Tue 2010-10-12 16:01 EDT

billy blog >> Blog Archive >> Iceland ... another neo-liberal casuality

...For a real world example of the benefits of adopting a floating, sovereign, currency we can look to Argentina....At the time of the 2001 crisis, the government realised it had to adopt a domestically-oriented growth strategy. One of the first policy initiatives taken by newly elected President Kirchner was a massive job creation program that guaranteed employment for poor heads of households. Within four months, the Plan Jefes y Jefas de Hogar (Head of Households Plan) had created jobs for 2 million participants which was around 13 per cent of the labour force. This not only helped to quell social unrest by providing income to Argentina's poorest families, but it also put the economy on the road to recovery. Conservative estimates of the multiplier effect of the increased spending by Jefes workers are that it added a boost of more than 2.5 per cent of GDP. In addition, the program provided needed services and new public infrastructure that encouraged additional private sector spending. Without the flexibility provided by a sovereign, floating, currency, the government would not have been able to promise such a job guarantee. Argentina demonstrated something that the World's financial masters didn't want anyone to know about. That a country with huge foreign debt obligations can default successfully and enjoy renewed fortune based on domestic employment growth strategies and more inclusive welfare policies without an IMF austerity program being needed. And then as growth resumes, renewed FDI floods in...sovereign governments are not necessarily at the hostage of global financial markets. They can steer a strong recovery path based on domestically-orientated policies -- such as the introduction of a Job Guarantee -- which directly benefit the population by insulating the most disadvantaged workers from the devastation that recession brings...

Billy Blog; blogs Archive; Iceland; neo-liberal casuality.

Fri 2010-10-08 21:57 EDT

A Mammoth One in Five Borrowers Will Default <<; Real Estate Prices & Mortgages on HousingStory.net

Michael David White

A leading mortgage analyst predicts over 11 million homeowners will default and lose their home if the government fails to take more radical intervention. Amherst Securities Group LP, one of the most respected names in mortgage research, has trumpeted an ambitious call-to-government arms in its October mortgage report. ``The death spiral of lower home prices, more borrowers underwater, higher transition rates (to default), more distressed sales and lower home prices must be arrested.''...

borrowing; default; HousingStory; mammoth; mortgage; net; real estate prices.

Fri 2010-10-08 21:53 EDT

MERS 101

MERS - Mortgage Electronic Registration Inc. - holds approximately 60 million American mortgages and is a Delaware corporation whose sole shareholder is Mers Corp. MersCorp and its specified members have agreed to include the MERS corporate name on any mortgage that was executed in conjunction with any mortgage loan made by any member of MersCorp...Thus in place of the original lender being named as the mortgagee on the mortgage that is supposed to secure their loan, MERS is named as the ``nominee'' for the lender who actually loaned the money to the borrower. In other words MERS is really nothing more than a name that is used on the mortgage instrument in place of the actual lender. MERS' primary function, therefore, is to act as a document custodian. MERS was created solely to simplify the process of transferring mortgages by avoiding the need to re-record liens -- and pay county recorder filing fees -- each time a loan is assigned. Instead, servicer's record loans only once and MERS' electronic system monitors transfers and facilitates the trading of notes...MersCorp was created in the early 1990's by the former C.E.O.'s of Fannie Mae, Freddie Mac, Indy Mac, Countrywide, Stewart Title Insurance and the American Land Title Association... MERS, as has clearly been proven in many civil cases, does not hold any promissory notes of any kind. A party must have possession of a promissory note in order to have standing to enforce and/or otherwise collect a debt that is owed to another party. Given this clear-cut legal definition, MERS does not have legal standing to enforce or collect on the over 60 million mortgages it controls and no member of MERS has any standing in an American civil court. MERS has been taken to civil courts across the country and charged with a lack of standing in reposession issues. When the mortgage debacle initially, and inevitably, began, MERS always routinely brought actions against defaulting mortgage holders purporting to represent the owners of the defaulted mortgages but once the courts discovered that MERS was only a front organization that did not hold any deed nor was aware of who or what agencies might hold a deed, they have routinely been denied in their attempts to force foreclosure. In the past, persons alleging they were officials of MERS in foreclosure motions, purported to be the holders of the mortgage, when, in fact, they not only were not the holder of the mortgage but, under a court order, could not produce the identity of the actual holder. These so-called MERS officers have usually been just employees of entities who are servicing the loan for the actual lender. MERS, it is now widely acknowledged by the courts, has no legal right to foreclose or otherwise collect debt which are evidenced by promissory notes held by someone else...

MERS 101.

naked capitalism Thu 2010-09-30 08:22 EDT

Why Backstopping Repo is a Bad Idea

The normally sound Gillian Tett of the Financial Times endorses an idea that is both dangerous and unnecessary, namely, government backstopping of the system of short-term collateralized lending called repo, for ``sale with agreement to repurchase.''...But the real problem is that the only securities that were once considered to be suitable were those of the very highest quality, namely Treasuries. The real problem is in widening the market beyond that. If you have absolutely impeccable collateral, you don't care if your counterparty goes belly up if you aren't at risk of losses on the assets you hold...the real problem is the use of low quality collateral...why would we possibly WANT a system that might down the road encourage the pledging of less than stellar instruments as repo?...we need to go back and look hard at why the need for repo has risen since 2001, and how much is related to legitimate activity. The fact that it grew much more rapidly than the economy overall suggests not...official efforts should proceed...to shrink the repo market (as we've recommended for a market that has contributed to the growth of repo, credit default swaps)...our efforts NOT to restrain banks leads to a tremendous tax on all of us...a banking industry that creates global crises is negative value added from a societal standpoint. It is purely extractive...

Backstopping Repo; Bad Ideas; naked capitalism.

Christopher Whalen Sat 2010-09-25 09:52 EDT

Double dip or global deflation?

Christopher Whalen

...Let's start with the term ``recession,'' which itself reflects the assumption that economic growth is always positive and the trend line is always upward sloping. While many economists in the U.S. remain convinced that this is an accurate descriptor, what Americans and many other people of the world need to consider is whether the assumption that the economy will grow endlessly is reasonable...much of what Americans think was real growth supported by real income and real work was, in fact, the result of deficit spending and reckless monetary expansion by the Fed, first under Alan Greenspan and now Ben Bernake...some of the leading experts in the housing sector believe that the U.S. is less than 25% through the restructuring of defaulted loans on commercial and residential real estate, and that the backlog is growing...Just as the housing sector and the related debt was the driver of the U.S. economy over the past several decades, I believe that the deflation of the housing market could spell an equally drastic period of shrinkage in economic activity in the U.S. and around the world...

Christopher Whalen; double dip; Global deflation.

naked capitalism Wed 2010-09-08 17:27 EDT

Economic consequences of speculative side bets -- The case of naked CDS

Yeon-Koo Che and Rajiv Sethi

...We argue that the existence of naked credit default swaps has significant effects on the terms of financing, the likelihood of default, and the size and composition of investment expenditures. And we identify three mechanisms through which these broader consequences of speculative side bets arise: collateral effects, rollover risk, and project choice...the existence of zero-sum side bets on default has major economic repercussions. These contracts induce investors who are optimistic about the future revenues of borrowers, and would therefore be natural purchasers of debt, to sell credit protection instead. This diverts their capital away from potential borrowers and channels it into collateral to support speculative positions. As a consequence, the marginal bond buyer is less optimistic about the borrower's prospects, and demands a higher interest rate in order to lend. This can result in an increased likelihood of default, and the emergence of self-fulfilling paths in which firms are unable to rollover their debt, even when such trajectories would not arise in the absence of credit derivatives. And it can influence the project choices of firms, leading not only to lower levels of investment overall but also in some cases to the selection of riskier ventures with lower expected returns...

Case; economic consequences; naked capitalism; Naked CDS; speculative side bets.

Money Game Wed 2010-09-01 10:53 EDT

Why Ben Bernanke's Next Round Of Quantitative Easing Will Be Another Huge Flop

There is perhaps, no greater misunderstanding in the investment world today than the topic of quantitative easing [QE]. After all, it sounds so fancy, strange and complex. But in reality, it is quite a simple operation...The Fed simply electronically swaps an asset with the private sector. In most cases it swaps deposits with an interest bearing asset...The theory behind QE is that the Fed can reduce interest rates via asset purchases (which supposedly creates demand for debt) while also strengthening the bank balance sheet (which entices them to lend). Unfortunately, we've lived thru this scenario before and history shows us that neither is actually true. Banks are never reserve constrained and a private sector that is deeply indebted will not likely be enticed to borrow regardless of the rate of interest...The most glaring example of failed QE is in Japan in 2001. Richard Koo refers to this event as the ``greatest monetary non-event''...Since Ben Bernanke initiated his great monetarist gaffe in 2008 there has been almost no sign of a sustainable private sector recovery. Mr. Bernanke's new form of trickle down economics has surely fixed the banking sector (or at least bought some time), but the recovery ended there. ..The hyperventilating hyperinflationists and those investors calling for inevitable US default are now clinging to this QE story as their inflation or default thesis crumbles before their very eyes...With the government merely swapping assets they are not actually ``printing'' any new money. In fact, the government is now essentially stealing interest bearing assets from the private sector and replacing them with deposits...now that the banks are flush with excess reserves this policy response would in fact be deflationary - not inflationary...

Ben Bernanke's; Huge Flop; Money game; Quantitative Easing.

zero hedge - on a long enough timeline, the survival rate for everyone drops to zero Wed 2010-08-25 10:47 EDT

Illinois Teachers' Retirement System Enters The Death Spiral: AIG Wannabe's Go-For-Broke Strategy Fails As Pension Fund Begins Liquidations

Two few months ago we disclosed how the Illinois Teachers' Retirement System (TRS) was doing all it can to become the next AIG. In addition to, or maybe precisely due to, its deplorable fundamental condition, which can be summarized as being 61% underfunded on its $33.7 billion in assets, with a performance record of down $4.4 billion in 2009 and 5% in 2008, the fund, courtesy of a detailed analysis by Alexandra Harris of the Medill Journalism school at Northwestern, was found to be on its way to trying to become a veritable self-made TBTF: as was described then, "TRS is largely on the risky side of the contracts, selling and writing OTC derivatives, including credit default swaps,..."

AIG Wannabe's Go; Broke Strategy Fails; Death Spiral; dropped; Illinois teacher; long; Pension Fund Begins Liquidations; Retirement System Enters; survival rate; Timeline; zero; Zero Hedge.

Tue 2010-08-24 20:09 EDT

EconomicPolicyJournal.com: Is China Executing a Cunning Sun Tzu Strategy to Destroy the Dollar and Cause an Upward Price Explosion in Gold?

Elizabeth Brinsden

Could China be coveting the role of the next economic superpower, thereby supplanting the USA? If so, is China planning to do this by design or is it simply awaiting this result by default as a result of the total collapse of the American economic system?...At a superficial level, it may appear to the onlooker that China has been sucked into a giant malinvestment by purchasing these bonds, but a closer look at Master Sun's stratagems may reveal a well conceived and even cunning plan...China may well be heading in the direction of pegging its currency in some form to something else and that that something else, is very likely to be gold. Then China could offload its US bonds by sale , once again raising the price of gold dramatically which in turn would compensate for the dollar losses...Not only would this give China the only trustworthy currency in the world, but it would simultaneously and conveniently constitute the knock-out blow to the USA as the economic superpower...

caused; China executive; com; Cunning Sun Tzu Strategy; destroyed; Dollar; EconomicPolicyJournal; gold; Upward Price Explosion.

PRAGMATIC CAPITALISM Mon 2010-08-23 19:11 EDT

SAY IT AIN'T SO JOHN....

TPC

I am saddened to say that John Hussman is worried about inflation and default in the USA. I guess the inflationistas and defaultiastas have made a substantial mid-season pick-up. Unfortunately, however, Mr. Hussman makes all the same claims that have driven these worrywarts astray for so many years. Specifically, Mr. Hussman is now discussing the inevitable ``collapse'' of the U.S. dollar due to Quantitative Easing...There is substantial historical evidence showing that QE is nothing more than an asset swap and has little to no impact on the real economy, inflation rates or currencies. Japan is again the best historical precedent...there is a long-term threat of inflation or that we have attempted to paper over many of our mistakes, however, there is very strong evidence showing that QE will not be the cause of a collapse in the dollar...

ain't; John; PRAGMATIC CAPITALISM; says.

PRAGMATIC CAPITALISM Mon 2010-08-23 19:08 EDT

WHEN WILL THE BOND AUCTIONS BEGIN TO FAIL?

TPC

There's great concern over the sustainability of US deficits. Most of the fear mongering, hyperventilating, flat earth economists believe foreigners will at some point stop ``funding'' our spending. The hyperinflationist crowd likes to keep a very close eye on US government bond auctions hoping foreign demand for debt will dry up, auctions will begin to fail and interest rates (and inflationary pressures) will surge as the United States effectively defaults (which is technically impossible) and dies the death that so many of these people wish upon it. Unfortunately, 99% of the inflationistas have a very poor understanding of reserve accounting so their arguments have not only been wrong for a very long time, but they never really carried any weight to begin with (as one reader eloquently put it -- ``at some point being right has to count for something'' -- the inflationistas have been horribly wrong throughout this downturn). So what is really happening when the government auctions off bonds?...

BOND AUCTIONS BEGIN; fail; PRAGMATIC CAPITALISM.

naked capitalism Tue 2010-08-17 12:40 EDT

Guest Post: Why Clearninghouses Are a Maginot Line Against Systemic Risk

Warren Turbeville

As discussed in ECONNED and on this blog, clearinghouses are not a solution to the systemic risk posed by credit default swaps, since there is no way to have a CDS counterparty post adequate margin and have the product be viable (to put it more simply, adequate margin make CDS uneconomic). ..I am one of the few people around who knows something about the clearing business and theory and is not employed by an investment bank or clearinghouse. At the end of my career on Wall Street, I was hired to perform a financial autopsy of the special purpose derivatives clearinghouse set up by California as part of an innovative power market structure. It had failed in the state's power crisis of 2001-02. Observing the tremendous systemic risk generated by using conventional clearing techniques for all but straightforward derivatives, I embarked on a seven year quest. I formed a company that designed a mathematical, IT and legal structure to provide a transparent and orderly system to manage the risks of those derivatives which shouldn't be cleared conventionally. Imagine my surprise when the banks decided against using the system...

Clearninghouses; Guest Post; Maginot Line; naked capitalism; systemic risk.

New Economic Perspectives Tue 2010-08-03 14:12 EDT

The CBO's Misplaced Fear of a Looming Fiscal Crisis

Eric Tymoigne

The Congressional Budget Office (CBO) has just released an 8-page brief titled "Federal Debt and the Risk of a Fiscal Crisis." In it you will find all the traditional arguments regarding government deficits and debt: "unsustainability," "crowding out", bond rates rising to "unaffordable" levels because of fears that the Treasury would default or "monetize the debt," the need to raise taxes to pay for interest servicing and government spending, the need "to restore investor's confidence" by cutting government spending and raising taxes. This gives us an opportunity to go over those issues one more time...

CBO's Misplaced Fear; looming fiscal crisis; New Economic Perspectives.

New Deal 2.0 Sun 2010-07-25 16:20 EDT

Will Criminals Exploit Cap and Trade?

Marshall Auerback

...the carbon trading proposals embodied in the Obama Administration's cap and trade proposals are misguided. Money laundering is very easy when you have an opaque pricing structure with little in the way of regulatory protections. It's the environmental equivalent of credit default swaps. Worse, the cap and trade system doesn't work...Carbon Trading Schemes amount to nothing more than a privatization of the atmosphere...the criminals can have a field day...

0; Criminals Exploit Cap; new dealing 2; trading.

naked capitalism Fri 2010-07-23 17:08 EDT

Deficits Do Matter, But Not the Way You Think

L. Randall Wray

In recent months, a form of mass hysteria has swept the country as fear of ``unsustainable'' budget deficits replaced the earlier concern about the financial crisis, job loss, and collapsing home prices. What is most troubling is that this shift in focus comes even as the government's stimulus package winds down and as its temporary hires for the census are let go. Worse, the economy is still -- likely -- years away from a full recovery. To be sure, at least some of the hysteria has been manufactured by Pete Peterson's well-funded public relations campaign, fronted by President Obama's National Commission on Fiscal Responsibility and Reform -- a group that supposedly draws members from across the political spectrum, yet are all committed to the belief that the current fiscal stance puts the nation on a path to ruinous indebtedness...[however] the notion of ``fiscal sustainability'' or ``solvency'' is not applicable to a sovereign government -- which cannot be forced into involuntary default on debts denominated in its own currency...If we can get beyond the fears of national insolvency then there are many issues that can be fruitfully discussed. While inflation will not be a problem for many years, price pressures could return some day. Impacts of exchange rate instability are important, at least for some nations. Unemployment is a chronic problem, even at business cycle peaks. Aging does raise serious questions about allocation of resources, especially medical care. Poverty and homelessness exist in the midst of relative abundance. Simply recognizing that our sovereign government cannot go bankrupt does not solve those problems, but it does make them easier to resolve...

Deficit; matter; naked capitalism; Think; way.

China Financial Markets Thu 2010-07-22 10:17 EDT

Do sovereign debt ratios matter?

Michael Pettis

...No aspect of history seems to repeat itself quite as regularly as financial history. The written history of financial crises dates back at least as far back as the reign of Tiberius, when we have very good accounts of Rome's 33 AD real estate crisis...we have only begun the period of sovereign default. The major global adjustments haven't yet taken place and until they do, we won't have seen the full consequences of the global crisis...there is no threshold debt level that indicates a country is in trouble. Many things matter when evaluating a country's creditworthiness...there are at least five important factors in determining the likelihood that a country will be suspend or renegotiate certain types of debt...With inverted debt, the value of liabilities is positively correlated with the value of assets, so that the debt burden and servicing costs decline in good times (when asset prices and earnings rise) and rise in bad times...Inverted debt structures leave a country extremely vulnerable to debt crises...

China Financial Markets; sovereign debt ratios matter.

New Economic Perspectives Mon 2010-07-19 13:51 EDT

The Myths About Government Debt and Deficit as Told By Carmen Reinhart and Kenneth Rogoff

Yeva Nersisyan

...with nearly 10% of the US labor force unemployed and another 7% underemployed, the public debate is now focused on the false issue of deficits and debt. A case in point is a recent book by Carmen Reinhart and Kenneth Rogoff, ``This Time is Different'' that has become a bestseller...The media as well as academia have fawned all over this book...The crux of the book is that each time people think that ``this time is different'', that crises cannot occur anymore or that they happen to other people in other places. True. This is exactly what Hyman Minsky was arguing more than 40 years ago. Reinhart and Rogoff don't really explain why this perception leads to crises...The book is mostly on crises driven by government debt...[however] Aggregating data over different monetary regimes and different countries cannot yield any meaningful conclusions about sovereign debt and crises. It is only useful if the goal is to merely validate one's preconceived myth about government debt being similar to private debt...As far as I can tell Rogoff and Reinhart haven't identified a single case of government default on domestic-currency denominated debt with a floating exchange rate system...Professional economists are a major impediment on the way to using our economic system for the benefit of us all. And Reinhart and Rogoff are no exception.

Carmen Reinhart; Deficit; government debt; Kenneth Rogoff; myth; New Economic Perspectives; told.

The Money Game Fri 2010-07-16 18:52 EDT

Here's The Real Reason Cities And States Would Never Be Allowed To Default

David Goldman at Asia Times nails it: It's not about the impact on the real economy (the attendant cut in public services and public employment), it's about the effect that such defaults would have on the banks...that's a good rule of thumb. If it's going to hurt the banks, it's probably not going to be allowed to happen...The $800 billion bailout package for Europe's PIIGS (Portugal, Ireland, Italy, Greece, Spain) in May was in fact a bailout for the banking system...

allowed; default; Money game; Real Reason Cities; s; state.

New Deal 2.0 Fri 2010-07-16 18:50 EDT

Despite Foreign Debts, U.S. Has the Upper Hand

Henry Liu

U.S. public debt as of July 8, 2010 was $ 13.192 trillion against a projected 2010 GDP of $14.743 trillion. As of April 2010, China held $900.2 billion of US Treasuries, surpassing Japan's holding of $795.5 billion. As of 2007, outstanding GSE (Government Sponsored Enterprises like Fanny Mae; Freddy Mac) debt securities (non-mortgage and those backed by mortgages) summed up to $7.37 trillion. Does this mean disaster for the US? ...the U.S., while vulnerable, is not critically over a barrel by massive foreign holdings of U.S. sovereign debt. The reason is because U.S. sovereign debts are all denominated in dollars, a fiat currency that the Federal Reserve can issue at will. The U.S. has no foreign debt in the strict sense of the term. It has domestic debt denominated in its own fiat currency held in large quantities by foreign governments. The U.S. is never in danger of defaulting on its sovereign debt because it can print all the dollars necessary to pay off foreign holders of its debt. There is also no incentive for the foreign holders of U.S. sovereign debt to push for repayment, as that will only cause the U.S. to print more dollars to cause the dollar to fall further in exchange rates... ...trade globalization through cross-border wage arbitrage also pushes down wages in the US and other advanced economies, causing insufficient consumer income to absorb rising global production. This is the main cause of the current financial crises which have made more severe by financial deregulation. But the root cause is global overcapacity due to low wages of workers who cannot afford to buy what they produce. The world economy is plagued with overcapacity as a result. It is not enough to merely focus on job creation. Jobs must pay wages high enough to eliminate overcapacity. Instead of a G20 coordination on fiscal austerity, there needs to be a G20 commitment to raise wages globally. [Henry C.K. Liu]

0; Foreign debt; new dealing 2; U.S.; upper hand.

Rajiv Sethi Tue 2010-06-15 14:25 EDT

Defenders and Demonizers of Credit Default Swaps

Rajiv Sethi

The recent difficulties faced by Greece (and some other eurozone states) in rolling over their national debt has let some to blame hedge fund involvement in the market for credit default swaps...Leaving aside the question of whether naked CDS trading has been good or bad for Greece, it is worth asking whether there exist mechanisms through which such contracts can ever have destabilizing effects. I believe that they can, for reasons that Salmon and Jones would do well to consider...such contracts allow pessimists to leverage (much more so than they could if they were to short bonds instead). The resulting increase in the cost of borrowing, which will rise in tandem with higher CDS spreads, can make the difference between solvency and insolvency. And recognition of this process can tempt those who are not otherwise pessimistic to bet on default, as long as they are confident that enough of their peers will also do so. This clearly creates an incentive for coordinated manipulation...

Credit Default Swap; defending; demonic; Rajiv Sethi.

Wed 2010-06-09 18:45 EDT

London business figures embroiled in Kaupthing fraud investigation: Serious Fraud Office team thought to be to be scrutinising Deutsche Bank's role in alleged suspect trades| Business | The Guardian

Simon Bowers| The Guardian

A Serious Fraud Office investigation into Kaupthing, the failed Icelandic bank, is understood to be pursuing a number of allegations of market manipulation involving investment vehicles controlled by some of the bank's largest clients, including several high profile UK business leaders. It is alleged that in the weeks and months before Iceland's financial system went into meltdown, certain trades improperly used at least €500m (£413m) of Kaupthing funds in an effort to manipulate credit derivatives. Bank bosses hoped this would restore crumbling confidence in Kaupthing's solvency in the months before the bank collapsed in October 2008...The effect was for investment vehicles -- financed by Kaupthing loans, and at least nominally controlled by some of the bank's largest clients -- to take on risk associated with the bank going bust. Kaupthing loans were being use to write insurance against Kaupthing bonds defaulting...Iceland's Truth Commission obtained details of emails sent by Deutsche Bank staff to Kaupthing which, according to its report, demonstrated that the German bank had been offering advice on how to influence the CDS price on Kaupthing bonds from early 2008...

alleged suspect trades; business; Guardian; Kaupthing fraud investigation; London business figures embroiled; scrutinising Deutsche Bank's role; Serious Fraud Office team thought.

New Economic Perspectives Mon 2010-05-24 10:52 EDT

The Coming European Debt Wars

Michael Hudson

Government debt in Greece is just the first in a series of European debt bombs that are set to explode. The mortgage debts in post-Soviet economies and Iceland are more explosive. Although these countries are not in the Eurozone, most of their debts are denominated in euros. Some 87% of Latvia's debts are in euros or other foreign currencies, and are owed mainly to Swedish banks, while Hungary and Romania owe euro-debts mainly to Austrian banks. So their government borrowing by non-euro members has been to support exchange rates to pay these private sector debts to foreign banks, not to finance a domestic budget deficit as in Greece...No one wants to accept the fact that debts that can't be paid, won't be. Someone must bear the cost as debts go into default or are written down, to be paid in sharply depreciated currencies...The question is, who will bear the loss?...There is growing recognition that the post-Soviet economies were structured from the start to benefit foreign interests, not local economies. For example, Latvian labor is taxed at over 50% (labor, employer, and social tax) -- so high as to make it noncompetitive, while property taxes are less than 1%, providing an incentive toward rampant speculation...Future relations between Old and New Europe will depend on the Eurozone's willingness to re-design the post-Soviet economies on more solvent lines -- with more productive credit and a less rentier-biased tax system that promotes employment rather than asset-price inflation that drives labor to emigrate...

Coming European Debt Wars; New Economic Perspectives.

Sat 2010-05-22 20:00 EDT

"Drop Dead Economics": The Financial Crisis in Greece and the European Union

Michael Hudson

Financial lobbyists are using the Greek crisis as an object lesson to warn about the need to cut back public spending on Social Security and Medicare. This is the opposite of what the Greek demonstrators are demanding: to reverse the global tax shift off property and finance onto labor, and to give labor's financial claims for retirement pensions priority over claims by the banks to get fully paid on hundreds of billions of dollars of recklessly bad loans recently reduced to junk status. The Greek bailout should be thought of as a TARP for German and other European bankers and global currency speculators. Almost $1 trillion is being provided by governments (mainly Germany, at the cost of its own domestic spending) into a kind of escrow account for the Greek government to pay foreign bondholders who bought up these securities at plunging prices over the past few weeks. They will make a killing, as will buyers of hundreds of billions of dollars of credit-default swaps on the Greek government bonds, speculators in euro-swaps and other casino-capitalist gamblers. (Parties on the losing side of these swaps now will need to be bailed out as well, and so on ad infinitum.) This windfall is to be paid by taxpayers -- ultimately those of Greece (in effect labor, because the wealthy have been untaxed) -- to reimburse Euro-governments, the IMF and even the U.S. Treasury for its commitment to predatory finance. The ³sanctity of debt -- sacrificing the economy to pay bondholders -- is to be used as an excuse to slash Greek public services, pensions and other government spending...

Drop Dead Economics; European Union; Financial Crisis; Greece.

naked capitalism Thu 2010-04-22 18:21 EDT

Guest Post: Are Interest Rate Derivatives a Ticking Time Bomb?

Washington&apos;s Blog

...Most economists and financial institutions assume that interest rate derivatives help to stabilize the economy. But cumulatively, they can actually increase risky behavior, just as portfolio insurance previously did. As Nassim Taleb has shown, behavior which appears to decrease risk can actually mask long-term risks and lead to huge blow ups. Moreover, there is a real danger of too many people using the same strategy at once... Given that the market for interest rate derivatives is orders of magnitude larger than credit default swap market -- let alone portfolio insurance -- the risks of a ``black swan'' event based on interest rate derivatives should be taken seriously...

Guest Post; Interest Rate Derivatives; naked capitalism; ticking time bomb.

naked capitalism Tue 2010-04-20 09:43 EDT

Satyajit Das: New & Old Greek Lessons

...Like many of the economically weaker EU members, Greece fudged the numbers to meet the qualifications for entry into the Euro. One example of this is the use of derivative transactions with Goldman Sachs to disguise the level of its real borrowing. Membership of the Euro also reduced the ability of Greece to manage its economy. It lost the ability to use its currency, via devaluations, to improve competitiveness and stimulate exports. It also lost the ability to set interest rates (now set by the European Central Bank (''ECB'')). It also cannot print its own currency to fund sovereign borrowing. Greece also has low levels of domestic saving...Greece's problems are probably incapable of solution and terminal. Temporary emergency funding may help meet immediate liquidity needs but do not solve fundamental problems of excessive debt and a weak economy...the optimal course of action for Greece may be to withdraw from the Euro, default on its debt (by re-denominating it in a re-introduced Drachma) and then undertake a program of necessary structural reform...The current debate misses the fact that the ``bailouts'' are mainly about rescuing foreign investors...

naked capitalism; new; Old Greek Lessons; Satyajit Das.

naked capitalism Mon 2010-04-19 18:46 EDT

Soros, Galbraith and Stiglitz on resisting inevitability in Greece

However, for now, it is Greece which is on everyone's mind...Kevin de Bruxelles says: ...I have to give credit to Angela Merkel. She is holding a pretty strong hand and it is now clear we are down to two choices for the endgame. The bailout solution will be international, in other words not limited to the Eurozone, and the amounts donated will be proportional to the risk each country holds. Or Greece simply defaults, probably first on their Anglo-Saxon debt (in return for low interest loans from Germany and France!), and each country then just bails out their respective banking system.

Galbraith; Greece; naked capitalism; resisting inevitability; Soros; Stiglitz.

naked capitalism Mon 2010-04-19 16:17 EDT

Strategic defaults increase consumer spending

...the evidence is pretty substantial that strategic defaults are indeed goosing retail sales...

naked capitalism; Strategic defaults increase consumer spending.

Fri 2010-04-09 08:08 EDT

charles hugh smith-The Contrarian Trade of the Decade: the U.S. Dollar

charles hugh smith

The majority of economic observers seem convinced that the dollar is doomed, and not in some distant future...But perhaps this thinking is wrong on virtually every important count...While the Federal Reserve successfully goosed money supply in their massive "quantitative easing" campaign, money supply is no longer expanding at a fast clip...It seems the money "created" by the Federal Reserve and lent to private banks at near-zero interest rates is simply sitting in the banks as reserves to offset their continuing horrendous losses. As a result, it is not flowing into the economy, and thus it cannot trigger inflation...Indeed, as has often been noted by Mish and others, this is what has happened in Japan for the past two decades: the central bank shovels money into private banks, who either engage in "carry trade" activities (borrowing at near-zero interest and then moving the money overseas to earn a decent yield elsewhere for easy profits) or they stash the funds to offset their ongoing losses in defaulted/impaired portfolios...

Charles Hugh Smith; Contrarian Trade; decades; U.S. dollar.

Culture of Life News Tue 2010-04-06 10:23 EDT

Ireland And US Will Be Devoured By Derivatives Beast

Elaine Supkis

The banking mess in the West continues. It has rather deep roots. That is, we decapitalized our own banking system long, long ago. The fix for this was to create a fake banking system with virtually no real capital reserves at all. This was possible thanks to the floating fiat currency created when Nixon suddenly cut the gold standard back in 1971. By 1987, the banking collapse was tremendous during a deflationary time that followed a hyperinflation era. This fix created conditions that caused the near-total collapse in Western banking...So far, governments in the West are being bailed out by Asia. And this is being done so Asia can continue to rapidly expand its own industrial base. This savage business gets worse and worse over time due to the self-feedback system of this debt expansion: you get more credit from export powers via letting them export even more to your own home base. So as capital vanishes, the need for debt shoots upwards and the system continues to get more and more unbalanced...Sure, we have little inflation except in important commodities but this is due to the Goddess of Zero slashing away at the mountain of debt, using the default tool to fix this mess in a very brutal way. Unfortunately, the bankers still control our `democracy' so they are moving all their losses onto our books and far from things going to zero, it is actually heading towards infinity: infinite debts owed by the taxpayers who want to continue stupidly cutting taxes while increasing credit based on virtually no capital at all! Sheesh.

Culture; Derivative Beast; devouring; Ireland; Life News.