Are ECB Target2 Balances Ever Risky?

Izabella Kaminska is a very talented and intelligent writer for FTAlphaville and I try to read everything she writes, because she makes you think.  I will continue to read what she writes.  When she wrote yesterday that ECB Target2 balances are a big deal, I was thrown for a loop and wondering what am I missing.  I even reached out to another financial and economic professional for a give and take discussion.

Kaminska cites the March BIS Quarterly which shows that Target2 balances have substantially increased as the result of the Asset Purchase Program but CDS spreads have remained stable.  She then concludes that the capital flight during the 2012 Greek crisis was a big deal which resulted in Target2 balances increasing and creating "financing" by Target2 credit National Central Banks, such as the Bundesbank in Germany.  She also concludes this was a failure of the transmission mechanism and cites a paper on the old Soviet Union's International Investment Bank in an attempt to draw a comparison of flows and a failure of the transmission mechanism.

I have written about Target2 twice in 2015 (here and here) and discussed it with economic and financial professional in the United states and other countries.  Additionally, as I have previously cited, Whelan published an excellent paper on Target2 and how it works in 2012.

I am going to try to keep this simple.

The stable CDS spreads with increasing Target2 balances show the Asset Purchase Program is working.  In fact Footnote 3 in the BIS March Quarterly cites the BIS November 2016 Quarterly which states, "The ensuing upward trend in TARGET balances largely reflects the settlement of these cross-border transactions by central banks and, therefore, does not signal renewed stress in financial markets."

Target2 credit balances are money created by the ECB and not by financing from the credit National Central Banks.  National Central Banks are only liable for losses at the ECB to the extent of their Capital Key ratio, which with Germany is 17.9973%.  With respect to the APP, National Central Banks are only exposed to 20% of any APP losses which would be distributed according to the NCB's Capital Key ratio. 

With respect to the study on the Soviet Union's International Investment Bank, its failure was from pricing, industrial capacity, governmental policy, access to international markets, and a weak Soviet ruble unsuitable for international trade.  It is an interesting study of a failure of the transmission mechanism.  However, the ECB and Target2 during 2012 demonstrates the success of a transmission mechanism.  While the ECB balance sheet shows spikes in 2012 and currently, they are from two different causes and both speak to the maintenance of financial stability. 

The IIB transferable ruble loans to Soviet Block countries creating foreign currency denominated debt for those countries has some similarity to every eurozone country having its debt in a foreign currency (euro), but the eurozone is a monetary union (without a fiscal transfer mechanism) with a central bank (ECB) exercising monetary policy.

When would Target2 levels constitute a risk?  Any risk to Target2 would be a risk to the eurozone itself.  This is why arguments against Target2 have been arguments against the credibility of the euro as a currency and attempts to argue the euro is on its way to a currency crisis.  While I have long maintained the euro is treading towards a currency crisis, the crisis is dependent on growing political risk fed by a defective monetary union without a fiscal transfer mechanism which uses destructive austerity to compensate and only creates negative economic growth, more unsustainable debt, and a growing eruption of political unrest which is swelling to possible political risks in Italy and France. 

People are suffering.  Greece, which is already at depression economic levels, is again facing demands for more destructive austerity from the EMU and has never recovered from the EMU enforced coup in 2012 or the monetary warfare waged by the ECB in 2015.  Spain has had a temporary government for so long it may have forgotten how a real democratic parliament functions.  Spanish and Italian banks need support.  Portugal was allowed to keep its government on condition it did what the EMU wanted.  Cyprus had its citizens bank deposits taken away from them. It is no surprise people are unhappy.  And nobody really wants to ask how strong German banks, not just the large international banks (like Deutsche Bank and Commerzbank) but the national, savings, and landes banks really are, particularly since Germany has resisted including all its banks in ECB stress tests.

How serious would the political risk have to be?  If you look at the CDS spreads of 2003 euro bonds and 2014 (which have CAC provisions) bonds, you can see the increased political risk with the spreads between the two doubling to 40 basis points.  This perceived political risk ignores the possibility of an eurozone country actually exiting the EMU, changing its countries bond laws and abrogating CAC's, and redenominating its debt from the euro to its own fiat currency.  Just using Target2 balances as a base example, it is easy to see that if Greece and Portugal both left the EMU, the EMU could easily survive with its monetary credibility tarnished.  However, if Spain and Italy left and defaulted on Target2 and redenominated euro debt, it would create a significant loss and change in remaining eurozone countries Capital Key ratio.  Even if France left, it would create a significant change in remaining countries Capital Key ratio and create damaged euro credibility.  A currency depends on its credibility to survive.

Could the eurozone survive as a monetary union without Spain and Italy if they defaulted on Target2 and redenominated their euro debt?

The political risks are growing and they are not supportive of democracy. 


Print Page

Financial Market History: Reflections on the Past for Investors Today

The CFA Institute Research Foundation and the University of Cambridge Judge Business School just published a long read study "Financial Market History: Reflections on the Past for Investors Today".

The First section "examines what we can learn about the trade-off of risk for return from an extensive analysis of historical returns on equities, bonds, and other assets" and "concludes with an extension to other financial markets."

The Second section "explores the historical evolution of how financial claims are traded."

The Third section "addresses the perception that financial markets are inherently prone to irrational exuberance and bubbles."

The Fourth section "addresses the history of financial innovation."

The Study " concludes with a contribution from Barry Eichengreen, who argues that the research frontier in financial history will be driven by current concerns motivated by the 2008–09 financial crisis. He points to a number of studies that reexamine the historical record on the basis of what we now understand about the role of banks and systemic risk. This research is now possible through low-cost and easily accessible historical data. There is the danger that access to these data may inappropriately frame research questions being asked. He concludes that looking to the past may not of itself allow us to predict what might happen in the future; however, it does allow us to understand the broader historical context and our ability to appreciate what is different about our current circumstances. This important observation helps establish why the study of financial history has such important practical significance in the current economic environment."

Understanding the market is not just for professional advisors and analysts; it is important for the investor.  It is information and factual information drives proper investing.


Print Page

Investing Requires Reliable Governmental Economic Information

As a fiduciary investment advisor, I do daily macroeconomic and financial research which is very lengthy and time consuming.  If I could not rely on unbiased (ethically professional), independent (without political interference) U.S. governmental economic statistical data, all efforts at economic and financial research would be meaningless.  Whether any current fears and concerns regarding the future of U.S government economic and scientific data are legitimate does not remove the absolute need for reliable statistically unbiased economic data which must be vigorously protected in order to have a free, democratic society.  While no statistical model is perfect, the professional ongoing debate on the construct of statistical models which are data based rather than result oriented based is fundamental to ethical professional conduct.

A lot of misunderstanding of BLS data has been repeatedly manifested, to the point where is almost a meme, by politicians who do not care if they are ignorant or lie and "financial" talking heads or wanna be talking heads who make money taking advantage of people. 

There are always professional concerns about statistical models and how they might be better, but the data has to be independent of political bias.  Brent Moulton at Political Arithmetick has written an excellent professional critic and concern for the need of independent U.S. government economic data, particularly with respect to the BLS.

Mark Thoma of  Economist's View has written at CBSmoneywatch on the political economic concerns which result if economic data is not factual data based (documentable as independent)  without political bias.  To skew the data reporting to promote a belief rather than a factual data set analytical result would make it impossible for economists to know what is going on in the economy and impossible for investors to make investment decisions within a factually known economic environment and trend.



Print Page

Is the Gig Economy the New Feudalism?

 Isabella Kaminska at FTAlphaville has demonstrated the gig economy is rigged against the workers in a series of articles, while nakedcapitalism has run a series of articles by Hubert Horan on Uber's destructive business model which is dependent on having enough money to run an unprofitable business until the competition is forced to disappear.

The Gig Economy is reliant upon a defenseless workforce which signs up for opportunity and become dispensable units is a business model which does not acknowledge its workers much less value them.


Print Page

Are Soda taxes a Tax Regressive Health Failure?

From the Jayson Lusk, a food and agricultural economist, is a new post of his in which he points to new research by Emily Wang et al and in which he points out as he has again and again:

"First, even if we believe people suffer from various behavioral biases, higher prices almost certainly make people worse off.  Second, when we raise the price of one unhealthy thing, people might substitute to consume other unhealthy things.  Third, if the tax is just added at the checkout counter and not on the shelf display, it may not have nearly the effect on purchase behavior as assumed.  Forth, if people know the reason for the tax, some may "protest" and buy more instead.  Fifth, the projected weight loss from such taxes often relies on unreasonable rules of thumb like 3500kcal=1lb. Six, even when taxes have an effect, the causal impact may arise more from an "information effect" rather than a "price effect."  Seventh, such taxes may induce unanticipated effects because of how sellers respond to the policy.  Finally, soda taxes are regressive - having a proportionally larger effect on on lower income households (see also my co-authored paper on effects of "unhealthy" food taxes more generally)."

Cook County passed a soda tax in 2016 and the idea is being floated in the Illinois General Assembly.  I do not drink soda pop, because it contains high fructose corn syrup and I prefer brown sugar, although I have never been a fan of too much sugar in food and often cut sugar amounts in recipes.  Taxing "sugar", more likely high fructose corn syrup, will in crease tax revenue but it is unlikely to make people more healthy and the argument the tax will decrease obesity should be discarded as a political excuse to impose a regressive tax on lower income citizens.


Print Page

Fed, FDIC, OCC Dodd-Frank Report: Merchant Bankers Beware

Last week there were some sketchy news articles on the multi-agency (Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency) report required by the Dodd-Frank Act which highlighted possible financial risks, not covered in Dodd-Frank, which necessitate additional attention.

The Fed wants to limit merchant banking, which is where banks buy an equity position rather than lend money, and bank ownership control of  mining, warehousing, and shipping of commodities.  The OCC wants to limit Wall Street's investments in industrial metals, such as aluminum and copper.

All recommendations would require legislation and/or rules.

What was missing from the short news articles was a link to the actual Report which I am providing for your better understanding of what was proposed.

Print Page

Financial Weapons of War

While I do extensive daily financial and macro-economic research, occasionally I find something important which is  more than interesting. Tom C. W. Lin has written an important paper on the threats and uses of financial warfare in cyber space.  We can continue to software and access protect systems from hacks and intrusions as well as war game scenarios, but the means of attack will always be constantly evolving.

The recent attacks on the central bank of Bangladesh resulting in the loss of #101 million and similar attempts on other countries are not isolated incidences and such attempts are not just limited to criminals but include countries and organized terrorists/revolutionaries.

Print Page

Insurance Companies Profit from the High Cost of U.S. Healthcare

Why are healthcare costs so high in the United States compared to the rest of the modern, technological countries of the world?

The bottom line, historically and currently, is the health insurance companies in the United States are more profitable as healthcare costs increase.  While politicians have personal goals and motives, I find it inexcusable that any economist would consider the ACA market approach more politically preferable to a more cost efficient single payer system.   The public-private market-based approach of the ACA is an ethical minefield.

The fear that making the ACA a single payer system would invite political repeal of the ACA is nothing but an excuse for the failure to communicate, listen, and demonstrate political leadership over several Congressional elections.  The focus on one election cycle only is self-defeating to a government dedicated to the general welfare of its people.

Here are three Blogs which can give you information and views on healthcare in the United States:
True Cost of Healthcare, The Incidental Economist, and Healthcare Economist.



Print Page

Worst Misconduct Brokers Are Retail Brokers

In a recent study by the University of Chicago - Booth School of Business, the researchers found not only a pervasiveness of misconduct but developed a rating system to rank the worst misconduct brokers, who are all retail brokers (brokers who sell to the public as investment advisers).  The 30 worst are listed here.

While the U.S. Department of Labor has proposed a limited fiduciary rule, the financial services industry is is desperately trying to further limit the rule, kill the rule, or change it to continue the ability of salesmen to portray themselves as "advisors" implying fiduciary duty while providing "advice" which is conflict of interest based.

I have long maintained that fee only fiduciary advisors need to be regulated separately from the SEC and FINRA (I personally would prefer the Consumer Finance Protection Bureau regulate SEC and State licensed fee only investment advisors to separate them from the continual and purposely wolves in sheep's clothing of those who sell or act with conflicts of interest).

Even less appreciated is my belief that current educational requirements are totally inadequate and that no professional designation provides sufficient educational requirements.  Even the so-called Masters Programs in Financial Planning are merely CFP course material, which lack academic rigor, primarily designed to provide revenue to the universities which offer them.  I have indicated verbally and in letters that fee only fiduciary advisors should have a Masters in Finance.  It would have to be at least a two year program which covered macroeconomics, CFA material, CMT material, current research on investment allocation and portfolio construction, ethics and law, and retirement planning and distribution.  This does not make me professionally popular.

I intend to write more about Fiduciary Duty and the financial services industry's desire to continue some form of public deception (confusion), but I will want to create Goggle Doc containing the research. 

Print Page

Self-Delusion and Investing in Gold

Over the years as an advisor as well as during the years of the radio show, one consistent self destructive myth keeps surfacing, accepting no denial, and refusing to accept factual history: gold.  Gold has a repetitive history of going up and dropping sharply.  It is not a hedge against inflation, particularly in a period of low inflation.  In the unlikely scenario of economic and social collapse, bullets would be far more valuable than gold.  There are always marketing vultures preying on fear and economic/political prejudice.  It makes no difference how many times, or over how many years, they are wrong.

The fact is, with gold, if you did not buy between 1997 and 2002, you underperformed.

Print Page

Is Schauble Afraid of European Unity?

There has been a great deal of speculation that Germany's Finance Minister continues to desire the compulsory exit of Greece from the European Monetary Union (EMU).  Wolfgang Schauble has written how he believes Germany should be an essential player in the New World Order, because western democracy has failed to provide the leadership to go beyond political parties and boundaries towards the bigger picture of unity.

Unfortunately, his concept of unity finds western democracy, bank union, and fiscal union which would complete a democratic political union as far less desirable than an Order of Rules that dictate actions without regard to democratic elections and nationally elected governments.  Democratic political union would require shared responsibility and governance.

The Troika has shown an intense desire to make any agreement with Greece impossible or, at the very least, totally unsustainable by the Greek government.  The Blog, Mean Squared Errors, asks if Schauble is actually afraid that the EMU will have to assist Greece when the Single Resolution Mechanism (SRM) takes effect on January 1, 2016.  The SRM wold require liquidity support for Greek banks, while during the Troika negotiations with Greece and the Greek referendum, the ECB was used as a political war machine depriving Greek banks of liquidity.

Is Schauble desperate to enforce the Rules before Law takes effect on January 1, 2016, in order to avoid a de facto economic transfer union?


Print Page

When Will Illinois Learn How to Budget?

 Illinois has until June 30 to pass a new budget.  At present the General Assembly has proposed a budget with a $4 billion revenue shortfall, because they want to continue funding educational and social programs, as a reaction to public concerns over proposed deep cuts, the Governor wants to cut even more and they want the Governor to publicly advocate the revenue solutions.  It is what has become the usual game of tug and pull rather than debate and compromise.  Illinois has played financial games with its budget since the second administration of Governor Jim Edgar in the 90's.

The Volcker Alliance has published Truth and Integrity in State Budgeting, which details how a State budget should be constructed and the information in State budgeting and financial operations accessible by the public.  Its checklist is:
1) Complete budgetary information, including how balance was achieved and whether one-
time revenue sources were tapped, should be easier to find and interpret,
2) Short-term revenue forecasts should be transparent and supportable by historic growth
trends. Past projections should be assessed for accuracy to help improve forecasting methods,
3)  Recurring costs should be paid with recurring revenue,
4)  The proceeds of borrowings should not be used to cover operating expenses,
5) States should move away from strictly cash budgeting and toward the type of accounting, used in their audited comprehensive annual financial reports, that shows the true present value of future spending obligations, and
6) States must build rainy day funds to safeguard essential services during economic down-turns. The size of the funds should be adjusted for revenue volatility, and they should be replenished consistently after they are tapped.

Illinois has the worst funded State pension systems in the United States, because it does not understand these basic budgeting rules.  Illinois has a revenue problem. It has put off required pension funding to future periods.  It has been sweeping (raiding) special funds for money with no intention of paying them back.  The Executive and both parties of the General Assembly have not been able debate, communicate, and compromise in the best interests of the people of Illinois for the last five Governors.  No one wants to take the revenue problem and own it by solving it and accept the political consequences.

With respect to information, you would have to read and analyze the General Assembly's budgeting bill (Good Luck) or you could get the Governor's position here.  You can go to COGFA and get forecasts and projections.  You can go to the Illinois Auditor General to find agency and department budget results (I particularly like reading the audit report for the Teacher's Retirement System as I find it far more informational than the TRS website).  Try finding the current balance of the Budget Stabilization Fund (rainy day fund); at least you can get FY2015 and FY2016 projections as of March 2015 here.  As of FY2013, the Budget Stabilization Fund had $276 million, which was less than 1% of General Fund revenues.

 Illinois needs to get its act together.  Unfortunately, this requires politicians to work together and compromise rather than continuously posture in the public circus.

Update: 
The credit downgrades have begun.

Print Page

U. S. Economy in a Snapshot

 The Federal reserve Bank of New York has just started a monthly report on the U.S. economy.

Here is the first 18 page report for the month of June.

Update:
Here is the July report.



Print Page

Chicago Public Schools Bond Fire

We have recently brought the problems of the City of Chicago and the Chicago Board of Education budgeting, financing, and outstanding bonds to readers attention through three articles by Kristi Culpepper.

Since then the Illinois General Assembly fortunately failed to pass a property tax freeze, passed a delay program for Chicago pension funding payments (which has not yet been signed into law), and the City of Chicago has authorized the issuance of $1.1 billion in GO fixed rate bonds to be used to restructure short term outstanding debt  and pay other current obligations, including $75 million in back police pay.  The City of Chicago had earlier issued an over subscribed fixed rate bond issuance that allowed it to convert $918 million in variable rate bonds to fixed rate bonds.

The Chicago Board of Education is, with the help of a former banker as Board President, in far worse financial condition with variable rate debt which lacks the backing a credit facility, a need to terminate its swap payments by probably depleting its $174 million debt service stabilization fund, the CBOE is looking at a $350 million budgeting shortfall and the school system could be out of cash as early as this summer, and  the CBOE looking for a $200 million line of credit and $935 million to address its next year deficit.

Kristi Culpepper covers the CBOE bond risks is far more detail in this new article which you should read.  She does an outstanding analysis.

Update:
The legislation to delay pension funding is being held hostage to the Illinois budget impasse between the governor and the General Assembly with the State without a budget for over a month while the Governor insists on diminishing collective bargaining rights.  Meanwhile, the Chicago Public School System has pulled its one year contract offer demanding a multi-year contract and that teachers pay full pension costs with no School system contribution, which may precipitate another teacher's strike.

Print Page

Biofuels Subsidies Raise Global Food Prices

On my radio show, I repeatedly discussed the subject of biofuels subsidies which divert corn grain products from the food supply to motor vehicle fuels.  Tim Taylor has a new article which nails the resulting global food price increases and how biofuels are economically inefficient and counter productive as a policy.

Print Page

Getting Bank Lending, Capital Flight, and Target2 Payments Right Part 2

 Frances Coppola has published an excellent article on Hans Werner Sinn's economic mistakes which compliments my recent article on the same subject, although my article referenced a recent Bank of England working paper on how bank lending works, which is not getting sufficient attention.

Sinn has been consistently confused and wrong.

Print Page

Dysfunctional Politics & the Beginning Depression

Here is a draft post from 2009/early 2010 on dysfuntional politics and economic policy and potential social upheaval and protests in countries.  How prescient was it?

We have noted in past radio shows and prior posts how the FED appears to be using unemployment to hold down inflation.  We have noted that the "Recovery" appears to be focused solely on the return of the status quo prior to the Financial Crisis of the financial system and the resumption of risky but profitable business trading.  Volcker has commented on the fact that no economy, which has 30% of its GDP from synthetic financial services, can continue without risking another financial crisis.  In fact, we have noted the "Recovery" appears to be setting the stage for the very same financial crisis.

In a long post Edward Harrison  has written on his belief that the Recession is over but the Depression has just begun.  His argument is essentially that the political process, of which Congressional actions are only one example, has created a dysfunctional economic debate, economic recovery policies, and a divisive political debate which serves the special interests but not the Nation.  He goes into some detail on what it means globally as well as nationally and what needs to be addressed.  While I do not entirely agree with him, his arguments are very worthy of consideration for anyone who is desirous of dealing with the economic conditions as they exist.

It is well known that I believe Geithner and Summers need to go, because they serve Wall Street more than the Nation.  Washington'sblog has been very good at delineating Summer's insistence on his way or no way to the point where Volcker is now in Europe speaking for financial reform because Summers has muzzled and isolated him in the United States.  Still, there is opposition loyal to President Obama which are attempting to debate and contradict him, however, dangerous that may be.  Despite what Summer's says, unemployment will continue to rise and it cannot be ignored.  Read the post "Larry Summer's is like the guy who yells the Sun really does revolve around the Earth ..." and sharpen your critical skills.

In past radio shows we have talked about food shortages and riots, economic protests, and even a Joint Special Operations University faculty member's speech at a former intelligence officers conference about the possibilities that prolonged economic crisis could cause social upheaval in countries.  My first career was intended to be military and I still do extensive readings on military subjects including papers and publications at the War College and the JSOU.  It again appears that there will be food and commodity shortages with increasing prices in 2010.  There are two scenarios which could evolve with one being demonstrations, riots, and perhaps revolution in some parts of the world and the other being that the population will become so demoralized by their treatment from the elite who run their governments that they will be passive and do what they are told.  Here is one recent article that lists a variety of sources from the establishment and from the fringe for your critical review.  For the argument that people have been broken and demoralized, although there are more scholarly books which have been published over that last 60 years.

Print Page

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.

Print Page

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.
.
But Hans Werner Sinn will just say it again and again and again: damn factual information.

Print Page

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 ....?



Print Page

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

Print Page

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.

Print Page

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.

Print Page

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.

Print Page

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

Print Page