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Randy Wray: Euro Toast, Anyone? The Meltdown Picks Up Speed

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Yves here. Readers may note that Wray cites the cost of the US bailout of the financial crisis as $29 trillion. I’ve never seen a figure like that (the highest estimate I’ve seen was from SIGTARP, which set the “theoretical maximum” at $23 trillion, and that figure was widely criticized. Barry Ritholtz has kept tab over time, and his tally has been in the $10-$11 trillion range). But this estimate is not core to his argument.

By L. Randall Wray, a Professor of Economics at the University of Missouri-Kansas City and Senior Scholar at the Levy Economics Institute of Bard College. Cross posted from EconoMonitor

Greece’s Finance Minister reportedly said that his nation cannot continue to service its debt and hinted that a fifty percent write-down is likely. Greece’s sovereign debt is 350 billion euros—so losses to holders would be 175 billion euros. That would just be the beginning, however.

Nouriel Roubini has argued that the crisis will spread from Greece and increase the possibility that both Italy and Spain could be forced out unless European leaders greatly increase the funds available for bail-outs. The Sunday Telegraph has suggested that as much as 1.75 trillion sterling could be required. To put that in perspective, the US bailout of its financial system after 2008 came to $29 trillion. The 1.75 trillion figure will almost certainly prove to be wishful thinking if sovereign debt goes bad because that will make the US subprime crisis look like a nursery school dispute. All the major European banks will go down—and so will the $3 trillion US money market mutual funds. (That probably explains why the US has suddenly taken a keen interest in Euroland, with the Fed ramping up lending to what Americans had formerly seen as “Eurotrash” financial institutions.)

It is becoming increasingly clear that authorities are merely trying to buy time to figure out how they can save the core French and German banks against a cascade of likely sovereign defaults. Meanwhile, they keep a stiff upper lip and demand more blood in the form of periphery austerity. They know this will do no good at all–indeed, it will increase the eventual costs of the bail-out while stoking North-South hostility. Presumably leaders like Chancellor Merkel are throwing red meat to their base for purely domestic political reasons. If the EMU is eventually saved, however, the rancor will make it very difficult to mend fences.

There is no alternative to debt relief for Greek and other periphery nations. But, they are not likely to get it, at least on the scale needed. Certainly not before a lot more pain is inflicted, and a lot more grovelling shown to Europe’s masters.

Indeed, the picture of the debtors that the Germans, especially, want to paint is one of profligate consumption fuelled by runaway government spending by Mediterraneans. The only solution is to tighten the screws. As Finance Minister Wolfgang Schäuble put it: “The main reason for the lack of demand is the lack of confidence; the main reason for the lack of confidence is the deficits and public debts which are seen as unsustainable…We won’t come to grips with economies deleveraging by having governments and central banks throwing – literally – even more money at the problem. You simply cannot fight fire with fire.” You’ve got to fight the headwinds with more glacial ice.

While the story of fiscal excess is a stretch even in the case of the Greeks, it certainly cannot apply to Ireland and Iceland—or even to Spain. In the former cases, these nations adopted the neoliberal attitude toward banks that was pushed by policymakers in Europe and America, with disastrous results. The banks blew up in a speculative fever and then expected their governments to absorb all the losses. Further, as Ambrose Evans-Pritchard argues, even Greece’s total outstanding debt (private plus sovereign) is not high: 250% of GDP (versus nearly 500% in the US); Spain’s government debt ratio is just 65% of GDP. And while it is true that Italy’s government debt ratio is high, its household debt ratio is very low by global standards.

But it is not at all clear that the nuclear option—dissolution–will be avoided. Even Very Serious People are providing analyses of a Euroland divorce—with resolution ranging from a complete break-up to a split between a Teutonic Union embracing fiscal rectitude with an overvalued currency and a Latin Union with a greatly devalued currency.

A recent report from Credit Suisse dares to ask “What if?” there is a disorderly break-up of the EMU, with the narrowly defined PIGS (Portugal, Ireland, Greece and Spain) abandoning the euro and each adopting its own currency. The report paints a bleak picture because the currencies on the periphery would depreciate, raising the cost of servicing euro debt and leading to a snowball of sovereign defaults across highly indebted euro nations.

The report assumes Italy does not default—if it did, losses on sovereign debt would be very much higher. With the assumption that Italy remains on the euro and manages to avoid default, total losses to the core European banks would be 300 billion euros and 630 billion euros for the periphery nations’ banks (excluding Italy), while the ECB’s losses would be 150 billion. (Note that gets very close to the rumored bailout costs of 1.75 trillion euros—without including any knock-on costs.)

Looking to previous “orderly” defaults, GDP would fall by 9%. With the weaker nations gone, the euro used by the stronger nations would appreciate, hurting their export sectors. That would increase the pressures for trade wars—and for a Great Depression 2.0. The report puts this probability at an optimistic 10%.

In his interesting piece, Ambrose Evans-Pritchard comes very close to getting it right—in my view. The problem, he asserts, is not “sovereign” euro debt, but rather is “the euro itself”, a “machine for perpetual destruction”. He rightly points to a competitive gap between the North and South, and argues that the euro is overvalued in the South and undervalued for Germany. He also points to the German delusion that its trade surpluses are “good” but the South’s trade deficits are “bad” balances. But obviously, they are nothing but the flip side of one another. He also discounts scare talk about the catastrophic costs of a breakup, and argues that the benefits of a North-South split could be significant. If the “Latin tier” could reboot with a significantly devalued (new) currency, it could become competitive. While my take is slightly different, I believe Evans-Pritchard is certainly on the right track, and his criticism of the German center of Europe is on-target.

An entirely different solution is offered by Jacques Delpla and Jakiob von Weizsacker, “The Blue Bond Proposal, published in May by bruegelpolicybrief. This would instead retain the union but pool a portion of each member’s government debt—equal to a Maastricht criteria 60% of GDP. This would be allocated to a “blue bond” classification, with any debt above that classified as “red bond”. The idea is that the blue bonds would be low risk, with holders serviced first; holders of red bonds would only be paid once the blue bonds are serviced. About half the current EMU members would have quite small issues of red bonds; about a quarter would not even be close to their limit on blue bond issues at current debt ratios. The proposal draws on the US experiment with “tranching” of mortgages to produce “safe” triple-A mortgage backed securities protected by “overcollateralization” since the lower-grade securities took all the risks. Well, that did not turn out so well! The idea is that markets will discipline debt issues since blue bonds will enjoy low interest rates and red bonds will pay higher rates. Again, the US experience proves that markets are far too clever for that—if anything market discipline did precisely the opposite.

Still, I am not completely against the proposal. If the full faith and credit of the entire EMU (including most importantly that of the ECB) were put behind the blue bonds, and substantial nonmarket discipline were put on the red bonds, the scheme has some potential. More importantly, it directs us toward a real solution.

The problem with the set-up of the EMU was the separation of nations and their currencies—as I have argued since at least 1994. It was a system designed to fail. It would be like a USA with no Washington—with each state fully responsible not only for state spending, but also for social security, health care, natural disasters, and bail-outs of financial institutions within its borders. What a stupid idea. In the US, all of those responsibilities fall under the purview of the issuers of the national currency—the Fed and the Treasury. In truth, the Fed must play a subsidiary role because like the ECB it is prohibited from directly buying Treasury debt. It can only lend to financial institutions, and purchase government debt in the open market. It can help to stabilize the financial system, but can only lend, not spend, dollars into existence. The Treasury spends them into existence. When Congress is not preoccupied with Kindergarten-level spats that works almost tolerably well—a hurricane in the gulf leads to Treasury spending to relieve the pain. A national economic disaster generates a Federal budget deficit of 5 or 10 percent of GDP to relieve pain.

That cannot happen in Euroland, where the Euro Parliament’s budget is less than one percent of GDP. As I argued a decade and a half ago, the first serious Euro-wide financial crisis would expose the flaws. And it did.

And things are made much worse because Euroland can neither turn to its center for help, nor can it any longer rely on the rest of the world. The economies of the West (at least) are stumbling. In addition to the residual (and growing) problems in US real estate, the commodities speculative bubble appears to have been pricked. Since fools rush in on the belief they can take advantage of sales prices, the air will not rush out quickly. But with prices at 2, 3, and even 4 standard deviations away from the mean, the general trend will be down. That leads to vicious cycle margin calls, which will have knock-on effects as those with long positions in commodities have to sell out other asset classes. The stock market will be next—and there is plenty of reason to sell bank stocks, anyway.

And US and European banks are already insolvent. When Greece defaults and the crisis spreads to the periphery that will become more obvious. US money market mutual funds will break the buck—again—and this time they will not be rescued (Dodd-Frank makes that difficult). Further, US banks are beginning to lose civil lawsuits on their rampant fraud—securities fraud, mortgage lending fraud, foreclosure fraud, insider trading fraud. Fraud is essentially the only business that big US banks know—the only thing keeping them in business. If that line of business is taken away, they are toast. In GFC 1.0 it took $29 trillion to prop up Wall Street’s banksters. They are not going to get a second chance.

And now even China wants to slow. The Euro toast is cooked. The question now is what Euroland will do about it, and whether the US, UK and other countries with the ability to avoid a toasting will choose a tastier outcome.

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89 comments

  1. MyLessThanPrimeBeef

    Indeed, the picture of the debtors that the Germans, especially, want to paint is one of profligate consumption fuelled by runaway government spending by Mediterraneans.

    ——

    I thought it was worse.

    I thought they cheated with help from Goldman.

    1. ug123

      I can only imagine what’s next for China and Southeast Asia. It seems like most emerging, commodity driven, economies are suffering from dutch disease. The bomb is ticking and i can just imagine how lost revenues from exports (China) will have a huge effect on commodity reliant countries (Brazil). It seems like the whole world is waiting for one massive correction.

      1. Maju

        Brazil with its huge size, perfectly comparable to the USA in all but the Pacific coast, could hypothetically maneuver around a loss of demand for raw products by generating internal (and continental bloc) demand, i.e. by jumping into industrialization and competing in the first tier bloc. This requires some important adjustments but it could show that developing economies can effectively develop in certain circumstances, which is not totally new and has been demonstrated by Japan, the USSR, China… the two last ones, like Brazil and the USA, enjoyed large internal ecologies and, potentially at least, economies, which they developed (at a cost). Brazil, if any state on Earth, can do that now (a lot will depend on leadership), together with its regional bloc: MERCOSUR.

        Brazil has two main problems: the ominous shadow of the USA, which is obviously not happy about sharing the continent with a rising power (hence the coup of Honduras, the faltering of Brazil in Haiti, the US protectorate on Colombia and the subtle but clear signal by Brazil of defending Chávez no matter what) and the general environment of crisis, which may hurt competence but also demand. But it’s in crisis when such swaps of power rank happen, and Brazil is doing fine so far.

        1. steve from virginia

          Funny … from what I can see from my window, all the countries that have followed the foolish USA into industrialization with ‘demand economies’ are now without exception going bankrupt.

          I wonder why?

          Rising input costs strand ‘investments’, demand cannot pay its own way. That Wray and others ignore input costs, energy, returns on consumption or sink limits is indicative of establishment blindness/corruption which insists the failed USA-style waste-based economy can be successfully imitated elsewhere while it fails completely in the land of its ‘birth’ …

          … the land where it was literally found under a rock!

          Maybe the entire process should be recalculated with ‘consumption’ given the negative value it actually represents. With input costs moving out on the exponential curve, the first country that invents an economy that rewards conservation and husbandry rather than waste will succeed/survive. The rest …?

          The consumption economies will join their ‘products’ — and perhaps their bloated populations — in the landfill. Good riddance!

          1. David

            An interesting comment. While reading it, I had the thought that debt-based money encourages consumption and the expansion of debt. At least the monetary authority for such money does so. (Greenspan!)

            Asset-based money, or even plain fiat money not based on debt, would be less prone to accelerating consumption. But it’s hard to find such currency schemes left in the world. The central banking model is nearly ubiquitous and includes Brazil.

  2. readerOfTeaLeaves

    Fraud is essentially the only business that big US banks know—the only thing keeping them in business. If that line of business is taken away, they are toast. In GFC 1.0 it took $29 trillion to prop up Wall Street’s banksters. They are not going to get a second chance.

    Might be time for some new economic thinking ;-)

  3. MyLessThanPrimeBeef

    In his interesting piece, Ambrose Evans-Pritchard comes very close to getting it right—in my view. The problem, he asserts, is not “sovereign” euro debt, but rather is “the euro itself”, a “machine for perpetual destruction”. He rightly points to a competitive gap between the North and South, and argues that the euro is overvalued in the South and undervalued for Germany. He also points to the German delusion that its trade surpluses are “good” but the South’s trade deficits are “bad” balances. But obviously, they are nothing but the flip side of one another. He also discounts scare talk about the catastrophic costs of a breakup, and argues that the benefits of a North-South split could be significant. If the “Latin tier” could reboot with a significantly devalued (new) currency, it could become competitive. While my take is slightly different, I believe Evans-Pritchard is certainly on the right track, and his criticism of the German center of Europe is on-target.

    ——-

    I also believe AEP is on the right track about focusing properly, but my take on trade balances is slightly different.

    I think trade deficits are bad and surpluses are good. Today, for some nations to run surpluses, others must incur deficits. Being unavoidable, we say to ourselves, we put quotation marks around ‘good’ and ‘bad.’

    That only happens with currencies.

    If you barter, no one will have run a deficit – my jet fighters for your crude; my Rockefeller Center for your cars; my Humvee division for your toys…always an even exchange.

    Please note that I am not necessarily advocating barter….maybe yes on the part of my Neanderthal side. I am for trade and I am just pointing out an alternative that it’s not always the case that we must have deficit nations, since there are surplus nations, in order to stimulate the discussion.

    1. Typing Monkey

      I think trade deficits are bad and surpluses are good. Today, for some nations to run surpluses, others must incur deficits. Being unavoidable, we say to ourselves, we put quotation marks around ‘good’ and ‘bad.’

      But you are assuming that all deficits and surpluses are created equally, and they aren’t.

      If a country temporarily runs a trade deficit in order to create long-lasting infrastructure improvements (eg: build roadways and ports and power generation), that generates future surpluses (presuming that those improvements are used appropriately). Equity is being built up.

      Similarly, if a country were to run a trade surplus by selling all of its mineral wealth or manufactured goods in exchange for worthless currency that will eventually be valued as such (or, even more simply, in exchange for fireqorks that they immediately set off in the sky upon receipt of them), that would be a “bad” surplus (presuming that those currency stockpiles are not immediately used to buy something more valuable). Equity is getting run down.

      Eventually, the flow for either country would reverse. The former country would eventually start using its asset base to generate goods that it can sell abroad. The latter country would eventually run out of its mineral wealth and have nothing to show for it to boot.

      1. MyLessThanPrimeBeef

        It would be nice if nations go back and forth between being in surplus and in deficit.

        What we see is that some countries are forever, or almost forever, in surplus and others, forever, or almost forever in deficit.

      2. Lefty

        I think the fundamental problem is that the countries in the EMU have vastly different industrial bases and are at different levels of development. If the Euro is strong it might hurt German industry a bit but it will severely harm the countries that have weak industrial bases. If the Euro is weak and exports are cheaper it will benefit countries like Germany greatly but only moderately, if at all, benefit the weaker, less developed countries and regions.

        Also, when you link countries together economically that are vastly different in wealth and power you have to have the stronger countries fund the development of the weaker countries, or the union will result in the strong dominating the weak. Essentially, the stronger countries have to fund their eventual competition. Is that a realistic expectation? Have we seen that happen?

        Then there’s the neoliberal, reactionary ECB and the abandonment of an alternative economic program by the “socialist” and labor parties. There is no coherent alternative at this point, at least one that people are rallying around, and so people feel aimless.

        I think the streets and the social movements will have to teach these brain dead neoclassical economists some economics. I also think that the typical capitalist game of divide and conquer isn’t going to work. That can work when a segment of the workers can be bought off.

        So, for example in the US, if wages are stagnating, de-industrialization is setting in, wealth inequality is growing, financialization is extreme, you might be able to get some workers to attack others. They’re from other countries and are stealing your jobs, or some workers were and are irresponsible, or maybe they’re gay or something. Things are too extreme now, the reality of the situation is too obvious. That requires that the elites give that group a stake in the game or else why in the hell would they work to defend and maintain the system? That isn’t happening. Too few people have a stake in the system and not enough are going to be called upon to defend it against the radicals, like in past decades.

        Some low information, working and middle class reactionaries might come to the rescue of their rich masters but not enough to fend off radical calls for change, at least in the long run. Either the enlightened capitalists step up and realize what harm they are doing to themselves in the long run or the current set of policies will lead to outright collapse. If, or when, that happens all bets are off.

        1. Maju

          In fact, a weaker euro should clearly benefit the weaker economies (whose prices of common goods like towels, shoes or even sunny vacations would be more like the rest) and could damage Germany (and the like) a bit – because they’d pay more for raw materials and components, which they resell as finished high value products like Bayer’s aspirin or Siemens’ computers, which have little competence in the global markets (for example, when I buy vitamin pills at the pharmacy, I can choose between a US, a German and a Swiss company – there’s nothing else: no Brazilian, no Chinese, no Spanish and not even French nor British vitamins).

          So choosing “the right value” for the euro is a key economical (and political) matter, yet it is a nonexistent debate. Now and then you hear the cries of the abandoned Portuguese industries unable to compete but the slogan is always “there are opportunities for those who survive”, yet the industrial production of all southern Europe, France included, has collapsed.

          1. Lefty

            That all depends on how much they import and export and what they can produce domestically. If a poorer country imports a lot (because they don’t produce much domestically and don’t have nearly as powerful of an industrial base as, say, Germany) and the price of the Euro declines then they will pay more for goods. If they don’t import much then a decline in the Euro might not hurt them as much. The problem is that to pay off debt or to buy things and to not go further into debt because they are buying them on credit they have to produce tangible things that other countries want to buy. I don’t, as an American, know of any Portuguese companies. I know plenty of German companies. You also assume that Germany can’t buy raw materials from other countries within the EMU. Maybe on some products they can’t, maybe they can. Raw materials though have horrible terms of trade with manufactured goods and the world is flooded with countries exporting raw materials.

            Portugal, for example, relies heavily on services. Anywhere from half to two thirds of its economy is in services. It also relies on agriculture. There is some industry, but not nearly as much as in Germany. There is no way these two vastly different countries can be under one currency and benefit or suffer equally from economic policies. Germany can make many high tech, manufactured products that have good terms of trade and export them around the world and the EU while Portugal can’t really. That is a huge problem.

          2. Maju

            You export and import because you are part of WTO and Bretton Woods agreements: protectionist economies are banned for the greatest part nowadays. Much more within EU, where you have to compete not just with other Eurozone partners but also with countries like the UK which are out of it and are letting their currency to fall almost freely (and “miracle”: no hyper-inflation!)

            “Portugal, for example, relies heavily on services”.

            And more in the future because the only good that has limited competition is sun and beaches. But that can hardly be the engine of any self-respecting economy.

            “There is some industry, but not nearly as much as in Germany”.

            We all know that Portugal is not Germany, thanks for the old news. But with salaries at maybe 1/3 those of Germany one would expect that german industries would move to Portugal… yet they move from Portugal to Morocco or China, which are out of the euro and have totalitarian regimes that repress workers’ demands brutally, keeping salaries even much lower than in Portugal.

            “There is no way these two vastly different countries can be under one currency and benefit or suffer equally from economic policies”.

            Probably not, that’s why the monetary policy should be and should have been in the past more balanced and less one-sided towards German interests. But with a more balanced approach, maybe with the euro at $1.2 instead of 1.5, both countries could benefit in a balanced way (but for that Portugal and the other southern countries should have statesmen that defend their interests and not colonial administrators as prime ministers).

            What the euro does is to facilitate trade and travel inside the eurozone and offers certain stable reference frame: all that is good for all economies, no doubt. It is not so much the euro as such but a too strong euro what harms the overall European economy.

          3. Lefty

            You said that German industries can move to Portugal. True. That has nothing to do with the development of Portugal though. When corporations chartered in a rich country takes advantage of low wage rates in another country it has nothing to do with the development of that country. Once wage rates rise, which they should if that country develops, bye bye foreign corporation.

            That isn’t development. That is a dependency on foreign capital. Development means that Portugal develops their own industries. So if Portugal runs up their public or private debt they can draw on the domestic productive economy, rent and finance and not just labor to pay that debt or imports off. They can also pay for imports and not have to go into debt or sell off their country to do so.

            Having said that, things would have to happen that won’t that would make this all possible. Things like technological transfer, funding the development of the stronger countries’ eventual competition BY the stronger countries, protection of domestic industry (since every single country we now called developed did just that, especially the US, Britain, Japan, South Korea and Germany). Since none, or little, of that will happen, this is doomed to eventually fail. Same with the so called “free trade” agreements here in the US. They are a disaster for everyone who doesn’t own the companies moving to poorer countries.

            If you read people like David Ricardo, who put forward a defense of free trade that is largely used still today, he assumed that capital was immobile. He said that capital, productive capacity, would stay within the country (which is why he analyzed two countries, Portugal and Britain, and not two companies within those two countries) and there would be a free trade in commodities. Totally different than the world we live in. There are other assumptions that have no basis in reality. Neoclassical/neoliberal economics is a horrible failure. We are seeing a systematic collapse not much different than what we say in Eastern Europe in the late 80′s. I just wonder what will take its place.

          4. Maju

            I do not say that it’d be any panacea, I just say that it’s not happening or at least not often enough to offset the industries that emigrate from Portugal to even cheaper countries or just directly collapse.

            Portuguese wages are low, Greek wages are low, their workforces are more than reasonably educated, but still the theory doesn’t work. And at least part of the fault is in an overvalued euro.

            Nobody is too concerned about development, that’s a longer-term frame, right now we are concerned about jobs and GDP and why we buy stuff made in China or Morocco instead of that one made in Portugal or Greece, member states of the EU and in principle advantaged for the reason of being member of this no-borders (no import taxes) zone.

            Why? Because the euro is so expensive that it offsets any other advantages.

        2. David

          Yes, the economists may learn that “growth theory” is not all there is to it. They should consider some of those old fashioned ideas from “welfare economics” that are glossed over and then forgotten these days.

    2. reslez

      What you’re advocating with barter is the abolishment of credit. Do you really think forcing all trades to be spot transactions would increase trade or improve the economy?

      1. MyLessThanPrimeBeef

        I did say I am not necessarily advocating barter (credit or no credit).

        As for increasing trade, I am for trade but not necessarily for unlimited trade. I wonder if there is an optimal size determined by, among other things, the parties’ ability to pay for them.

  4. TulsaTime

    Yes, the euro is ‘toast’, but none of the developed world economies will escape the GFC that is lurking around the bend. And that is a good thing, because the pathology of Finance needs to be eliminated from the preferred position it has insinuated itself into. Growth gave the illusion that this was a beneficial activity, but a low to no growth world may make it a non-profit one going forward.

  5. Daniel de Paris

    Hi all,

    All those formidable commentators, policy-makers, professors from countries with a massive net external debt teaching the rest of the world with “lessons in economics” and/or banking…

    They did not even tackled the extensive fraud within their own banking and financial system. That would be an entirely different proposition.

    Sure that will convince themselves and possibly offer the USD a dead cat bounce. At least we can hope so.

    What else except destroying what is left of the tarnished reputation of their bankers, judiciary, policy-makers and even bloggers?

    We are alas one thousand years away from the 70s and 80s. On all accounts.

    1. Kiste

      “All those formidable commentators, policy-makers, professors from countries with a massive net external debt teaching the rest of the world with “lessons in economics” and/or banking…”

      I agree and I am beginning to get bored by this self-serving claptrap.

      1. Pierre Garenne

        Agreed – to paraphrase William Hague’s last anti-Euro tirade “The good news is we are talking about the Euro not Sterling.” Don’t forget that a large part of Evans-Pritchard’s (The Telegraph) readership consists of Tory backwoodsmen who wish they were still in the Edwardian era (and are also fundamentally anti-Cameron). Others are still under the illusion that we can borrow our way out of trouble ad infinitum (ad nauseam), by continually increasing leverage to ever higher levels, (or invent fiat fictitious instruments like carbon futures – as in “let there be darkness!) without affecting the solvency of banks, hedgefunds… nation states…, a system from which some in the UK (and in affiliated off-shore hedgefunds) profited before the subprime and derivatives crash. There is a delicious irony in Geithner’s proposition that Europe create a new level of SIVs given that his leverage + free money “trip” with Bernanke turned into a disaster.

    2. Luciano

      I will add that all these doomsayers are salivating at the prospect of the biggest crisis of the world JUST to satisfy their intellectual hubris or, worse, to let them have a chance to speculate wildly and gain a lot of money form the destruction of real economies. Italy has, unique between ALL the developed contries, a strong fiscal surplus before the payment of interests on its debt. There is no real estate bubble. There is the lowest % of private debt on GDP respect to other EC countries. The banks have a good deposit base, have raised their capital at a good pace and have never used those f*°#ing conduits typical of northern european banks to conceal losses.
      BUT, the anglosaxon financial community has decided that we are doomed. We are broken. We will surely default. And the speculation has started, prompting an avalanche of stop losses barely ring-fenced by the BCE…

      I’m disgusted, i’d really love to see some goodfella go cut some finger to some hedge fund manager or guerilla trader, just to remember them that the time to play is over…

      1. chris

        If you are correct, the inetermediate term future will reward a prudent Italian banking system. If not, deposits will flee elsewhere.

      2. Lefty

        I don’t want the countries in the EMU or the EU to fail because I know what it will do to working people and others who did nothing to cause this mess. What I do hope is that people re-examine how they look at economic issues, how the economy is structured, who benefits from these neoliberal policies and the underlying logic used to justify this monstrosity.

        All I see is the ECB finally stepping in to act like a typical central bank and it doing so only because the banks are now in trouble. NOW they’ll directly buy debt, but only to socialize the losses of the bankers. When it was harming the workers or the real economy then austerity and inflation targeting was their main focus.

        People should think about why most every country in the West, across the ideological spectrum, are in trouble. Why are countries with vastly different living standards, lead by left, right and center parties all in the shits? Are we allowed to ask these questions?

    3. tiebie66

      I agree too.
      Further, what a poor post this is:
      “But you are assuming that all deficits and surpluses are created equally, and they aren’t.” (MLTPrimeBeef)
      The nuance above is not addressed in the post, instead we get this:”Indeed, the picture of the debtors that the Germans, especially, want to paint is one of profligate consumption fuelled by runaway government spending by Mediterraneans.”

      The author also seems to clamor for a world currency when lamenting that “the separation of nations and their currencies” makes nations vulnerable.

      Finally, he shoots himself in the foot with
      “Fraud is essentially the only business that big US banks know—the only thing keeping them in business.” Or did the euro cause the fraud and I missed it in the post?

      Frankly, there is too much pontification and too little learning.

  6. Maju

    “a complete break-up to a split between a Teutonic Union embracing fiscal rectitude with an overvalued currency and a Latin Union with a greatly devalued currency”.

    That would be a good solution for the Latin+ states. It would work well and it is my desired solution for EU as a whole.

    It’d be a disaster for the German bloc. But their problem, parasitic whiners.

    What will happen eventually anyhow is that the euro will devalue, with or without the ECB’s agreement, with or without Germany remaining in it. So if Germany left the Eurozone now, it would make a favor to the rest of the bloc: because it’s the unreasonable and stubborn German demands which are dragging the Eurozone.

    He’s right about the need of a shared economic governance and overall a shared government but first of all we’d need democratic institutions (elected by the people(s) of Europe) and social institutions (less agricultural subsidies waste and more public housing spending for example, more emphasis in similar salaries and working conditions across the EU, etc.) Without that it’d be building on a vacuum and inviting secession and revolution.

  7. Linus Huber

    This is not related to above poste but just made me kind of happy to find in the inbox today:

    Dear Friend,

    Thank you for recently contacting my office regarding the latest developments in the 50-state national settlement of the mortgage probe.

    Though I was elected to work on behalf of New Yorkers, I am pleased that in pursuit of justice my office positively impacts the lives of all Americans. To that end, I am deeply committed to pursuing a full investigation into the misconduct that led to the collapse of America’s housing market, and to seeking a resolution that gives homeowners meaningful relief, allows the housing market to begin to recover, and gets our economy moving again. Too many of our families have suffered for my office to sign onto an inadequate settlement that gives banks and others broad release from further legal action. As Attorney General, I pursue cases and settlements based on facts, so any agreement must not prevent those investigating the mortgage crisis from following the facts wherever they lead.

    Again, thank you for contacting my office. Please continue to stay engaged on this issue by contacting my Albany offices at (518) 474-7330, or by sending your comments to me on my website. You may also follow me on Twitter or Facebook.

    Sincerely,

    Eric T. Schneiderman

    New York State Attorney General

      1. Linus Huber

        I do not need to believe all of it but if Schneiderman is going after the banks, that is more than enough for me. Based on his latest actions, he may really try to get at them.

        1. jake chase

          If he means what he says they will bury him. Chances are he does not mean any of it, is merely soliciting some kind of payoff. Don’t bet he wont get it. Change never comes from politicians. It only comes from public rage. So far, most people blame themselves and hope to be saved by these grandstanding blowhard Democrats. Schneiderman has not demonstrated he knows how to pour piss out of a boot. Who is he? Where did he come from? Where does his money come from? The office of state attorney general has been occupied by bullshit artists on the make for one hundred years. You think this guy is different. PLEASE!

          1. morris deka

            Unfortunately Jake, everyone has to be taken around the block a few times before they get to where you are.

    1. Maju

      Interesting, thanks: all that matters is ghostly “investors” and not the Italian People, which is the source not just of the power of all those clowns but also of all the wealth of Italy.

      It’s criminal and I think that Draghi and Trichet should be put to trial for high treason against the Peoples of Europe.

  8. Charlie

    “EMU would be like a USA without Washington”: you come dangerously close to the actual solution of the problem, which is quite simple- turn the EU (not the EMU) into a federal republic.

    1. chris

      Well, perhaps those banks that are marking their assets to market value are not insolvent (but since the marking to market requirement of the Financial Accounting Standards Board under Statement of Financial Accounting Standard #157 was set aside by the Democratically controlled Clowngress in late March 2009) but anyone reading a bank balance sheet has no way of knowing the what the assets are really worth.

      If assets are overstated (residential and commercial loans) and assets less liabilities equals owners equity (capital for a bank) then the bank is lying about its capital.

      Please feel free to pretend any bank is solvent.

  9. gerold k.b. weber

    New credit creates new financial assets and liabilities at the same time – and their sum is always zero, as MMT does not tire to point out.

    Capitalism without manifest class conflict relies on expanding credit to uphold aggregate demand (Steve Keen et al.), as labor doesn’t get its fair wage increases of inflation + productivity growth. At the same time ‘as in a poker game the chips become concentrated in fewer and fewer hands’ (Marriner Eccles).

    This expansion of credit/debt works as long as borrowers are able to pay agreed interest and principal. But as lenders (financial investors) are saturated with goods and services and don’t have much animal instinct to invest their wealth in the real economy, lender money doesn’t recycle to borrowers.

    Trust in borrowers ability to repay decreases, ‘Minsky moments’ arrive, credit/debt starts contracting, with negative side effects like unemployment, conctracting real GDP and deflation. And class conflict becomes visible again.

    To avoid debt deflation with cascading defaults and a repeat of the Great Depression, ‘lenders and borrowers of last resort’ emerge, such as central banks as lenders and states as lenders and borrowers, taking over or guaranteeing debt of financial institutions. This creates first of all breathing space for political and social processes focusing on the crisis and possible solutions.

    In the Eurozone we lack a strong lender of last resort and have therefore only weak borrowers of last resort – a neoliberal dream world. The weak borrowers feel compelled to rely on ‘structurally monopolistic’ financial markets and their permanent attempts to dictate prices to buyers with inelastic demand. Additionally we strive for ‘fiscal responsibility’ to deliver the desired debt-to-gdp ratio and market confidence, although theory and experience on austerity is discouraging (Krugman et al.).

    Only in the Eurozone we insist on minimal breathing space to understand and ‘come to grips’ with the crisis (Schäuble; the German colloquial word ‘Grips’ denotes intelligence, cleverness, shrewdness), thereby risking an acceleration of the debt deflation spiral and a repeat of the Great Depression.

    Culturally this is rooted in surplus economies moral principles of hard work, limited debt, good products, and just fortune for the brave. Limited debt equals limited guilt, as in the German word ‘Schuld’ which is used for ‘debt’ and ‘guilt’ as well. Along this strange but popular line of thinking, after excess debt/guilt there has to be repentance, expiation, and even punishment if the excess debt/guilt crime is repeated.

    Not a good cultural foundation to solve the European credit/debt crisis without significant debt deflation.

    1. Linus Huber

      Not a good cultural foundation to solve the European credit/debt crisis without significant debt deflation.

      Well, this sentence implies that you seem to prefer to kick the can down the road and delay the credit deflation that has to take place one way or another. We have the choice to bite the bullet now or just continue the slow grinding towards the abyss or in other words, an end in horror or horror without end. The US chose the second as we know. Whether the Europeans will still choose the same route is presently in question.

      1. aet

        Agreed; the US seems to have cured the pain of a moment by blasting the prospects of the next ten or twenty years. (but we are three years in already, so only 7 or 17 to go!)

        Theoretical question: By what mechanism does ‘austerity” increase economic activity?

        Or is that belief – that ‘austerity” would lead to more economic activity – is it “faith-based”, like so many other “solutions” proposed by the “common-sense” right-wing?

        PS These “Austrian-school” economists all formed their personalities – that is, spent their first 30 or so years of their lives – amongst the fading and crumbling ruins of the Austro-Hungarian Empire, before moving en masse to the USA in the 1930s, did they not?

        How is the Austro-Hungarian economy of the 1900-1940 period in any way like the economy of the USA in the 2010s?

        Why would those men have ANY insight into our economy?

        1. chris

          They have the same insight as the MMT crowd spewing their theory. Of course, whether the theory is spouted by Austrians, Keynesians, or MMT’ers does not mena any economy should be run on a theory.

        2. Maju

          There’s no mechanism by which austerity alone leads to economic prosperity: it is a bourgeois myth, one that would surely never pass the scrutiny of empirical research.

          Some austerity may help other mechanisms but wealth almost invariably comes from taking it from someone else (either by exploitation, scam or outright robbery). But this truth cannot be acknowledged: the system would lose all its legitimacy.

          Also workers and petty bourgeoises love to dream that hard work and austerity will lead them to wealth… when at best, if conditions are very favorable, can lead them to being alright – but never wealthy except in dignity. But dreaming is for free and the con-men who really make money won’t tell this crowd of faithful sheep that they are being deceived, not just from outside but from their own wishful thinking as well.

        3. Linus Huber

          It seems that one does not realize who has been actually saved by the Fed’s and Geithner’s actions over the past 3 years. It is hardly the jobless, homeless and whateverless guy but their buddies on wallstreet or in other words those guys who continue looting the system.

          Well, on the surface your usa may look better at the moment but do not be deceived by the recent calm. There is sufficient uncovered stuff on the books of banks, there are sufficient municipalities close to bancruptcy, there is always the danger of the treasury market to revolt should the fed and congress continue to enlarge deficits and debt. Your USA simply looks good at the moment when looking at the turmoil in Europe but generally, how the US devalued their currency over the past many years is certainly not a harbour of confidence or of knowing better how things should be handled. Do not forget, default can also be achieved by devaluing one’s currency but only upto a point because if the confidence into a currency should evaporate, overnight you are faced with hyperinflation.

          1. Linus Huber

            People continue to believe that there is an easy way out, some kind of a free lunch. Well, those free lunches were eating up over the previous 20-30 years. But I do not need to convince anyone here, I rather simply watch the game from afar and even I am sorry for most who are/will be suffering, but certainly not for those looters and know-it better guys.

          2. Maju

            Linus: what’s the problem with bankruptcy? Loss of credibility? That some blood-sucker usurer “loses” money? The real problem is military or police intervention. Otherwise bankruptcy is so necessary that it’s consecrated in bourgeois constitutions, and has been practiced continuously since always.

            Nobody cares if all banks collapse. They could close all the private banks today and, as long as the state guarantees regular deposits, the effects would be minimal. Similarly the state can take over and create new banking institutions out of the blue (provided political will or common sense) that dynamize a renewed economy.

            The banks do nearly nothing other than parasite the real economy. Let them fall.

      2. gerold k.b. weber

        I would prefer to delay significant Eurozone deleveraging as I deem the risk to repeat the Great Depression experience as too high. There is little doubt that the currently prevailing Eurozone mindset – although some is in flux right now – is close to the worst possible.

        If we look e.g. at Irving Fisher’s ‘Debt Deflation of Great Depressions’ (1933), we find right after his listing of nine occuring and recurring factors in depressions:

        “But it should be noted that, except for the first and the last in the ‘logical’ list, namely debt and interest on debts, all the fluctuations come about througt a fall in prices.

        When over-indebtedness stands alone, that is, does not lead to a fall of prices, in other words, when its tendency to do so is counteracted by inflationary forces (whether by accident or by design), the resulting ‘cycle’ will be milder and far more regular.”

        I don’t advocate inflation as a genuine solution, but some inflation should be part of it, and I am here with Krugman’s reasoning. Preferably the course of action would be adequate to the causes, and correct internal (distribution of income and wealth between capital and labor, and within labor) as well as excessive external (current account) imbalances. But this is politically infeasible, if we cannot make clear that we save capitalists from themselves (Eccles).

        And TBTF should end before significant debt deleveraging starts, e.g. according to proposals of the Vickers commission, which should be implemented more broadly and speedily.

        Having said that, I am not fully convinced that significant Eurozone sovereign and bank deleveraging would be nesessary at all if the Eurozone had a credible ‘lender of last resort’ like the US, Japan, or GB.

        But of course, imbalances have to be addressed anyway, as we probably understand better now which troubles they generate.

    2. aet

      In addition to their moral view of what constitutes debt, the Germans also historically considered their freedom to be their greatest possession, and that the telling of the truth honestly and openly as the highest of virtues.

      “Credit” is “belief”; would you lend to a man you knew to be a liar, and whom you knew to have hidden or obscured the truth as to his financial affairs?

      1. Maju

        We are not discussing individuals but peoples.

        In any case, Spain for example still has low public debt but it’s being targeted for liquidation. Why? Because it can’t compete with an over-valued euro.

        The euro must be put back to parity with the dollar, as it was in 2003. We cannot wade the crisis as EU with an overvalued euro (and Germany cannot do without the EU: that’s a total delusion).

        We Basques also pride in being honest and direct. But in addition to that we also pride on never ever having waged war of conquest against any other people (with one medieval exception in Albania) nor styled any empire. And still doing fine in spite of all.

        1. Linus Huber

          We cannot compete because of the EURO? Really?

          Well, there would be a possibility; simply to cut everything in the state by 30% (salaries, pensions etc. resulting in lower prices overall).

          But guess what, it becomes impossible when you have total debt (government, private and business) in excess of 300% as you cannot reduce those. That is the reason why debt reduces your ability to do things that should be done.

          1. Maju

            We cannot compete because of THIS euro: it is too strong in comparison with the US dollar (and therefore almost every other currency out there).

            “Well, there would be a possibility; simply to cut everything in the state by 30% (salaries, pensions etc. resulting in lower prices overall)”.

            It does not work that way: salaries MUST be able to afford basic living conditions. You can’t pay €500 per month when the cost of life is €1000. You must pay at least €1000, nobody will work for less: it’s more productive to commit a crime and live in jail (or live out of crime if you can get away).

            Just by lowering salaries the price of stuff does not go down. This is true for a demonstrated hyper-rigid housing market (which makes up much of the cost of life) and it is true for a globalized commodities market as well. Furthermore: you do not lower prices by increasing direct taxes.

            What the state could do if it wants to lower salaries is to force housing and basic commodities’ prices down. The latter may be impossible but the former is easy: it just needs that the state is willing to accept that banks are going to lose a lot of nominal money. But instead the state defends rigid hyper-high prices for housing and in those conditions salaries can’t go down.

            A real life example: in this city is nearly impossible to find an apartment for rent for less than €700 and the basic salary is under that. If you are on basic salary you can’t pay a rent, even home-sharing is extremely hard. It is hard to pay a rent even with a €1200 salary (because you need to pay other stuff, amounting to many hundred euros every month). And those are the salaries most people have. So salaries are already below the minimum acceptable considered the cost of life.

            In Greece is even worse.

            Unless you are willing to accept widespread growth of slums and squats, and to hire people living in such conditions, you have to accept that salaries cannot be lowered (unless a huge planning, interventionist, effort is done to lower prices first).

            “But guess what, it becomes impossible when you have total debt (government, private and business) in excess of 300% as you cannot reduce those”.

            Debt is not important for this. It is cost of life what matters. You take debts to face a cost of life that is higher than you can afford without them. But that’s irrelevant because debt can be written off by means of bankruptcy, what you can’t do is to pay 1000 when your income is of 500. Not without further debts.

            That’s why a revolutionary exit is the only possible exit, barred an unlikely “socialist” change of course by the EU and its member states.

          2. David

            How do you propose to force down the price of housing? For that matter, what is making it so high now?

            If it’s supply and demand, either increase the supply (build housing projects? “affordable housing”? that usually is another name for slum) or decrease the demand (throw out illegal immigrants, change residency laws, I guess.)

            What else is possible?

          3. Maju

            I understand that the housing market is very rigid: investors do not want to sell under their expectations when they bought and prices only recede very very slowly.

            Also lack of demand for property homes implies increased demand for rented homes, what drives these prices higher (there used to be relatively low rent market: since fascism the sociologically-induced goal has been to OWN a home, at first it was cheap now it’s a nightmare).

            How do I propose to draw prices down:

            1. Large public investment into cheap public housing (nowadays a token item in Spain but dominant in the affluent countries of Central and Northern Europe, like Switzerland, Germany, etc. – notice how this is a subtle subsidy for a potentially cheaper workforce).

            2. Legally forcing empty homes (for too long) to be auctioned or nationalized, or allowing them to be squatted with certain legal guarantees, that way homes could not be withheld from the market economy for long. Notice that owners who don’t want to sell still can rent but not just keep them empty, occupying social space for mere speculative reasons (there are many variant forms for this intent, in case you don’t like my style, you can overtax empty homes, fine owners of empty homes, etc.)

            As always, it all depends on political will, assuming politics are independent from corporations (what is kind of utopic I know but also extremely necessary).

          4. Maju

            And affordable housing is not exactly the same as a slum: slums are illegal squats in which the squatters have built their own huts and tin homes. Call it whatever you want but a home that is legal, does not fall down, has electricity and sanitation is not a slum: it’s basic housing and a traditional remedy against slums.

        2. Lucio

          Maju, you will surely be served a valid argument by watching a graph showing the adjusted exchange rate between the euro and the Us$-pegged yuan.
          But you should also take a deep look at the BIS datasheet regarding all the world’s countries’ commercial accounts and current accounts. Go see when exactly the German deficit has turned into an ever widening surplus…

          1. Maju

            The German surplus is partly because they export to the Eurozone thanks to the semi-false increase of purchase power in hard currency Deutsche Marks (oops, I mean euros). Germany anyhow exports high value products made up of lower value components/raw materials, which they import cheaply thanks to a strong euro.

            This has been debated in this blog comments section once and again since the euro-crisis began: Germany (and a few smaller states like the Netherlands) get benefits from the hyper-expensive euro, while most of the Eurozone pays the costs by lost of international competitiveness and therefore a href=http://forwhatwearetheywillbe.blogspot.com/p/whats-wrong-with-eurozone.html >loss of industrial production and jobs.

            And then these are insulted, spitted on and plundered. By whom? Guess.

            Is it fault of Germany? Only in as much as we consider the EU a good faith agreement among equals: in that case Germany has scammed the rest, what is immoral. If we consider EU to be “the jungle”, then it’s the fault only of southern European countries (incl. France) for accepting the German deal raw and not imposing their own conditions: for imagining that somehow all would become Germany-like by miracle of the euro currency.

            Admittedly at the beginning this was not so clear. It was only since 2003 (and specially since 2007) when the euro began its catastrophic climb. We could blame Washington for dumping the dollar but we must blame the leaders of the EU and that means largely Germany but also France. The low profile of large states like Italy and Spain, which have traditionally trailed French and German leadership, and lack of “guts” to impose at least some of their conditions (and not mere tokens but life-or-death matters such as the relative strength of the euro).

            Sometimes you think that the Zapateros, Berlusconis, etc. just do not care about their responsibilities as leaders are and are just posted there by Volkswagen and Deutsche Bank as administrators of a protectorate. And it’s probably not far from the reality, at least the Greek, Irish and Portuguese cases clearly show that their rulers are not taking any chance of upsetting Brussels and Berlin.

            And that political weakness the people will be made to pay.

  10. LeeAnne

    Bankers and shareholders prospered beyond measure under a regime of limiting employment in the US that demanded a 6% unemployment rate. That limit has been exceeded far far beyond their, TPTB, wildest dreams. And they still want more. More destruction of unions. More public sector financing for their ilk, fewer taxes, more subsidies for themselves, etc. along with no legal constraints for themselves; police and military against the people.

    So corporate goals limiting economic opportunity for the people are not foreign to us. Organizations such as the AMA have been particularly notable for that; capping opportunity for medical training for their own control and excessive profits.

    Now, we need a goal for FIRE industries, particularly banking, back to 7% of the economy. That’s long overdue.

    By just shining a light on their true value, the value of their assets, and letting them fail; as things collapse, the perpetrators identified, arrested and tried, reformers will appear.

    Once the charges and arrests begin, reformers within their respective industries will show up, and not before.

    1. Linus Huber

      “By just shining a light on their true value, the value of their assets, and letting them fail; as things collapse, the perpetrators identified, arrested and tried, reformers will appear.”

      On this one I agree whole heartedly; the looters will stop at nothing until it becomes clear to them that they cannot get away with the loot.

      “More destruction of unions. More public sector financing for their ilk, fewer taxes, more subsidies for themselves, etc. along with no legal constraints for themselves; police and military against the people.”

      Well, here I am not really on your page. Banks do not really care about this aspect but simply to get their monies credits paid back in full, debt that those irresponsible politicians took upon their governments/municipality/state or whatever public utility. Of course, we have to get haircuts and the banks should have been diligent when extending unsustainable credit but the politicians were partly responsible too and should be thown out of office at least. Remember, what cannot be paid, will not be paid. Unions cannot get a larger part of the pie, simply because they have some agreement as it would bancrupt the tax payer. In other words, the pie will be smaller and the individual share available for distribution too. There is not one particular section of society that must be allowed to take an inappropriate larger share as the rest would revolt.

      1. aet

        The ONLY entities which can GUARANTEE a stream of payments in the future are sovereign states with the power to levy taxes.

        Others can only undertake to give their “best efforts”.

        Governments are the best “credit risk”, NOT “private enterprises”.

        PS Income-swaps were a big part of the derivative business…once the price of oil went over $150/bbl (the brains apparently got the economic effects of the invasion of Iraq wrong!) private companies could no longer meet the payment schedules specified by those derivatives and swaps… and the rest is history.

        Only Governments and States can guarantee a stream of payments in the future. So-called “private entities” which attempt to do so require Government backstopping, without exception.

        I feel that the economic crisis is a result of Governments giving private outfits the right to print money; ie, the putative ability to “guarantee” a stream of payments in the future, without the necessary and essential Governmental oversight and power which controls the performance of that promise – that is, without the power to tax.

        1. Linus Huber

          You must be of the belief that the next generation will take on the debt produced by us. Well, I have news for you: THEY WILL NOT

          In general, governments never paid back their debt. They either inflate it away or default. The question is only when and which of the 2 will happen.

        2. morris deka

          Don’t worry: they’ll tax on behalf of the private entities which own the government.

          And it won’t be a progressive tax. It will come as inflation on food, fuel, and other necessities, not on luxury goods or high incomes.

  11. Bruce Krasting

    Where does the $29 Trillion number come from? Yves says it’s closer to $10T. Where does that number come from?

    Neither of these numbers is right.

    1. anon

      Agreed.

      Such numbers are entirely bogus. They confuse the coverage provided by an insurance policy, its premium cost, and the eventual claim – among other confusions.

      The whole idea is that the government balance sheet is big enough to provide the insurance coverage – not that it got lost in the process.

      Very silly analysis.

      1. morris deka

        What’s silly is your assumption that there won’t be an eventual claim.

        At some point the “trash” from “cash for trash” is going to be written down and it will be the government writing it down.

    2. skippy

      Bruce,

      Your so warm, so close, whats the number? I agree with you, why is it so hard…eh…29T – 10T{?] a sliver in the palm or the tree landed upon my ass.

      Skippy…I don’t want to know to bet upon it, just would like to teach my kids…recourse math.

      PS…have enjoyed some of your recent posts…reflective…gives me hope…thanks.

  12. ArkansasAngie

    So … we spent 29 trillion … er … 12 trillion … and didn’t fix the banks.

    And … some yahoos want to spend more?

    Talking about insanity.

    How about we do something different.

    The illusion of the brillance of TPTB is horse manure.

    Obviously … the first thing to do is to bring down the MSM for the collaborators they are. Hair cuts anybody

  13. PPP Lusofonia

    …the German delusion that its trade surpluses are “good” but the South’s trade deficits are “bad” balances…

    The general and foolish delusion was that, with the Single Currency, such imbalances no longer mattered. In fact, with a Single Currency, trade imbalances have to be kept close to zero, as in barter, since no one can print currency to pay the other trading partner.

  14. Rodger Malcolm Mitchell

    There are two, and only two, long-term solutions for the euro nations:

    1. Become Monetarily Sovereign (http://rodgermmitchell.wordpress.com/2009/09/07/introduction/) by re-adopting their sovereign currency, so they can control their money supply . . .
    or . . .
    2. For the EU to assume the same role as the U.S. federal government, and supply euros to its member nations — a quasi United States of Europe.

    There are no other long-term solutions. I predicted this problem in a 2005 speech (http://rodgermmitchell.wordpress.com/2010/05/12/the-meteorology-of-economics-speech-at-umkc/) where I said, “The economies of European nations are doomed by the euro.”

    Rodger Malcolm Mitchell

    1. chris

      Why, thank you for your brand of kool-aid as the “only” solution.

      Please continue to pimp yourself as all-knowing.

  15. Hugh

    I have posted this before both here and elsewhere from the Fed audit:

    I. Agency Mortgage-backed Securities Purchase Program: $1.25 trillion
    II Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility: ~$217.3 billion
    III Aid to AIG: Revolving Credit Facility: $85 billion; $72 billion used
    Securities Borrowing Facility: $37.8 billion: $20.6 billion peak
    Maiden Lane II: $19.5 billion
    Maiden Lane III: $24.3 billion
    IV Bear Stearns/Maiden Lane I: $30 billion
    V Bank of America Lending Commitment: Backstop not used
    VI Citigroup Lending Commitment: Backstop not used
    VII Commercial Paper Funding Facility: $738.3 billion
    VIII Direct Money Market Mutual Fund Lending Facility: Never operational
    IX Dollar Swap Lines with Foreign Central Banks: $10.057 trillion
    X Money Market Investor Funding Facility: Backstop not used
    XI Primary Dealer Credit Facility and Credit Extensions for Affiliates of Primary Dealers: Primary Dealers: $7.3894 trillion
    Affiliates: $1.5616 trillion
    XII Term Asset-backed Securities Loan Facility: $200 billion authorized; $71.1 billion used
    XIII Term Auction Facility: $3.818 trillion
    XIV Term Securities Lending Facility: $2.319 trillion

    This gives a total of $28.1882 trillion.

    As I also noted, there were lots of caveats to this. Some of the listings are only for the largest users and so incomplete. The GAO in its summing at the beginning of the report uses peak not total numbers. Some numbers are authority rather than money spent. I tried in my calculation to include money that actually went through the facility or program.

    If memory serves, the reason that the money market wasn’t used was because Treasury ran a big one of its own. I never heard the exact number on it but it was supposed to be in the trillions. Similarly, the initial buy up of crap assets by Treasury’s TARP program was ditched because the Fed was already running bigger buy up programs, like some of those above. Still the number above gives a reasonably good figure for the overall extent of the Fed’s activities covered in the report.

    And again if memory serves not all of what the Fed was doing is covered, just the special programs.

    http://www.gao.gov/new.items/d11696.pdf

    1. chris

      Hugh,

      Your numbers do not seem to include the loans guaranteed by the FDIC (which may have been the acronym TLGP) to companies morphed into bank holding companies like GE Capital.

      Or are they included under some other name?

      1. Hugh

        FDIC is under Treasury not the Fed. The $28 trillion comes from the Fed special programs. So the two big things missing from this accounting are Treasury programs and regular Fed programs like access to its discount window.

        If you remember the Fed audit bill that passed Congress was significantly limited both in terms of the time period covered and what was covered (the special programs). Treasury has not given an accounting of how big its programs were. The upshot is that the $28 trillion is what we know about but the overall size of the bank bailout is trillions higher. My WAG would be at least $5 trillion for Treasury and I have no idea about the discount window and other regular Fed operations that were used in the bailouts.

  16. Pat

    The structural problems of the Eurozone — a competive gap between North and South — have been glaringly obvious for several years now, and commentators like Ambrose Evans-Pritchard have been writing about it since at least 2008. The best and obvious solution is of course to undo the Euro and return all countries to native currencies. But how do you do that in this age when money moves at lightning speed? If you revert back to native currencies there will be massive outflows and inflows, bank runs and collapses and total market chaos, as people move their money to the stronger currencies and out of the weaker ones. Germany could withdraw first, or Greece-Portugal-Ireland. But really you would need to shut down all the European banks at once and apply a universal solution, such as pegging all currencies at agreed rates, then applying strict currency controls. I don’t know how such currency controls could work, but perhaps you could apply a 90% capital gains tax on currency transfers — that might stop rampant currency speculation.
    In order for a plan like this to work, all the EU members would have to agree on the plan and operate secretly, and of course that is something that they could never do.
    So instead we will get more inaction and paralysis, more piecemeal plans that merely delay the day of reckoning. No one will act until they absolutely have to, or alternatively, the markets will decide for them, or people will take to their feet. Eventually, in about 5-10 years, maybe sooner, Italian bond rates will reach 25%, Greece and Portugal will reach 50%, riots will break out, politicians in the South will refuse to pay the French and German banks and then we will see a complete blow-up followed by everyone re-establishing their own currencies and disavowing all foreign debt.

  17. orionATL

    telling it like it is:

    “…US banks are beginning to lose civil lawsuits on their rampant fraud—securities fraud, mortgage lending fraud, foreclosure fraud, insider trading fraud. Fraud is essentially the only business that big US banks know—the only thing keeping them in business. If that line of business is taken away, they are toast…’

    this quote was cited once above in the comments, but it is much too good for only a single cite.

    1. Susan the other

      I liked that paragraph too. Interesting thing I noticed today. Yesterday’s speech by Bernanke included an exhortation about the housing crisis. Something needs be done he says. And nobody carried this excerpt, except Housing Wire. HW is a mouthpiece for the MBA and the banks, right? So this tells me the banks are running a bluff. They want out. So question: Why don’t they just say so? Why don’t they offer the country something of equal value for their amnesty? We are a pretty forgiving country if we are given the sincere truth and a valuable offer. Face saving is really screwing things up. The banks can’t admit to all their incompetence, fraud and forgeries because then they won’t get any more money from the Fed. Grief.

  18. Jim Haygood

    ‘That leads to vicious cycle margin calls, which will have knock-on effects as those with long positions in commodities have to sell out other asset classes. The stock market will be next — and there is plenty of reason to sell bank stocks, anyway.’

    I quite disagree. Every financial crisis — from Penn Central in 1970 and Franklin National in 1974, up through LTCM/Russia in 1998 and Lehman in 2008, has marked a bear market bottom.

    So will the Greek crisis. By all indications, the ECB (either directly or through EIB, SPVs and the like) will be turned into a TARP-style garbage barge, taking toxic junk off the hands of braindead banksters and giving them solid, discountable assets in return — a dirty deal at the public’s expense.

    In coming months, Europe is going to be flooded with liquidity. European shares will bounce back quite sharply from their deep-oversold condition. If you want to invest in stocks, you’ve got to buy them while they’re on sale — such as when clowns like Rastani go viral with crash predictions.

    VIX is over 40 again today — Blue Light Special on Aisle 5!!

    1. Praedor

      In that case, I recommend you spend all your available cash on BoA stocks. That is certain to be a windfall for you.

    1. Praedor

      They will get a third, fourth, fifth, etc, chance until it is mathematically and/or physically impossible for another chance to give.

      It is in the nature of looters and those who love them (all extant criminal govts).

  19. Praedor

    Yves:
    And now even China wants to slow. The Euro toast is cooked. The question now is what Euroland will do about it, and whether the US, UK and other countries with the ability to avoid a toasting will choose a tastier outcome.

    C’mon now. Toast is delicious so how could the US, UK and others choose a tastier outcome? What do you have against toast? Next you’ll take a go at the birds or flowers.

  20. annalog

    Greece should do what Iceland did. D-E-F-A-U-L-T.
    All Eurozone countries in trouble should do what Iceland did. Teach these greedy banksters a lesson.

  21. morris deka

    I’m not really sure why anyone should be wringing their hands about the breakup of the Euro. Can someone enlighten me?

    1. Maju

      There are many reasons I believe, notably that titles now denominated in euros would become something else (drachmas? francs?) and lose real value, maybe most of their real value.

      But for the common people like myself, the euro (together with Schengen) represents the possibility of moving around Europe essentially forgetting about the artificial borders imposed by history. Most people do not want to lose that: we do not want to need to change pesetas into forints when traveling around. It’s not just an annoyance but also an extra cost.

      As businesspeople, I can offer my services or product in France and get paid in a currency I can immediately use in Spain to pay providers or workers. Or vice versa.

      The main and only problem the euro has is that it’s too strong in comparison with other currencies outside there, making most European products non-competitive in the global markets.

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