Misery Economic Theater 2011

[R.D. Silverman]

Originally Posted by ewmayer

My Comment: So the president wants to do what just about every president since Reagan has promised but abjectly failed to make good on, eh? I say, keep printing trillions a year to fund Wall Street bailouts and insane government spending, and the resulting currency debasement will eventually get you your hoped-for reduction in oil imports. $10-per-gallon gasoline has a tendency to do that.

The only way that it is going to happen is if it is driven by market forces.
It won't happen by government mandate. Any such mandate would
cause pain to at least one group of people and politicians
don't want to upset voters.

How about a mandate that by 2015 every car (not trucks) must get
40 MPG? How about putting a big premium (e.g. $20K) on the sale of
every SUV or other gas guzzler (e.g. v8 or other big engine sports car)??
Let's raise the gas tax by $1.00-$2.00/gallon to be used strictly
for infrastructure repair? Or for improving public transportation?

Most people are unwilling to make such sacrifices for the good of our
descendents.

Let the screaming begin!


What this means is that gas prices must indeed rise to a level that makes
alternatives attractive.

[R.D. Silverman]

Originally Posted by ewmayer

In Troubled Spain, Boom Times for Foreign Languages

My Comment: 5 percent is shockingly low...


SIGTARP Barofsky Goes Out Blasting

...with a scathing Op-Ed about the "success" of TARP in today`s NYT:

Where the Bailout Went Wrong

See:

http://www.huffingtonpost.com/robert..._b_842998.html

[ewmayer]

This morning, Barry Ritholtz posted some

Advice to Irish: Prepackaged Bankruptcy for Banks

Our story so far: Irish banks went hog tulip-wild, building out a huge residential and commercial boom. The construction was far beyond actual demand for the former Celtic tiger; it was essentially speculation run amuck.

Ireland had briefly found the pot-o-gold at the end of the rainbow: Everyone was making oodles of loot. Banks were lending money, investment firms were underwriting massive bond offerings, construction was booming, accountants and lawyers well well fed, all manner of jobs plentiful. It looked like Ireland had tapped into a massive wealth creation machine. In reality, it was halfway between a nation of greater fools and a Ponzi scheme.

And as these bubbles typically go, so long as the music is playing, all the fools danced the night away. Until the band suddenly stopped, and the reckoning was upon them.

For the first time in 15 years, emigration was greater than immigration. The Irish budget went from surplus to an highest deficit (by far) in the history of the Eurozone: 32% of GDP.

For reasons we have yet to fully learn, the Irish government decided to guarantee the banks’ recklessness. The 2009 bail out, plus the additional monies needed, will put the 4.5 million people in Ireland on the hook for €15,000 each — about $21,337.50 in dollars per person.

I normally am reluctant to offer up advice to sovereign nation as to how to conduct their affairs. But the new Irish government seems so very close to making a leap away from the rest of the bailout driven world and into the correct posture, that I had to add my two cents.

The bailouts in the US are instructive. Giving banks money to rescue themselves from their own actions does not lead to a long term healthy economy in a capitalistic system. Banks take advantage of the easy money, leverage themselves up all over again, and produce record profits.

But the banks are a negative, not positive, contributor to the economy post bailout. Capitalism isn’t a charity, and this was precisely what the US should have expected (and what a few people warned against). The risk reappears, no lessons are learned, moral hazard gets writ ever larger.

The alternative to the Japanese approach, adopted in part by the US, is the Swedish system. This is what the US FDIC does: Insolvent banks have their deposits guaranteed by the government, the banks are then liquidated, shareholders wiped out, senior management fired, assets than sold off to pay for the losses. Whatever is left over goes to the bondholders.

That is roughly what was done with General Motors. The GM prepackaged bankruptcy saved what was worth saving, reorganized the company, and allowed it to move forward.

This is what the US should have done with their own banks, but refused to. Both the Bush and Obama White Houses ceded their decision making on this issue to the former head of Goldman Sachs (Hank Paulson as Bush Treasury Secretary) and Citigroup Director and prior Co-Chairman of Goldman (Obama’s Economic advisor Robert Rubin).

The Irish politicians who made the bailout decision were tossed out. The new government has a window to not only show some backbone, but to take their country back from the bankers who bankrupted it.

Here’s hoping the Irish are smarter than the rest of the fools who now find themselves indentured servants to reckless bankers.

My Comment: Ah well, the faint hope that the "new, improved" Irish government would actually represent the people who elected them rather than the international banking mafia lasted all of an hour or two after Barry`s posting appeared:

Ireland Caves in to Trichet; Backs of Irish Taxpayers Will be Broken

Ireland yielded to the European Central Bank to protect bondholders even as its bailout bill for the region’s worst banking crisis moved to as much as 100 billion euros ($142 billion) after stress tests.

The ECB in Frankfurt was “solidly opposed” to imposing losses on investors in senior bank debt, Finance Minister Michael Noonan told broadcaster RTE today. The ECB agreed to provide “ongoing” funding for the banks, he said.

[Fusion_power]

It is funny in a way to watch the cascade effect. Here piggy piggy, which of the PIIGS is now grunting at the Euro trough? Could it be Portugal? Oh my!

http://www.bbc.co.uk/news/business-12993318

Mr Socrates said the country was "at too much risk that it shouldn't be exposed to".

The government has long resisted asking for aid but last week admitted that it had missed its 2010 budget deficit target.

Portugal follows Greece and the Irish Republic in seeking a bail-out.

"I always said asking for foreign aid would be the final way to go but we have reached the moment," Mr Socrates said.

"Above all, it's in the national interest."

European Commission President Jose Manuel Barroso said in a statement that Portugal's request would be processed "in the swiftest possible manner, according to the rules applicable".

He also reaffirmed his "confidence in Portugal's capacity to overcome the present difficulties, with the solidarity of its partners".
Borrowing costs

Mr Socrates did not say how much aid Portugal would ask for. Negotiations will now be underway and the BBC's business editor Robert Peston said rescue loans could amount to as much as 80bn euros ($115bn; £70bn).

Mr Socrates was speaking after Finance Minister Fernando Teixeira dos Santos said it was necessary to resort to financial aid from the EU.
Continue reading the main story
Analysis
Matthew Price Europe correspondent, BBC News

First Greece, then Ireland, now Portugal. But unlike the previous two bail-outs, this one does not seem to have provoked panic - either in the corridors of power here, nor on the markets.

The EU's top economic official Olli Rehn called the Portugese decision a "responsible move". The President of the European Commission Jose Manuel Barroso - himself Portugese - said the request would be processed as quickly as possible.

A team could be dispatched to Portugal in the coming days.

EU finance ministers hold a scheduled meeting in Hungary at the end of the week. Portugal will be top of the agenda.

The European Commission and the European Central Bank are both expected to be involved in the bail-out funding. The International Monetary Fund says it stands ready to help as well.

Earlier, the government raised about 1bn euros after tapping the financial markets in order to repay loans, but will have to pay a higher interest rate to lenders.

Portugal's cost of borrowing has risen sharply since the minority Socialist government resigned last month after its proposed tougher austerity measures were defeated in parliament.

Since then several rating agencies have downgraded the country's debt.

An informal meeting of European finance ministers had already been scheduled for Thursday in Budapest. Portugal was not originally on the agenda but is expected to be discussed.

The UK Treasury Minister Mark Hoban will attend. A source at the Treasury said that the bilateral loan the UK offered to the Irish Republic was "very much a special case" and a similar offer is "not on the table" for Portugal.

Jan Randolph, head of sovereign risk at IHS Global Insight, told the BBC that Portugal might organise "some sort of bridging loan" in the short term.

But he added: "The real big loan over several years will require a medium-term plan and I don't think that can be agreed until the new government comes into place."

Elections are likely to take place in a few months' time.

It would be more impressive if it were not such a sad state of affairs.
Portugal - socialist nation, major debt from social programs, high unemployment, etc.
Ireland - bank debt, should have hammered the banks
Iceland - bank debt, somewhat hammered the banks
Italy - This one is the big question mark. I suspect social programs and government sculldudgery will take them down eventually.
Greece - socialist nation, entitlement citizenry, social program debts
Spain - combination of causes, banks, socialist programs, entitlements, etc.
USA - This is the grandaddy of them all. Bank debt, ignorant FED, lack of effective regulation, the potential is devastating.

Of the above, Portugal, Ireland, and Greece are in bailout purgatory.... or is that heaven? Iceland is cutting a wake in uncharted waters. What about Spain? My best projection says that 20% unemployment, overpriced social programs, and an increasingly jittery market point to Spain needing a bailout within 6 months. Anyone want to make odds?

DarJones

[ewmayer]

Originally Posted by Fusion_power

Of the above, Portugal, Ireland, and Greece are in bailout purgatory.... or is that heaven? Iceland is cutting a wake in uncharted waters. What about Spain? My best projection says that 20% unemployment, overpriced social programs, and an increasingly jittery market point to Spain needing a bailout within 6 months. Anyone want to make odds?

Well, given that Spain just announced that it has "absolutely ruled out the need for a bailout" - repeating almost verbatim the noises Portuguese PM Socrates was making until only a few short weeks ago - I'd say the odds of Spain needing some form of emergency assistance (which the ECB will try very hard to call something "not a bailout", at least at first) by year's end are extremely good.

And of course all the "remedies" so far (at least outside of Iceland) have done nothing to solve the core issue, which is that someone needs to take a loss on all that bad debt, and suffer the consequences. So the ECB is, like the US Fed, engaged in a massive temporizing exercise, kicking the can down road as best they can, hoping for a miracle, or - even better - for them to find a way to stick taxpayers and the prudent (i.e. folks who actually still have money) with the entire bill without causing a mass uprising leading to dissolution of the Eurozone.

------------------------------

Gonna be a lazy shite today and simply post today`s econo-headlines-with-links for ZeroHedge:

• China Inflation May Hit 6%, No End to Tightening (China Daily)
• Portugal Bailout May Reach $129 Billion (WSJ)
• Brazil Takes Fresh ‘Currency War’ Action (FT)
• Obama Says Meeting ‘Narrowed the Issues’ on Budget Impasse (Bloomberg)
• Government Shutdown Threatens 800,000 As Obama Seeks Solution (Bloomberg)
• Ireland will need another bailout, says former IMF director (Guardian)
• Japan to Head Off Hydrogen Blast (WSJ)
• U.S., Italy Consider Arming Rebels to Speed Qaddafi Ouster (Bloomberg)
• European banks in further capital calls (FT)
• Expected Rate Rise in Europe Hits Commodity Prices (FT)

Germany Frowns On Financially Innovative Euro Coin Recycling Program

Germany Arrests 6 in Euro Fraud Ring: German prosecutors have arrested six men in one of the biggest and most unusual thefts in German history, one that defrauded the country’s central bank of some $8.5 million.

FRANKFURT —It was not a glamorous Hollywood-style bank heist. No tunnels. No rappelling from helicopters. Not even a single ski mask.

Just an unusually heavy carry-on bag, which a female flight attendant struggled to carry through Frankfurt’s airport after arriving from China.

But when curious customs agents took a look, they found evidence that may have helped them crack one of the biggest frauds in history against the Bundesbank, Germany’s august central bank. Authorities say the fraud has cost the bank about 6 million euros, or $8.5 million.

Inside the flight attendant’s bag, the authorities say, were thousands of 1-euro and 2-euro coins that had supposedly been scrapped after years of use but had been methodically reconstructed so they could be cashed in.

According to prosecutors, in recent years a fraud ring involving flight attendants has toted 30 tons of supposedly scrapped euro coins back into Europe from China. Recyclers in China were supposed to have melted down the old coins, which had been removed from circulation and sold as scrap metal.

Instead, officials say, the band and its accomplices painstakingly restored the coins, then fooled the Bundesbank into redeeming them for paper currency or money transfers into bank accounts. Last week, German authorities arrested six men in and around Frankfurt in connection with the case. The investigation is continuing, said Doris Möller-Scheu, a Frankfurt prosecutor, who did not rule out further arrests.

My Comment: So here you have some hard-working, industrious folks in Germany and China trying to supplement their meager incomes and help the environment by way of an innovative coin-recycling program, and the powers-that-be coming down all heavy-handed on it. Sheesh. I say this is preferable to the much more toxic and large scale "financial innovation" practiced by the big banks every day without penalty.

[ewmayer]

Very nice reader-comment exchange on ZeroHedge today, in response to a post about rising oil and corn prices by ZH veteran Bruce Krasting:

by Mercury
on Thu, 04/07/2011 - 12:54
#1145628

"The conclusion is that the dog (crude) is wagging the tail (corn)."

But corn is also a food staple and in an inflationary environment, you cut back on oil/gas before you cut back on corn (or it's substitutes).

Some very smart people are saying that rising commodity prices are simply a manifestation of the next bubble. It can't really be inflation they say because some things are going up in price (and at different rates) and some things (tech, cars, RE) aren't going up at all.

To me at least it seems obvious that Fed induced inflation shows up in equities: pretty much in real time, commodities: with a very small lag...if at all, things that use commodities as signifigant inputs: a much longer lag and in places where increased efficiencies are still greater than rising input costs (technology basically - areas where things like Moore's Law applies etc. like Ipads, TVs etc.)....perhaps no price inflation at all. No car price inflation either since demand is weak in part because of the price inflation of other goods that people need more.


by Imminent Crucible
on Thu, 04/07/2011 - 14:21
#1146136

Those "very smart people" just aren't very old, Mercury. The idea that "it can't be inflation because everything isn't going up at the same rate" is easily debunked, if you lived through the 1970's.

Monetary inflation doesn't negate supply/demand factors. It just distorts markets and nominal prices. In the 1970's, which I remember all too well, prices went up faster than wages. Much faster. Some prices (like fuel) went up much faster than the official CPI inflation rate, while others (like house prices) barely broke even.

House prices aren't going up with gold, oil and corn today because the banks are stuck with a 10 year supply, if you count all the [nonperforming loans] that they haven't yet foreclosed on. On top of that, new home sales are only 20% of what they were at the peak of the real estate craze.

In a stagflation like today, as in the 1970s, money flows will determine which prices go up fastest. The Fed is firehosing money at stocks and bonds; the consumer is directing his garden hose at food and fuel. This fundamental dynamic can be tinkered with, but it won't be reversed. The only thing that can reverse it is to shut off the presses.

At which point both the markets and the economy collapse together.

My Comment: The price for the cheapest grade of self-serve gas as the local Valero station I`ve used as my price reference since the gas-price runup in the /spring of 2008 passed $4 last weekend...this morning it was up to $4.07. In 2008 it didn't hit that level until 2 months later in the year, eventually topped out at $4.50, and then collapsed in the Fall, in approximate synchrony with much of the global financial system and economy. I have a feeling that this time around prices are going to stay elevated for quite a while - even a reversion into full-blown global recession will only partly undo the effects of the rampant money-printing by the world`s major central banks over the past 3 years.

[Fusion_power]

Gas is heading higher EWM. The dynamic playing out now is an old refrain where pumping up the supply of US dollars depresses the value of the $ on world markets which then causes oil to rise. As the supply of dollars rises depressing the dollar on world markets, oil must rise since it is traded in dollars.

It is interesting to me that when gas hit $4.30 per gallon a couple of years ago, everyone gasped and stopped traveling which increased supply and reduced demand forcing prices to tumble. I bought gas as low as $1.35 just 2 years back after that price collapse. Now we are up to about $3.65 per gallon on average in this area. I expect it to be over $4 within 4 weeks.

DarJones

[ewmayer]

Matt Taibbi takes on the "bold and courageous deficit-slashing budget proposal" recently put forth by GOP "pinstriped prep-school cutie" darling Paul Ryan in one his latest blog postings:

Tax Cuts for the Rich on the Backs of the Middle Class; or, Paul Ryan Has Balls:

The problem, of course, is that to actually make significant cuts in what is left of the “welfare state,” one has to cut Medicare and Medicaid, programs overwhelmingly patronized by white people, and particularly white seniors. So when the time comes to actually pull the trigger on the proposed reductions, the whippersnappers are quietly removed from the stage and life goes on as usual, i.e. with massive deficit spending on defense, upper-class tax cuts, bailouts, corporate subsidies, and big handouts to Pharma and the insurance industries.

This is a political game that gets played out in the media over and over again, and everyone in Washington knows how it works. Which is why it’s nauseating (but not surprising) to see so many commentators falling over themselves with praise for Ryan’s “bold” budget proposal, which is supposedly a ballsy piece of politics because it proposes backdoor cuts in Medicare and Medicaid by redounding their appropriations to the states and to block grants. Ryan is being praised for thusly taking on seniors, a traditionally untouchable political demographic . Here is how old friend David Brooks, taking a break from his authorship of breathless master-race treatises, put it in a recent column called “Moment of Truth”:

Over the past few weeks, a number of groups, including the ex-chairmen of the Council of Economic Advisers and 64 prominent budget experts, have issued letters arguing that the debt situation is so dire that doing nothing is not a survivable option. What they lacked was courageous political leadership — a powerful elected official willing to issue a proposal, willing to take a stand, willing to face the political perils.

The country lacked that leadership until today. Today, Paul Ryan, the Republican chairman of the House Budget Committee, is scheduled to release the most comprehensive and most courageous budget reform proposal any of us have seen in our lifetimes…

Brooks sums up the Ryan proposals this way:

The Ryan budget will put all future arguments in the proper context: The current welfare state is simply unsustainable and anybody who is serious, on left or right, has to have a new vision of the social contract. The initial coverage will talk about Ryan’s top number — the cuts of more than $4 trillion over the next decade. But the important thing is the way Ryan would reform programs…

Brooks then goes on to slobber over all of Ryan’s ostensibly daring proposals, from the Medicare block grants to the more obnoxious Medicare voucher program (replacing Medicare benefits with vouchers to buy overpriced private insurance, which Brooks calls the government “giving you a sum of money” to choose from “a regulated menu of insurance options”).

What he doesn’t mention is that Ryan’s proposal also includes dropping the top tax rate for rich people from 35 percent to 25 percent. All by itself, that one change means that the government would be collecting over $4 trillion less over the next ten years.

Since Brooks himself is talking about Ryan’s plan cutting $4 trillion over the next ten years (some say that number is higher), what we’re really talking about here is an ambitious program to cut taxes for people like… well, people like me and David Brooks, and paying for it by “consolidating job-training programs” and forcing old people to accept reduced Medicare benefits.

My Comment: I snipped the opening bit of Taibbi-esque color from the above because I wanted to stick to the more substantive discussion. But Taibbi - even if you disagree with him - is too good a wordsmith to ignore like that, so here is the opening by way of an end-of-work-week sendoff to our loyal readership:

"Paul Ryan, the Republican Party’s latest entrant in the seemingly endless series of young, prickish, over-coiffed, anal-retentive deficit Robespierres they’ve sent to the political center stage in the last decade or so, has come out with his new budget plan. All of these smug little jerks look alike to me – from Ralph Reed to Eric Cantor to Jeb Hensarling to Rand Paul and now to Ryan, they all look like overgrown kids who got nipple-twisted in the halls in high school, worked as Applebee’s shift managers in college, and are now taking revenge on the world as grownups by defunding hospice care and student loans and Sesame Street. They all look like they sleep with their ties on, and keep their feet in dress socks when doing their bi-monthly duty with their wives."

[Fusion_power]

I keep thinking that one day the politicians are going to realize the desperate nature of the debt load the U.S. is carrying. Fat Chance!

/begin rant

Obama is now ready to publicize his own version of the deficit reduction du jour. Instead of balancing the budget in anything resembling a reasonable solution, we get to listen to the republicans attempt to lower tax rates on the wealthy and the democrats equally voluble to raise taxes on the wealthy. Isn't it about time somebody realized that there we are living the parody of (only 10 people in the United States and one of them pays taxes and that ONE is about dead from overwork)?

The underlying problems are already so huge that they may be beyond resolution. The only way we can eliminate some of this huge burden of debt is by getting businesses like GE to actually pay a fair amount of tax, cutting tax shelters and write offs, increasing taxes in a meaningful way, eliminating "take from the rich, give to the poor" programs like earned income credit, doing significant surgery on programs like medicare/medicaid, etc, etc....

end rant/

So get ready for another dog and pony show complete with popcorn and tiddlywinks. This promises to be entertaining... for a few minutes at least.

DarJones

[Prime95]

Ernst can finally raise is count of financial villans facing indictment. Better late than never. The Department of Justice indicted 11 people for major bank fraud yesterday. Hooray, those scumbags will finally pay for their fraudulent mortgages, packaging toxic crap up and selling it as grade A paper, and sending the bill to Uncle Stoopid when it all fell apart.

http://content.usatoday.com/communit...solute-poker/1

Oh wait. My bad, this wasn't related to mortgage fraud and scandal. These guys wanted people to play poker online with their own money. Well, maybe the DOJ knows something I don't, maybe this really is a bigger crime than blowing up the entire U.S. and world economy.

Upon further reflection, I do feel so much safer knowing I will not face financial ruin playing poker with that $1000 I had online. Maybe the Feds can invest that $1000 in some mortgage backed securities from one of the big banks....

[xilman]

"If an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns.

http://www.bbc.co.uk/news/business-13118834