Archive for May 17th, 2012
Mr. Tsipras says that, if push comes to shove, Greece can manage on its own. By not paying its debts, the country will have enough cash to pay its workers and retirees, he says. He also proposes cuts in defense spending, cracking down on waste and corruption, and tackling widespread tax evasion by the rich.
“Whatever we do, things will be difficult. But it will also be difficult at the same time for all of Europe because the euro will collapse” if Greece’s funding is cut off, says Mr. Tsipras. He adds that both sides should step back “before we reach that point” and find a “European solution.”
Now you’re screwed Christine Lagarde, Merkel and the various ECB wonks. They figured it out over in Greece.
You have crap cards and Tsipras has a Royal Straight Flush.
Now he may be lying, but if he’s not he knows that he can pay the workers and retirees — if he walks on the debt payments.
This means he holds the trump hand. He can operate internally and tell you all to stuff it. And assuming he’s telling the truth and really has run the numbers, the ECB, Merkel and the rest of the Eurozone is stuffed on trying to force anything down Greece’s throat.
He also wants to nationalize the banking system. Now, if he goes further and forces a “One Dollar of Capital” standard for all banks inside Greece, then the game-playing stops but so does the systemic risk — inside Greece.
Now what’s left for the rest of Europe? They’ve got a problem — a big problem. By nationalizing the banking system he flushes the private parties that would otherwise play “hand grenade” with the economy and government.
This doesn’t mean that Syriza won’t screw it up, of course. He might.
But it leaves the door open to solve the problem and stabilize the banking and monetary system in Greece going forward.
It’s about damn time.
Christopher Whalen is a Senior Managing Director of Tangent Capital Partners in New York City. Christopher is co-founder and vice chairman of the board of directors of Lord, Whalen LLC, parent of Institutional Risk Analytics, the Los Angeles based provider of bank and company ratings, custom analytics and consulting services.
There’s dumb and then there’s real dumb. This is in the latter category:
During the 2012 election cycle Democrats are positioning themselves as the “defenders of the middle class,” and Sen. Bob Casey Jr. is honing that message by attacking the top .001 percent of income earners, including Facebook co-founder Eduardo Saverin.
Along with NY Sen. Chuck Schumer, Casey is introducing a bill that would prevent U.S. citizens from renouncing their citizenship in order to avoid taxes.
Good luck Senators.
People with enough money to care about this also won’t care about your bill. They’ll leave, take their money with them, and never come back. You can chuckle about how “you got them” but the truth is that they got you, and all of America.
There’s a point where people get what is commonly called “fuck you” money. As the name implies it enables them to say exactly that to anyone they disagree with and who pisses them off — including petulent little Senators and their petty games. Facebook’s co-founder has no reason to come back into the United States, and you can’t reach him beyond our borders, so what I expect you’ll see is a giant middle finger erected in your direction — from Singapore.
There is no material revenue impact from this bill that will be forthcoming. There will, however, be a capital drain that will accelerate and harm America.
And when it does, it will be your fault.
The bank runs that we are watching right now in Greece are shocking, but they are only just the beginning. Since May 6th, nearly one billion dollars has been withdrawn from Greek banks. For a small nation like Greece, that is an absolutely catastrophic number. At this point, the entire Greek banking system is in danger of collapsing. If you had money in a Greek bank, why wouldn’t you pull it out? If Greeceleaves the euro, all euros in Greek banks will likely be converted to drachmas, and the value of those drachmas will almost certainly decline dramatically. In fact, it has been estimated that Greek citizens could see the value of their bank accounts decline by up to 50 percent if Greece leaves the euro. So if you had money in a Greek bank, it would only make sense to withdraw it and move it to another country as quickly as possible. And as the eurozone begins to unravel, this is a scenario that we are going to see play out in country after country. As member nations leave the eurozone, you would be a fool to have your euros in Italian banks or Spanish banks when you could have them in German banks instead. So the bank runs that are happening in Greece right now are only a preview of things to come. Before this crisis is over we are going to see bank runs happening all over Europe.
If Greece leaves the euro, the consequences are likely to be quite messy. Those that are promoting the idea that a “Grexit” can be done in an orderly fashion are not being particularly honest. The following is from a recent article in the Independent….
“Whoever tells you a Greek exit would be no big deal is an idiot, lying or disingenuous,” said Sony Kapoor of the European think-tank Re-Define. Economists fear that a disorderly exit would prompt a huge run by investors on Spanish and Italian debt, forcing those countries to seek support from an EU bailout fund, which, with a capacity of just €500bn, is widely regarded as too small to cope with those pressures.
A Greek exit from the euro would not only result in a run on Spanish and Italian bonds, but it would also likely result in a run on Spanish and Italian banks.
If Greece is allowed to leave the euro, that will be a signal that other countries will eventually be allowed to leave as well. Nobody in their right mind would want their euros stuck in Spanish or Italian banks if those countries end up converting back to national currencies.
Fear is a powerful motivator. If Greece converts their euros back to drachmas, that will be a clear signal that all euros are not created equally. The race to move money into German banks will accelerate dramatically.
And a Greek exit from the euro is looking more likely with each passing day. Even the IMF is now admitting that it is a very real possibility….
Christine Lagarde, head of the IMF, warned she was “technically prepared for anything” and said the utmost effort must be made to ensure any Greek exit was orderly. The effect was likely to be “quite messy” with risks to growth, trade and financial markets. “It is something that would be extremely expensive and would pose great risks but it is part of options that we must technically consider,” she said.
Meanwhile, banks in other troubled European nations are already on shaky ground. The Spanish banking system is an absolute disaster zone at this point and on Monday night Moody’s downgraded the credit ratings of 26 Italian banks.
The situation in Italy is especially worth keeping a close eye on. As Ambrose Evans-Pritchard recently noted, things are not looking good for Italy at all….
Italy’s former premier Romano Prodi said the EU risks instant contagion to Spain, Italy, and France if Greece leaves. “The whole house of cards will come down”, he said
Angelo Drusiani from Banca Albertini said the only way to avert catstrophe is to convert the European Central Bank into a lender of last resort. Otherwise Italy faces “massive devaluation, three to five years of hyperinflation, and unbearable unemployment.”
So what can be done about any of this?
Well, there is actually a lot that could be done if politicians in Europe were willing to think outside of the established global financial paradigm.
The truth is that Greece could solve their current financial problems in four easy steps. They would have to be willing to stick it to the rest of Europe and to risk being blackballed by the international community, but it could be done.
The following is my prescription for Greece….
1) Default on all debts.
2) Leave the euro.
3) Issue drachmas that are debt-free and that do not come from a central bank. Instead, have the Greek government create them and spend them directly into circulation.
4) Enjoy a return to prosperity.
In such a scenario, the Greek national debt would no longer be a problem, the Greek government would never have to borrow any more money and austerity would no longer be needed.
Yes, inflation would be an issue with the new currency, but a bit of inflation would be a walk in the park compared to the horrible economic depression that Greece is experiencing right now.
And once the Greek economy was growing again, it would certainly be possible for them to make the transition to “hard money” if they wanted to.
It is imperative that we all understand that just because the global financial system works a certain way today does not mean that it must always work that way.
Today’s lesson that you should have derived from your elementary and middle-school math is served….
Let’s recap first.
GDP = C + I + G + (x – i), where “C” is consumption, “I” is investment, “G” is government spending and (x – i) is net exports.
GDP must be bought with something, and that “something” must either be money or credit. Since each “unit” of money or credit “turns over” in the economy some number of times in a year, and the unit of time in GDP is a year, we have:
GDP = ((M + C) * V), where “M” = money (earned output from personal production), “C” = credit (a promise to produce tomorrow) and “V” = Velocity (number of times the “M” or “C” turns over.)
Now let’s look at “M”, or “money.” We think of “money” as cash, but in fact “M” is a subset of something larger, otherwise known as “wealth”, or “W”. Wealth is that which you’ve previously earned and retain. “M” is that which you can immediately dispose of and is a subset of “W”.
There are two forms of “C”, or credit. “C” either comes into existence because you sequester some of your “W”, or it comes into existence without such a sequester.
When you take a loan backed by collateral you are making liquid current wealth. In doing so you post as reserve something you hold as wealth. This is not inflationary for that reason — you withdraw from the market the potential use of that wealth during the time the loan is outstanding by posting it as security.
But when you have unsecured credit outstanding that is pure monetary inflation because you posted exactly nothing against it other than your word you will pay, and that has no wealth value (it is “on the come” that you will earn wealth tomorrow.)
All this should be clear by now if you’ve been following these discussions for a while.
Now let’s talk about what happens when GDP declines.
The common rubric from the Keynesians is to “print more money!” and “spend in deficit!”, which is the emission of unbacked credit into the system.
This is in fact exactly mathematically backward.
Remember that GDP = (( M + C ) * V)
Therefore, if GDP declines since “M” is a subset of earned wealth it cannot decline. You therefore have exactly two things you can do — you can reduce “V” (which can only be indirectly controlled — for example you could raise bank reserve requirements) or you can withdraw “C”.
If you don’t then the people have the effect of inflation, as their wages do not go up (if anything they go down during a recession!) but since GDP declines and the equation must balance there are more units of “C” or “M” required to buy each unit of GDP!
That’s destruction of your purchasing power and it is exactly what must, mathematically, happen if the government engages in “pump priming” and other similar stupidity!
It’s exactly backward folks!
Worse, history proves I’m right. In 1920-21 we had an extremely sharp deflationary recession. Rather than “prime the pump” The Fed (which existed at the time) raised interest rates, thereby constricting “C” and the government balanced the budget, therebyremoving the excess “C” emission it was involved in.
What happened? The economy cleared the excess capacity and employment recovered within 18 months, with the posting of the largest y/o/y industrial production gain ever in the history of the nation.
The Keynesians are wrong, Obama is wrong, Romney is wrong, Johnson is wrong, Bernanke is wrong, Krugman is wrong and the basic mathematics that everyone agrees upon, if you bother to look at them, prove it.
Mathematics just are. The fundamentals of mathematics present truth, whether you wish to admit to them or not. Pi = 3.141592654…. no matter what you may declare. 2 + 2 = 4, irrespective of what you declare. And GDP = (( M + C ) * V), andmust, because every unit of GDP must be bought with something, and all of those “somethings” are either a unit of money or credit.
These people therefore are not “wrong”, they’re either incompetent or intentionally screwing you.
More to the point, no candidate or politician who takes a position contrary to this mathematical fact is fit to hold office as he has announced his prior intention to steal from you.
Once again, the practices of the “Too Big to Fail” banksters bring the financial money machine to the brink. The J.P. Morgan derivative losses and trading gambles by their “London Whale” demonstrates business as usual in the murky world of risk distortion. Even the vexing progressive Robert Reich makes an accurate assessment for breaking up the big banks and the resurrecting of Glass-Steagall.
“Word on the Street is that J.P. Morgan’s exposure is so large that it can’t dump these bad bets without affecting the market and losing even more money. And given its mammoth size and interlinked connections with every other financial institution, anything that shakes J.P. Morgan is likely to rock the rest of the Street.”
Since then, J.P. Morgan’s lobbyists and lawyers have done everything in their power to eviscerate the Volcker rule — creating exceptions, exemptions, and loopholes that effectively allow any big bank to go on doing most of the derivative trading it was doing before the near-meltdown.”
The prospects for constructive oversight and judicious safeguards on the money center banks; while, desperately needed, are highly unlikely for enactment. The existing administrative regulation is more about process than accountability.
The notice - S.E.C. Opens Investigation Into JPMorgan’s $2 Billion Loss, admits to a limited scope – “Regulators are investigating potential civil violations”.
“An important avenue for the S.E.C. investigation, the people said, is the firm’s accounting methods relating to the trades. Investigators could take a close look at a measure known as value-at-risk. The company disclosed earlier this year that it changed the way it calculates the metric, which may have masked some of the risk surrounding this trade. On a conference call Thursday, Mr. Dimon said the firm had reverted to the old way of measuring value-at-risk.”
The sociable regulatory atmosphere that turns the revolving door relationship of Wall Street and government regulation is so chummy that only insignificant fines are levied, when the major money center banks gets caught with their hands in the cookie jar. Earnest and comprehensive restructuring of the financial system is impossible as long as the banksters dictate economic policy to their favorite legislative protégés.
Fox News identifies the inadequate measures of legislation heralded as a response to prevent future bank bailouts.
“Enhanced oversight of derivatives was a pillar of the 2010 financial overhaul law, known as Dodd-Frank, but the implementation has been delayed repeatedly and will not take effect until the end of this year at the earliest.”
Both Senator Dodd and Congressman Frank took their retirement after the passage of this banker friendly diversion from reinstating a total separation of commercial banking from speculative investment banking swap instruments.
J.P. Morgan Chase, the dominating financial house behind the Federal Reserve, prescribes a coordinated government policy in every political administration. Goldman Sachs best known for supplying senior treasury officials, as Morgan keeps herd on the Fed’s Open Market Committee.
The Washington Times publishes an article, Avast, Wall Street: At J. P. Morgan, there be whales!, and describes practices in the pirate culture that ignores any reform or institutional restraint.
“From 2008 onward, taxpayers have been bailing out Jamie Dimon’s J.P. Morgan, along with Citibank, Bank of America, etc., etc., because they’re “too big to fail.” And here goes JPM four years later indulging in the same activities with the same abandon that caused at least two of their major peers to fail in 2008.
“The London whale” and his ilk have a distinctly buccaneering attitude out there that should have been tempered by the events of 2008 and the following years. But they haven’t learned a thing, apparently.”
Even a casual observer of the unstable international banking environment, knows that the banks game the system at every opportunity. The certified cynic does not need additional proof that the central banks are more important in shaping an unending economic crisis that, favor the “Too Big to Fail” money banks, than governments. If the federal government can enact the Foreign Account Tax Compliance Act to close the door on offshore banking accounts, in theory meaningful revamping of commercial and investment banking should be possible.
Notwithstanding, in practice the banks refuse to allow legislation that strips away the risky trading wagers that contribute to obscene short term paper gains, while sticking the taxpayer and government bail outs when losses accrue.
Mr. Reich continues with a valuable insight on just how the fiasco operates.
“And now — only a few years after the banking crisis that forced American taxpayers to bail out the Street, caused home values to plunge by more than 30 percent and pushed millions of homeowners underwater, threatened or diminished the savings of millions more, and sent the entire American economy hurtling into the worst downturn since the Great Depression — J.P. Morgan Chase recapitulates the whole debacle with the same kind of errors, sloppiness, bad judgment, excessively risky trades poorly-executed and poorly-monitored, that caused the crisis in the first place.”
Is it possible to save the international financial system from its own greed and high risk betting patterns? From all empirical evidence and from the best business advice available, chasing the debt bubble in an attempt to make computer-generated returns is a fool’s mission. Presently, profits clear depositing banks because governments devalue their currencies and pump fresh liquidity that add to the balance sheets of money-centered banks, to keep them solvent by increasing accumulative debt.
Breaking up the oversized behemoths because whales are feeding on a red tide of poison is the rational response to continued excess. Simply put, governments are forfeiting their sovereignty to banking ministers who are beholden to the fractional reserve central banking model.
Since it is a matter of time before a financial crisis becomes uncontainable, the judicious alternative is to abandon the entire premise that banking is a debt created scheme. Any discussion that rejects this axiom is doomed to failure. Coherent oversight means designing a financial system that restricts speculation, leverage and mad risk by requirements of elevated secured capitalization.
James Hall – BATR