"European banks’ toxic debts risk overwhelming EU governments"

The title of this Telegraph article may strike some US readers as alarmist, and since one of the two authors is Ambrose Evans-Pritchard, a card carrying member of the uber-bear club, it may be easy to dismiss it.

But that would be a mistake. I was in Austria in December, meeting with some local businessmen, and to a person, they expected the bank failures to be of a scale that would force Germany to rescue the Austrian government (the German part of the contingent was amused at the Austrians’ confidence that Germany would rush to their aid). Willem Buiter asserts that there is a “non-trivial risk” that Britain could go the way of Iceland. UBS alone poses a risk to Switzerland.

From the Telegraph:

“Estimates of total expected asset write-downs suggest that the budgetary costs of asset relief could be very large both in absolute terms and relative to GDP in member states,” said the document, prepared for a closed-door meeting of EU finance ministers.

“For some member states, it may be the case that asset relief for banks is no longer an option, due to their existing budgetary constraints and/or the size of their banks’ balance sheet relative to GDP. The extent of any risks to the EU banking system as a whole from an inadequate response in these member states needs to be considered, particularly in the case of cross-border banks”.

While no country was mentioned, the obvious candidates are Ireland, Luxembourg, Belgium, the Netherlands, Austria, Sweden, and Britain — and non-EU member Switizerland — which all have oversized banking sectors…

The IMF says European and British banks have 75pc as much exposure to US toxic debt as American banks themselves, yet they have been much slower to take their punishment. Write-downs have been $738bn in the US: just $294bn in Europe.

Global banks have so far written down half the $2,200bn losses estimted by the IMF. On top of this, EU banks have $1,600bn of exposure to Eastern Europe — increasingly viewed as Europe’s subprime debacle, and EU corporate debts are 95pc of GDP compared to 50pc in the US, a mounting concern as default rates surge.

The EU document also highlighted the “real danger of a subsidy race between member states” if countries start to undercut each other in the way they value toxic debts in their `bad bank’ rescue programmes. This could be used as a means of covert state aid, undermining the unity of the EU single market.

It could also lead to an explosion of budget deficits, already threatening to hit 12pc of GDP in Ireland next year and almost 10pc in Spain and Britain.

“It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems. Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance,” it said.

The nice thing about having the reserve currency is the US isn’t worried about that sort of thing…..yet.

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47 comments

  1. Anonymous

    They should just freeze the bank stocks, fire the morons who got us into this mess and hold a big conference to sort out and possibly collectively nullify all the CDS and other stupid instruments re-arranging and revaluing assets accordingly. With the way credit markets are today, I doubt they’d notice a few more missing days.

    Of course that would require REAL global cooperation plus sacrificing some of the wealth of the elite minority, and we can’t have that. Also after China demanded empty guarantees on US debt and the Buy ‘x’ country policies, I expect more posturing and less cooperation.

  2. bb

    i am sure it would make more sense for the chinese gov’t to buy bankrupt european industrial capacity than bankrupt u.s. gov’t debt.

  3. bg

    I have thought it was common knowledge for a year that european banks were more exposed than the US banks because of their toxic assets were comperable or worse to ours, but the governmental structure was unprepared to do much, and the central banks won’t give them a yield curve to work with.

    What I missed was the markets can stay innefficient longer than you (I) can remain solvent. Eyes wide shut denial is working for the EU.

    Yves, your comment about the US$ long term may be true, but the definition of long term may outlive us if we create a world of zombie banks. But my conviction about the dollar is fading.

    My trading strategy had assumed that the EU would have zero interest rates before the fed bought treasuries. And all of this would happen long before China dumped treasuries.

    I have noticed that Bill@pimco has predicted the government response by 3-6 months, (first with constipated owls, later demanding bank bailouts, then later demanding stimulus). Recently he said that the day the fed buys treasuries will “be a very good day”. That means we are 3-6 months away (by my silly simplistic model.)

    I no longer believe that the EU banks will be in full crisis and bailed out that quickly. In this scenario, we will see massive currency volatility (as opposed to a sudden reset like iceland), which will add further uncertainty to low margin international trade. We have a couple of more legs down to play out on this crisis.

  4. Anonymous

    NOT LUXEMBOURG, they were the most willing to buy crap assets to play the debit game, snap where to go now.

    BTW for those with parachutes remember to clear all sensitive body parts in the groin area or BANG, nuthin like clawing air for thousands of feet till the sudden stop or its not the fall that kills but the sudden stop.

    skippy

  5. bb

    this 1,600bn eastern europe number seems suspect. in none of the countries the housing sector is greater than 10% of GDP (PL,HU,CZ,SK,RO+Rest=1.6bn GDP), and the bulk of homes are bought cash, except for speculative purchases by irish, british, and swedish citizens.
    the bulk of the loans are (if you have ever been in eastern europe) to subsidiaries of western european companies. most of the goodies are sold in the eurozone.
    and on the budget deficit side: Ireland+Spain make less than 15% of the eurozone GDP, the rest has deficits of just below 3%. compare this to 12% across the whole US economy.

  6. aw70

    Yves,

    I understand that some or all of what you heard in Vienna back in December might have been confidential, but hearing more about these theories that Austria is facing huge bank failures would be very, very interesting.

    I’ve been following the development of this particular piece of drama quite closely, and so far, it seems to be genuinely hard to tell what will happen. On paper, the prospects for the Austrian banks look dismal, because they have so much exposure to the “developing” (and now faltering) economies in former communist eastern Europe. However… that economic area is one where a very particular set of rules and constraints applies, and it is not at all clear if and how much money will end up going down the drain through these commitments.

    While a lot of these commitments are, on paper, not worth all that much anymore *at the moment*, they do represent a lot of systemic value to these economies – systemic value that these economies are not likely to shed anytime soon. And it is in many cases very unlikely that they will have to be written down with a huge loss, given a bit of time – quite the contrary, actually. The economic exposure to the former East is mainly in the form of loans that were used to finance real projects in developing economies – infrastructure, and commercial activities in strongly under-saturated markets.

    This is in stark contrast to, say, the woes of the U.S. credit market, which derives its problems from banks having huge loads of genuinely overvalued crap on their books. Given time, the stuff the Austrian banks have on their books can, and – barring a complete economic meltdown – *will*, show its intrinsic value, if that is needed.

    Now all this is good and fine, but – unfortunately – does not mean that no Austrian banks will go bust in the near future through financial technicalities. Which is why I’d be very interested to hear what you’ve got to say about this.

  7. Hubert

    I second BB,

    that 1600 bn is impossible. 160 bn could be it though I would have guessed somewhat more. In current terms 160 bn does not sound much but Austria is a small country and they have a big part of it.

  8. Yves Smith

    The fact that Austrian banks were bust seemed to be common knowledge. Austria was the gateway for lending to Eastern Europe, so many of the loans booked with Austrian banks were not for Austrian companies. I am not certain, but they may also have had branches in Eastern Europe (but I would suspect the deposits gathered there would not have been all that large).

  9. aw70

    Yves,

    thank you for your quick reply! What I meant was that of course everyone agrees that *technically*, most Austrian banks are bust, at least if they had to value their assets and loans in the current economic climate. This is no different from most banks in the western world at the moment, though.

    However, and this is what interests me… the particular type of “toxic asset” that the Austrian banks are holding might not be quite as toxic as it seems – not by a wide margin. Or not. This is what any debate about the state of these banks currently seems to revolve about.

    If you by any chance were listening to people like Stefan Pierer, a local industrialist in Austria, you might want to get a second opinion, by the way. While he seems to be adept at running a manufacturing business, consensus has it that he made a wise career choice by not becoming a banker. I’m saying this because he has been one of the more vocal prophets of doom recently, which seems an odd thing to do for a leader of (local) industry. You’d expect the likes of him to at least shut up, if they can’t say anything positive.

  10. bb

    eastern europe housing (excluding ex USSR) loans are in the range of 40-50bn euro.
    austrian banks have branches in eastern europe and have been lending irresponsibly in 2007-2008, but the total amount is laughably small.
    they have been heavily lending to russian and ukranian businesses. do you expect the russians to hand over their natural resources companies to foreign banks for a few hundred billion of loans? the government can easily take over the loan repayment.

  11. Anonymous

    Your blog posts seem to be having more sloppy type-Os and syntax mistakes of late. I haven’t been counting, but I’d say each of the articles that I’ve read the last 3 days has had one or more mistakes.

  12. Anonymous

    Euroland’s problems are all very interesting (just tell them to start printing) but California is about to go belly up.

  13. Anonymous

    Yves,

    “European and British banks” (I thought Britain was both in Europe and the EU).

    “budget deficit already threatening to hit (…) almost 10 pc in Spain” Where does he get those estimates from? The official estimate is 4.8%, and Solbes (the Spanish VP and Minister for Economic Affairs, and a former EU Commissioner fining countries with large budget deficits) would never allow it to get much higher.

    Keep up the good work and best regards,

    Diego Méndez

  14. Anonymous

    For those doubting the Euro 1,600 bln, as long as Russia is included, I can get to 750 bln easily. Very easily.

    And this is only their direct, on-balance sheet subsidiaries. That is, not including cross-border loans to e.g. Russian, Kazakh companies. I fear the 1,600 bln is overly conservative.

  15. Anonymous

    Why ignore Germany? That’s where that huge, teetering mass Deutsche Bank swivels its planet-like size while balanced on a wafer.

  16. Chris

    There’s an issue of ambiguity here.
    When you say “American banks” what are you talking about? All of them, some of them, or a handful of them?

    It is well known by now that using “all American banks” as the divisor in any ratio produces results which can be misleading. So too when “some American banks” is the choice.

    Total assets divided by all American banks gives a much lower leverage ratio than for European banks. Similarly dividing some of the assets by some American banks.

    But the assets, and therefore dollar ratios to GDP and stuff are highly concentrated among a handful of US banks.

    The assets of those banks, per bank, is an interesting number, as it also is relative to GDP etc.
    Equally, that handful of banks is comparable to each European country’s handful of banks in a much less misleading way than is usually represented.

    The UK is deciding what to do about its 5 or 6 banks. Germany has how many? Three big ones plus the Landerbanken? France four or five.

    Each of these separates out savings institutions and provides cash and deposit taking services through the post offices.

    Oh, and since lending to places like in Eastern Europe was often done with borrowed funds, like the ones raised in Japan where low interest rates favored carry trades, the issue of “For whom the bell tolls…” is one that very much does need to be asked about, because very little of the aggregated information that people rely on to make decisions is fine-grained enough to permit confidence that the decisions made will on balance be right ones.

  17. DoctoRx

    No one can have any idea what loans are “good” or “bad”. As Hamlet said, “there’s nothing good or bad but (meaning “except) thinking makes it so”.

    The key is the real economy, which drives the performance of the loans. Since that’s unpredictable, so is the default rate.

    The real key for the future IMHO is to move decisively toward equity financing and away from debt on all levels.

    The implication of that reasoning is that pushing bad assets out of financial institutions so they can lend again is a strategy that is doomed to fail.

  18. Anonymous

    Join us next week for another exiting episode Titled “U.S. banks’ toxic debts risk overwhelming U.S. Government”

  19. Timo

    “…Ambrose Evans-Pritchard…”

    That stupid Anglo still barking? The credibility of Anglo economists nowadays is somewhere between a Zimbabwean economist and a Siberian drunken bear. Except Siberian Drunken Bear is much more funny!

  20. bb

    Anon @ February 12, 2009 8:17 AM

    thanks for the numbers. there is no detail behind the totals, so it is unclear to me how much was lent to domestic eastern european companies & citizens (pure foreign risk exposure) and how much to wholly owned subsidiaries of foreign corporations(de facto domestic exposure).
    the lending practice on the surface seems to be the following: french companies borrow from the eastern european subsidiaries of french banks, german companies from german banks, italian from italian, austrian from austrian, etc.

    the BIS has just stopped short of aggregating as well the loans of all debtors that cross the national borders on the continent. it is only due to the impractibility of such an approach.

  21. Matt Stiles

    Yves,

    I was writing an article on European troubles and referencing Evans-Pritchard in doing so. I noticed the link to the story you reference, however there were far more details and the article has since been censored.

    I copied the entire text of the original article to my website interspersed with my comments. The original number cited by the EC in the “leaked document” was 16.3 Trillion pounds or 44% of entire European bank assets as “impared.”

    It’s toward the end of my article:
    European Disintegration Continues

  22. Anonymous

    bb: this 1,600bn eastern europe number seems suspect. in none of the countries the housing sector is greater than 10% of GDP (PL,HU,CZ,SK,RO+Rest=1.6bn GDP), and the bulk of homes are bought cash, except for speculative purchases by irish, british, and swedish citizens.

    I second that.

    aw70: While a lot of these commitments are, on paper, not worth all that much anymore *at the moment*, they do represent a lot of systemic value to these economies – systemic value that these economies are not likely to shed anytime soon. And it is in many cases very unlikely that they will have to be written down with a huge loss, given a bit of time – quite the contrary, actually. The economic exposure to the former East is mainly in the form of loans that were used to finance real projects in developing economies – infrastructure, and commercial activities in strongly under-saturated markets.

    I second that. The Eastern European markets are largely cash-based economies. The banks derive their income mainly from small fees, and loans tend to be small amounts and usually well documented.

    However, I have to say, there seem to be far too many branches of Erste and Raiffeisen in villages and small towns all over the East. A little pruning might help.

    Austria is a small country, with a banking sector in trouble, but it also has successful companies such as OMV, which bought large oil and gas resources in Eastern Europe.

    Timo: That stupid Anglo still barking? The credibility of Anglo economists nowadays is somewhere between a Zimbabwean economist and a Siberian drunken bear. Except Siberian Drunken Bear is much more funny!

    Well, I don’t know about that. Societe Generale is a French bank. Do you remember the “missing” billions of last year? So much for French accounting, eh? Also, there is a Societe Generale branch on every corner in Eastern Europe. And they are anything but an Anglo bank. The same goes for Greek and Austrian banks. I would say it’s not the Anglo banking system that’s been discredited, rather this entire Western banking system of lending money you don’t have to people you don’t know and governmental policies of creating money out of thin air.

    But you’re right; a Siberian Drunken Bear is quite a riot to behold. Any chance we can get these bankers do a little dancing for us after a little vodka?

    Vinny GOLDberg has left the site…

  23. Swedish Lex

    Yves,
    The probable reason why EC officials are leaking this document at this particular point in time is that they are seeking to build momentum in advance of putting forward far-reaching proposals for regulatory reform. Those reforms would otherwise be difficult for the EU countries to accept.

    We are expecting an barrage of proposals from the EC Commission and other EU bodies in the coming weeks on bank capital, mark to market, etc.

    During the French EU Presidency, a sufficient sense of urgency was established and, also, a sense that the response had to be a joint one in order to be efficient.

    During the past weeks, the current Czech EU Presidency, has failed to sustain the momentum built by the French (who are not innocent, bien sûr). Preventing and fighting intra-EU protectionism in various forms will be necessary. But this is one thing that the EU officials actually know how to do and also have the legal tools to deal with.

    What the EU does not have and despereately needs (as pointed out by Willem Buiter and others) is a common fiscal policy and resource and to create a joint policy for failing banks. Simple co-ordination will be insufficient. Sarkozy made attempts in this direction in 08, without success. Perhaps the spectre of 16 trillion in writedowns will be sufficient to get the EU leaders’ attention. Developments in Brussels in the coming weeks will be crucial.

  24. Ambrose Evans-Pritchard

    For BB,

    I don’t normally blog but just to clarify a point.
    The $1.6 trillion figures comes from the BIS. It refers to all European bank lending to Eastern Europe, including Russia, where corporate foreign debts are $500bn.

    I did not mean East European mortgages only. The parallel with subprime is that the debacle is of a similar scale, and this time mostly European. US banks hold very little of this stuff. The shoe has not yet dropped either.

    If you add Europe’s exposure to US property + Europe’s exposure to East Europe, the overall damage may prove equal to the damage to US banks. We will see.

    This $1.6 trillion figure has been widely aired in earlier stories, so I didn’t dwell on the detail is this piece.

  25. Anonymous

    One aspect that I have not read anywhere regarding these Western European banks that expanded so widely in the Wild-Wild East is, exactly what is their exposure to local infrastructure projects (freeways, railways, etc). The reason why this should be a concern is that Easter Europe in general is a very corrupt place, and vast sums of money allocated by the EU for “reconstructure” have magically disappeared, only to rematerialize as top-of-the-line BMW and French Riviera villas for the ruling class (often the old communist party rulers and their secret police). As such, I don’t see why these corrupt leaders would resist the temptation to produce phony documentation in order to obtain loans form one of these foreign banks.

    Incidentally, after those spectacular “revolutions” in Easter Europe during the 1989, the aforementioned former communist party rulers and their secret police have simply become bank directors, CEOs of “privatized” state enterprises, and, of course, senators, parliamentarians, prime ministers and ministers of all kinds, and last but not least, presidents of countries. Now, lest we forget, these people have received their “training” at the Moscow KGB Academy alongside the all-wise, all-knowing, oh how great art thou, oh mighty savior of nations, glorious exporter of oil and gas,Vladimir Vladimirovich Putin.

    So, when discussing Eastern Europe, do not forget the corruption factor — if I were an Austrian banker, I’d fear that.

    As a former oppressed Eastern European and currently a proud American, I think I understand that.

    Vinny GOLDberg
    PS — I am now conducting a study about corruption in nations in transition (focus on Eastern Europe). I shall post links when it will be complete. Meanwhile, if anybody here is interested in corruption in the eastern part of the “European Union,” I suggest a visit to http://www.transparency.org

  26. bb

    Ambrose,
    thanks for the clarification. i looked at the BIS numbers myself and concluded that total ‘claims’ are not equal to private+public debt.
    2 examples:

    example 1:
    commerzbank lends 100m to a subsidiary in slovakia. it has a claim on a slovak bank for 100m. the slovak bank lends that money to a subsidiary of volkswagen germany. volkswagen germany has a claim for 100m (less amortization) for its subsidiary’s assets on slovakia. gross claims on assets and loans: 200m (BIS number). net german entities claims on slovakia 0.

    example 2:
    commerzbank lends to its subsidiary in slovakia 100k euro. the slovak bank lends it to peter as a mortgage loan. total claims on loans: 100k. net german entities claims on slovakia 100k.

    this level of detail is impossible (at least for me) to obtain from the BIS data.

  27. Ambrose Evans-Pritchard

    reply anonymous

    The deficit figures for Ireland are for next year (not 2009) and come from the Irish government. It warned of 12pc on “current policies”. If Dublin tightens hard, it may be lower of course. I believe Brussels says 13pc.

    On Spain, that comes from Barcap — 9.8pc in 2010 — although this is well in ine with many private forecasters.

    The Commission says Spain will reach 6.2pc this year. Madrid says 5.8pc.
    Obviously it will be much higher next year given the lag effects and the rise in unemployment to 4m in 2009.

    I agree that the speed of deterioration has been shocking.

    The UK is going to 9.5pc.

  28. Diego

    Ambrose,

    thank you for your answer. Most private estimates for Spain’s fiscal deficit in 2010 are in the 6-7% range, which is not 10%. As with EC and IMF figures, they always underestimate Spain’s ability to grow (just review their past performance).

    Unlike the US and the UK, Spain can have a lower deficit next year than in 2009, through cost-cutting (no new public employees) and privatisation (e.g. selling hospitals, railways, airports and other assets to private investors).

    Please take also into account that Spain has been receiving 700,000 immigrants every year for the last decade, and they still keep coming in those numbers. There is a lag effect on immigration, and the trend will reverse in the next months, thus lowering unemployment.

    Anyway, thank you again for your answer.

    Diego Méndez

  29. poszi

    FYI,

    At the end of 2008, Polish individuals and companies had $50 bn of mortgage debt in foreign currencies (plus $32 bn in local currency). In 3Q 2008, total external debt of Poland was $265 bn, including $76bn of government debt (based on the National Bank of Poland data: http://www.nbp.pl)

  30. Anonymous

    Diego: Please take also into account that Spain has been receiving 700,000 immigrants every year for the last decade, and they still keep coming in those numbers. There is a lag effect on immigration, and the trend will reverse in the next months, thus lowering unemployment.

    Indeed, Bulgarians and Romanians that went to Spain to work in agriculture and construction have already been returning home in droves.

    Nonetheless, Spain remains ill equipped to weather this crisis. The country has been dependent largely on tourism and selling overpriced homes in remote areas to Germans and British expats. Both these sources of income have disappeared. I remember being in Pamplona two years ago, seeing a forest of cranes all over town. Last October there wasn’t even one in sight. Most construction activity has basically stopped. Similarly, I remember, in years past, Barcelona buzzing with tourists, but now all tourist areas are almost deserted.

    Furthermore, the multinational companies that have set up shop in places like Barcelona and Madrid have quickly discovered that the Spanish work ethic is dismal, and are now already relocating further east or to Asia.

    During these past decades Spain has enjoyed a first world standard of living with a third world mentality. I am afraid some rather painful adjustments are likely to occur, and the numerous retirees currently enjoying 3000+ euro per month pensions before even reaching 59 years of age are in for a rather unpleasant readjustment. The Spanish economy is simply unsustainable.

    Another thing to worry about regarding Spain is its ability to remain together as a nation after this crisis. I expect the Basque and Catalan separatist calls to increase in coming months. Spain is already perhaps the loosest federation in Europe – it won’t take much for it to fall apart.

    Vinny GOLDberg

  31. Anonymous

    It’s the OTC desks that have ruined these banks. BIS only reports numbers that are voluntarily supplied concerning private contracts. Who knows what the true numbers are?

    J. Sinclair comments that the prop job for the foreign banks comes from Federal Reserve swaps like to the ECB.

  32. Timo

    “Now, lest we forget, these people have received their “training” at the Moscow KGB Academy alongside the all-wise, all-knowing, oh how great art thou, oh mighty savior of nations, glorious exporter of oil and gas,Vladimir Vladimirovich Putin.”

    Ha ha! Your American justice system is a friggin joke, a relic from the 1950’s. More prisoners than in China, not to mention gitmo and other “specialities”.

    You bet the wrong horse by moving there. Now you will see ANOTHER collapse, USA is going down big time.

  33. aw70

    @anonymous 11:20

    However, I have to say, there seem to be far too many branches of Erste and Raiffeisen in villages and small towns all over the East. A little pruning might help.

    Austria is a small country, with a banking sector in trouble, but it also has successful companies such as OMV, which bought large oil and gas resources in Eastern Europe.

    Well, as long as the Austrian banking sector is only seen as being in trouble, everything is fine and dandy, at least by the standards of these times. After all, no-one will emerge from this without a haircut.

    And your comment about these many branches of Erste and Raiffeisen actually goes along with the point I was trying to make. Most of these banks have a large exposure in Eastern Europe, but a lot of that are fairly “normal” banking operations. This is not to say that individual banks cannot run into loads of trouble with just that – in particular, Raiffeisen might have taken on more than they can chew in the Ukraine, by acquiring a large bank there, just before everything came to a complete standstill. But still, there are worlds between the majority of the activities the Austrian banks in the former East, and the pure speculative frenzy that drove many of the anglo-american banks in these past years.

  34. Anonymous

    Timo: Ha ha! Your American justice system is a friggin joke, a relic from the 1950’s. More prisoners than in China, not to mention gitmo and other “specialities”.
    You bet the wrong horse by moving there. Now you will see ANOTHER collapse, USA is going down big time.

    You are completely correct abut the US justice system. But you don’t provide many details, so I will do it for you. I could go on forever about this topic, but time is not permitting. Yet, I am going on a little longer simply because I have a great deal of disdain and outrage at the US justice system, and don’t mind sharing it with our European “friends” :) If anything is to change, the more informed people there are, the better.

    Actually, 1 percent of the US population (3 million people) is in jail or prison, and another 3 percent is on probation. 12 million people altogether. Additionally, the sentences passed down by these conservative (a.k.a. Republican) judges would make the Spanish Inquisition look soft. The worst judges are from the Southern states, especially Texas. Believe me, there are people serving 5 or 6 consecutive life sentences in US prisons. There are also people serving 300, 500, or even 1000 year sentences without the possibility of parole. I know it sounds ridiculous, but it’s true.

    Anther interesting aspect about the US justice system is, or course the death penalty, a relic of the 18th century, which is much more commonly applied to blacks and Hispanics.

    And, speaking of Hispanics and blacks, they make up almost 70 percent of the US prison population, obviously reflecting the incredible bias and prejudice of the system. I suspect this is also a way of keeping the blacks enslaved long after slavery was abolished. There are millions of black and Hispanic children that grow up without their fathers. Their fathers are more often than not serving a 20+ year sentence for selling 2 grams or more of crack-cocaine. Yes, the all-wise, all knowing US Congress passed a law increasing 10 fold the penalty just for crack-cocaine.

    Additionally, about half a million inmates are illegal aliens, many having committed no other crime except that they crossed the Mexican border illegally, and got a construction job in California so they can support their families in Mexico. The penalty for “illegal reentry” in the USA is 5 years in federal prison, followed by deportation. So, you may ask, why would any nation in its right mind waste so much money in keeping illegal aliens in prison, when it could just deport them to start with? See the following paragraph…

    However, you must understand that the justice system in America is little more than an evil money-driven machine preying on the weak and vulnerable. For example, did you know that a law firm sucks on average $100,000 form the federal government to arraign somebody convicted of a crime? Now you see why Law School is so competitive in the US.

    Another example, did you know that every inmate in federal prisons (and there are lots and lots of them) has to work while in prison. They make things like goggles, textiles, electronic equipment, tools, etc. And, the hourly wages they receive are… are you ready for this?… are $0.25 per hour (yes, that was not a type: 25 cents per hour). The company they work for is called UNICOR Industries (check out their web site at http://www.unicor.gov), and it has branches in all federal prisons. Then they take the products and sell them to the federal government at rates such as $800 for a hammer and $100 for one nail. I’d like to know who sits on the board of trustees of this firm… let me guess: some corrupt judges form Texas, perhaps?

    But I saved the best for the end. Did you know what is one of the most profitable industries in the good ole U.S. of A.? It is the new “private prison business.” There are on average two new such private prisons being built every month in the US. And, do you know who sits on the board of directors of these private prisons? It is the very judges that convict people of crimes and send them to prisons. Nice scam, eh? Do you see a slight, just slight, conflict of interest there? Well, these prisons are projected to fair this downturn rather well, considering how many new unemployed people will resort to crime to feed their families. Here are the major players: Corrections Corp. of America (CXW) and Geo Group (GGI). Go ahead, buy their stock – you’re likely to make a killing!

    As far as your mentioning of gitmo and other “specialties”, let’s just place that on that mentally retarded, Bush, and his criminal “vice” Cheney. Also, let’s not forget the other criminal, Antonio Gonzalez, the torturer in chief and former boss of federal prisons. Let us hope that after this experience the conservatives will not ever run the USA again for 1000 years. Better yet, let us hope that there won’t be another white male President of this country for the next 100 years.

    Believe me, as a former European and currently an American, I consider myself fortunate to have left Europe behind. I do love the US, despite its flaws, most of which are tolerable. However, this monstrous US justice system is a terrible blemish for the US and it needs to be changed.

    I hope you found the above information interesting. I know it’s off the subject of this blog, but you brought the subject up :)

    As far as betting on China (if I understand you correctly). It wasn’t a worse horse than Western Europe betting on Eastern Europe. At least, the Chinese have a better work ethic than the Hungarians, and unlike the Eastern Europeans, they lent us money, for which we are forever grateful :)

    Well, the US will not go down anytime soon, and the dollar won’t be replaced by the Euro. It’s naïve to think so. The US will remain the world leader. But that’s not because of its wonderful wisdom, rather because the rest of the world is in worse shape. The alternative leaders (i.e., China, Russia) are much scarier.

    Yours truly,
    Vinny GOLDberg

  35. Diego

    Vinny GOLDBerg,

    Spain makes more cars than France (and much more than Britain), leads the world in renewable energy (with home-grown windmill manufacturers, such as world-leading Gamesa) and builds some military aircraft not even the US can match (e.g. air tankers designed in Seville).

    Of course, Spain is a laggard in other areas, such as biotech. But I wouldn’t call it Third World in the sense of, you know, having your financial system implode suddenly à la banana republic.

  36. Anonymous

    Diego: Spain makes more cars than France (and much more than Britain)

    Are you referring to Seat?… :)
    Or, to the quickly-relocating-further-east foreign auto makers?

    Well, in my opinion, Spain will need to drastically reduce it’s standard of living. It’s unsustainable. But you are fortunate to have had nice freeways built after this EU experience. :)

  37. Timo

    “Well, the US will not go down anytime soon, and the dollar won’t be replaced by the Euro. It’s naïve to think so.”

    What actually will keep it together? Justice system is fubar and USA is also de facto plutocracy, ruled by the wealthy. (FYI, I am a card carrying member of Club Orlov :)

    Like Mr. Orlov, I see this crisis as far bigger than just another recession or depression, at least for USA. This is economic perfect storm.

  38. Martin

    And, speaking of Hispanics and blacks, they make up almost 70 percent of the US prison population, obviously reflecting the incredible bias and prejudice of the system.

    Vinny GOLDberg,

    How did you reach this conclusion? It’s also a possibility that crime is higher in these ethnic groups. Why do people with such distorted and biased thinking go and publicize their own stupidity?

  39. Anonymous

    Martin: How did you reach this conclusion? It’s also a possibility that crime is higher in these ethnic groups. Why do people with such distorted and biased thinking go and publicize their own stupidity?

    Martin,
    No, that’s not what it is. I’ll give you an example: two individuals (and a white guy and a black guy) that commited similar crimes in the same state coming from similar socio-economic backgrounds, will usually receive strikingly different punishments.

    Now, I am a lot more familiar with the US justice system than I am willing to disclose on this site or anywhere else. Perhaps what I saw in the past 8 years (and I saw it first hand) made me feel ueasy about saying too much about this government. It will take a lot more than 3 weeks into a new presidency before I trust this government again.

    Vinny GOLDberg

  40. Anonymous

    Timo: Well, the US will not go down anytime soon, and the dollar won’t be replaced by the Euro. It’s naïve to think so.”

    What actually will keep it together? Justice system is fubar and USA is also de facto plutocracy, ruled by the wealthy. (FYI, I am a card carrying member of Club Orlov :)
    Like Mr. Orlov, I see this crisis as far bigger than just another recession or depression, at least for USA. This is economic perfect storm.

    Well, in my statement I tried not to take into account things like World War 3 or major revolutions. But if you thow that in, then anything is possible.

    I am not necessarily against socialism, as long as it’s done right. But my experience growing up in Eastern Europe behind the Iron Curtain was, shall we say, a bit of a let down… :)

    Vinny GOLDberg

  41. GreenspanPutExpired

    “I was in Austria in December, meeting with some local businessmen, and to a person, they expected the bank failures to be of a scale that would force Germany to rescue the Austrian government”

    A bit surprising then that Austrian bank loans to companies went up in December, and a majority of consumers in Austria is optimistic.

    If you read German, here are the sources:

    http://www.oenb.at/de/stat_melders/presse/oenb/pa_20090211_oenb-kreditmonitor__dezember_2008_brachte_wachstum_bei_unternehmenskrediten_kaum_nachfrage_bei_fremdwaehrungskrediten.jsp#tcm:14-96287

    http://www.wirtschaftsblatt.at/home/oesterreich/wirtschaftspolitik/361669/index.do

  42. Diego

    Anonymous 3:41,

    Are you referring to Seat?… :)
    Or, to the quickly-relocating-further-east foreign auto makers?

    Well, in my opinion, Spain will need to drastically reduce it’s standard of living. It’s unsustainable. But you are fortunate to have had nice freeways built after this EU experience. :)

    All of them (including Seat) are foreign-owned, so what? They could have gone to Eastern Europe more than a decade ago. The fact is they keep expanding production in Spain; just some weeks ago, Volvo opened the largest car-part factory in Europe in southern Madrid.

    While unqualified workers are cheaper in the Czech Republic and Slovakia than in Spain, there is a severe shortage of qualified workers in those countries. Absentism, salary inflation and expensive engineers are additional problems; in just 10 years’ time, their price advantage will be gone.

    Car production in Spain is all the more profitable when compared to Germany. I mean, you can hire an experienced engineer in Spain for 1,500 euros/month, compared to 4,000 euros/month in Germany. There are three times as many engineering graduates in Spain as in Germany; the reverse situation as 30 years’ ago.

    Respecting freeways, investment in Spain has been 30% GDP every year for the last decade, compared to 20% in France, Germany, etc. This 10% gap cannot be explained by EU aid, as this amounted to less than 1% GDP. However, it can be explained by measures of capital productivity, as every new road, railway, etc. was more profitable in Spain than in France or Germany, in part because of better civil engineering and the legal framework (I can elaborate if you are interested).

    I do agree with you on something: Spain’s (as all other Western countries’) standard of living was unsustainable and will have to be correspondingly reduced. I would bet 15% down in a couple of years.

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