Mystery Economic Theater 2010

[cheesehead]

Eleven years ago, those of us participating in Y2k forum discussions wondered whether it would turn out to have been a big mistake for the EU to proceed with the euro introduction before it was clear that Y2k disruption had been prevented.

Y2k definitely turned out to have been the easier problem -- as should have been obvious: It was only a technical problem, whereas the euro was/is a political and economic problem with a minor technical dimension.

[ewmayer]

Originally Posted by cheesehead

Y2k definitely turned out to have been the easier problem -- as should have been obvious: It was only a technical problem, whereas the euro was/is a political and economic problem with a minor technical dimension.

Although as Barry Ritholtz argues in Bailout Nation, as-it-turned-out-overblown fears about Y2K were the main driver between Alan Greenspan`s first great experiment in quantitative easing, and the resulting flood of cheap credit played a large role in helping blow the DotCom bubble. Most assuredly a case of the [supposed] cure being far worse than the [alleged] disease.

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Latvia government collapses amid economic crisis: PM Dombrovskis "remains confident" that an emergency IMF bail-out worth £6.7bn will remain unaffected by the political instability.


Fed Must Release Bailout Documents Identifying Firms on Brink, Court Rules: The Federal Reserve Board must disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever, a federal appeals court said.

The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of Lehman Brothers Holdings Inc. The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.

The Fed had argued that disclosure of the documents threatens to stigmatize borrowers and cause them “severe and irreparable competitive injury,” discouraging banks in distress from seeking help. A three-judge panel of the appeals court rejected that argument in a unanimous decision.

The U.S. Freedom of Information Act, or FOIA, “sets forth no basis for the exemption the Board asks us to read into it,” U.S. Circuit Chief Judge Dennis Jacobs wrote in the opinion. “If the Board believes such an exemption would better serve the national interest, it should ask Congress to amend the statute.”

The opinion may not be the final word in the bid for the documents, which was launched by Bloomberg LP, the parent of Bloomberg News, with a November 2008 lawsuit. The Fed may seek a rehearing or appeal to the full appeals court and eventually petition the U.S. Supreme Court.

My Comment: How much do you want to bet that at this time next year the Fed will still dragging its heels by way of one appeal after another ... unless they`ve managed to also capture the judicial branch of government by way of the Supreme Court, which is certainly not a possibility to be dismissed ... could well end up being a Monetary-policy version of the 2001 Bush v Gore presidential-election ruling.

[Fusion_power]

An economy is a system. A stagnant system can be destabilized by relatively small changes. All it takes is for one piece of the system to become more productive than other similar parts and the whole schmoo collapses.

The eurozone is an economic system and borderline stagnant. Germany is increasing efficiency at a steady rate while other eurozone members are relatively flat to slightly downward on the productivity trend scale. This indicates that over the next 10 years the european economic zone will gradually become more unstable and that Germany will eventually have to withdraw from the pact.

What happens to the eurozone if Germany withdraws? Do the remaining members then become a group of 3rd world nations?

DarJones

[cheesehead]

Originally Posted by ewmayer

as-it-turned-out-overblown fears about Y2K

< snip >

the [alleged] disease.

The Y2k problem in computer software was very real. Had it been uncorrected there could indeed have been serious consequences. However, the potential seriousness was sometimes (and easily) exaggerated for purposes of pushing someone's usually-political agenda, or sometimes mistakenly on account of ignorance of actual software and hardware realities.

Furthermore, the completeness of remediation resulted in there being very few instances in which Y2k errors actually created significant problems on and after January 1, 2000. This misled many folks into thinking that it had all been a hoax all along, but the truth was that remediation was so complete only because of:

advance warnings by authoritative people in the computer industry,

development of software Y2k-remediation tools for rapid automated detection and correction of Y2k bugs in software source code and object code,

expenditure of billions of dollars by companies to remediate their Y2k problems, including dedicating hundreds of thousands of programmers to the effort (there was a noticeable layoff of such programmers in late 1999 and 2000)

and the 1990's migration to PCs, whose software had been developed by folks aware of the Y2k problems. This allowed many companies to simply migrate away from mainframes and Y2k-buggy legacy software instead of having to actually fix their Y2k-buggy software.

For a while, Reader's Digest was publishing stories about how the Y2k problem was all a hoax, but eventually their director of computing finally managed to explain the realities to the company president. RD did an about-turn and stopped pushing the it's-all-a-hoax idea, but many others didn't make this transition.

Ernst, you should drop the "alleged". It was real and potentially serious. Claiming otherwise is a mistake.

Perhaps you could substitute "substantially-fixed-in-time" to acknowledge the reality.

[ewmayer]

Originally Posted by cheesehead

The Y2k problem in computer software was very real. Had it been uncorrected there could indeed have been serious consequences. However, the potential seriousness was sometimes (and easily) exaggerated for purposes of pushing someone's usually-political agenda, or sometimes mistakenly on account of ignorance of actual software and hardware realities.

I meant "as it turned out overblown" to refer to the likely dangers based on the industry's response to the problem, which, as you say, was for the most part admirably proactive, and removed most of the "unexploded ordnance" before Y2K rolled around. (Contrast that with the utter lack of self-policing by Wall Street with regard to leveraged risk ... rather a different set of incentives at work, alas.)

If my post conveyed any kind of "Y2K hoax" intimations, those were unintended.

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Naked Capitalism has links-to and comments on a pair of articles from the Financial Times and the Telegraph on The Beginning of the End of the Eurozone As We Know It?:

The widely-extolled idea, that the EU would find a way to muddle through the Greece crisis, looks very much in doubt. The pressure has not simply put the rescue of Greece into disarray, but appears to have led to some positions being taken that, if they hold, look likely to lead to the partial dissolution of the monetary union. This development would have far-reaching ramifications which are far from well understood, to put it mildly.

On a lighter note, Washington Post editorial cartoonist Tom Toles has a humorous take on Wall Street`s likely reaction to Senator Chris Dodd`s financial reform bill:

[ewmayer]

The New York Times` Tobin Harshaw looks behind the "official" (Congressional Budget Office) numbers regarding the health care reform act:

“The C.B.O. process has now been so thoroughly gamed that it’s useless,” writes Megan McArdle of the Atlantic. She’s concerned about how many of the costs have been pushed to the tail end of the budgeting period, and that the excise tax on so-called gold-plated insurance plans won’t take effect until 2018:

The proposed changes increase spending dramatically, most heavily concentrated in the out-years. The gross cost of the bill has risen from $875 billion to $940 billion over ten years–but almost $40 billion of that comes in 2019. The net cost has increased even more dramatically, from $624 billion to $794 billion. That’s because the excise tax has been so badly weakened. This is of dual concern: it’s a financing risk, but it also means that the one provision which had a genuine shot at “bending the cost curve” in the broader health care market has at this point, basically been gutted. Moreover, it’s hard not to believe that the reason it has been moved to 2018 is that no one really thinks it’s ever going to take effect. It’s one thing to have a period of adjustment. But a tax that takes effect in eight years is a tax so unpopular that it has little realistic chance of being allowed to stand.

And, she asks, when you borrow from yourself, have you really saved money? “A disturbingly high percentage of the revenues still come from insurance premiums for other programs. About $53 billion of the net deficit reduction is from Social Security taxes collected on the wages people will now be getting in lieu of health care benefits. But since those contributions raise the amount Social Security will eventually have to pay out, the Republicans convincingly argue that this is not true ‘deficit reduction’; it’s just deficit shifting. Ditto the premiums for the new long-term care insurance.”

My Comment: Laudable as the notion of universal health coverage is, as I`ve repeatedly stated, without a serious effort at not just cost containment but actual cost slashing (the U.S. spends nearly 2x as much as other developed countries per person, and gets no better overall health care as a result), this "reform" is a colossal budgetary boondoggle. There will very likely be some very interesting unintended consequences on the coverage-arbitrage front, as well, none of which which make it less of a boondoggle, but which will complicate efforts to achieve the intended goals of the legislation.

Lots more details and perspectives in the linked article...

Your thoughts?

[ewmayer]

...And it's probably just a wee bit closer to home than the G-Papster might have liked:

The Biggest Greek CDS Speculator Has Been Uncovered: Culprit Is... Greek State-Controlled Hellenic Post Bank!

We have officially moved from a Greek tragedy to a Greek surreal comedy. After nearly a month-long scapegoating campaign in which Greek PM G-Pap said he would spit in the faces and skullf#@* all those who dared to buy Greek CDS (because as we have all been lied to by everyone who doesn't know the first thing about CDS, it is CDS buying not bond selling that drives spreads), with the stupidity reaching as far and wide as the Spanish and German secret services, which said they would spy on CDS traders in London and New York, Greek daily Kathimerini has just uncovered that the biggest speculator, holding 15%, or $1.2 billion of the total $8 billion in Greek notional CDS, has been a firm that operates about 2 blocks away from the parliament building in Athens - the state-owned Hellenic Post Bank (TT)!

My Comment: Now *that's* funny...


Cost of the Healthcare Reform Bill: Lie To Me

Bloomberg has a followup on what I posted yesterday about the Healthcare Reform Bill being a giant fiscal boondoggle:

Health-Care Cost Lies Make Us Sing the Blues

The CBO’s rules make it hard for the group to fulfill its own mandate. You’d think, for example, that the CBO would use its own parameters when it crunches numbers. Instead, the CBO must use the same mathematical assumptions supplied by the very lawmakers who wrote the bill the group is evaluating. No matter how improbable those formulas are.

Former CBO director Douglas Holtz-Eakin, writing in the New York Times, described the group’s process as “fantasy in, fantasy out.”

...
The CBO’s structural failure benefits the Democrats this week. Indeed, Pelosi is teaching Republicans something: the bigger the misrepresentation, the greater the credibility with voters. Croon to them a tune about entitlement, and they forget that you’re clearing a path for a tripling of the tax on dividends.

The CBO’s rules are bipartisan -- they hold for whatever legislation lands in its in box. Congressman Paul Ryan, a Republican from Wisconsin, recently put forward a new blueprint for the federal budget. Ryan’s plan is less questionable than Pelosi’s because it’s relatively honest about costs. Ryan points out that the current unfunded part of the Medicare liability is in the trillions.

The tax cuts Ryan proposes allow for more possibility of growth than Pelosi’s health-care bill. When CBO studied Ryan’s plan using Ryan’s assumptions, however, it placed a question mark over the plan that wasn’t there before. Everyone knew the numbers came out the way Ryan wanted them to. His proposal, therefore, is having a hard time gaining traction.[/quote]

[markr]

http://news.bbc.co.uk/2/hi/business/8584812.stm

Portugal's credit rating has been downgraded by leading credit rating agency Fitch.

Concerns about the country's high levels of debt led the agency to drop the rating from AA to AA-.

[ewmayer]

Originally Posted by markr

http://news.bbc.co.uk/2/hi/business/8584812.stm

As during the late great Housing Bubble, Fitch is the only one of the Big Three ratings cartels which has even the slightest shred of credibility left.

Surely the mounting Eurozone woes, along with other great news related to "the recovery" (I love how the MSFM, "most economists" and politicians all use the oh-so-confident "the", as if the "the" of which they speak were anything other than a GDP-and-Ponzi-equity-market-index-linked artifact of massive government deficit spending and financial-markets-liquidity pumping) like today`s dismal new-home-sales numbers will be fodder for yet another stock market runup.

A ZeroHedge guest contributor has a nice rant of the false illusion of choice in American politics today, which touches on the load of codswallop referred to as "the health care reform debate" as well as the corporate/government-complex--promoted state of debt slavery by way of consumerism:

Guest Post: Towards A 21st Century Peasant Rising

Something else to consider: How is it that we were force-fed a highly-unpopular health care “reform” package that aims to pull down costs without allowing for cheaper drug imports or malpractice payout limits—which, as every Canadian, European, and Japanese bureaucrat knows, are the only proven methods for holding down medical costs? Does the answer have something to do with both parties being in the pocket of the seven-figure ambulance chasers and the ten-figure drug, err, pharmaceutical kingpins?

But again, why sweat this stuff when it is more fun to argue about Obama’s missing birth certificate and the political implications of the Avatar movie?

How is it that we have a politico-economic system in which the government’s explicitly stated goal is to entice people to take out loans for houses and cars they don’t even need? 150 million cars on the road and we must keep buying new ones? Millions of vacant housing units and we need to build new ones? Homes so full of Chinese junk that half of it goes into off-site storage, and we need to shop more? For whose benefit?

[ewmayer]

For readers interested in the mechanics of the arcane, toxic financial instruments which figured so largely in the global financial crisis, the pseudonymous Yves Smith at Naked Capitalism has a fascinating piece in the form of review of a popular book on the subprime crisis and the "heroic band of short sellers who bet against the subprime machine" which explains how said short sellers, because they were operating in the unregulated CDO/CDS markets, in fact were key in *helping* the subprime debt-securitization machine continue for as long as did before it blew up:

Debunking Michael Lewis’ Subprime Short Hagiography

[Short seller] Eisman recognizes that the subprime market is a disaster waiting to happen, a monstrous fire hazard that, once lit, will engulf the housing market and financial firms. Yet he continues to throw Molotov cocktails at it. Eisman is no noble outsider. He is a willing, knowing co-conspirator. Even worse, he and the other shorts Lewis lionizes didn’t simply set off the global debt conflagration, they made the severity of the crisis vastly worse.

So it wasn’t just that these speculators were harmful, and Lewis gave them a free pass. He failed to clue in his readers that the actions of his chosen heroes drove the demand for the worst sort of mortgages and turned what would otherwise have been a “contained” problem into a systemic crisis.

The subprime market would have died a much earlier, much less costly death absent the actions of the men Lewis celebrates. They didn’t simply keep the market going well past its sell-by date, they were the moving force behind otherwise inexplicable, superheated demand for the very worst sort of mortgages. His “heroes” were aggressively trying to find toxic waste to wager against. But unlike short positions in heavily-regulated equity markets, these wagers, using credit default swaps, had real economy effects. They pushed down the interest rates on the cash bonds backed by those same loans, which in turn made it perversely attractive for lenders to generate mortgages with the worst characteristics. And it isn’t surprising that weak-credit borrowers were enticed by this once in a lifetime “opportunity”.

[ewmayer]

Europe agrees IMF-EU rescue for Greece: After weeks of discord, Europe's leaders have agreed to an emergency facility for Greece backed by the International Monetary Fund and bilateral loans from eurozone states.

The accord was vague on figures and aid can be invoked only as a "last resort" if Greece is shut out of the capital markets. Since Greece is already paying an untenable debt premium, the wording once again leaves it unclear what exactly has been settled.

Angela Merkel, the German Chancellor, and Jan Peter Balkenende, the Dutch premier, leaders of the two key creditor states, imposed their demand that the IMF must be central to any rescue.

While the Eurogroup is to play a "co-ordinating" role, Germany and Holland will retain a veto over use of the facility. Greece said it was "satisfied" by the terms.

The accord masks a bitter struggle between Germany and a French-led bloc over the future shape of Europe. For all the rhetoric, Berlin has refused to cross the Rubicon towards an EU fiscal union, shattering long-held assumptions about the inevitable march of the EU project. By bringing in the IMF, it ensures that each sovereign state remains responsible for its own debts.

My Comment: Yawn ... somebody wake me up when the EU leaders actually *commit* to something, besides "standing behind / supporting / not letting fail" Greece. This is, what - roughly the 2394363482340943743643943023467546548494567437439437436743934624351234321549068th time the EU heads have attempted to jawbone the bond markets into permitting Greece to issue debt at cheaper rates without actually committing to anything? I lost count weeks ago.


Interest bill on UK government debt set to soar: More than 10p in every pound of tax Britons pay will within four years go straight on the Government's ballooning debt interest bill, according to figures underlying the Budget calculations, it has emerged.

The scale of the "repayment shock" facing Britain as its national debt climbs to the highest level since the 1960s was laid bare as the Institute for Fiscal Studies calculated, based on Treasury figures in the Budget, that debt interest payments will climb to £73.8bn by 2014/15. At this level – 10.6pc of total tax revenues – debt interest payments would be at the highest level since the 1980s, when Nigel Lawson was still gradually reducing the scale of Britain's national debt.
...
The sharp rise in the cost of financing this debt, which will be sold at increasingly high interest rates – particularly once the Bank of England ends its quantitative easing programme – is likely to become a key issue in the next decade. Next year the debt interest bill will hit £42bn: higher than Britain's annual defence bill. At £73.8bn, it is likely to be equivalent to both the defence and transport bills combined.

My Comment: There once was a debtor named Britain,
Whose owings became quite unfittin'.
The Brits were astounded,
As their sterling got pounded,
And now gilted bricks they are shittin'.

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Inaugurating a new post-signature-counter feature today ... counting the number of days into the global financial crisis, and starting the count at the slightly arbitrary Day One of 8. February 2007, the date HSBC, a.k.a. the erstwhile "Hongkong and Shanghai Banking Corporation", wrote down its holdings of subprime-related MBS by $10.5 billion, which proved to be the major major fund-blowup salvo in the subprime mortgage meltdown which was the trigger for the still-ongoing global financial crisis), along with the number of actual criminal convictions of major players in the blowup - note that folks like Bernie Madoff don`t count here, since even though his Ponzi scheme cam to light partly as a result of the crisis, he was not directly involved in orchestrating subprime-related scammery. Note that we only count actual criminal *convictions*, not cases like the prosecution of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin, which resulted in their acquittal by an all-too-credulous "gosh, they look like nice boys, and are so well-dressed and very punctual, to boot" jury.

Let me know if I overlooked any perp walks...

Today is Day 1143 since the start of the global financial crisis, and there have been 0 related criminal convictions.