Archive for June 13th, 2012
German Chancellor Angela Merkel now admits that government borrowing is the problem. Part of the 100 billion Euro Spanish bailout is that Italy is loaning Spain at 3% but having to borrow it on the open market at nearly 7%. Cyprus quietly announced that it needed a bailout because it is exposed to Greek debt. Italy’s oldest bank, BNI suspended withdrawals a week ago. One town in Ireland is accepting the old Irish Punt — the debt-free Irish money before the Euro took hold; and Nigel Farage blasts the European Parliament and calls the Euro experiment the Titanic on the rocks with not enough lifeboats.
Is it one minute to midnight in Europe?
The failure of German public opinion to grasp the dire state of affairs in Europe today is inviting a repeat of precisely the crisis of the mid 20th century that European integration was designed to avoid.
Pray tell then, why is it that all these banks in Europe were permitted to issue credit without a single thing backing it beyond the belief that a new sucker would appear and take it off the issuer’s hands, thereby perpetuating a Ponzi Scheme of historic size?
I mean, it’s not like the consequences of this on an arithmetic basis weren’t known to everyone. Stable economic conditions require that you not do that, or if you do allow it that the people who do it (1) can’t counterfeit the sovereign’s currency and (2) can’t become so intertwined in the financing of governments and major economic centers that their failure becomes an existential threat to your existence.
But both of those things happened, didn’t they? And why? Because the governments and people sat back and allowed it.
What is the situation today? Europe’s periphery is in depression. According to the IMF, gross domestic product will contract this year by 4.7 percent in Greece and 3.3 percent in Portugal. Unemployment is 24 percent in Spain, 22 percent in Greece and 15 percent in Portugal. Public debt already exceeds 100 percent of GDP in Greece, Ireland, Italy and Portugal. These countries, along with Spain, are now effectively shut out of the bond market.
Good. These nations lied to their people about what they could support and spend. They got caught. Now the pain comes. It is unavoidable — all we are arguing over is whether the governments will face the music and so will the citizens and banksters that were involved, or whether someone will try to shove it off on someone else.
The process of political fragmentation is also speeding up. In the last Greek elections, seven in 10 voters cast their ballots for smaller parties opposed to the austerity program imposed on Greece in return for two EU-led bailouts. Established parties are also losing out to splinter parties in Italy, where the comedian Beppe Grillo’s Five Star Movement has just won control of the city of Parma, and in Germany, where a maverick party called the Pirates is all the rage. Less frivolous populists now have substantial support in France, the Netherlands and Norway. This trend is ominous.
There’s nothing ominous about it. The people got nothing in Greece for their acquiescence. The banksters got all the loot, and the people got fucked. Royally, serially, repeatedly fucked.
Why should they stand for this? What they should do is rise and remove some heads. Peacefully if possible, the old-fashioned way if necessary. Peaceful political process only works until the political process fails and is co-opted and stolen by the very people doing the looting. Then it’s not a representative government anymore, it’s a jackbooted fascist dictatorship and the people have every right to overthrow it, exactly as was demonstrated here in The United States in 1776.
Men and women tend to suffer these ignobilities for far longer than they should, and this is probably a good thing on balance, as resolution when a dictatorship has taken over your nation is almost always messy and fraught with the highest of risks. Nonetheless, if this is what has happened the solution is singular and clear to anyone who thinks clearly.
What we are left with as a question at this time is whether or not this has occurred.
The way out of this crisis seems clear.
First, there needs to be a program of direct recapitalization — via preferred non-voting shares — of euro-zone banks both in the periphery and the core by the European Financial Stability Facility (EFSF) and its successor the European Stability Mechanism (ESM).
The institutions that lent money that cannot be paid back must take their losses. If they cannot then their stockholders and bondholders must be zeroed if necessary to cover depositors, and any alleged “superior” status on derivative instruments must be voided. In short, depositors must be senior to all; the rest of the capital structure falls where it does. And fall it will.
That’s fine. These nations should, at the same time, both enact One Dollar of Capital for all institutions going forward and prosecute all banksters who blow sky high for effectively counterfeiting the currency, because that’s exactly what they did. Put them all in prison.
Of course, over time, sound banks that restore capital through earnings would be able to buy back the public preferred shares. So this partial nationalization would be temporary.
There is no such thing as a “sound bank” that has lent out more than the sum of its collateral taken against loans and its capital. Such a bank has practiced an effective fraudulent device in that it has issued credit fungible with currency that it knows at the time of issue cannot be repaid in the present tense. It therefore haseffectively naked shorted the currency.
This is a pyramid scheme as indefinite exponential growth, for any positive growth rate, is arithmetically impossible. All we are arguing over is when, not if, the scheme will collapse.
Pyramid schemes are broadly illegal and must be prosecuted. If the government will not do so then the government must be replaced with one that will.
Finally, given the unsustainably high public debts and borrowing costs of certain member states, we see no alternative to some kind of debt mutualization.
None of the nations who are in the Euro agreed to this. Committing public frauds for years so as to force someone else to rescue you via “mutualization” and “integration” of political systems is tantamount to the taking of political power by force from the people and giving it to those who are not elected.
This is commonly known as an act of war and is full and fair justification for those who have this imposed upon them to take arms and repeal the literal subversion and replacement by force of their political process.
Giving up some sovereignty is inevitable.
No it’s not — those who committed frauds can be prosecuted and imprisoned instead. This is the correct course of action.
Ultimately, as Chancellor Merkel herself acknowledged last week, monetary union always implied further integration into a fiscal and political union.
Perhaps in Merkel’s mind. But she does not speak for the other nations and their people. Simply put, she is not Fuehrer over Europe, and if this is attempted I expect that what Roubini “fears” will come to pass — because it damn well should if Germany, or anyone else, tries to impose “political union” by fraud, threat, coercion or, most-unfortunately, force.
The parasitic financial Elite don’t do any “work” in the sense of something beneficial for society, as no voluntary payment for their services exists.
If a parasite’s entire income is leeched from the productive, then isn’t their entire income a tax on those creating value? In this sense, the share of the parasite’s income which is carved off by the Central State as tax revenues is a secondary tax: the parasite’s entire income is a tax on the economy.
This distinction between legitimate wealth derived from value creation (think Steve Jobs/computer industry) and parasitic wealth skimmed from the productive (think Mitt Romney/investment banker) is the heart of Correspondent James B.’s insightful inquiry into the question: can the parasitic Elite be said to pay taxes at all, given that their income is itself a tax on legitimate wealth creation?
I’d like to add something to your recent essay Income Tax Solution: Apply Social Security Taxes to the Super-Wealthy. (June 1, 2012)I’m a former banking executive and I’ve had the opportunity to figure things out from the inside. (Emphasis added: CHS)
In the article it mentions the disparity between what the rich pay in terms of percentage of earnings for income tax compared to the middle class.
However, a substantial portion of the rich earn their income by co-opting the income of the middle class via money-printing / income suppression. They can do this by being in the loop for the “money printing” machine as the Fed manages the economy to benefit the connected Elite.
I think it’s underappreciated that the banking system and the financial system has been perpetually bailed out on a moment-by-moment basis by printing money to cover duration mismatch while the Fed has replaced transaction balances with credit – thus enforcing a spread for the benefit of the connected financial Elite, corporate CEOs, etc. This has been going on for decades with periodic accelerations of the bailout process due to mismatched duration excess (i.e. the Austrian Economics Business Cycle).
The middle class (the workers) put value into the currency by producing, while the money-printers take that value out (by dilution, and by lobbying with the value they’ve stolen). It is an organized, structured system of theft, and that includes VISA, etc. which are cash substitutes because cash has been replaced with credit transactions. No amount of taxes are ever “paid” by those rich, as all their income is stolen.
For example, quite a number of top banker CEOs have not paid any taxes in the economic sense, they are not productive (they are destructive), and that is true even if their 1040 says they pay “60%”. Someone else (a producer) paid their taxes … Money really is a “veil” in this case. It diverts from the truth.
Unfortunately, the legitimate rich are really hurt by this process, as they impart tremendous value and have that value taxed away. They are, in a sense, the justification for hitting the lower and middle classes, and they suffer particularly for it.
In my view, we should make all cuts and adjustments from the top down, starting with those institutions that destroy value (pretty easy, just let the market work and let the organizations fail), as that is where the problem lies, and there can be no recovery as the poor simply do not impart enough impact in this parasitic process to make the difference. In fact, many poor simply want a job, and jobs are hard to find as the impediments to working rise higher and higher with the necessity of rationing the spoils in a crony capitalist system.
A recent Levy research article noted the total support by the Fed for the banking system was 29 trillion dollars. While that is not direct cash infusion (with FNMA / FHLMC / FHA, and other back door programs) – there is simply no group in the U.S. with as much influence and welfare.
In other words, the connected insider Elite pay nothing at all in taxes – and in fact they don’t do any “work” in the sense of something beneficial for society as no voluntary payment for their services exists.
Thank you, James. That last line is profound: investment bankers like Mitt Romney don’t solicit voluntary payments for buying companies and reshuffling the assets to skim their parasitic siphoning of the wealth created by others.
If we understand the difference between parasitic wealth and real value/wealth creation, we can properly align the tax structure to reality: the tax on authentic wealth creation should be low, to encourage wealth creation and the employment (broad-based wealth creation) generated by legitimate value creation.
We must also understand that the Central State now protects and enables parasitic skimming as the primary function of the nation’s financial system. Thus the entire financial system is parasitic on the wealth of the nation.
Financial parasitic incomes should be taxed at 99%. If Mitt Romney reshuffles assets created by others and skims $100 million, 99% of that parasitic wealth should be returned to the nation via taxes. The parasite still gets to keep $1 million, more than enough to live well but not enough to buy the presidency, the Congress and the regulatory machinery of the Central State.
All those who claim the Mitt Romney/investment bankers are “creating wealth” are either terribly confused about value creation and capitalism, or they are lackeys/ apologists of the parasitic Elite.
If we cannot grasp the difference between parasitic wealth and legitimate value/wealth creation, then we are well and truly lost.
Charles Hugh Smith – Of Two Minds
I can’t argue with the logic (which is usually the case when it comes to Janet ;-))
When performing due diligence, investors consider capacity, capital, and character. Investors will develop a subjective opinion of character informed by their own standards and those of the society in which they live.
Oh, the three “Cs”? I thought that was dead and buried in the 2000s Janet? You mean it still matters?
Some hedge fund managers feel they are above appearances, if not the law. Some investors believe prostitution isn’t a big deal, too. But there’s a large cohort of investors that won’t go near a hedge fund manager with a reputation for using prostitutes.
What else could go wrong? If a prostitute is in a hedge fund manager’s apartment when he’s not home, what is she doing? Who else is she letting in? Does she have friends who are good at hacking computers? What if the hedge fund manager gets caught up in a legal sting? That could distract him from fund management for a while. Investors have a tough enough job performing due diligence without these potential problems.
After all, at least in most parts of the United States prostitution (for both the seller and buyer) is illegal. So is insider trading, incidentally, along with a whole host of other things.
And we don’t know of any hedge funds that have gotten caught doing any of those other things lately, do we? Oh wait….
See, this is the problem — you can personally disagree with the law barring prostitution. I can make a very cogent argument that the law is wrong — that it actually causes harm, because it drives the behavior underground, provides fuel for the “pimping” of women (which can and often does amount to slavery rather than consensual contractual behavior) and in addition tends to provide “extra vig” that is then exploited by various criminal elements that are all about violence and coercion instead of contracts for service.
But the fact remains that if you’re willing to break one law you might be willing to break other laws — including laws that screw people in a non-sexual way.
Is this a fair evaluation?
You bet it is.
From Professor Tim Duy: Is Anyone Answering the Phones at the ECB?. Excerpt:
It is never a good sign when the monetary authority – the lender of last resort – is no longer willing to buy your bonds. If the ECB sees only risk at these rates, why should private investors jump into the pool?
Honestly, I find it incomprehensible to believe that the ECB will not soon come to the aid of Spain and Italy with additional bond purchases. Only the most irresponsible policy body would take such a risk. To not do so almost guarantees the destruction of the Eurozone and a deepening recession if not depression throughout Europe. They cannot possibly believe that fiscal and structural reforms will bear sufficient fruit in any reasonable time frame. Nor can they possibly believe that Spain and Italy can implement a IMF-type structural reform program in the absence of the competitive boost provided by currency devaluation.
Or can they? If they do believe these things – that they can do no more, the job is entirely on the shoulders of fiscal policymakers – then we all need to be afraid, very afraid. Because when the ECB fully abdicates its role as a provider of financial stability for the Eurozone, all Hell is going to break loose.
Once Greece leaves the Euro the ECB is bust as it has €444 billion in exposure to the bailed out countries.
Uh huh. This is exactly what I’ve been saying since this crap began.
There is no solution, here or in Europe, until governments accept that you cannot spend more than you tax!
That’s the beginning and end of it, and that these nations have played the deficit spending game, and that we have done so, for more than a decade “in size” does not change the essential truth of this fact. All you do by continuing to play that game is to make the eventual damage that must be absorbed by the economy bigger!