Posts Tagged ‘Bailouts’
For those who read the previous article on the topic of last minute chaos and confusion in Cyprus, and Europe, it will come as no surprise that the previously scheduled Monday bank holiday (akaGreen Monday) has been extended into Tuesday. So prepare to not be surprised.
The Cypriot cabinet has declared Tuesday a bank holiday, for fear of capital flight, and this may even be stretched to Wednesday, as depositors are certain to withdraw huge sums from the Cypriot banks after the haircut imposed.
Nicosia postponed from Sunday to Monday the tabling in Parliament of the bill including the measures for the Cypriot bailout – including a bank account haircut and a tax hike on interest and corporate earnings – but the European Central Bank insists on a rapid voting because there are already signs a domino effect will follow across European lenders and markets from Monday.
There is genuine fear of market unrest on Monday morning when stocks may crumble in the eurozone and bank accounts in other southern European bank may suffer.
Skai radio reported on Sunday that the Bank of Greece has sent between 4 and 5 billion euros to Cyprus in order to help Cypriot banks respond to cash requirements by their clients.
So, if the official name of the March 18 holiday was “Green Monday“, will the March 19th ad hoc holiday be called “Red Tuesday“? Inquiring minds want to know.
Since it seems that Parliament can’t manage to muster the votes, perhaps something a bit more instructive is in order. Like history and natural law, for example. Let’s go down the (reasonably short) list:
- Private property, including the privately-held funds of the people is, in fact, private.
- Taxation for public good is an accepted and necessary part of living in a society. However, putative “taxation” to bail out people who did irresponsible things, like gambling with other people’s money on Greek sovereign debt, is nothing other than theft to cover a bad marker at Vegas after someone loses. This is in fact felony, not taxation, and those who solicit or commit such felony deserve to be tried for treason and punished according to their guilt thereof.
- No legitimate government has a right to cross the line between taxation and theft.
- All legitimate governments obtain their power from the freely-given consent of the governed, and that consent may be withdrawn at any time.
If and when that consent is withdrawn those putative members of government have two choices — leave quietly and willingly to be replaced by those who will honor the four principles above or risk be deposed by force as the people always outnumber the government. Further, the people cannot be compelled to effort at anything approaching a sufficient level of output to cover government’s expenses once it finds itself trying to bail out the irresponsible or criminal with other people’s money, so it is not necessary that the people shoot or otherwise engage in violence — a work stoppage is sufficient to guarantee the government’s collapse, should the people choose to maintain it for a sufficient time.
However, history also says that most of the time the people will choose to hang, burn, shoot or loot either in concert with or in place of a general work stoppage.
Thus ends our history lesson for today.
Let’s see whether today rhymes with the past 5,000 years of recorded human experience.
That title is intentionally provocative.
The top five banks — JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. – - account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). In other words, the banks occupying the commanding heights of the U.S. financial industry — with almost $9 trillion in assets, more than half the size of the U.S. economy — would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.
There’s a problem with this, of course.
You didn’t consent to it.
The banks have effectively extorted this from you. They have taken it with literal threats of “financial Armageddon” and “tanks in the streets” if they do not get this subsidy, year in and year out.
And more to the point they level an even-worse implicit threat on a daily basis at Congress and the Administration — the literal destruction of the government’s funding, immediately and permanently, which has come about because the government is borrowing more than one third of every dollar spent.
The so-called “Primary Dealers” are the reason for this perversity. The Treasury Department and Administration, with the full knowledge and consent of Congress, has become a willing and intentional partner to this and you, the people of America, have and continue to take in the shorts.
Now $83 billion is, in the light of a $1 trillion annual deficit, not the biggest number out there. But I remind you that the sequester, which Obama is now having an apoplexy over despite being the individual who proposed it, has an impact this fiscal year that is less than the amount stolen from you via this subsidy.
In other words, but for this forced transfer of your money to these banks, (1) they would not make a profit but would pretty-much break even, so they would not go out of business, and (2) the sequester would be completely balanced out — its net cost would be very close to zero!
There are two gigantic scams in this nation that are bleeding it dry, and which no American should tolerate. This is one of them; in addition to the direct subsidy documented by Bloomberg there are indirect subsidies in the form of hundreds of billions in transaction volume that have passed through these firms under fraudulent pretense and yet which go unpunished, whether that be in the form of robosigning, money laundering or other crimes that you and I, the common man, would face indictment and prosecution over while these banksters simply pocket the loot.
The second, which I’ve been writing on for years in the Ticker in the “health-care system”, is now starting to poke its ugly head out in the mainstream media as well.
So here’s my question folks — where’s your threshold, politically and otherwise, for refusing to sit for these acts that, were you or I to engage in them, would land any of us in pound-you-in-the-butt federal prison?
I wish there was a cogent way to explain this point of view – a point of view that is distressingly common among market commentators and politicians – that didn’t resolve back to the title of this article. But…. there isn’t.
As of 2007, the Fed was unprepared for what was to come, though not mainly for the reason most commentators are highlighting. The initial reporting on the transcripts has focused on whether or not the Fed saw the financial crisis coming, and most find that the Fed did not. But the Fed also missed something much more important.
For all the attention the financial crisis gets in the story of the latest recession, it isn’t that important to understanding our current weak economy. The reason that more than 12 million people are unemployed, that workers no longer quit their jobs or get raises, and that economic prospects are dim for the foreseeable future, has to do with the financial health of consumers, not the health of Wall Street.
The article goes on to conclude…
Reading the transcripts from 2007 makes it clear that, even though it didn’t understand the extent of the problems, the Fed was looking at the financial system as the main source of concern. Households, suffering from the housing-bubble collapse, were a secondary priority. An economic elite more in tune with broader prosperity could have caught the severity of the recession earlier, and made a case for the demand-stimulating monetary policy needed to recover from it.
This is in fact pining for that which never was.
The simple fact of the matter is that since 2000, and to some extent even before then, the economy was floating on a false premise.
Look at the below chart:
From the late 1990s through 2007 there was anywhere from 2-6 times as much debt taken on in a given quarter as there was expansion in the economy.
There was no actual economic “growth” created through productive output – it was all financed through promises to pay tomorrow for hamburgers today.
In fact this pattern began in earnest in the early 1990s.
This is the “big scam” among writers and pundits when it comes to “doing more” and “stimulating the economy”; they all proceed from a false premise, that the problem is a transient lack of demand and if we simply add more stimulus economic response will come in the form of greater output and ability to pay.
The facts say that this is not what happens — and it is particularly not what happens when you lower interest rates and make borrowing cheaper. Instead, what expands is systemic leverage, or promising to pay tomorrow for hamburgers eaten today.
This was lampooned so many years ago, of course, by the cartoon character Wimpy who first appeared in the 1930s! It seems that in 1931 cartoonists were very much willing to lampoon the idiocy of the 1920s in terms of debt expansion, but we seem to have forgotten that lesson.
To make matters worse the government has dramatically raised the costs of hiring people. Obamacare, for example, has turned the employment world on its ear, especially when it comes to the lower end of the scale. How many 27-year-olds are about to get a nasty surprise when they are expelled from their parents’ health insurance and find that (1) their own policy costs $5,000 a year, (2) their boss has cut them to 28 hours a week (from 40) because at 30 they must provide that insurance, a gross pay reduction of 30%, (3) at $15/hour (a pretty good starting wage) they’re now grossing $21,000 a year and (4) they don’t qualify for any sort of “assistance” as they make too much money, but roughly 1/4 of their gross, before taxes, must either be paid for that “insurance” or they get fined for not having it!
Markets always force resolution of distortions that are foisted upon it. It may take time before it happens, as the madness of crowds is not to be underestimated.
But it always happens.
The problem we have in the economy today is that the so-called “demand” in the economy since the early 1990s was not real. It never existed in terms of organic output and thus trying to revert to what was is impossible, as what “was” didn’t really exist. That ever-increasing alleged demand was predicated upon an exponential series that ran to exhaustion in 2007 and collapsed.
It is the previous level of organic demand that is being returned to, which is much less than what which was allegedly “experienced” in the 1990s and 2000s — not the “previous” figures that were driven by debt leverage expansion.
The entire point of the policies of the Federal Government and Federal Reserve have been aimed toward refusing to recognize this mathematical reality and the economic outcome that must come from this adjustment.
The sooner we face reality the better the outcome will be.
But this is, and will remain, a relative term, for in comparison to the fraud-laced “prosperity” that was claimed for the 1990s and 2000s the factual economic output that is sustainable in real terms, less that fraud, is considerably lower than that which we previously “enjoyed” — just as Wimpy could not have possibly maintained his corpulent status but for his scamming hamburgers via bogus promises to pay for them next Tuesday.
Discussion (registration required to post)
AUSTIN, Texas—On the 13th floor of a sleek downtown office building here, the trading desks are manned overnight. The chief investment officer favors cowboy boots made of elephant skin. And when a bet pays off, even the secretaries can be entitled to bonuses.
The office’s occupant isn’t a highflying hedge fund but the Teacher Retirement System of Texas, a public pension fund with 1.3 million members including schoolteachers, bus drivers and cafeteria workers across the state.
It is a sign of the times. Numerous pension funds are still struggling to make up investment losses from the financial crisis. Rather than reduce risks in the wake of those declines, many are getting aggressive. They are loading up on private equity and other nontraditional investments that promise high, steady returns in the face of low interest rates and a volatile stock market.
Oh, they promise high, steady returns eh?
Sounds like Charlie to me. You know…. Charlie PONZI?
Now I have no quarrel with a private pension system that has no recourse to the public purse making such a decision, provided that the beneficiaries decided to go down this road and accept the risks from doing so.
But that’s not the case here, nor with any other public pension system. In these cases if the “strategy” winds up with the result that is mathematically inevitable over time (that is, it is not possible to obtain reward without risk, and the more reward you expect the more risk you take) then the taxpayer will be attacked to make up the difference.
The solution to this problem is quite simple – remove the backstop.
That is, go ahead and do what you want, but if you can’t pay down the road then the system goes into receivership just like anyone else who makes a bet that doesn’t pay off, and the pensioners take it in the ass.
If that’s an acceptable trade-off for the pensioners then this sort of arrangement is fine. That’s called the “free market” and is how things are supposed to work.
But there is no such thing as a free lunch, and there is utterly no argument that one can raise for this sort of arrangement where public employees are able to gamble with the taxpayers money – getting paid irrespective of whether their bets win or lose.
Discussion (registration required to post)
The very promise of permanent security dooms the economy to stagnation as complicity, avoidance of risk and passivity are incentivized.
Focusing on econometric data to make sense of our economic ills blinds us to deeper dynamics, for example, the Grand Tradeoff of risk and financial security.
We can visualize this as a seesaw: if financial security is the priority, then risk is avoided. If risk and innovation are rewarded, then security is off the agenda.
Contrast this ontological tradeoff with what Central States around the world have promised their populaces: rock-solid, permanent financial security via guaranteed mortgages, bank deposits, pensions, education and healthcare, and high growth to pay for it all based on ever-expanding innovation.
Sorry, developed-world people; you cannot have it both ways. If everyone is promised financial security, a premium is placed on risk avoidance and complicity with the Status Quo. Why risk failure and disorder for an unpredictable pay-off when “going along to get along” will reap guaranteed pensions, healthcare and an assortment of other entitlement goodies?
If you want growth, you must reward risk and innovation and foster a culture that accepts failure and low-intensity disorder as the norm. Promising financial security in this environment is promising the impossible.
That leads us to the deliciously perverse Grand Irony of the Grand Tradeoff: by fostering expectations of guaranteed financial security, you incentivize risk avoidance, which fosters a low-risk, low-innovation, low-growth economy that is incapable of expanding fast enough to fund all the grandiose promises of rock-solid security made to citizens.
The very act of promising financial security guarantees the promised security is illusory.
If you want a high-innovation, high-growth economy, you must reward risk and accept constant disorder and failure–the very antithesis of guaranteed financial security.
Risk cannot be eliminated, it can only be suppressed or transferred to others.This is the foundation of all three of my recent books: An Unconventional Guide to Investing in Troubled Times, Resistance, Revolution, Liberation: A Model for Positive Change and Why Things Are Falling Apart and What We Can Do About It.
In promising financial security to hundreds of millions of citizens, Central States have in effect claimed that risk–that the promises cannot be kept–has been eliminated. This is an ontological impossibility. Risk cannot be eliminated, it can only be pushed beneath the surface or transferred to others.
If it is suppressed by financial repression and intervention, it doesn’t vanish; it slowly builds up like tectonic pressures that are suddenly released in the financial equivalent of a massive, unpredictable earthquake.
If the risk is transferred to the system itself, then it will eventually bring down the system.
Promising financial security is also promising that risk has been systemically eliminated. This is the fundamental dynamic of the “social contract” that underpins societies and economies from Europe to Japan. It is a social contract constructed on an ontological illusion.
If risk is avoided, suppressed and unrewarded, the economy will stagnate and the costs of the promised financial security will crush it. If risk is embraced and rewarded, the resulting expansion is based on a high rate of disorder and failure. Security cannot be promised, because security is illusory.
The very promise of permanent security dooms the economy to stagnation as complicity, gaming the system, avoidance of risk and passivity are incentivized.
“There is no security on this earth; there is only opportunity.”
Charles Hugh Smith – Of Two Minds