Monday, June 1, 2015

Getting Bank Lending, Capital Flight, and Target2 Payments Right

Hans Werner Sinn evidently believes if you say something false enough times people will believe it is true.  He has written an article in which he again demonstrates he does not understand how banks lend money, what constitutes capital flight, and that Target2 credits are not financing.

His misunderstanding of Target2 payments is many years old.  If you want to understand Target2 payments and how they work and function, you only need to read Karl Whelan.  Target2 credits do not create financing for the countries with Target2 credits.  Capital flight is not created by taking out a bank loan and buying assets in a foreign country (read Whelan).  In Greece you see foreign businesses taking money out to insure business liquidity, in the past wealthy Greeks have transferred money out but Greek Tax authorities are going after much of that money, and you do not see  lines of Greek citizens lining up at banks to withdraw money in fear of capital controls even if they could afford a mattress under austerity to hide the money.  Deposits are decreasing in Greece.  However, the problem is austerity and the demands of the Troika to suppress democracy, make loan payments which require more loans, and further destroy the Greek economy and people.

Bank loans are made on the basis of profitability and solvency.  When a bank loans money, it creates a credit and debit of equal amounts which has no effect or dependence on the bank's reserves.  A very recent Bank of England working paper acknowledges this despite the misconception of how banking works by most of the public and some economists.
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But Hans Werner Sinn will just say it again and again and again: damn factual information.

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Chicago's Financial Dance of Veils

Chicago's pension funding problems and recent credit rating downgrade from only one of the three credit rating services has caused some salesmen who are also bloggers/commentators to try to work a fear frenzy that Chicago will go bankrupt and provide them with willing victims/clients.  In fact, Chicago's bond auction last week was significantly over subscribed providing a lower yield.

While the situation is serious and in need of fundamental restructuring of current bonds and the funding process, Chicago is not likely to go bankrupt.  The Illinois General Assembly is currently considering two bills: one would allow a Chicago casino with the profits going towards the pensions but the bill is being held and the other which allow a five year slow down in pension payments has, as of Sunday, passed both houses.  Chicago pension funding costs were going from approximately $300 million to approximately $840 million next year, but the legislation would decrease next year to approximately $619 million with annual increase each year (but less than current law) until 2020 when payments would be calculated to meet 90% full funding by 2055 (15 years longer than current law).  This is just punting the ball down field to a future date.

Kristi Culpepper, writing as munilass, has written three excellent posts which explain Chicago's situation, credit rating analysis, and the municipal bond market.

The first was how Chicago has used financial engineering to paper over its extensive budget problems.  One of the positives of Chicago's bond auction last week was the beginning of the necessary process to convert variable interest rate bonds to fixed interest rate.

The second details shopping for ratings and the insolvency of the Chicago school system.

The third evaluates Chicago's fiscal emergency and the quality of credit analysis.  One issue she discusses is the relatively low effective residential and commercial  property tax rate in the city of Chicago compared to other Cook county municipalities.  Chicago should be looking at the property tax base and optimal taxation, but they are probably not familiar with the economic work of Frank Ramsey.  Additionally, there are some politicians in both parties in Illinois who want to freeze property taxes.

If you are looking for a current analysis of Chicago and its municipal bond problems, you need look no further than these three articles by Kristi Culpepper (munilass).

The Chicago problem precedes current Mayor Rahm Emanuel who, despite is "experience" in finance, has not substantially helped the situation other than to ask for bailouts.  The failure of the city of Chicago to properly fund its pensions over the years and put off payments until the problem becomes a potential crisis (not to mention the State of Illinois doing the same inadequate delayed funding with the worst funded pension systems of any state).

All of this a financial dance of veils.  What happens when the veils fall?  Chicago had better be in better fiscal shape.  And they can sell only so many parking meters and skyways.  How about the El, subway, bus system, and ....?



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Yves Smith Interview and My Podcasts

I have updated the Yves Smith interview post from 2010, because the radio station link had gone bad.

Here, also, is the link to the Yves Smith interview and my other radio shows as podcast archived (at least the ones not lost by the radio station).

Yves Smith

Robert Carlson

2010 Shows

 2009 Shows

2008 Shows

2007 Shows

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Bad Radio Interview Links

     It has been brought to my attention that the links in several past posts in which I was interviewed on radio shows have gone bad.
      I brought this to the attention of the radio show host.  He has deleted all of his past professional work.  At his suggestion, on 26 March 2015, I provided 18 dates of appearances on his two radio shows.  If he did not create a database, it would be difficult for him to provide any podcast which I could download and store on the web.  I have heard nothing.
     I do not know why anyone would delete their past professional work, but, obviously, my professional courtesy of linking to his webpage for each interview was a mistake as I try to keep my history documented.
     The interviews made good radio, because, while the host and I share many similar concerns, we do not agree on economics.  And I was consistently right.

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Friday, August 31, 2012

Jobs, Scandals, Fed, & Global Economy: Radio Interview

On August 4, 2012, we discussed jobs and unemployment in the United States, the Fed and auditing the Fed, the Libor Scandal and how financial fraud by banks is not prosecuted in the United States but fined making it a cost of doing fraudulent business, and the general economy in the United States and the world on Saturday Session with Bishop.

Here is the podcast of the interview.

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Friday, August 3, 2012

Kicking euro IED Down the Road & Global economy: Radio Appearance July 7, 2012

In a radio appearance on Saturday Session with Bishop on July 7, 2012, we talked about how the eurozone is no longer kicking a can down the road but it is kicking an IED down the road and when it explodes it will have global repercussions.

We discussed the Libor scandal and the banks involved.

We discussed US unemployment and how the Fed's warning on the "fiscal cliff" is not just about revenue but the need of the government to spend if continuing high unemployment is to be lowered.

We discussed how the Fed minutes from the preceding month which would come out in the week of July 9th would not show any inclination towards QE3 and would show concern about the potential economic impact of the eurozone currency crisis blowing up and the continuing threat of US fiscal contraction (the need for government to spend to address the unemployment problem).  And we were right on as the minutes show.  The Fed FOMC meeting statement in July continued its reluctance to do anything which might place it in a political cross fire during an election year.

Here is Part 1 of the interview.

Here is Part 2 of the interview.

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Saturday, June 16, 2012

Eurozone, Chinese banks, JP Morgan, and Facebook: Radio Interview on May 26, 2012

On Saturday Session with Bishop on May 26, 2012, we talked about the predictable unfolding of a currency crisis in the Eurozone, the growing presence of Chinese banks in the United States, the JP Morgan trading loss update, and the problems of the Facebook IPO:

podcast

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