Misery Economic Theater 2011

[ewmayer]

Ambrose Evans-Pritchard Loses His Mind

Geithner Plan for Europe is last chance to avoid global catastrophe

Europe, the G20, and the global authorities have one last chance to contain the EMU debt crisis with a nuclear solution or abdicate responsibility and watch as the world slides into depression, endangering the benign but fragile order that has taken shape over the last three decades.

My Comment: "Benign" ... if you consider willfully offshoring much of the developed world`s productive-economic capacity in order to dodge environmental and labor laws, allowing those overseeing the scheme to get hugely rich, and papering over the accompanying destruction of the wage base of the lower 4 quintiles of the economy by selling them into lifelong debt-servitude "benign", then yes, I suppose the "new world Ponzi-financial order" that has grown so rampantly over the past 30 years is "benign".

"The threat of cascading default, bank runs, and catastrophic risk must be taken off the table," said US Treasury Secretary Tim Geithner over the weekend.

"Sovereign and banking stresses in Europe are the most serious risk now confronting the world economy. Decisions cannot wait until the crisis gets more severe."

Euroland's dysfunctional arrangements are no longer a local affair. As the European Central Bank's Jean-Claude Trichet said in Washington, EMU is at the epicentre of a global sovereign debt crisis that risks engulfing all, and is more intractable than 2008 because governments themselves are now crippled.

China, India, Brazil and the world's rising powers will not escape lightly this time if leaders let events spiral out of control. European banks have lent $3.4 trillion to emerging markets (BIS data), or three quarters of external loans to these countries.

The International Monetary Fund warned last week that emerging markets face the risk of "sharp reversals" or even a "sudden stop" if there is further spill-over from Europe. This comes at a time when Asia and parts of Latin America are already in the topping phase of a credit boom, one of epic proportions in China where loans have doubled to almost 200pc of GDP over the last five years.

My Comment: do I detect a common theme underlying all the admittedly-dire issues? Credit bubbles ... crippling debt ... excessive leverage ... Ok, so the problem is "too much debt" - and at the epicenter of the storm is the banks which profited so handsomely from 30 years of exponential debt growth, and the governments which aided them in the scheme and watched happily as the epic debt explosion masqueraded as "economic growth".

The reserve powers would be well advised to pull out all the stops to save Europe and its banking system. Together they hold $10 trillion in foreign bonds. If they agreed to rotate just 4pc of these holdings ($400bn) into Spanish, Italian, and Belgian debt over the next two years, they could offer a soothing balm. None has yet risen to the challenge. It is `sauve qui peut', with no evidence of G20 leadership in sight.

Sorry, Ambrose, no amount of "soothing balm" (better-known as "stealth taxation via currency debasement") is going to actually fix the problem. The U.S. has thrown trillions at its version of the problem, and fixed exactly NOTHING thereby. And given that the backers of the EFSF are now throwing around numbers in the 2-trillion-Euro range to "contain Spain and Italy as well". 400 Bln isn`t even going to be close.

Once again, the US has had to take charge. The multi-trillion package now taking shape for Euroland was largely concocted in Washington, in cahoots with the European Commission, and is being imposed on Germany by the full force of American diplomacy.

It is an ugly and twisted set of proposals, devised to accommodate Berlin's refusal to accept fiscal union, Eurobonds, and an EU treasury. But at least it is big.

The EU's €440bn bail-out fund (EFSF) will be "leveraged" from €440bn to €2 trillion to cope with Italy and Spain. The fund will assume an "equity" stake of 20pc or so in holdings of EMU debt, supported by loans of 80pc from the European Central Bank.

Right - so "more leverage" and more of the same kind of "nuclear option" bank bailouts that worked so well in the U.S. are now being prescribed for Europe by those legendary financial quacksalvers, Messrs Geithner and Bernanke. Yes, I feel much better about this already.

Even if the €2 trillion "Geithner Plan" does get off the ground, it can do no more than buy time - not to be sneezed at, for sure.

Aha, so more can-kicking is prescribed...If I`m not permitted to sneeze at it, may I be permitted to spit on it or urinate in its general direction?

The root of the euro crisis is a 30pc intra-EMU currency misalignment between North and South. That structural flaw cannot be solved with debt guarantees or bank rescues.

Nor can this gap in competitiveness be bridged by austerity alone, by pushing Club Med deeper into debt-deflation and perma-slump. Such a strategy must slowly eat away at Italian and Spanish society, undercutting the whole purpose of the EU Project. It would ultimately risk trapping them in a debt spiral as well, leading to colossal losses for Germany in the end.

The Geithner Plan must be accompanied by a monetary blitz, since the fiscal card is largely exhausted and Germany refuses to lower its savings rate to rebalance the EMU system. The only plausible option is for the ECB to let rip with unsterilized bond purchases on a mass scale, with a treaty change in the bank's mandate to target jobs and growth.

So the solution for "lack of competitiveness" in the Club Med countries is to punish those "evil Germans who resist becoming debt slaves like the rest of us" ... That will address the competitiveness issue how? Or is it the proposed "money-printing blitz" which is supposed to magically make the PIIGS competitive? Call me dense, but I`m not seeing the connection between the problem and the proposed solution here.

This would weaken the euro, giving a lifeline to southern manufacturers competing with China. It would engineer an inflationary mini-boom in Germany, forcing up relative German costs within EMU. That would be the beginning of a solution, albeit a bad one.

"Competing with China" is something the PIIGS can only dream of doing, as long as their economies are so grossly distorted by an oversized non-productive government sector. Until those economies drastically downsize their parasitic components and actually invest in goods-producing sectors, "southern manufacturing" will alas remain largely an oxymoron. But I`m sure Germans share AEP's wistfulness for those good old "inflationary mini-boom" times of Weimar and post-WW2, when people's lives were so wonderfully repurposed by having their life`s savings destroyed. Yep, them was good times ... just me and my wheelbarrow full of cash, on the way to the Biergarten to buy a beer. (If I wanted a pretzel with that I of course needed to make a second trip).

Sorry Deutschland. History has conspired against you, again. You must sign away €2 trillion, and debauch your central bank, and accept 5pc inflation, or be blamed for Götterdämmerung. It is not fair but that is what monetary union always meant. Didn't they tell you?

Said the guy from the country that did all it could to have it both ways - benefit from the monetary integration of its mainland neighbors while blowing its own credit bubble and working-calls wage-base destruction. "Get the guys who actually invested in their manufacturing economy and did not run up the national credit card to the tune of several GDP multiples to pay for it."

Also, Ambrose conveniently forgets that the Germans already went through a severe period of austerity and what they refer to as "Budgetsanierung" as a result of re-integrating the former Eastern Germany. "Punish the prudent" - Why does that sound so sickeningly familiar? Well, if the prudent stand for this, they deserve everything that`s coming to them as a result.

[Fusion_power]

The mortgage debacle is arguably starting to wind down. It absorbed hundreds of billions of taxpayer dollars that are being quietly disposed of in the hands of Fannie and Freddie. There is some serious sleight of hand involved in the process given the myria-billions that were pumped into the economy by the feds either borrowed or created like magic. The article linked below should be viewed by Ewmayer as proof that at least a few sacrificial goats were convicted.

The fraud began in 2002 and took multiple forms until Taylor Bean collapsed two years ago. The Ocala-based company shut down after federal agents raided its headquarters in August 2009, which led to the failure of Alabama-based Colonial Bank — the sixth-largest bank failure in U.S. history.

At its peak, Taylor Bean had about 2,500 employees and had originated some $30 billion in loans as of 2009.

Seven Taylor Bean executives were convicted of federal criminal charges, including former chairman Lee B. Farkas, who was sentenced in June to 30 years in federal prison. Federal prosecutors called the criminal case one of the most significant to arise out of the nation's financial meltdown.

http://moneywatch.bnet.com/economic-...-case/6304537/

But this brings on a question. What happened to the auditors? Why didn't the auditors of these huge banking organizations raise flags and blow whistles years ago? And why aren't the auditors being held accountable? Read the article for one bit of grandstanding and denial. You don't have to look far to find out that the auditors are highly conflicted. Who pays for the auditing? Who would benefit by having a good audit? Let me see.... "your books look good this year, here is our bill". That is just as bad as the ratings companies that are paid by the companies they rate.

DarJones

[Christenson]

Arthur Andersen, anyone?

[garo]

http://whitecollarfraud.blogspot.com...anagement.html


Money shot:

Last week, Groupon restated its financial reports to comply with revenue accounting rules as called for by Ketz and Catanach. The company revised its reported 2009 revenues from $30.5 million to $14.5 million and its 2010 revenues from $713.4 million to $312.9 million – no small potatoes!

Why did Groupon’s CFO and its auditors at Ernst and Young (the third largest accounting firm in the world) miss revenue accounting violations? Ketz and Catanach did not have access to company management or its books and records. They found GAAP violations from merely reading financial reports filed with the S.E.C. in anticipation of the company’s initial public offering. They compared the company’s revenue accounting disclosures with applicable accounting rules and found material misstatements in violation of GAAP. Were Groupon’s management and its auditors stupid?

[ewmayer]

Re. Groupon: Fellow DotBomb 2.0 IPO wannabe Zynga is engaging in similarly creative accounting:

Accounting Questions, Market Timing Delay Zynga IPO

A sign of the times? Mere overreaction? Either way, news that Zynga, the company behind popular online games such as FarmVille and CityVille, might delay its initial public offering had Silicon Valley and the press abuzz on Monday.

The New York Post reported that the company said in a Securities and Exchange Commission filing that the offering, originally scheduled for as soon as possible or early September, could be delayed.

One reason Wall Street might be in a tizzy over the delayed Zynga IPO is because this is one of the more widely anticipated tech public offerings. No, Zynga won’t be par with Facebook, but it is probably in the realm of Groupon in terms of offering size and demand. A $2 billion IPO from Zynga could value the company at $15 billion to $20 billion, plus Zynga said it is already profitable, as Trader Daily noted last month.

But is the delay of Zynga’s IPO really any big deal? The late August/early September time frame isn’t traditionally active in terms of IPOs. After all, bankers need to get in one last weekend at the Hamptons. Plus, an October offering makes a lot of sense, as CNN Money points out.

On the other hand, it’s important to note why Zynga’s Morgan Stanley-led IPO might be shelved for a little while. Citing unidentified sources, CNBC reported that the fine folks at the SEC are asking Zynga for more clarity on the company’s accounting metrics. At issue are “bookings,” which Zynga describes in a recent document as the total revenue from the sale of virtual goods in games or advertising that Zynga would have reaped if it could have recorded all the proceeds immediately, according to CNBC. Problem is, bookings aren’t part of generally accepted accounting principles.

Groupon previously garnered headlines for irking the SEC with its own use of a questionable accounting metric. The coupon company said earlier this month that it would ditch that methodology, which didn’t include marketing costs.

Of course Morgan Stanley has vast experience with fraudulently-overvalued IPOs - remember LinkedIn? (Which MS downgraded not long after co-IPO-underwriting.)

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

Nice rundown on the "leveraged EuroTarp" proposal for taking the existing EFSF and "multiplying its potency using the magic of leverage":

Euro Tarp - Why It Will Be A Screaming Failure

The EFSF fund has already committed to providing emergency loans to Ireland, Portugal and Greece – the worst bets on the table. It is expected to provide over 100 million euros ($134.9 million) in additional funding for a Greek bailout. According to some estimates after those loans, the fund will be down to about 295 billion euros ($400 billion), So we assume they take roughly $200 billion or so from the European Financial Stability Facility to fund the special purpose vehicle.

$200 billion is not NEARLY enough to solve the problems that Europe faces so the SPV will likely, as suggested by Tim Geithner, be levered up to 9x its capital giving the this vehicle about $1.8 Trillion to work with. The SPV, as stated will take the PIIGS debt in and the banks will get EIB paper which they can then use as collateral to get liquidity from the ECB. Doesn’t this sound a lot like the “good bank/bad bank” solution that Lehman tried to sell?

Yes, the EIB paper is of stronger credit – barely - than the PIIGS paper but you are still left with the fact that broke countries are taking in debt from countries that cannot pay their debts, issuing a SPV to sell to other broke banks so that they can use it as collateral to borrow money after it has been leveraged 9x. 9x times a problem doesn’t make the problem smaller does it? What could possibly go wrong?

[ewmayer]

An amusing "EuroZone Crisis NewsBlather" video clip to start your weekend off right:

Peter Oborne 'Idiot' Comments Prompts EU Spokesman To Storm Off Newsnight


Bloomberg's Jonathan Weil has a funny (and very handy "Eurozone bailout language translation guide":

What Europe’s Leaders Mean When Their Mouths Move: The error most Americans make when trying to understand the European debt crisis is this: They fail to realize that the euro isn’t just a doomed currency, but a language unto itself.

To truly see the meaning of the seismic events rapidly reshaping Europe, you must know what the following 10 Euro terms of art mean in plain American English:

1. Finance ministry: A house of worship where government leaders go to pray for bailouts, economic miracles, panaceas and other forms of divine intervention.

How to use in a sentence: Officials at the Greek Finance Ministry said they remain hopeful the country will receive its next batch of rescue loans in time to avoid a cataclysmic default.

2. Coordinated: Chaotic, unfocused, brain-dead, paralyzed to the point of nonexistence; even in its best moments resembling a hopeless klutz.

Example: Finance ministers from the Group of 20 nations last week said they were “committed to a strong and coordinated international response to address the renewed challenges facing the global economy.”

3. Firewall: A partition made of fireproof material to prevent the spread of flames from one place to another. Of no use in containing a financial crisis, except as vague public- relations catnip for readers of news articles who can’t tell the difference between napalm and a 10-year bond.

Usage: U.S. Treasury Secretary Timothy Geithner, who is fluent in both Euro and Mandarin, last weekend urged euro-area nations “to create a firewall against further contagion.”

4. Contagion: A financially transmitted psychiatric condition, marked by intense fear of losing everything. Only known treatments in use at the moment are firewalls, rather than anything that actually works.

5. Peripheral country: A core, indispensable member of the European Union. Related word: Sovereign, meaning German or subservient to Germany.

Example: “Although some peripheral countries in Europe continue to experience acute pressure on their sovereign debts, the risk of a broader contagion throughout the area did not materialize,” Italy’s finance minister, Giulio Tremonti, said April 16, four months before Europe’s central bank rescued Italy via large, open-market purchases of Italian government bonds.

6. Stability mechanism: A wooden paddle ball, mainly used for contests between office workers to see how many times they can bounce the little rubber ball off the paddle without missing; also advertised as a cure-all device for comatose economies.

Usage: The European Stability Mechanism, due to take effect in 2013 as a permanent successor to the region’s current bailout fund, will have a “lasting, stabilizing, confidence-creating function,” German Finance Minister Wolfgang Schaeuble told reporters on Sept. 24.

7. TORRP: The much-awaited European version of TARP. Abbreviation derived from the second letter of each of the following countries’ names: Italy, Portugal, Ireland, Greece and Spain.

Rumored to stand for Troubled Obligation Relief Relief Program, providing relief from the relief. In fact, it stands for nothing in particular, like other government institutions. Unlike the U.S. Troubled Asset Relief Program, any TORRP money distributed to European banks is guaranteed never to be repaid.

8. Controlled default: The act of telling another country’s government that it’s OK to stiff most creditors, and then watching with morbid fascination to see if the global banking system falls apart. Originally an aviation term used to describe the final landing of the Hindenburg, which crashed all by itself without taking any other zeppelins with it.

9. Recapitalize: To transfer money from a country’s middle- class taxpayers to an insolvent bank -- in essence, a bribe to bondholders and senior management -- as a way of ensuring that the wealthy don’t rise up and oust the government.

Related term: Austerity. As in, an economic-stimulus program that involves doing exactly the same thing, except the money comes from the citizens of a different country, such as Greece, who are left to subsist on a diet of untreated water and surplus rice.

Usage: “More banks may need to be recapitalized,” European Union Competition Commissioner Joaquin Almunia said Sept. 20 at a press conference in Brussels. “That’s why it’s so important to solve the sovereign-debt crisis without a delay.”

10. Covered-bond purchase program: Forget it, way too complicated to explain here.

Just remember this. The EU and its member nations’ finance ministries are proceeding with their coordinated efforts to erect firewalls, and will never permit contagion to spread beyond the euro area’s peripheral countries. Remain calm. All is well. Everything is under control.

My Comment: The full article has many useful embedded links, including one to a similar glossary Weil previously published, the Goldman Sachs dictionary. And keep in mind the famous aphorism by Herr Von Bismarck [at least so I'm told - precise attribution woulkd be appreciated], "Believe nothing until it is officially denied".

[xilman]

Originally Posted by ewmayer

An amusing "EuroZone Crisis NewsBlather" video clip to start your weekend off right:

Peter Oborne 'Idiot' Comments Prompts EU Spokesman To Storm Off Newsnight


Bloomberg's Jonathan Weil has a funny (and very handy "Eurozone bailout language translation guide":

What Europe’s Leaders Mean When Their Mouths Move: The error most Americans make when trying to understand the European debt crisis is this: They fail to realize that the euro isn’t just a doomed currency, but a language unto itself.

My Comment: The full article has many useful embedded links, including one to a similar glossary Weil previously published, the Goldman Sachs dictionary. And keep in mind the famous aphorism by Herr Von Bismarck [at least so I'm told - precise attribution woulkd be appreciated], "Believe nothing until it is officially denied".

From http://www.angelfire.com/or/truthfinder/wisequote.html

"Never believe in anything until it has been officially denied" Otto von Bismarck, 1815-1898

"Believe nothing until it has been officially denied" (1956) Claud Cockburn

"Nobody believes a rumor here until it's officially denied" Edward Cheyfitz, Washington D.C.

"Believe nothing merely because you have been told it" Buddha

And note that it's "von Bismarck". I'm surprised a German speaker would make that typo ...


Paul

[Fusion_power]

The news today is a surprising hodgepodge. A noted think tank announced that a recession is incipient and unavoidable. This seems to come as a surprise to some blatter heads in Washington. Another blatter head wants to borrow up to $2 Trillion for infrastructure spending in the U.S. and would leverage public money to do so. This would be along the lines of the European proposal of public funding for a special bank to the tune of 10% of the projected cost followed by issuing bonds and selling them to the private sector for the remaining 90% of the cost. The "beauty" of this arrangement is that it only adds a few $ per year to the deficit. Yeah, right, we need to discuss this bridge I own......

Across the pond, acknowledgement is finally being made that the systemic problems in Greece are far greater than Greece cares to admit. 8 billion more euros in October, but within the next 3 years, they need another 150 billion minimum. A few Germans are openly suggesting that Greece needs to wash its underwear out somewhere outside the EU. Greece is an open pit for money and that won't change any time soon. Italy and Spain look to be near the same condition.

DarJones

[Christenson]

Originally Posted by Fusion_power

The news today is a surprising hodgepodge. A noted think tank announced that a recession is incipient and unavoidable. This seems to come as a surprise to some blatter heads in Washington. Another blatter head wants to borrow up to $2 Trillion for infrastructure spending in the U.S. and would leverage public money to do so. This would be along the lines of the European proposal of public funding for a special bank to the tune of 10% of the projected cost followed by issuing bonds and selling them to the private sector for the remaining 90% of the cost. The "beauty" of this arrangement is that it only adds a few $ per year to the deficit. Yeah, right, we need to discuss this bridge I own......

Across the pond, acknowledgement is finally being made that the systemic problems in Greece are far greater than Greece cares to admit. 8 billion more euros in October, but within the next 3 years, they need another 150 billion minimum. A few Germans are openly suggesting that Greece needs to wash its underwear out somewhere outside the EU. Greece is an open pit for money and that won't change any time soon. Italy and Spain look to be near the same condition.

DarJones

Now why does *any* of this surprise you?

OK, now for my next economics history question, seeking guidance for the crystal ball: Not too long ago, 1970s, a number of central american, south american, and african economies were in similar straights, owed a lot of $$ abroad. How did that money get repaid or not?

And what is Greece planning on exporting?

[garo]

Peter Oborne or Paxman (the moderator) didn't exactly cover themselves with glory here. You may disagree with someone's views. But calling them an idiot on live TV is just bad behaviour.

[R.D. Silverman]

Originally Posted by Fusion_power

The news today is a surprising hodgepodge. A noted think tank announced that a recession is incipient and unavoidable.

<snip>
Across the pond, acknowledgement is finally being made that the systemic problems in Greece are far greater than Greece cares to admit. 8 billion more euros in October, but within the next 3 years, they need another 150 billion minimum. A few Germans are openly suggesting that Greece needs to wash its underwear out somewhere outside the EU. Greece is an open pit for money and that won't change any time soon. Italy and Spain look to be near the same condition.

DarJones

The following essay might be of interest:

http://www.cnn.com/2011/10/03/opinio...html?hpt=hp_t1