trouble ahead, with the first spending cuts announced in July 2008. But that was nothing compared to what happened next. The bottom fell out of the construction market – which had been producing 80,000 homes a year, double what the country required to meet demand – and the global recession wiped out a good chunk of Ireland's exports.

A series of emergency packages and austerity budgets followed as the government sought to balance the books during a recession in which national output sank by 20%. In November 2010, the Irish government asked for external support from the EU and the International Monetary Fund. Again, it had little choice in the matter.

The terms of the bailout were tough and there has been no let-up in the austerity. The finance minister, Michael Noonan, plans to put up the top rate of VAT by two points to 23% in next week's budget. Unemployment is already nudging 15% (with more than half of those out of work being long-term jobless), at least 100,000 homeowners are in negative equity, and welfare payments (with the exception of pensions) have been slashed.

In recent quarters there have been signs of life in the Irish economy, but the boost has come entirely from the export sector, which has benefited from the increased competitiveness prompted by cost-cutting. The best that can be said for its domestic economy is that the decline appears to have bottomed out. At least for now.

Around a third of Ireland's exports go to Britain, which is heading for stagnation next year, a third go to the eurozone, which is almost certainly heading for recession, and a third go to the United States, which will suffer contamination effects from the crisis in Europe.

\That's the bad news. The good news is that the supply side of the Irish economy is sound. Much attention is paid to Ireland's low level of corporation tax, which has certainly acted as a magnet for inward investment, but that is not the only reason the big multinationals have arrived.

There is a young, skilled workforce and Dublin does not have London's hang-up about using industrial policy to invest capital in growth sectors. Ireland had a dysfunctional banking system, but most of the multinationals — which account for 80% of the country's exports — don't rely on domestic banks for their funding.

The problem is that you can't run a successful economy on exports alone, no matter how competitive they might be. Wandering around central Dublin, it is hard to believe that this is a country in depression. The restaurants are busy, the theatres full. There is no tumbleweed blowing through the streets. It is rather like Tokyo in the mid-1990s: a city that still looks prosperous despite the contraction in the economy.

This, though, is something of an illusion. Domestic demand is weak, private investment has collapsed and households are saving rather than spending.

The crisis in the eurozone now threatens to choke off exports, making it more difficult to hit the targets for reducing the budget deficit. There is a risk of a debt trap, where budget cuts lead to slow growth, which in turn worsens the fiscal position and increases the pressure for still more cuts. Bond yields have come down in the past 12 months but were edging up towards 10% during last week's turmoil.

Interestingly, when the finance minister, Michael Noonan, tried an alternative policy for a specific sector of the economy last year, it paid off. He cut VAT for the tourist industry and saw numbers go up by 10%.

Moral hazard
The chance of this being adopted for the rest of the economy looks slim. Keynesian economics are not big in Ireland, a country where monetary laxity in the bubble years has been followed by budgetary rigidity in the downturn. David Begg, the general secretary of the Irish Confederation of Trade Unions, says: "We were the poster child for globalisation. Now we are the poster child for austerity."

So what should happen? Well, clearly the troika needs to cut Ireland a little slack. As Noonan rightly says, Europe is in desperate need of a success story and there is far more chance of that being Ireland than Greece or Portugal. At the moment, a perverse form of the moral hazard argument is in force, whereby Ireland cannot be rewarded for doing what it has been told to do in case it stops doing so. Up until now, Ireland's response has been almost Pavlovian, reacting to the demands to inflict pain on itself with a consensual approach that has bordered on passivity.

There are now, however, the stirrings of a reaction. The unions are urging a mild form of reflation, while Noonan is making the valid point that there should be recognition of the sacrifices Ireland has made for European solidarity. He would like the terms softened on an IOU Dublin agreed with the European Central Bank to help recapitalise Anglo Irish, something officials believe could save billions of euros a year.

The concern among Irish policymakers is that they will be punished for any show of resistance to austerity. There are two things to say to this. The first is that in the current circumstances, the small debtor nations on the eurozone's periphery have the potential to bring the whole house down. Ireland has a population of 4 million, and the underlying strength of the country means that it would flourish in or out of the single currency, even though the transition would be tough. It can afford a crisis more than the ECB or the European commission can.

The second thing to say is that the current policy of ever more pain is wrong politically and wrong economically. It will depress the economy and make it more likely that the people will vote against any treaty change to strengthen monetary union. Ireland made mistakes, big mistakes. It was like Icarus but it is now being treated like Sisyphus, the character in Greek mythology condemned in Hades to roll a rock to the top of a steep hill only to watch it roll down to the bottom again.


Ash said...

Just got a chance to read JMG's interesting post about choosing your contemplations. It's essence boils down to the phrase, "what you contemplate, you imitate". Perhaps a subset of that would be Nietzsche's famous quote:

He who fights with monsters might take care lest he thereby become a monster. And if you gaze for long into an abyss, the abyss gazes also into you.

JMG also talks a bit about the Occupy movement in this context. His discussion may be a bit simplistic, but it still makes some very insightful points.

"The same process [imitating what one contemplates] can be seen in action all through the culture of denuciation that has replaced civil discourse in so much of contemporary life. From the evangelical preachers whose spluttering polemics about homosexuality provide an interesting counterpoint to their propensity for being caught in compromising positions with their boyfriends, to the militant atheists whose hostility toward religion is neatly matched by their eagerness to match the intolerance and self-righteousness of its least impressive forms, today’s society is well stocked with object lessons relating to this branch of magical philosophy. Still, such reflections are less important just now than the issues raised at the beginning of this essay.

The decision on the part of the Occupy movement to create a protest with protest itself as its only fixed content was, as I suggested earlier, a brilliant tactical stroke. What makes for good tactics, though, may not be equally wise as strategy. If the movement proceeds along the lines mentioned already, moving to the formulation of demands and then to the pursuit of active political goals, it has a good chance of dodging the inherent strategic weaknesses of its tactical choice. The longer it tries to avoid formulating its own coherent vision, though, the more likely it is to find itself following out the implications of someone else’s vision. That may happen by way of the contemplation effect—there’s a reason why revolutions so often end up installing governments all but identical to the ones they overthrow—or by way of any of several other modes of derailment; as history shows, a movement of the kind we’re discussing can run off the rails in any of a remarkable number of ways."

jal said...

What a great title question!!!


The articles that you have quoted have a lot of E.U. countries that are worst than N. America.

The E.U. and the US have vowed not to let the financial system crash. If the financial system crashes then granma will not be able to get a dividend check or withdraw her saving.
They won’t let that happen. Must keep the stock market up for dividend checks and the institution able to give granma her savings.

They are willing to change or ignore the rules and regulations to achieve their goal.

The unemployment for the youth are worst in the E.U. and they are not there yet.
We are not there yet.

Yes. Its going to be a longer trip than we expect.
For a lot of people, the destination will be waking up from a nice dream.

Matrix anyone?


LynnHarding said...

Could I submit a quick comment from the last post? I couldn't get it accepted earlier this afternoon.

@ fallguy, ElG, Scrofulous etal. who advised me on alternative hot water systems: I like the fallguy system a lot though it means I will have to do more work than I had anticipated.

I only have one well and it is drilled more than 400' deep, but the static water level is 12'. The hand pump will be an alternative to the electric one for when the power goes out.

As a result of your comments, I am now a bit worried that my chicken coop is too close to my well though it does have a wooden floor and we bed them down in peat moss that is very absorbent. Plus, I don't have all that many chickens. Still, you are right that there might be a possibility of contamination. I had better test it.

For batteries, has anyone investigated the Edison battery? Apparently there is one of Edison's that is still running. In the meanwhile, I use a really good deep cycle marine battery to keep small electronics going in a power outage. I have a big problem with intverters, though. The cheap ones keep breaking and the expensive ones are..well, expensive. Anybody know of a good one?

Frank said...

Lynn, If you have a 400 ft will, it is most likely cased (steel pipe) down to bedrock, with some sort of a seal there.

The whole purpose is to avoid issues like your chicken coop, or your dog lifting his leg on the well. Water that has traveled through a significant distance underground, especially rock rather than dirt, is pretty thoroughly filtered.

bluebird said...

Ilargi said "But in this case one that can blow the entire global financial system out of the water in one fell swoop. And in one fell day."

It does appear that the bigger the Ponzi grows, the bigger the boom when it bursts.

Nassim said...

re: Steve Keen's BBC interview

The part of the interview that I found quite unpleasant was the curtsey that Keen gave Obama towards the end by implying that if Obama were to have been elected in 2012, he would have "changed" things for the better. In fact, I found it more of a grovel than a curtsey. :)

As for the BBC lady, she was smart and would not let Keen get away with some obtuse academic generalities as to whose debt should be forgiven. The fact that Keen could not give a straight answer had nothing to do with the need to come up with sound-bites, IMHO. She was not obnoxious, merely doing her job and she did not interrupt him.

It is just another problem that has no solution.

Ash said...


"It is just another problem that has no solution."

That's true to an extent (depending on how we conceive of "solution"), and that's probably why Keen could not give the interviewer what she kept asking for in her attempts to induce a soundbite answer (that's just what interviewers are trained to do). He eventually did say something like, "this will not be easy, or something that I can" [present to you in a gift-wrapped box with a bow on top for Christmas] (my paraphrase).

Frankly, I think Keen realizes how unlikely anything remotely resembling a debt forgiveness plan for debtors is to occur, and therefore has not spent much time thinking about the mechanics. I may go as far as to say that he has simply assumed that whatever form the general policy takes, it can't possibly lead to any worse outcomes than those we will get by continuing to extend & pretend. That is an understandable, yet flawed logic. The underlying point remains, though, that it is the system which must be reformed (or revolutionized), rather than tweaking the inner workings of the system.

trojanhorse said...


"The fact that Keen could not give a straight answer had nothing to do with the need to come up with sound-bites"

What is this straight answer Keen should have come up with? What was the question?

and this?

"She was not obnoxious, merely doing her job

Listen to that BBC lady at about 21:40-21:50 : "You alone are clever enough to see this ... [refering to the global crisis] "

Dunno, but that sounded quite obnoxious to me. This after Keen laughed off a similar verbal jab before that.

I think that 'clever lady' is not so much clever but envious, but that is just an opinion, only 'The Shadow' knows ... I guess that dates me some, LOL!

Jim said...

Upon looking at the photo labeled "Russell Lee Are we there yet? June 1939",
"Migrant children heading west in the back seat of the family car somewhere east of Fort Gibson in Muskogee County, Oklahoma",
I could not get over how remarkably similar they are to the two children featured in Sundays" 60 minutes episode "Hard Times Generation: Families living in cars"

MonkeyMuffins said...
This comment has been removed by the author.
MonkeyMuffins said...

if you're going to proffer and promote something by Paul Craig Roberts, i respectfully request you be more honest about his "credentials" (and i use this word facetiously) as follows:

"Dr. Paul Craig Roberts (of Reagan administration fame and nine-eleven-was-an-inside-job moonbattery infamy)"

because the guy is a pseudoscientific, conspiradroid moron.

Nassim said...

My apologies for going on about Steve Keen. If I didn't (past tense) have a lot of respect for him, I would never have mentioned him. I read his blog regularly - I tried to attend his lecture in Melbourne last year but personal committments prevented me.

I never found on his blog a clear explanation of what, in nitty-gritty terms, he means by debt-forgiveness. Should all these people who never could afford those houses end up as the owners? Should they just pay the principal, or the equivalent rent? Should all these banks who sold CDS's (Credit Default Swaps) for Greek debt and so on be forgiven (like AIG was)? Should businesses that geared up immensely and bought back shares (to raise the share price and pay off the managers' options) be forgiven their debts? I am sure you can all think of many other examples.

Ultimately, I personally think that people who bought houses and paid off their mortgages should not be penalised vis-a-vis those who didn't. I believe that banks that did not write CDS's should not be penalised. I believe that businesses that did not gear up should not be penalised. It is not just a matter of morality. If you let those debtors off, you are merely encouraging imitators. If Long Term Capital Management had not been rescued by Greenspan and so on, this bubble may never have grown to this size.

That embarrassing episode at the end of the interview leads me to believe that Keen would dearly love to be adopted by Obama and put on a toothless panel of "eminent" economists who would propose "debt forgiveness" as "the solution". He is actually part of the "system". Of course, the puppeteers guiding Obama would get to decide on who qualified for forgiveness and who didn't - plus ça change, plus c'est la même chose.

IMHO, at the base of this on-going crisis is the lack of resources and the excess artificial demand for lots of goods and services. Mr Market, in his very crude way, is trying to limit our waste and we are fighting him tooth-and-nail in our efforts to continue business-as-usual.


If anyone thinks this BBC presenter unpleasant, they should check out Jeremy Paxman's interview of Michael Howard. :)

scandia said...

@Ilargi, Re Schlesenger's comment about both carrots and sticks...much as the Federal Reserve did during...2008.
Ahem what sticks? I did hear of little slaps on the wrist fines but sticks? Na only carrots for the white shoe boys.
Appreciate the head's up to pull a little cash from the system.Don't know how long this road trip is but we are definitely on the road. Thanks.

trojanhorse said...


"Ultimately, I personally think that people who bought houses and paid off their mortgages should not be penalised vis-a-vis those who didn't."

Did you listen to the C-Realm Podcast with Keen that I posted on the last blog? It is a more complete item.

I think what he says is, that if you give a guy a million bucks to write down his mortgage, you also give a guy who paid for his home a million dollars. The thing is the guy with the mortgage must pay down that mortgage with the money,
you on the other hand, if you own your home free and clear, get a million bucks to spend on wine women and song or if you aren't into those vices you can always spend it on drugs, right? LOL!

Nassim said...

Secret Fed Loans Helped Banks Net $13B

Nassim said...

if you own your home free and clear, get a million bucks to spend on wine women and song

Thank you. I already share a house with 3 females - quite enough - and I have a cellar full of wine which seems to get better with time. I rent. Should people like me also get $1 million?

Also, what to do with companies and banks?

Journal Actif said...

"Ilargi: Are we there yet? No, but we won't be long now. And besides, where we're going there's no milk and honey, so enjoy the ride, enjoy your life, enjoy the day, while you still can."

I read this blog since few weeks (months?) and the highly pertinent and interesting comments too. My first time commenting because I feel I absolutely need to give this information.

I was on the phone with a friend living in France two days ago (Saturday exactly). He told me he went to the bank on Thursday to withdraw 500Euros to tend to house repairs. He decided he would take that from his savings account, the regular one, simple, accessible at all times, extra-low interest savings account. Usually he would just show his bank card and voilà, merci, au revoir.

Not last Thursday. The teller asked him for a whole bunch of papers, among them his official taxes receipts. They told him they changed rules to check people's identity. He knew better. He completed the required papers (also a new one, never had to fill out forms before to access his money) and while doing so, he doubled tasked, Iphone in left hand, calling his family members.

He told me he didn't need to convince anyone to go take their money out ASAP. The taxes receipt requirement info did that job for him and everyone reacted immediatly to that.

Friday he returned to the bank with the required papers and instead of the 500$ he initially needed, he took *as much money as he could out* (the stars is my attempt to emphasis how worried he was). He had notified the teller the day before that he changed his mind and to prepare for closing the accounts he has there. He spent most of the morning at the bank. He has a 4000Euros still stuck there (as of Saturday evening) on which he intend to work hard withdrawing this week.

I didn't call since. I'll probably have news about how it went for him and his family by the end of the week.

That's a tiny-mini-micro bank run, no?.

Needless to say, my spouse and I stayed up late Saturday night. We had a lot to decide on and how to achieve it (we're in Quebec, not France, but you know...)

Anonymous said...

When enough people decide that fairness matters far less than ending this doomed system, nothing will be able to stop the abandonment of the money system. If and when the floodgates open, all would be washed away. No need for jubilee, just choice.

progressivepopulist said...


Capitalism: A secular religion (?) dedicated to the belief that despite all evidence to the contrary, exponential economic growth is not only possible, but desirable.

I've never heard Keen talk about exponential growth, or the impossibility of it as lying at the root of the symptoms we are witnessing in the global economy. He may be a brilliant heretic, but it's easy to look like an eagle when you are standing among a flock of turkeys (the domestic variety).

As for debt forgiveness, whatever virtues such a concept may have, I'm with jal. TPTB will never let such a thing come to pass, the crises that come will be used as an excuse to consolidate power and wealth at the expense of the masses until the system breaks or the peasants revolt. What comes next? Who can say? But we are living in interesting times...

trojanhorse said...

"Should people like me also get $1 million?"

An upstanding consumer like yourself? You have to ask such a question?

On the second one, just banks would get stiffed, and if I had my way most corporations as well, but I don't think Keen would agree with that part. The banks get their mortgage money back but after all is settled they end up with no cash flow and nothing to do but twiddle their thumbs and repent their sins. Of course they could have the bright idea to give decent interest rates to any of those so foolish as to save their million bucks instead of spending it on those items previously mentioned. At least that is what I think Keen was sort of on about.

scandia said...

@Journal Actif, Merci for the story of your friend in France! So now a bank card and pin number won't do??? Photo ID not good enough???
And who are these rule changers?

Journal Actif said...

Scandia, bienvenue.
I have no idea, or rather, I have one, my own suspicion. I didn't have the presence of mind to ask him much details. I will be more curious about the details and nitty-gritty of his conversations at the bank next time I talk to him.

Nassim said...

An upstanding consumer like yourself? You have to ask such a question?

How can I be an "upstanding consumer" if I don't have debts, do rent and never use credit of any description? I think you have forgotten your economist-hat.

I think all economists' beef with guys like me is that we don't consume "enough" to create full employment. Our savings are there to be pilfered in the name of the "greater good". We are the guys that Keen is trying to ignore the existence of.

I think you and I part ways. :)

agtefc said...

@ Board...

Good Evening. Keen is really intelligent and is hitting a lot of home runs. This said the normalcy bias and tunnel vision from academia will be to his downfall.

Keen has yet to mention exponential growth in a finite system, peak oil, eroi, herding dynamics, global militarization, geopolitics, eco-footprint, optimal carrying capacity, Natural capital, etc. (list goes on and on)

What we get from keen are empirically validated models that show debt based economies are unstable.
Kind of intuitive.

Keens debunking of neoclassical economics is Wonderful. Using past data to predict future trends in this complex system of feedback loops, emergent phenomena, turbulence, and chaos may become a loosing proposition.

This said I regularly visit his site and watch his interviews to at least give me a critical unit of the system, while removing one unit of uncertainty. Problem is that we are talking about an infinite unit system.

el gallinazo said...

I was the first to use the term "obnoxious" to the BBC interviewer woman and it was, as Scrofulous pointed out, strictly in relation to her uncalled for comments such as ""You alone are clever enough to see this ... "
Keen handled it well, but it was a stupid and repeated assertion. She was quite justified in pushing him harder for his specifics in terms of details of a jubilee.

As to Keen not mentioning "exponential growth," he states early in this interview that it was his realization that debt in Australia was growing in a perfect exponential curve that tipped him off to the coming debacle much earlier than most.

As to Nassim's comment about Keen being a Obama toady with his mention of Obama in 2012. I partially agree. Obama was a stealth Manchurian candidate from the get-go. He became a David Rockefeller asset under the tutelage of his psychopathic strategist, Brzezinski, after he took a position at Columbia U when Carter was defeated for a second term. Obama sold his soul to the devil in a Faustian bargain early in the game, and he never would or will act with integrity or the welfare of the American people as a whole. OTOH, I agree with Keen that until the American consumerate becomes a lot more desperate and rebellious, no president, a puppet post anyway since Kennedy was gunned down, could hope to change anything.

Despite his Reagan past, Paul Craig Roberts is a crystal clear and brilliant analyst. We are forbidden to discuss or debate the realities of 9/11 in this comment section, so I will just leave it that MonkeyMuffins has IDed himself with remarkable accuracy.

SecularAnimist said...

Occupy is a counter culture movement, though, it doesn't know it yet. It's a thought convention focusing on the financial system(which is a good thing) for now.

When I see things like this I think It could be the early stages of a global revolution

Re: The Egyptian revolution turns against the military
« Reply #1 on: November 28, 2011, 06:13:45 PM »
We are in the midst of a decisive battle in the face of a potentially terminal crackdown. Over the past 72 hours the army has launched a ceaseless assault on revolutionaries in Tahrir Square and squares across Egypt. Over 2000 of us have been injured. More than 30 of us have been murdered. Just in Cairo alone. In the last 48 hours.

Tahrir Square last night (Nov 21)

But the revolutionaries keep coming. Hundreds of thousands are in Tahrir and in other squares across the country. We are facing down their gas, cudgels, shotguns and machine-gun fire. The army and police attack again and again, but we are holding the lines, holding them back. The dead and wounded are carried away on foot or motorbikes and others take their place.

The violence will escalate – for WE WILL NOT MOVE. The junta does not want to give up its power. We want the junta gone.

The future of the revolution hangs in the balance; those of us in the square are ready to die for freedom and social justice. The butchers attacking us are willing to kill us to stay in control.

This is not about elections or a constitution, neither of which will change the authoritarianism and violence coming down around us. Neither is this is about a so-called “transition” to democracy that has seen the consolidation of a military junta and the betrayal of the revolution by political forces. This is about a revolution, a complete revolution. The people demand the fall of the regime, and will stop at nothing short of that to achieve their freedom.

Foreign governments are paying lip-service to ‘human rights’ while they deal with the junta, shaking hands and legitimizing them with empty rhetoric. The US is still sending $1.2 billion in military aid to the Egyptian military. The army and police rely on tear gas, bullets and weapons from abroad. No doubt their stock has been replenished by US and other governments over the last nine months. Stock will run low again.

We ask you to take action:

Occupy / shut-down Egyptian embassies worldwide. Now they represent the junta ; reclaim them for the Egyptian people.
Shut down the arms dealers. Do not let them make it, ship it.
Shut down the part of your government dealing with the Egyptian junta.

The revolution continues, because we have no other choice.
An action is also being planned for Thursday, December 1st in front of a tear gas plant in Jamestown, Pennsylvania that has been supplying the Egyptian military junta. Participants from Occupy camps across the Northeast region will gather outside of the plant, which is owned by Combined Systems International.

As put by one call to action:

"[CSI] tear gas canisters have littered the streets of Cairo. CSI and their allies in the U.S. State Department, who must approve the sales of their weapons to foreign governments, are complicit in crimes against humanity. ... "They are sponsoring terror against the egyptian people," says a comrade in Cairo. "...the US is partly responsible for this."
We will make sure the people of Egypt hear our message; We are with you, our government's actions to not represent the desires of our people, and we will take action against businesses and institutions that aid in the repression of our movements; We will defend the Egyptian revolution!

For more information about the Dec. 1st action, including information on carpooling from other locations in the area, visit this Facebook event page.

Ilargi said...

Elite bonds were never an option, just a story. As if the reason wasn't obvious enough, there's this. For similar reasons, Austria can't be in an elite group.

S&P may cut France outlook within 10 days

Credit rating agency Standard & Poor's could change its outlook on France's triple-A credit rating to negative within the next 10 days, a French newspaper reported on Monday, citing sources, the latest signal that France's top-tier status is at risk.

An S&P spokesperson in Paris said the agency did not comment on rumours. A spokesman in Melbourne earlier also declined to comment on the report, which if true would signal a heightened risk of a downgrade in the weeks ahead. "It could happen within a week, perhaps 10 days," La Tribune quoted a diplomatic source as saying of a change to the outlook.

The economic and financial daily said S&P -- which cut Belgium's credit rating to double-A from double-A-plus on Friday -- had planned to make its announcement on France the same day but postponed it for unknown reasons.


Ash said...

re: Keen

I find it somewhat difficult to believe that he doesn't realize his proposal to allow governments to print massive amounts of money for debtors and consumers, bankrupt the major banks and nationalize them is not essentially the equivalent of taking down the entire debt-based global monetary system and perhaps the global capitalist system in the process. Since he wishes to remain a "credible economist" who is invited to speak at high profile events and with high profile media outlets, he obviously cannot argue that.

On the other hand, his economic models do not argue that debt-based money is the root of our financial predicament, but rather speculative finance. He argues that his relatively simple models show that a credit fiat system does not theoretically require exponential growth in debt to function, and it is only when speculative finance takes over that debt grows exponentially and faster than the rate of the productive economy's ability to service it. In a closed economic system, he may be correct for some time, but I believe capitalist relations of production and exchange necessitate speculative finance over time.

A big part of that is, of course, the rapid and wasteful energy/resource consumption engendered by this system. I have heard Keen mention peak oil before as a very serious issue in a Q&A session, but that's about it. He does not incorporate it into his economic analysis. All in all, I believe Keen's arguments are very incomplete and naive on the surface, including the notion that the global capitalist system can reach some sort of relatively stable equilibrium through a combination of market forces and government intervention/regulation. Beneath the surface, my gut instinct tells me he is watering down his own views to make them palatable for the academic community, and feels that it is better to get "something" positive done than be ostracized and get "nothing" done.

Personally, I find it hard to agree with that, but it is obviously an understandable route to take.

Ashvin said...

Morning Euro bond market update.

"More from Italy - the country's three-year borrowing costs were higher than 10-year costs in this morning's auction (see 10.15 post).

Bonds maturing in 2014 were sold with a record yield of 7.89pc, up from 4.93pc on October 28, according to Bloomberg.

Quite a staggering increase..."

(succeeding in paying much more to borrow for 3 years than 10 years is a good thing for equities, because its not the worst possible outcome!)

In other news, anyone crazy enough to still have money invested in American Airlines (or fly with them), just got wiped out.

Greenpa said...

Ilargi said...
"Elite bonds were never an option, just a story."

The "National Pastime" of the US is supposed to be "baseball"; for the rest of the world, it's mostly "futbol".

The Owners (aka the 1%) have adopted "Kick The Can" as their passion. The "down the road" part is understood.

In that game, the elite bonds were pretty obviously a feint, or "fake". "Look over here!" - while something entirely different is going on.

bluebird said...

@Journal Actif - Very interesting story. Keep us posted with additional details, especially if you hear of people in other countries having to fill out new forms to withdraw their own money.

Biologique Earl said...

Blogger Journal Actif said...

"I was on the phone with a friend living in France two days ago (Saturday exactly). He told me he went to the bank on Thursday to withdraw 500Euros to tend to house repairs.............."


Hearing this I decided to contact a friend in France who was quite upset on hearing the above.

He went to his local bank and said "I want to withdraw an important amount from my account". The bank person asked “how much would this important amount be?" He answered "10,000 Euros". The bank person handed him a paper to fill out. My friend asked "what is this for?"

Answer: "Just fill in the denominations you want and we will have your money for you demain matin" (tomorrow morning).

No other paper work was demanded.

Be aware that many banks in France do not carry large amounts of cash on hand for security reasons. Why should they because it is so easy to withdraw cash from ATMs.

So at least for my friend, at his bank, there is no new, potentially invasive or limiting, requirements in place at present.

Ashvin said...

File under "completely predictable escalation".

Protesters Storm British Embassy in Tehran

"In the latest sign of deteriorating relations with the West, around 20 Iranian protesters entered the British Embassy compound in Tehran on Tuesday, chanting “death to England,” tearing down a British flag and ransacking offices, news reports said.

The episode came a day after Iran enacted legislation to downgrade relations with Britain in retaliation for intensified sanctions imposed by Western nations last week to punish the Iranians for their suspect nuclear development program. Britain promised to respond “robustly.”

The British Foreign Office in London said it was “aware of the reports” from Tehran about its embassy on Tuesday, but declined to comment further. There was no immediate word on the whereabouts of the embassy staff."

scandia said...

Canada has a new $100 bill. A pretty thing with a see through window. I took my stash of " old " bills into the bank for exchange and was told not to expect to exchange a large amount as the bank has limited supplies? It took what was left in two bank teller drawers to exchange 1500. I consider that chicken feed. so now I'll have to go into the bank again and again to update my currency stash. Next year there will be an issue of new $50's, then new $20's.
I mention this so others can avoid a potential situation wherein your stash is no longer legal tender. If you have some cash then get busy upgrading to the new " paper ".

Ashvin said...



Iran Hostage Crisis, UK version.

Greenpa said...

TAE Dail- have you got links to share? All I'm finding is Jimmy Carter's version-

Greenpa said...

oh; wait; there it is. :-)

Journal Actif said...

I'll call at the begining of the afternoon ask my friend to tell me exactly what and why and how. I'll get back and post what I was told.

Is it ok to post the name of the bank here?

Ashvin said...


Live updates here:

@Journal Actif

"Is it ok to post the name of the bank here?"

Sure is.

Ashvin said...

"Big Bazooka" ---> "Pea Shooter" ---> What's less effective than a pea shooter? A verbal scolding??


"As George Osborne heads for the Eurostar terminal to get to Brussels for this afternoon's EU finance minsters' meeting (and you thought you were having a busy day), we also turn our attention back to the eurozone for a while.

Our esteemed colleague in Brussels, Bruno Waterfield, has got tongues wagging with some info on the European Financial Stability Fund not being all it's cracked up to be.

He says the EFSF, one of the main topics of conversation for the finance ministers this afternoon, cannot be leveraged as much as leaders hoped back in October, when the aim was to borrow against it to the value of €1 trillion. Via Twitter:

Twitter @BrunoBrussels #eurozone: #EFSF will 'not be enough to restore confidence in Italy and Spain. That's a bad thing' - EU diplomat

Twitter @BrunoBrussels #EFSF will have leverage x2.5 tops, an upper estimate of €625bn, half the big bazooka that was originally touted - officials"

Schumann said...

Euro zone crisis: It's Germany's fault

‎Interesting self-critical point of view put forward by a former German government official:

Heiner Flassbeck, UNCTAD's (United Nations Conference on Trade and Development) chief
economist, sees Germany as being primarily responsible for digging the grave of the euro:
Germany's competitive advantage over its fellow euro countries has resulted in a huge trade surplus
on her part, and a corresponding trade deficit in other euro countries and thus made the latter run
(willy-nilly) into debts. He sees Germany's deflationary wage policy as the root of this fatal
structural trade imbalance within a common currency zone: „One country got it absolutely wrong. That country was not Greece, it was Germany. Due to German wage-cutting, Germany adopted a beggar-thy-neighbor export model.“

(Reuters Blog, Nov. 6, and Hamburger Abendblatt, Germany, Nov. 29)

Schumann said...

My two cents: Being a German employee myself, I can tell you how the self-righteous German government and the even prouder German companies have generated an edge over their European competitors. It is in fact very simple: They have disregarded EU regulations on a large scale; they have cheated on their own employees; they have conned their own fellow-citizens. And still do so. Just three examples:

1) While all other European countries – including even Britain – now adhere to the EU regulation concerning equal pay and equal treatment for temporary agency workers, the German government simply does not honour this rule and has found a quasi-legal workaround. The German government closes its eyes to the standard practice of German temp agencies tricking its own citizens – and many foreign workers – into signing work contracts including a waiver on the EU's equal pay and equal treatment directive. The low wages of temp agency workers (approx. 35 – 45 percent below average in Germany!) have not only driven down Germany's unit labour costs and thus miraculously increased its competitive trade advantage, but were also used to threaten permanent staff to behave docile and to put pressure on the German trade unions so as to bring down wages in general. This is the Pudels Kern (the gist of the matter) of the miraculous German competitive advantage: A fair swindle. While this cheat is now coming under increased scrutiny finally, the latest trend goes to – formally - outsource whole business divisions into (underpaid) service companies (which in itself is nothing to write home about), without, however, altering the command structure or even the physical job location. Different method, same results: lower German wages, cheaper products, higher exports, increased competitive advantage over other euro countries, diminished stability of the common currency.
2) In contrast to most other European countries Germany still does not have a general minimum-wage scheme. While it is, in theory, a legitimate political decision not to have one, most euro countries have introduced minimum-wage schemes in order to avoid seeing wages fall below subsistence level. This exactly, however, is happening in Germany as a practical consequence of not having such a directive, with gross wages falling as low as 4 euro per hour. The result of the missing minimum-wage policy is, of course, that Berlin (read: German taxpayers and employees) has to subsidize more and more of Germany's underpaid – mostly temp agency – employees: their wages; their social security contributions; their employers; their products! And thus, in turn, it makes German taxpayers and German employees subsidize their own exports, e.g. to more profligate (read: humane) mediterranean euro countries, increasing regional trade imbalances and destabilizing the euro.
3) Whereas many countries, including even India, for instance, assist their citizens in coping with high energy and gas costs, Germany does not only tax energy to a high proportion, but even goes so far – be it the companies' or be it the government's idea - as to make private German citizens actually pay for the electricity bills of German companies and corporations, thus, again, subsidizing German exports, increasing Germany's competitive advantage, creating asymmetric trade balances inside the euro zone and, you know it already, destabilizing the common currency.

And there you go: Greece has cheated, Germany has cheated. Both have violated genuine EU rules, the former one more in the legal sense, the latter one more in the real sense – and much more efficiently. While Greece has triggered the European sovereign crisis, Germany has caused it. That'll be euro 4 trillion.

ghpacific said...

Stick a fork in Europe and call it le NWO. Verification at the 2:00 minute mark in last nights NewsHour.

ex VRWC said...

I proposed this 2 years ago on RGE monitor. My basic plan was:

Assess areas of the US based on how much decrease there had been in the housing bubble. The bigger the collapse, the more targeted stimulus.

Everyone gets a debt reduction handout based on the decrease of property values in there area and their housing situation. If you own your home - it is stimulus. If you owe it is debt reduction. If you rent it is based on the value of the property you rent, and it is divided between the landlord and the tenant.

You must use the adjustment to pay down debt if you owe.

This would target stimulus to the worst hit areas.

On to biblical jubilee. The biblical jubilee was designed for one thing - to prevent property accumulation by the few. Because the only basis of lending in the ancient world was land or crops (or indentured servitude), the jubilee was designed to base land sales on the number of crops until jubilee, and to return property to original family owners in the jubilee. It was not about debt freedom, but about keeping wealth from accumulating. It also provided for freedom from debt servitude.

trojanhorse said...

Hi Ash,

My immediate reaction to Keen's BBC interview was that he was not taking into account resource depletion, but listening later to the C-Realm interview [posted above] he mentions that he does include that factor in his overall thinking, though possibly not with the intensity a peak oil freak like myself would.

I doubt that Keen takes very seriously that anything will be done to implement what he feels to be a solution and, judging by the reaction on site, neither does anyone here, myself included. What I take away from this is that he is indicating how vast the divide is between any practical solution and our helter skelter slide into the chaotic.

A Fall Guy said...


Our inverter/charger is a Magnum MS4024, which has worked fine so far. It did, however, cost about $2,000 (in Canada). As you said, the batteries are the weak point. We have 4 Surrette forklift deep-cycle batteries (963 amp-hours). If taken care of, they should be able to last 20 years, which is still not long compared with the other components (such as the water wheel and solar panels), but much longer than many other deep-cycle batteries (such as golf-cart batteries, that last only about 6 years). Of course, the forklift batteries cost much more (it averages out over time, in theory...)

One thing I forgot to mention before: solar hot water systems work either by directly heating water or by heating a solution (such as glycol). The former (which we have and I would recommend) is much simpler, but you need to drain the panel in the winter (when we heat with just the woodstove). The panel is so efficient, it will freeze (and crack the pipes) at just below +2 degrees Celsius. The latter approach has the benefit that the solution is anti-freeze, but is much more complicated, and requires a heat-exchanger (and probably a pump).

If you really want to go simple, the "water heating solar panel" could be replaced with "a coil of black pipe". Lower efficiency (so only good around here for a few months of the year on sunny days), but cheap and easy to install/repair. We have an outdoor shower that is simply a ~200' coil of 1 1/2" black pipe lying on an old trailer frame tilted towards the sun, and connected to a hot/cold faucet and shower heat. Works great on sunny days for 4 to 5 months of the year. And taking a shower outside is so nice. El G probably could add to this, but I believe that such systems are common in southern locales.

Also a minor errata in my last description: the position of the bottom of the tank relative to the solar panel doesn't matter, but as far as I know, the top must be above the top of the panel for the thermosiphon to work.

davecydell said...

quote of the month:

"I would suggest that perhaps, maybe, it might be an idea to get some cash out of your accounts and into your very own pockets." Ilargi

weeone said...

Let me ask how much cash do you people recommend having on hand? I can see having small amounts on hand for short-term, limited problems only. But if we have a longer term widespread banking crisis then all of the merchants will be closed/empty/looted in which case it would be better to have barter items for things you need like ammunition. What's the point of holding large amounts of cash?

Am I missing something?

Ashvin said...

Spiegel interviews former Italian PM and former EC President.

'Germany Must Make a Decision or the Game Is Over'

(on Berlusconi)

Prodi: It all went too slowly. Italy is in the midst of a deep crisis that should not have come to this point. Berlusconi simply had to leave.

SPIEGEL: Did he really leave?

Prodi: I'm not so sure about that. After my resignation from the office of prime minister, I simply went back to my hometown Bologna. He instead gives constant statements demonstrating his will to leave the door open for a possible return to the political stage.

SPIEGEL: He has said he would like to return "with double power."

Prodi: Indeed, he seems to be more active in politics today than when he was the prime minister.

SPIEGEL: Could he become dangerous for his successor Monti?

Prodi: Not at the moment -- Monti is too highly regarded for that. But Berlusconi won't give in. He has lost his magic, but I am convinced he will try again.

SPIEGEL: Are you afraid of that?

Prodi: You cannot imagine how I have suffered in the last years. Wherever I went, it was all "bunga bunga". In Beijing, they laughed at my wife and I. Even in Kenya, the park rangers pointed at the monkeys in the trees and said, "Look, they are doing 'bunga bunga'."

Franny said...

Somebody at CNBC understands deflation!

jal said...
Europe's Real Problem? Deflation
Published: Tuesday, 29 Nov 2011 | 10:28 AM ET
By: John Carney
“The reason the feared inflation didn’t arise is because the Fed was not expanding the money supply. It was replacing lost money-equivalents with new money.”

That above statement partly true.

The last sentence is misleading.

It should read, ” It was replacing the money that was stolen by the system.”

Nassim said...

Beneath the surface, my gut instinct tells me he is watering down his own views to make them palatable for the academic community, and feels that it is better to get "something" positive done than be ostracised and get "nothing" done.

Precisely. Co-option leads directly to throwing the baby out with the bathwater.

Ashvin said...

As S&P downgrades a bunch of banks in the West (and one in China) and the EFSF continues to be a nonsensical DUD while Europe crashes and burns...

don't forget Japan.

TOKYO, Nov 30 (Reuters) - "Japanese manufacturing activity contracted in November at the fastest pace since the record earthquake triggered a nuclear crisis as slowing growth in China, a strong yen and floods at factories in Thailand hurt Japan's output.

The Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) fell to a seasonally adjusted 49.1 in November from 50.6 in the previous month.

That marked the lowest level since 45.7 in April, one month after the March 11 quake and tsunami struck. It was also the first time in two months that the index had been below the 50 threshold that separates contraction from expansion."

Ashvin said...

Superbly tragicomic quotes, courtesy of one single Reuters article.

"Officials said the EFSF leveraging mechanisms could become operational in January, but that may be too late."


"Ministers said the International Monetary Fund may have to provide more help, possibly bolstered with more European money."


"With Germany opposed to the idea of the European Central Bank providing liquidity to the EFSF or acting as a lender of last resort...

...One option EU sources said is being is explored is for euro system central banks to lend to the IMF so it can in turn lend to Italy and Spain while applying IMF borrowing conditions."


"New Italian premier Mario Monti was to outline his fiscal and economic reform plans to the 17 euro zone finance ministers amid reports, officially denied in Rome and Washington, of a possible impending approach to the IMF."


"German Chancellor Angela Merkel will not make a deal at a December 9 European Union summit to stop resisting joint issuance of euro zone bonds in exchange for progress on strengthening fiscal rules, German MPs quoted her as saying.

She told a closed-doors meeting Europe was "a long way from euro bonds", suggesting they may not be ruled out forever."

Gravity said...

The monetary arc of the economy is costly but bends towards what Gravity wants.

trojanhorse said...


... in which case it would be better to have barter items for things you need like ammunition.

Everyone already has ammunition! Possibly you should think ready-wear, like something sweet in Kevlar?

But you might as well read Orlov's writings about the collapse of the USSR. Myself I store only what I can conceivably use over a reasonable period of time.

trojanhorse said...
This comment has been removed by the author.
Nassim said...

Franny & jal,

The CNBC article is brilliant despite its incompleteness. I expect they could not say the full story.

Ashvin said...


Nothing of the sort in the spam box.

scandia said...

So Cameron is promising a return to growth in 6 years. Wonder how he worked that out:)

jal said...

Chris Martenson-The Collapse Of The Exponential Function

In his presentation he focuses on the so-called three “Es”: Economy, Energy and Environment. He argues that at this point in time it is no longer possible to view either one of those topics separately from one another.

Since all our money is loaned onto existence, our economy has to grow exponentially. Martenson proves this point empirically by showing a 99.9% fit of the actual growth curve of the last 40 years to an exponential curve. If we wanted to continue on this path, our debt load would have to double again over the next 10 years. By continually increasing our debt relative to GDP we are making the assumption that our future will always be wealthier than our past. He believes that this assumption is flawed and that the debt loads are already unmanageable.

Martenson explains how exponential growth works and why it is so scary that our economy is based on it. In an example he illustrates how unimaginably fast things speed up towards the end of an exponential curve. He shows that an exponential chart can be found in every one of the three “E’s” for instance in GDP growth, oil production, water use or species extinction. Due to the natural limitations on resources, Martenson comes to the conclusion that we are facing a serious energy crisis.

trojanhorse said...
This comment has been removed by the author.
Nassim said...

Charles Hugh Smith's blog has a two-part article about "debt forgiveness" by Zeus Yiamouyiannis, Ph.D.

Unleashing the Future: Advancing Prosperity Through Debt Forgiveness (Part 1) (November 28, 2011)

Unleashing the Future: Advancing Prosperity Through Debt Forgiveness (Part 2) (November 29, 2011)

I don't know if this has anything to do with Steve Keen's work, but I fear that these guys have grabbed the wrong end of the stick - vast swathes of people are doing pretend jobs while consuming untold amounts of scarce resources. This state of affairs cannot continue and that is, IMHO, what it is all about. The whole notion of "advancing prosperity" (i.e. further growth) being peddled by someone with a suspiciously Greek name smacks of a bad case of hubris.

Ah how shameless--the way these mortals blame the gods. From us alone, they say, come all their miseries, yes, but they themselves, with their own reckless ways, compound their pains beyond their proper share.

Zeus, Hubris and True Religion.

p01 said...

RE Keen / obnoxious interviewer:

The show is called HardTalk. And it's a SHOW. It's ALL a show. She did the same thing with Bass. It's the way the showbiz works.

RE Jubilee. Why not talk about perpetuum mobile instead? The discussion would be more animated. Or dunno...time travel?

RE General situation. I'm starting to get really really sick seeing boomers popping up everywhere with "solutions" to keep "capitalism" (they own most of the capital, no?) humming along.

I'm going out to change my 100$ bills. They will surely have enough "in stock" for me to do it in a single visit to the bank.

Over and out.

Ashvin said...

If we can't raise actual capital, let's use short-term liquidity swaps!

"Those wondering about the global Fed bailout (this is not the first time, recall How The Federal Reserve Bailed Out The World) can read the FAQ from none other than the source of the global liquidity tsunami itself."

Ashvin said...

Now just a slightly less short shove away from complete collapse.


"Turning back to this suprise coordinated move by the world's biggest central banks to cut the cost of borrowing in dollars, Jeremy Cook, chief economist at foreign exchange company World First gives his explanation for the move:

'Cutting swap costs is the equivalent of interest rate cuts. These banks are now basically providing unlimited US dollars to banks with which to fund themselves. The banks will be hoping this is a turning point in the crisis.

We do not know what caused this decision, we may never know, but the smart money is on the fact that yields on one-year German debt went negative this morning (paying Germany to lend it money).

This may have been a signal that the money markets were a short shove away from complete collapse'"

Greenpa said...

Scroffy: "But you might as well read Orlov's writings about the collapse of the USSR."

Actually; I'm having a very interesting and highly relevant read at the moment, from an entirely unexpected direction.

Jimmy Carter wrote a novel. Just one. I picked it up at the Salvation Army store, I think; for educational purposes. He's not a terrible writer, but it's also obvious he was not cut out to write novels. What his writing IS full of is hard historical facts.

The novel is "The Hornet's Nest" - and is set around the American Revolutionary War, in the Carolinas. He goes into extensive detail about day to day life in the pre-Revolutionary world.

And it's not the squeaky Disney version- it's full of extremely corrupt local officials, both from the King and from the "wealthy elite" ; and details the powerlessness of the common people to resist the armed corruption. And what they did about it.

The parallels with today; and tomorrow, struck me hard. It could be useful homework. I think Jimmy would likely get a huge kick out of that.

Greenpa said...

Wow. An absolutely spectacular object lesson in the value of controlling public information. TEPCO announced today; with no attention globally at all, that yes, by golly, all 3 reactors had core meltdowns; and at least one certainly melted through containment.

Ho hum. In toto:

"TEPCO: Melted fuel ate into containment vessel

"The operator of the damaged Fukushima Daiichi nuclear power plant has announced the results of an analysis on the state of melted fuel in the plant's Number 1 unit.

"The Tokyo Electric Power Company, or TEPCO, and several research institutes made public their analyses on the melting of fuel rods at 3 of the plant's units at a government-sponsored study meeting on Wednesday. The analyses were based on temperatures, amounts of cooling water and other data.

"TEPCO said that in the worse case, all fuel rods in the plant's Number 1 reactor may have melted and dropped through its bottom into a containment vessel. The bottom of the vessel is concrete covered with a steel plate.

"The utility said the fuel may have eroded the bottom to a depth of 65 centimeters. The thinnest part of the section is only 37 centimeters thick.

"TEPCO also said as much as 57 percent of the fuel in the plant's Number 2 reactor and 63 percent in the Number 3 reactor may have melted, and that some of the melted fuel may have fallen through reactor vessels.
Wednesday, November 30, 2011 20:02 +0900 (JST)"

Isn't that great! They're so specific! 57%! 63%! Boy, they obviously have really great scientists working for them, to generate such exact information!

And they do; too; but the scientists generating the exact information, I totally guarantee you, are marketing scientists; not physicists. And- bet your bottom bottom, it was all still much worse than they're reporting yet.

Ashvin said...

Good thing all of Europe's problems are now fixed.

Greek 1Y yield = 313%

Portugal 2Y = 18.2%

Ireland 10Y = 8.2%

(all three up 4%+ today)

Greenpa said...

I'm finding the behavior of the VIX, the "volatility" index, a tad puzzling. Markets up by the biggest amount/day in months- and the volatility index is down- by the largest amount in months (according to my back-of-the-brain calculation).

I checked it, because my gut is telling me; ho; big fat volatility increase here. Which tends to precede a ... what? 6 months ago, daily DOW excursions were averaging something like 50 pts; in the last weeks, it's been more like 150 pts, with 200 rather common. Can't wait to see how the week ends.

scandia said...

@TAE Daily...I don't grasp what the co-ordinated bailout by central banks means. I just notice I am fighting back tears...

Greenpa said...

We've been really short on Polka Dot Gallows material for a long time. But this should do it.

I won't explain. That would spoil it. Now here's a company for Cheryl to invest in.

el gallinazo said...

Where are all them dollars digits that we are sending to Europe coming from? Did they spring full grown, like Athena, from Bill Dudley's head?


Thank you for your report from Germany and your analysis of how this royal screw-up developed. I think that the MofU knew from the beginning that a monetary union without a full political and fiscal union was bound to fail. But this was the only way, politically, that they could get their nose under the tent. The game plan, undoubtedly a la Naomi Klein, was to convert the inevitable crisis to a central, coercive government in Brussels run by their "technocrat" gangster minions. I think the plan is not going as smoothly as they had hoped, but they will probably pull it off anyway. The problem, as David Rockefeller's sub-brain Brzezinski points out, is that the internet is wising the sheeple up much too fast. But a free internet can be dealt with easy enough. The real purpose of the Internet, after all, is for shopping. Any other use is simply terraist propaganda.

Greenpa said...

WaPo (and nobody else, so far?) deigns to note that - 2,000,000 UK public employees are on 24 hour strike today. Re: austerity and retirement renegs.

Ho hum!

Did you hear one of the Krasnajarians is pregnant? OMG!

Greenpa said...

ah, there we are; finally hit the AP-

LONDON (AP) — Paramedics, emergency crews, teachers and even some employees from the prime minister's office took to the streets of Britain for the country's largest strike in decades — drawing attention to government cuts but failing to bring the nation to a standstill.

Mister Roboto said...

@TAE Daily: My take on this latest insane and desperate action by the central banks: They know it's pretty much over, and they're pulling out this last stop that will just make the consequences much worse in the long haul just so that there can one last kind-of-sort-of normal winter holiday season. [singing off-key]'Tis the season to be folly, ja-la-la-la-la, ja-la-la-la![/SOK]

jal said...

Now you know what that meeting was about with Obama.

Change the rules!
Make new rules.
Make new "tools".

The E.U. and the US have vowed not to let the financial system crash. If the financial system crashes then granma will not be able to get a dividend check or withdraw her saving.
They won’t let that happen. Must keep the stock market up for dividend checks and the institution able to give granma her savings.

They are willing to change or ignore the rules and regulations to achieve their goal of saving the financial system.

Ashvin said...

Peter Tchir explains Euro Basis Swaps.

"In normal times, European banks borrow in dollars to fund their US positions. That makes sense. As the banks face pressure on their USD funding rates, they have two choices, they can either pay up to get $’s directly, or they can borrow at home in euro’s and “swap” it into dollars. The basic premise is that foreign banks have more ability to raise money in their home countries or through their own central banks at times of stress.

As they get shut out of borrowing directly in dollars they rely more and more on funding in their domestic market. US Banks may be scared to lend to French banks, but French institutions and individuals are far less likely to be as concerned. The borrow at home and swap it into dollars. That drives the basis swap more negative. Although that is only one of the explanations of the moves in the eur basis swap, it is a reasonable way to look at the market.

To the extent that is why the rates were moving, it is clear why the central banks wanted to intervene. It doesn’t cost them anything to do and it provides the banks with a chance to earn more positive carry. By making such big globally co-ordinated announcements, it probably makes it easier for banks to shed the stigma of using the facility and can bring their cost of funds lower.

In the end, does it change the need to shed assets? No. Does it print money? No. Does it virtually ensure an ECB rate cut? Yes."

el gallinazo said...

I didn't think that Tchir explained things very well for the central bank scam student novice. The Wikipedia article is pretty good.

The question still arises, where did the Fed get the "dollars" to stuff in the ECB's pockets? Thin air?

This money is then passed on to the ECB client private banks. Presumably most of it goes to the USA subsidiaries of the Euro home based banks and thus increases M1 in the USA.

"In the end, does it change the need to shed assets? No. Does it print money? No. Does it virtually ensure an ECB rate cut? Yes. "

Hmmm. The Euros swapped to the Fed by the ECB get put into a "lockbox account" at the ECB, but the dollars get passed on to Herr Ackermann to use to bet on the ponies. It's not printing dollars? Well by I&S's definition maybe not, but it sure as hell is printing credit which will have velocity. Am I missing something?

el gallinazo said...

So why did we have a 4.33% rally on the S&P500 today? Was it the reduced 0.5% rate that the Fed is charging the ECB to swap euros for dollars? Upon second thought, as Herr Ackermann prepares to leave for his undisclosed location palatial fortress, he may have more urgent things to do with those dollars than bet on the USA ponies and prop up the USA stock market. And the borrowing rate on the 10 year Italian and Spanish bonds dropped big time. How does the ECB lending euro banks dollars at a 0.5% lower rate of interest prop up the PIIGS sovereign debt? I think we just may have to look at the lemming model of global finance.

Or maybe it was the incredibly positive numbers suddenly coming out of the various USA reports, numbers many SD better than expectations. Either the USA economy has hit the afterburners and gone vertical, or some people are lying through their teeth.

When economics was called "the dismal science," they got half of it right.

Ash said...

El G,

From the Wikipedia you linked:

"At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve."

In theory, at least, that's why it would not be printing, since the Fed doesn't take on exchange-rate or counter-party risk (no direct lending to private Euro banks). In practice, if the swap lines are run indefinitely, I could see how some would argue that it is an indirect form of printing (not nearly as direct as QE). What happens if the ECB never honors its side of the arrangement?

There also seems to two other interesting aspects with this latest operation.

1) "The fact that the discount rate is 75bps whereas OIS+50 is under 60bps creates some odd optics, as it is cheaper now for European banks to borrow dollars from the ECB than for US banks to borrow dollars from the Fed"

2) "The new foreign liquidity swaps, whereby the Fed can offer euros, yen, loonies, pounds or swiss francs to US banks, is a novel step and a curious feature of today's announcement. The Fed's official statement is that these are being implemented as a "contingency measure." There are no plans to make these operational in the near term, but are apparently being set up as a backup plan in the event of a worsening in global financial conditions."

I'm not sure how either of those affect the issue of printing vs. non-printing. Either way, I don't think any of these operations have a chance in hell of increasing velocity in the real economy through private bank lending, either in the US or in Europe.

el gallinazo said...


As to the "printing" question:

1) You didn't deal with where the dollars the Fed was swapping with the ECB come from.

2) As to where they go to, they go to the European banks, presumably to spend in the USA through their subsidiaries as they see fit.

3) The Fed's temporary euros get locked up in the ECB's Fed's account, inactive and interest free.

Net transaction: the Fed invents credit from thin air and send it at a very low interest rate to giant European banks to spend as they see fit. The Fed's balance sheet is balanced with euros, but the euros are interest free and locked away from the economy. The ECB takes the credit risk if their banks stiff them. If the swap lines are very big, this could be serious printing for the Fed.

Also, the swap is reversed upon termination at the forex rate at which it was initiated. If the euro is, say, at 1.10 when the swap gets reversed, then the Fed (read the US tax payer) will take a very big hit in real terms.

Also in a minor side note, a Chinese major general states at a press conference that China will not shy away from WW III to defend Iran.

Joe in NC said...


What are the potential unintended consequences of the global Fed bailout that might bite the markets in the ass sometime down the road?

Surely there must be some.


Ilargi said...

New post up.

Day X