Money And Value(s)

Incredible move by B of A to make FDIC (and taxpayers) liable for derivatives losses

dadelson — Tue, 18 Oct 2011 23:37:39 +0000

http://www.nakedcapitalism.com/2011/10/bank-of-america-deathwatch-moves-risky-derivatives-from-holding-company-to-taxpayer-backstopped-depositors.html

Why the German government cannot resolve the European financial crisis quickly

dadelson — Tue, 18 Oct 2011 16:26:49 +0000

“If you try to get to the European crisis with economic rationality you will be mistaken. What you have to do is you need to look at the legal framework, and you have to understand the legal framework. And unfortunately the German constitution is very different when it comes to flexibility when compared to the US or to the French constitution, and that has a lot to do with Germany’s past. So they have written a constitution in 1948 to avoid that [in] the course of emergency laws you can take a democracy back into dictatorship, therefore the hurdles are very high and that implies as well for the current situation. And therefore I am afraid we will have to deal with this constitution, and that is going to make the process of European integration quite slow.”

Hans Guenter Redeker, head of foreign-exchange strategy at Morgan Stanley in London, speaking on Bloomberg Surveillance on Oct. 17, 2011

The ESFS is a mechanism for increasing the debt burden of European taxpayers

dadelson — Sat, 15 Oct 2011 03:32:58 +0000

“The expanded powers of the 440 billion-euro ($600 billion) EFSF would allow the fund to buy the debt of stressed euro-area nations, aid troubled banks in the region and offer credit lines to governments. The EFSF’s current role is to sell bonds to finance rescue loans.”

read the full article at: http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/10/14/bloomberg_articlesLSYN1G6TTDT7.DTL#ixzz1aoqOzbPi

———–

It appears as though financial markets are breathing a sigh of relief in the belief that the European Financial Stability Facility (EFSF) will be able to stanch the threat of “disorganized” default in Greece and beyond. The ESFS is a remarkable mechanism. It is widely referred to as a rescue fund. But what kind of rescue is it really? The ESFS provides a resource for European governments that are tapped out, and could not on their own borrow more money, to borrow from. The money is provided to allow the borrowing country to make sovereign debt (bond) payments, bail out their banks and, by extension, bail out the counter-parties of their banks, many of which are other European banks. The money is absolutely not provided for the purpose of providing fiscal stimulus – government spending – that might stimulate the economy and (if properly deployed) generate new wealth. No, the money is provided to pay prior debts, and it itself must be paid back. Ponzi scheme, anyone? What it all amounts to is adding yet more debt to the public tab while protecting the financial markets and investors from losses…for now. The rationale for doing so is the carnage that would be created by “disorderly” defaults, and that a “Lehman-like” freeze-up of the financial system would wreak havoc on the global economy. Thus, the economy is held hostage, and the governments (read: taxpayers) are being ransomed. And make no mistake, the economy is genuinely hostage. Defaults would, and will, cause severe and unpredictable economic damage. Of course, it is hard to believe that the system will be able to make any eventual default “orderly.” Default will be disorderly thanks to the impossibility of understanding the chain of exposures created by credit default swaps (CDS) and synthetic securities constructed from them. Since CDS are contracts between two parties, there is no way the outside world can predict the chain of failures that a “credit event” (read: default) would unleash. Presumably European regulators (and those in other countries) have been demanding that banks come clean and show them all the contracts to give them some idea of the chains of relationship. Maybe that is the justification for raising the debt still further just to buy time. Who knows. One can only hope. But chains is the right word…the new chains of servitude are paper chains.

The debt trap of trying to join the rentier class

dadelson — Wed, 14 Sep 2011 20:04:12 +0000

“The distinguishing characteristic of economic rent is that earning it requires no effort whatsoever. Indeed, the regular rent tenants pay landlords becomes economic rent only after subtracting whatever amount the landlord actually spent to keep the place standing. Most members of the rentier class are very rich. One might like to join that class. And so our paradox (seemingly) is resolved. With the real estate boom, the great mass of Americans can take on colossal debt today and realize colossal capital gains—and the concomitant rentier life of leisure—tomorrow. If you have the wherewithal to fill out a mortgage application, then you need never work again. What could be more inviting—or, for that matter, more egalitarian? That’s the pitch, anyway. The reality is that, although home ownership may be a wise choice for many people, this particular real estate bubble has been carefully engineered to lure home buyers into circumstances detrimental to their own best interests. The bait is easy money. The trap is a modern equivalent to peonage, a lifetime spent working to pay off debt on an asset of rapidly dwindling value.”

Michael Hudson, in The New Road to Serfdom, An Illustrated Guide to the Coming Real Estate Collapse, published May 2006 in Harper’s

“The normal structure of finance has government standing behind it, so that when markets fail, when banks are in trouble, governments stand up and shore up the system”

dadelson — Wed, 14 Sep 2011 19:23:31 +0000

Lena Komileva, global head of G-10 strategy in London at Brown Brothers Harriman & Co., speaking Sept. 12, 2011 on Bloomberg Surveillance

“Crisis brings us back to the basics of how economies and financial systems work. They are social structures that are purely man-made, and they depend on trust. This is what we don’t have in the European banking system at the moment. The English word ‘credit’ comes from a Latin expression meaning, “He believes,” or, “He trusts.” And indeed, modern economies are dependent on financial systems being trustworthy, to make payments, to store wealth and manage risks, to help economic activity run. So recent developments have brought these fundamentals into question.

“The normal structure of finance has governments standing behind it, so that when markets fail, when banks are in trouble, governments stand up and shore up the system. We have all been reminded through this banking crisis in Europe that financial and economic activity depends on entirely on people, that includes governments, keeping their commitments. What the European governments have done, however, is said, “No we cannot keep our commitments, not only can we [not] pay off all our loans, but we cannot possibly shore up the financial system.” Indeed, there is no single European national budget that is big enough to backstop the level of financial liabilities that are currently a risk. I mean, Ireland is a very good example. Whereby Ireland was, is, a very solvent economy but it has an insolvent financial system, and the governments struggle to backstop this. Unpayable loans have brought the whole economy into a depression-like scenario.

“So, the lesson here is that it is time for governments to step back in. It’s time for trust to return. Once it’s lost it needs to be won back. And the speed with which it returns depends crucially on whether politicians, who decide what governments do, realize that a breakdown in trust in financial instruments and in financial institutions is bound to have a very central, core effect on economic activity in the Euro area.”

Our comment: Well, yes…but the problem is for the last decade plus, the players in financial systems have been screaming that they ought to have no regulation, and be free to take whatever wild risks they choose, keep the profit, and socialize those risks. Now they want rescue, while still being free to serve themselves rather than the broader public interest (though in their rhetoric they tend to equate their action in their own self-interest with ultimate broader public interests via the magic of free markets that turn unbridled greed into virtue). And any attempt by politicians to demand broader responsibility to those ultimately shouldering the risk – taxpayers – is still met with outrage from the dependent financial system. The situation is very much like the US Savings and Loan debacle: deregulation of the industry permitted wild risks to be taken, and when it all came crashing down, the government stepped in to pick up the tab. A cynic would say that it all was a government-sponsored means of transferring wealth from poor to rich, and a cynic would say the same process is underway right now. And a cynic might be right.

What politicians are grappling with now is a battle over who pays for what, from whom and to whom wealth is being transferred going forward, and what will be the ultimate structure that emerges. Unfortunately, the ideology of unfettered risk-taking (with an implicit government backstop that must never be mentioned for fear of justifying government regulation of risk) is so deeply entrenched in the functions and functionaries of modern finance that it will be very difficult to let these people return to business as usual. At the same time, it is very difficult to develop a new form of business as usual if the architects of the current system are responsible for building the new structures. Yet this is the most likely scenario, given the wealth and political power that those the existing financial system amassed during the last decades. As a result, any ‘solutions’ that emerge are likely to lead to much greater problems in the future.

Three views of the same elephant

dadelson — Wed, 31 Aug 2011 19:49:39 +0000

“We’re part of a group that’s buying a very large stake into the Bank of Ireland. The Bank of Ireland is about the same size as Bank of New York Mellon… We think Ireland will be the first of the European economies to recover, because they really bit the bullet. They cut civil service costs 13%, cut out government-funded capex [capital expenditure], cut social services, all to deal with the terrible debt problem caused by the banking crisis.

But once they get through that, the fundamental advantages of Ireland are intact. The lowest corporate tax rate in Europe, the one euro-using country that speaks English, the favorable trade balance both with the rest of Europe and the rest of the world, young and well-educated workforce, very good telecom and transportation logistics, so Ireland will once again become the Celtic tiger.”

Wilbur Ross, CEO of WL Ross & Co., speaking on Bloomberg Surveillance 8/30/11

————-

“I think the first thing that leaders need to do, and also citizens and anyone interested needs to do, is to recognize that the sovereign debt crisis never really was one. It began as a banking crisis and it will end as a banking crisis. We have huge global-reaching highly-leveraged institutions which in 2008 were found out to be writing out-of-the-money options on mass publics, taxpayers, and states stepped in to save them, and the combination of recapitalization, bailouts, lost revenue and stimulus blew a hole in states’ deficits, at which point the banks turned round and said, “Here look at all that debt, that’s terrible, you guys need cut it.” But what we really have is a financial crisis that was transmuted into the responsibility of the State. Now what’s happened is that because growth hasn’t returned the State’s debt is getting worse, and at the same time we try to cut this, this is affecting growth, and guess what that does? That feeds back and then hits banks. So it begins as a banking crisis, and it will end as a banking crisis. The fact that it was transmuted into a sovereign debt crisis at one point is really quite misleading.”

Mark Blyth, professor of political economics at Brown University, speaking on Bloomberg On The Economy 8/31/11

————-

“The luxury business has never been better in America, because if we look at the top 10% who’ve gained from the great capital markets, we look at Tiffany doing incredible, Harry Winston, Hermés, Sacks all the upscale stores are hitting the ball out of the park, Neiman Marcus and Polo Ralph Lauren is right in there in the upscale business. The ten percent of America which accounts for 40% of the spending is doing terrific because over the last three years we’ve had the greatest capital markets ever, and they’re benefiting from that.”

Howard Davidowitz, chairman of Davidowitz and Associates, Inc., speaking on Bloomberg Surveillance 8/31/11

Blackstone private equity investing in offshore German wind farms

dadelson — Fri, 12 Aug 2011 22:43:12 +0000

The following article from the Aug. 5, 2011 edition of the FT is not the usual fare for this blog, but it is relevant to the question of how all the money sloshing around eventually gets invested, and why. Blackstone sees, as do many, the coming challenges in the energy economy, and is investing in sustainable energy development, albeit with the substantial help of subsidies by German taxpayers. Then again, it seems that German taxpayers are subsidizing a lot of consumption these days, so its nice that they’re also spending something to spur investment. We’ll leave aside the fairness issue for now…

FT: Blackstone to invest €2.5bn in wind farms

The FT requests that we not reproduce their work in full (understandable), so go to the site to see the whole article, but here are some key bits: “The investments mark one of the biggest ever moves into renewable energy by a global buy-out group. It comes after the German government decided to heavily subsidise wind energy amid its ambition to phase out nuclear energy by 2022. ” … and… “The projects benefit from a generous guaranteed feed in tariff of €119 per megawatt hour for wind energy in Germany. Blackstone is also the first beneficiary of a government programme to give loans to 10 privately financed offshore wind farm projects, aimed at kick-starting private investments into the area.”

The managers of economies are restricted by the people and politics of their respective countries

dadelson — Tue, 09 Aug 2011 21:37:31 +0000

” We’re at the point now where I think there’s a real electoral opposition to further bailouts, to fiscal expansion obviously, and so we’re at the point now where domestic politics is limiting the ability of the leaders and authorities in various crisis economies to respond the way they could have, say, in 2008.”

Richard Franulovich of Westpac Banking Corp, speaking on Bloomberg Surveillance on Aug. 8, 2011. The immediate topic of discussion was German political opposition to allowing Germany to continue to finance bailouts of the periphery countries, and the resulting incapacity of the Eurozone to respond to building debt crises.

Broken multiplier

dadelson — Tue, 09 Aug 2011 20:39:28 +0000

“[With QE2]…they created $1.6 trillion excess reserves that are just sitting there on the Fed’s balance sheet. The banks don’t want to lend, the creditworthy borrowers don’t want to borrow.”

A. Gary Shilling speaking on Bloomberg Surveillance, 8/9/11

PIMCO’s Crescenzi: US must change the composition of government spending

dadelson — Sat, 09 Jul 2011 07:51:00 +0000

“It will be very difficult for the United States to avoid having to cut the overall amount of spending. We must, because we have a deficit of $1.4 trillion in the United States. [But] it will be very difficult also because the baby boomers began turning 65 this year, and this group will grow from 13% of the population to 20% by 2029, so what we have to do is change the composition of our spending, skew it more, a little bit away from healthcare and areas like that and toward investment in education, infrastructure, and research and development. These are the areas that power economic growth over the long-term, so we can’t raise our spending, so we’re going to have to change the composition of it, do what China is doing, invest in itself.”

Anthony Crescenzi, executive vice president and market strategist at Pacific Investment Management Co. (PIMCO), the world’s largest bond fund company – speaking in an interview on Bloomberg Surveillance on 07/08/2011