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Systemic coupling round-up

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Time to count up the systemic implications of the Irish crisis, following up on some of today’s links and other news.

First, the usual contagion to Portugal and Spain is now in full swing, propelled by another barrage of bumbling Euroannouncements:

Weber announced that if necessary, the EU would increase the ceiling of the EFSF (to a level that looked intended to accommodate a Spanish bailout); the EU and German government immediately denied any such intention.

Ex-European commissioner Prodi said it was all Merkel’s fault for shooting her mouth off, and puffed his mate Draghi as the next ECB head; nice sense of priorities there.

Someone or other in Portugal said ‘Portugal’s not next’; but we are all getting bored with that sort of thing.

The market noticed Friday’s Irish Times story, repeated now on Bloomberg, that senior bondholders might take haircuts as part of the bailout, leaving alea, the bondholders, and the bond market (Irish 10 years now yield 9.18%, that’s another +14bps today; Spanish are 5.21, +3bps, after an excursion to 5.28), all equally unimpressed.

..and also by doubts about whether the bailout would work at all, nicely recapped here. We are told to expect an announcement of the terms on Sunday, by the way.

Second, there is the coupling to the UK, both financial, as mentioned here en passant, and economic.

Third, there is the shadowy shadow banking connection to Germany and elsewhere, set out here.

Fourth, the “elsewhere” may include not only France and the UK, but also the States. Back at the beginning of the year, the staff at Naked Capitalism caught a glimpse of the massive presence of shadow banking funding vehicles in Ireland, during our attempt to dig into into GS’s Abacus programme. Such public listing particulars as there are, are to be found on the Irish SE’s web site, along with scrillions of other shadow-banking-related entities. One imagines there’s a tax angle, as well as a disclosure and reg-arb angle. I have no idea how much has run off in the last couple of years, perhaps lots, which would rather deflate my point; and finding out what’s still there might be hard. But anyway, there do seem to be *tons* of liabilities for international banks via Ireland: to the tune of $500Billion, according to Eurointelligence, who explore what happens if this unconvincing bailout of the very possibly hopelessly insolvent Irish state goes ahead.

So if you are looking for systemic couplings, then, pending further research on exactly what Irish debt restructuring scenarios blow up the shadow banking system (again), it might be time to lightly pencil in Ireland-US and Ireland-France, via whatever’s left of CDO funding vehicles, and the zoo of VIEs, SIVs, etc, apparently still pullulating in Dublin.

Fifth, there’s even a Belgian connection.

If you couldn’t tell by now, Ireland really is more than a sideshow, and even proximately, it may not just be about the Eurozone or the European banking system.

One one side, global politics and Finanzcapital; on the other, the Irish electorate (maybe) and some Irish MPs. This guy perhaps. Or this one, if he sorts his thinking out, to say nothing of his drinking, and his language: be warned. (Hat tips to @LorcanRK and Scott F, respectively, if I remember correctly).

Quite the showdown.

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35 comments

    1. DownSouth

      BloggyBayou (from the link you furnished) said: “I HOPE a new Republican Congress will have learned the errors of its ways and start to investigate the incestuous relationship between the Treasury, the Fed, the Big banks and Financial Houses that occurred during the 2008 meltdown and is CONTINUING STILL.”

      I hope it will too. Heck, if it were to do that, you might even get me to vote Republican! But given the history of the Republican Party for the last 90 years or so, I think the possibilities of my needing a sudden metamorphosis to the Republican Party fall somewhere between slim and zero.

  1. Swedish Lex

    The most important point being that the various disaster areas, when mixed and blended, make a TNT cocktail of historial proportions. Still, our Dear Leaders seem to believe that this can be handled mess by mess, country by country, with no particlar attention to the big picture.

    Doubling the bail-out fund would solve little, if anything, unless there is some kind of realisation with the Leaders of how very much more they actually have to commit financially and politically if the euro is to survive.

    1. readerOfTeaLeaves

      Emperor, the Death Star is receiving hits from Rebel Forces, but we have it all under control…

  2. Hugh

    A house of cards, a juggler with too many balls in the air, driving blind toward the cliff edge, pick your metaphor, the end is much the same.

    I am pretty much a broken record on this but if you want to understand the world’s or a region’s economic situation and its prognosis, you need to keep three things in mind: failed elites, wealth inequality, and kleptocracy. This explains why we keep hitting the wall over and over, and nothing gets fixed.

  3. DownSouth

    Richard Smith,

    The implications here go way beyond just the economic. They are cultural and political as well.

    If the Irish people give the boot to PM Brian Cowen and his neoliberal guru, Brian Lenihan, and follow the example set by Argentina in 2002 when it rejected finance capitalism and defaulted, the U.S. financial overlords will go ballistic.

    This from Lawrence Goodwyn, writing in The Populist Moment, helps put it in context:

    Harry Tracy and other Populist theoreticians called for 300 per cent inflation through a return to the per capita circulation of 1865, on the sole and valid ground that the sub-treasury system was intelligent and would provide an immediate remedy for a central and long-neglected flaw at the heart of American capitalism. The capacity to think politically on such a scale was Populistic; it passed from the mainstream American reform tradition with the defeat of Populism.

    By this process, the relatively expansive pre-industrial sensibilities that had animated Thomas Jefferson, George Mason, and the original Anti-Federalists gradually lost that strand of democratic continuity and legitimacy which, in fact, connected their time and their possibility to our own through the actions of Americans who lived in the interim: the Populist connecting link was lost to the heritage. The egalitarian current that was part of the nation’s wellspring became not a constantly active source of ideas, but a curious backwater, eddying somewhere outside both the conveyed historical heritage and the mainstream of modern political thought that necessarily builds upon that heritage.

    The result is self-insulation: the popular aspirations of the people of the “third world” in the twentieth century have easily become as threatening to modern Americans as the revolt of their own farmers was to goldbugs eighty years ago. Though American foreign policy and American weapons have defended anachronistic feudal and military hierarchies in South America, Africa, and Asia, such actions being justified at home as necessary to the defense of “democracy,” neither the policy nor the justification has proved notably persuasive to the non-Americans who are the mass victims of such hierarchies. The resulting unpopularity of America puzzles Americans. The policies themselves, however, are not debatable within the limits of public dialogue sanctioned in modern America. Under such constraints, the ultimate political price that Americans may be forced to pay for their narrow cultural range in the twentieth century has emerged as a question of sobering dimension.

    By the way, I always enjoy your posts.

    1. DownSouth

      Also Richard, would you agree that what’s currently going on in Ireland is déjà vu of what happened in Argentina in 2000 and 2001? Here’s how Miguel Teubal describes the machinations of Argentine President De la Rua and his neoliberal guru, Domingo Cavallo, during those years. It’s from Teubal’s paper Rise and Collapse of Neoliberalism in Argentina: The Role of Economic Groups:

      Machinea, the first Minister of the Economy of the Alianza, and then Cavallo called upon to ‘save’ Argentina from the impending crisis and adopted new adjustments and schemes trying to generate ‘confidence’ in international financial organizations. But their actions only served to deepen the crisis: Machinea’s ‘blindaje financiero’ (‘financial armour plate’) of December 2000; the rapid passing through government of Lopez Murphy with his extremist adjustments; and then finally Cavallo supported by an ‘amalgamation of banks and the media’ (Cafiero and Llorens, 2002: 126) only made things worse. Nothing was to stop the run on the banks and capital flight. Cavallo’s ‘expertise’ this time failed lamentably. Despite the great powers that were given to him by Congress (April 2001), and his megacanje de deuda (mega debt swap, June 2001) supported by his friend David Mulford of Credit Suisse and J.P. Morgan- Chase that implied restructuring foreign debt to the tune of US$30 billion, the crisis could not be controlled. In this debt restructuring process 65 different types of bonds, most of them denominated in dollars, for a total of US$28 billion were rescued. They were exchanged for five new types of bonds for a value of US$30 billion, but with future interest rates that amounted to US$85 billion, and of course an enormous commission paid to Cavallo’s banking friends. Argentina was to pay a yearly interest of 18 percent, 13 percent higher than interest on US treasury bills. Thus Argentina’s overall foreign debt increased to the tune of US$115 billion.

      But this ‘magic’ was of no use. A series of additional measures for the purpose of restructuring a rapidly increasing foreign debt could do nothing to stop the drain of domestic funds, pertaining in particular to the establishment. New funds available could not stop the irresistible drain of funds until in late
      November 2001 the ‘corralito’ was created, thus prohibiting the withdrawal of deposits – mostly of small operators – from the banking system. This was the drop that overflowed the cup. The rebellion of 19 and 20 December precipitated the fall of Cavallo and De la Rúa. The latter had lasted only two years in office, but he will go down in history as being one of the most inept of all presidents
      in Argentine history, and also one responsible for the deaths of at least 40 people due to repression.

      1. Richard Smith

        DS yes, most emphatically it is all politics!

        The above post is just a stab at identifying who some of the less obvious players might be.

        Any sovereign guarantee can be ripped up by the pols or the people, a point which the pure finance-oriented types are just beginning to hoist in.

        In the Irish case, even if the bailout and the budget goes through and the next Irish gov supports all the terms, the money still comes out of the skins of taxpayers, for years and years. If there’s not much populist pushback in Ireland yet, or elsewhere, there’s plenty of time for it to develop.

        Your Argentina comparison, which haunts our occasional Spanish commenters too (Diego Mendez IIRC, perhaps someone else though), may be about to go mainstream: see this http://tinyurl.com/3755abq, which went up a couple of hours ago.

        1. attempter

          So is anyone in Ireland trying to spread the word – “We can do what Argentina did.”

          (I’d say they need to do a lot more, though. So far as I can see, in Iceland they got rid of one gang of crooks but only replaced them with another gang who still want to commit the same crimes. Isn’t the Icelandic replacement gang still promoting “austerity” as the answer?)

          1. Adam

            Argentina had a current account surplus, and it was messy enough. Ireland have a substantial current account deficit. If Ireland tear up agreements with the IMF and EU, how are they going to get funding to pay for their imports? Your nearest example in that sitution is Zimbabwe, not Argentina.

          2. Paul Repstock

            Tempter..I don’t think Icelanders have any choice about austerity. Given the ‘primary salute’ they issued to the Banking Cartel, nobody is willing to step in and lend to them for fear of annoying the bankers.

            With Iceland’s trade profile, there is little opportunity to earn export revenues. Therefore their imports and standard of living will suffer dramatically.

            I believe they did the right thing and will eventually gain, but in the meantime, there will be hardship. On the other hand, if Icelnd is the only country to resist, they will probably be occupied and ‘reeducated’.

          3. Paul Repstock

            Adam; you raise a good point about Argentina not being a good comparison to Ireland’s situation because of the current account. However, the result may not be too different.

            I hate to keep being the wet rag here. But, the key point for Ireland may be geography and because of that exposure on the world stage. Ireland is front and center. They are seen as a test case for the power of the Euro Zone to prevent default and disidence. The last thing any of the global banksters want is a Debtor Revolt. The debt is their big weapon. Pay up, submit, or you and your decendants ar doomed. Hopefully there are now enough people screaming “who cares, under the tender mercies of the debt, we are all doomed anyway”.

          4. attempter

            Certainly, if they’re still fiending after luxury imports, they can never be free, and indeed don’t deserve to be.

            I’d like to see a will to break free and endure any necessary temporary inconveniences of redeeming sovereignty and freedom. In a previous thread somewhere I mentioned the word autarchy. (Not that I think it would come to that, but if necessary, people should be willing to undergo it.)

            So Paul, it looks like we’re getting our two opposite kinds of austerity mixed up. I’m all for the healthful austerity often involved in resuming control of one’s life. Not that Iceland should need a tremendous amount of it. For example, they have sufficient geothermal heat that if they get rid of all their spas and heated pools and built greenhouses, they could grow a large amount of their food requirements.

            I meant above that the replacement government still wants to cave in to IMF’s brand of “austerity”. It means far worse material deprivation for the people than self-determined austerity would, and they get to keep their debt enslavement and elites!

            I think my proposal sounds better.

          5. Paul Repstock

            No Tempter. We are on the same page.
            You said, and I agree,
            -” So far as I can see, in Iceland they got rid of one gang of crooks but only replaced them with another gang who still want to commit the same crimes.”-

            For a long time I have stated that government as we know it has failed to evolve and should be discontinued. However, too many people have bought into this abdication of resposibility.

            In my view; Government of the people, by the people, and for the people, suggests that the government is not morally or intelectually superior to the people. Therefore they should not be given blanket coercive powers. It is a tricky area and I get little support for my views.

            The rational for my post on Iceland was that their ‘ability to pay’ is so small that the costs of enforcement may exceed any possible returns. We shall see how important ‘precedent’ is to the banksters.

          6. attempter

            I agree, there’s no rationale for this kind of government, other than the people’s own laziness.

            (As far as statist ideology goes, that which would argue the elites are “superior”, I always love the contradiction inherent in representative pseudo-democracy: that the people aren’t qualified for self-management and self-rule but are qualified to identify and select their elites. Even Hamilton and Madison couldn’t come up with a good explanation, which I take as dispositive that there is no such explanation, since they were as good as “republican” ideologues get.

            That’s part of why I find neoliberalism the most vile ideology of all. It’s just as elitist as divine right or classic fascism, but is intellectually more stupid and adds hypocrisy as an added moral insult.)

    1. Cedric Regula

      that’a such a good idea it’s been thought already. they created a euro bailout fund that way. EUR60B last I heard. looking for buyers.

    2. R Foreman

      No but we can dump it all into a super SIV.. call it daFed or something.. then lock it up tight so no one ever finds out what’s in there.

  4. Jim Haygood

    ‘Fifth, there’s even a Belgian connection.’

    There had to be, didn’t there — if the first go-round (Greece) was tragedy, this one (bailing out Ireland to save the Belgians) has descended to farce.

    My question is what all the elite Moscow cocaine dealers holding 500-euro notes are gonna do? My friend Dr. M suggested this morning that if you see a surge in BMW and Porsche sales to Russia, you’ll know it’s all over for the euro.

    Who knew, back in the halcyon ‘euro convergence trade’ days of the 1990s, that it was all a gigantic Bubble engine for the periphery? Not even a handful of economists saw it coming.

  5. pebird

    Yes, the idea that public debt holders should take a haircut is another policy under the guise of progressive regulation that functions to contract the economy.

    The public bailout of banks in essence saved private debt holders. Everyone predicted money printing and hyperinflation in response, as the price to be paid. Instead, it is playing out in another form, the risk inversion between private and public debt. Of course, we cannot radically restructure banks, instead what is supposed to be the lowest risk debt is going to be made subordinate to private claims.

    1. Liminal Hack

      There isn’t a risk inversion from private to public debt. Well, there is in the eurozone as long as they are trying to play chicken and claim they are not going to queese.

      If the euro is to stay intact they have to play the game like the Fed, BoE and BoJ have been doing. Then again, if they euro falls apart there will be plenty of printing DM, Lira etc to prop up their banks anyway.

      Never mind that though, first we must have a farcical ritual in which all the players and talking heads act shocked, shocked at the very notion of just printing up some money which sooner rather than later will turn into bank capital and everyone returns to Go and collects $200.

      Of course when push comes to shove there will be no argument. The debt exists only in our minds – the asset which is owed in such vast amounts by taxpayers is just a god damn number which is entirely arbitrary, after all the amount of said asset has been arbitraily increased non stop – between 1987 and 2007 the USA created some 500 billion of these liabilities – which we are all scrambling to obtain.

      “Yes, the idea that public debt holders should take a haircut is another policy under the guise of progressive regulation that functions to contract the economy.”

      Quite. All those arguing vociferously for austerity or default – it matters not – are collaborators in the most colossal collective delusion. There is no need for default or austerity.

      There has been little actual difference between nominal government debt and bank money the last 30 years, and since all deposits are insured there is no real difference between broad money and base money.

      Oh, the tangled webs we weave for ourselves!

      1. Jim Haygood

        ‘Since all deposits are insured there is no real difference between broad money and base money.’

        Nonsense from start to finish. Deposit insurance is limited to $250,000, as you can verify with a single mouse click:

        http://www.fdic.gov/deposit/deposits/dis/index.html

        ‘No real difference between broad money and base money’? A ludicrous assertion. The difference is six trillion dollars, as you can verify here and here:

        http://federalreserve.gov/releases/h3/Current/
        http://federalreserve.gov/releases/h6/Current/

        1. Liminal Hack

          —”Nonsense from start to finish. Deposit insurance is limited to $250,000, as you can verify with a single mouse click:

          http://www.fdic.gov/deposit/deposits/dis/index.html

          ‘No real difference between broad money and base money’? A ludicrous assertion. The difference is six trillion dollars, as you can verify here and here:”—

          Oh give me a break – the 250K limit is enough to cover the vast majority of deposits and anyone not having spread their money around to come under this limit is few and far between.

          It seems because someone has TOLD you there is a difference you believe it. What differences? What is the difference between saving rates and the base rate? To all intents and purposes, bank deposits are risk free to the depositor.

          Likewise there is no essential difference between government bonds and bank deposits (except govvies have no ‘deposit insurance’ ceiling), so if you must distinguish between broad money and base money you should add the national debt on top of M3.

          Forget what you have been told, take a look at the actual way things work. When all deposits everywhere are guaranteed there can’t be any distinction between these various forms of money in the real world.

  6. RanDomino

    Stupid, stupid capitalists. Of course they consider a default to be death and destruction; it would serve the interests of people instead of money. One of the most beautiful results of Argentina’s default and subsequent capital flight was that 30,000 people there are now employed by cooperatively-owned businesses that were abandoned by the owners and are now held by the workers. If such a thing would happen again when other countries default, we should hope for it everywhere.

  7. so

    On Thursday I opined that Gold was in a channel bottom and should be watched for a breakdown.

    “Check the Gold Channel. I just started looking at this tonight. It looks tasty, but won’t place trades until watching for a while longer.”

    And posted this chart: then further down, look what happened,

    http://oahutrading.blogspot.com/2010/11/doctor-gold-has-caught-cold.html

    An important break, support at the PRS177…and then a sharp rally and sharp slap down by the main PRS 100 (or zero if you prefer) channel line. This is extremely bearish for Gold. This is one of my systems, this must be bet. Too bad I missed Thursday, but since it was first channel line I drew on Gold, I had to refrain from doing anything.

  8. Ted K

    I hope Richard is not implying with the last link that the Irish “electorate” is just a bunch of drunks, or for that matter the Irish in general. I think Richard’s time would be better served implying how ignorant TeaBaggers are. Implying the question of if TeaBaggers can read a 5th grade level newspaper and if TeaBaggers are more prone to marry their cousins—–All this, while the TeaBagger is perfectly sober. Or discussing why many American housewives are consumed with dancing competitions on TV where they can vote for fat girls which recently had bastard children.

    My point here being, I didn’t watch the youtube video of the Irish man drinking, but my GUESS is when he was drinking his thoughts were probably more coherent than your average sober American. And probably has better choice in TV shows.

    Just trying to add more topics to the discussion. 2 or 3 of those links towards the top were awesome though.

    1. Richard Smith

      Not implying anything of the kind, no. If one has any Irish friends and colleagues at all, that sort of stereotype just looks lame.

      You’d have to agree, these two do look more colourful than the average Congressman, though one suspects the difference is just packaging. And now they are in the big time, for the moment.

      Point is, the government majority in Ireland is so precarious (just two, now) that a couple more mavericks could unseat the government. That’s worth keeping an eye out for. Even though the cross-party consensus is that it’s best to go for the bailout, having the government fall before the bailout is a done deal would really intensify the Eurocrisis.

  9. leroguetradeur

    “Stupid, stupid capitalists. Of course they consider a default to be death and destruction; it would serve the interests of people instead of money.”

    My goodness, people do write some terminally confused things. Money has no interests. Defaults do not necessarily serve the interests of all people. They serve the interests of some, and damage the interests of others. As for these ‘capitalists’, we need to get more specific. Who exactly is a capitalist in America today, or perhaps more important, who is not?

    It is certainly true that there are examples of very successful cooperative, staff owned, enterprises. The famous one in England is a department store chain called John Lewis. There are not many of them. The Co-op in England was another example, it was very successful until the abolition of resale price maintenance, after which it found it very difficult to compete because its cost base was very high. It is still around, but it is no longer the force that it was.

    The question is why there are not more of them. And realize also that in our society, an enterprise owned by its staff is just as capitalist as any other. The only difference is the restricted shareholding.

    It may be true that if management and shareholders of existing companies leaves them to the staff in some way, that this could result in cooperative structures taking over and running them. The question is why this would make much difference to anyone except the staff.

    The experience of the UK and French nationalized industries post WWII was that all you got was more and more overmanning and more and more protectionism. In effect, the staff-owners exploited their relationship with the government to extract rents from the rest of the country.

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