Economy & Market week ended 12/25/2010

Here is a draft post from 2010 early 2011 which did not get published in which the dysfunctionality of  the eurozone was so obvious and yet so ignored today.

For a Holiday week, a tremendous amount of information flowed and we are going to cover the eurozone, Ireland, Germany, bonds, the euro, other countries like the UK, China, the new tax bill in the U.S., the mortgage mess, austerity in U.S. municipalities and States, unemployment, sectoral balances, the effect of home prices on small business, and the market and investing.  You should find this material pertinent and thought provoking.

Michael Hudson in discussing how financial interests determine sovereign policy argues that bankers are getting politicians to siphon off public money bail bankers out of their mistakes at the expense of capital formation and living standards.  Latvia is an example of how the economy has been subjected for the purposes of bankers just as if it has been militarily defeated and occupied.  Germany is serving its bankers and not the people; Germany needs to adopt more progressive tax and financial policies.  Hudson sees the current crisis as a sovereign crisis --- who is in charge and responsible for taking care of the citizens --- not a true debt crisis.  Banks should be forced to realistically value assets and debts on their books.  There is no need to wreak economies with financial asset stripping.  Debt needs to be restructured with the help of a progressive tax and a true central bank which can help finance governments.  He wants to see taxes shifted back on to land and resource rent as well as financial and capital gains.  He wants to de-privatize basic utilities and natural monopolies to take control from rentiers and prevent Europe from being turned into a tollbooth economy.

Edward Harrison acknowledges that eurozone internal devaluation and austerity is not a politically sustainable solution and there are only three possible outcomes in his opinion: monetization, default. or breakup.  Charles Wyplosz sees the problem as a lack of alternative options planning allowing decisive action, because the ECB has been consistently late to help.  Wyplosz remains concerned about debt and possible default.  He sees six questions which need to be addressed: can eurozone member nations face down the markets, is there a strategy for avoiding defaults, is there a plan to organize defaults if they occur, can a first defaulter be ringed to avoid contagion, if sovereign default is a possibility should banks also need to fail, and is ECB independence threatened by its need for more capital?  Daniel Gros finds the debate in the eurozone over the structure and financing of a stability mechanism self-defeating and likely to promote a festering situation which does not solve the lack of growth in the countries affected and the increasing costs to refinance with rising interest rates.  Geoffrey Underhill sees the problem as fully understood from the beginning of the euro as a lack of federalism.  The eurozone needs to act as a federal union consistent with the primacy of Germany as established by the structural formation of the euro and the ECB needs to proved guarantees to the "provinces" "... and adequate internal resource transfers to compensate for the fully predictable adjustment asymmetries in the absence of intra-Eurozone devaluations."

Is Germany, in demanding at the European Summit that "... there would be no fiscal transfers to troubled economies, and that the best way forward is further fiscal consolidation, along with plans for the private sector to share in any losses after a sovereign default", acting in its best interests?  Gavyn Davies believes Germany is not acting in its best interests.  There is a "damaging effect of a permanent increase in the interest rate spread of 1 per cent over Germany fully offsets the beneficial effects of reducing the budget deficit by 1 per cent of GDP for the troubled EU economies."  He believes the strategy emerging from the Summit will not work and the stronger EU economies could make a big difference by providing the weaker economies with liquidity in the form of lower interest rates.  Davies uses a recent paper by Lupton and Mackie to demonstrated the arithmetic to show Germany cannot continue to assert its creditor nation policies which will not reward these weaker nations and demands they suffer the sanctions befitting their debt and not place German banks on the precipice of shared suffering in sovereign default by any one of these weaker nations.

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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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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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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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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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Eurozone, Bankia, Chinese Banks in US, and JP Morgan: Radio Interview on May 12, 2012

On the Saturday Session with  Bishop on May 12, 2012, we discussed the mounting problems of the Eurozone as exemplified by the imminent problems in Spain's banks as exemplified by Bankia, the effect on currencies, and the improper trading losses amounting to at least $3 billion by JP Morgan Chase bank:

podcast

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Radio Interview 2/25/2012: Greek Bailout, Europe, and Federal Reserve QE3

We were interviewed on Saturday Session with Bishop about Greece and the proposed bailout and how it forces Greece to relinquish its sovereignty.  The details of the proposed bailout, which would include new restrictive laws, more pension reductions and spending cuts, the prohibition against any Greek political action contrary to the bailout, and the requirement to make debt payments before any public spending in Greece would be allowed, and the need for resolution prior to March 20th, which is the date on which Greece must pay maturing debt.  Greece is already in technical default.  We discussed the imposed austerity programs and how they are making Greece's economy even more unsustainable.  We discussed how Greece will inevitably face the choice of default within the euro or default with abandonment of the euro which is a choice between economic slavery as a colony of the eurozone (Germany) with foreign EU/ECB technocrats running the Greek government or the harsh new beginning of freedom with a new sovereign currency which could devalue up to 80% after a fixed exchange from the euro to the new currency and the redenomination of  all Greek public and private debt into the new currency and the possibility of economic growth.

While it may appear that the United States has decoupled from the developing storm of Europe, the consequences of a currency union without a fiscal transfer mechanism, recession in Europe, eventual Greek default, and the pressure on European banks and other eurozone peripheral countries will have global consequences on financial liquidity and the world economy including the United states and China.

We also went over the minutes of the last Federal Reserve Open Market Committee (FOMC) meeting in which most members are not inclined to initiate a QE3 unless disinflation reasserts itself and economic growth weakens in the future.

An MP3 of the interview is here.  The European situation and the tragedy of Greece have been unfolding in very predictable and obvious fashion for a few months.  Even Wolfgang Munchau has finally acknowledged that Greece needs to default.

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