GROWING WORRIES IN ATHENS
A Greek Default Would Hit the ECB Hard
Hopes that Greece can be saved are dwindling. Athens had hoped to reach a deal with its creditors on a 50 percent debt haircut, but banks have now made it clear that efforts to reach an agreement could fail. Should the country go bankrupt, the European Central Bank stands to lose the most.
A new proposal by the New York Stock Exchange to trade retail orders in increments of a 10th of a penny—down from today’s one-cent ticks—is meant partly to restore the confidence of retail investors by keeping the exchange competitive with alternative trading platforms.
“We’re trying to further improve the quality of order flow for retail orders in the public markets,” says Joseph Mecane, executive vice president at the exchange.
But those tiny trading increments could present new opportunities for mischief by high-speed traders and lead to more “collateral damage,” says Kevin Cronin, global head of equity trading at Invesco.
So what can you do to trade more safely?
How Small Investors Can Get Stomped – Jason Zweig, Wall Street Journal
The U.S. Postal Service (USPS) has been sliding down an unsustainable fiscal path for years. A toxic combination of a poor economy, an increase in online bill paying, the proliferation of e-mail and other digital communication, and congressional mandates have created billion-dollar deficits for the USPS since 2007. Last year it lost $8.3 billion. This year, it lost $5.1 billion (only because a mandatory $5.5 billion prepayment for retiree health benefits was postponed). Mail volume declined 1.7%. Projected mail volume over the next decade? Down, down, down. Officials say if nothing’s done, the postal service will run out of money by August or September of next year, and absent congressional action by Friday, the USPS will default on that mandated $5.5 billion payment.
How the US Postal Service Fell Apart – Josh Sanburn, TIME
Opinion: GOP’s ‘alternate universe’ Matt Stoller, Politico
An intellectually honest conservative faction might be arguing that this is what it seeks — a revolutionary change.
Meanwhile, Republicans assert that unemployment benefits are what’s stopping the nation’s jobless from finding work, though the U.S. lost millions of jobs in the economic crisis and employment is now higher than 9 percent.
So there is little discussion about extending unemployment insurance, even as benefits run out, because the deficit is the GOP’s gravest economic emergency. There’s no debate about ways to address high unemployment — just deny reality and enforce it with the Leninist-style propaganda arm of Fox News, Rush Limbaugh and Glenn Beck.
But there is a big problem. America is simply not set up to handle one political party that bases its political organizing on an alternate reality and the raw power of propaganda. The U.S. government, and our public debates, are organized around the idea that there’s some measure of good faith in both parties, some common basis on which to make decisions.
I do not think most Republicans realize this is how their party operates — but the more cynical high-level operatives certainly do.
When George W. Bush ran for president in 2000, one of his campaign promises was to avoid nation-building. His presidency, of course, shifted America toward endless war and occupation of foreign countries — based on overt deceptions, like implying there was a link between the Sept. 11 terrorists and Saddam Hussein. Bush had his secretary of state, Colin Powell, hold up a vial of powder at the U.N. to show we had allegedly solid intelligence about Hussein’s weapons capabilities.
Back in 2004, a Bush administration official laid out what is now clearly the Republican Party’s guiding philosophy. The official spoke to a journalist as though he were from a foreign land — since he hailed from “what we call the reality-based community.”
“When we act,” the official said, “we create our own reality. And while you’re studying that reality — judiciously, as you will — we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors … and you, all of you, will be left to just study what we do.”
It’s unclear whether the Republicans want to, or even can, leave this alternate universe that they have constructed. Unfortunately, it’s also unclear whether our society can survive it.
Matt Stoller worked on the Dodd-Frank financial reform law and Federal Reserve transparency issues as a staffer for Rep. Alan Grayson (D-Fla.). He is now a fellow at the Roosevelt Institute.
During the Depression bankers became so unpopular that bank robbers, such as Bonnie and Clyde, became folk heroes.[54]
Paul Krugman does an excellent job of summarizing the genesis of the current crisis:
THERE’S SOMETHING peculiarly apt about the fact that the current European crisis began in Greece. For Europe’s woes have all the aspects of a classical Greek tragedy, in which a man of noble character is undone by the fatal flaw of hubris.
ROME Students protested planned changes in the university system on Dec. 22 in Italy, where youth unemployment is about 25 percent.
Not long ago Europeans could, with considerable justification, say that the current economic crisis was actually demonstrating the advantages of their economic and social model. Like the United States, Europe suffered a severe slump in the wake of the global financial meltdown; but the human costs of that slump seemed far less in Europe than in America. In much of Europe, rules governing worker firing helped limit job loss, while strong social-welfare programs ensured that even the jobless retained their health care and received a basic income. Europe’s gross domestic product might have fallen as much as ours, but the Europeans weren’t suffering anything like the same amount of misery. And the truth is that they still aren’t.
Yet Europe is in deep crisis — because its proudest achievement, the single currency adopted by most European nations, is now in danger. More than that, it’s looking increasingly like a trap. Ireland, hailed as the Celtic Tiger not so long ago, is now struggling to avoid bankruptcy. Spain, a booming economy until recent years, now has 20 percent unemployment and faces the prospect of years of painful, grinding deflation.
The tragedy of the Euromess is that the creation of the euro was supposed to be the finest moment in a grand and noble undertaking: the generations-long effort to bring peace, democracy and shared prosperity to a once and frequently war-torn continent. But the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter — to ignore warnings, which were issued right from the beginning, that Europe lacked the institutions needed to make a common currency workable. Instead, they engaged in magical thinking, acting as if the nobility of their mission transcended such concerns.
The result is a tragedy not only for Europe but also for the world, for which Europe is a crucial role model. The Europeans have shown us that peace and unity can be brought to a region with a history of violence, and in the process they have created perhaps the most decent societies in human history, combining democracy and human rights with a level of individual economic security that America comes nowhere close to matching. These achievements are now in the process of being tarnished, as the European dream turns into a nightmare for all too many people. How did that happen?
THE ROAD TO THE EURO
It all began with coal and steel. On May 9, 1950 — a date whose anniversary is now celebrated as Europe Day — Robert Schuman, the French foreign minister, proposed that his nation and West Germany pool their coal and steel production. That may sound prosaic, but Schuman declared that it was much more than just a business deal.
For one thing, the new Coal and Steel Community would make any future war between Germany and France “not merely unthinkable, but materially impossible.” And it would be a first step on the road to a “federation of Europe,” to be achieved step by step via “concrete achievements which first create a de facto solidarity.” That is, economic measures would both serve mundane ends and promote political unity.
The Coal and Steel Community eventually evolved into a customs union within which all goods were freely traded. Then, as democracy spread within Europe, so did Europe’s unifying economic institutions. Greece, Spain and Portugal were brought in after the fall of their dictatorships; Eastern Europe after the fall of Communism.
In the 1980s and ’90s this “widening” was accompanied by “deepening,” as Europe set about removing many of the remaining obstacles to full economic integration. (Eurospeak is a distinctive dialect, sometimes hard to understand without subtitles.) Borders were opened; freedom of personal movement was guaranteed; and product, safety and food regulations were harmonized, a process immortalized by the Eurosausage episode of the TV show “Yes Minister,” in which the minister in question is told that under new European rules, the traditional British sausage no longer qualifies as a sausage and must be renamed the Emulsified High-Fat Offal Tube. (Just to be clear, this happened only on TV.)
The creation of the euro was proclaimed the logical next step in this process. Once again, economic growth would be fostered with actions that also reinforced European unity.
The advantages of a single European currency were obvious. No more need to change money when you arrived in another country; no more uncertainty on the part of importers about what a contract would actually end up costing or on the part of exporters about what promised payment would actually be worth. Meanwhile, the shared currency would strengthen the sense of European unity. What could go wrong?
Red the entire article at NYT:
Is there any way to save Europe’s democracies from sinking together in the ill-conceived currency union?
A lot of people forget that having debt you can’t pay back really sucks. Debt is not just a credit instrument, it is an instrument of political and economic control.
It’s actually baked into our culture. The phrase ‘the man’, as in ‘fight the man’, referred originally to creditors. ‘The man’ in the 19th century stood for ‘furnishing man’, the merchant that sold 19th century sharecroppers and Southern farmers their supplies for the year, usually on credit. Farmers, often illiterate and certainly unable to understand the arrangements into which they were entering, were charged interest rates of 80-100 percent a year, with a lien places on their crops. When approaching a furnishing agent, who could grant them credit for seeds, equipment, even food itself, a farmer would meekly look down nervously as his debts were marked down in a notebook. At the end of a year, due to deflation and usury, farmers usually owed more than they started the year owing. Their land was often forfeit, and eventually most of them became tenant farmers.
They were in hock to the man, and eventually became slaves to him. This structure, of sharecropping and usury, held together by political violence, continued into the 1960s in some areas of the South. As late as the 1960s, Kennedy would see rural poverty in Arkansas and pronounce it ’shocking’. These were the fruits of usury, a society built on unsustainable debt peonage.
Power farming displaces tenants from the land in the western dry cotton area. Childress County, Texas, 1938.
By Matt Stoller, a blogger-turned Congressional staffer. He was a policy advisor to Rep. Alan Grayson on financial policy issues. Cross posted from New Deal 2.0.
Today, we are in the midst of creating a second sharecropper society. I first heard the term “slaves to the bank” from a constituent fighting a fraudulent foreclosure. The details aren’t so important — this couple had been illegally placed in a predatory loan — but at one point, the wife explained that she and her husband were so scared they would have “given their first born to the bank to keep their home”. That was fear speaking, total unadulterated panic. And as we watch debt-holders use the ornaments of fear, such a loan sharking company that set up fake courts to convince debtors they were losing cases, we should recognize that what the creditor class wants is what they’ve always wanted: total dominance of our culture.
Today, the debts do not involve liens against crops. People in modern America carry student loans, credit card debt, and mortgages. All of these are hard to pay back, often bringing with them impenetrable contracts and illegal fees. Credit card debt is difficult to discharge in bankruptcy and a default on a home loan can leave you homeless. A student loan debt is literally a claim against a life — you cannot discharge it in bankruptcy, and if you die, your parents are obligated to pay it. If the banks have their way, mortgages and deficiency judgments will follow you around forever, as they do in Spain.
Young people and what only cynics might call ‘homeowners’ have no choice but to jump on the treadmill of debt, as debtcroppers. The goal is not to have them pay off their debts, but to owe forever. Whatever a debtcropper owes, a wealthy creditor owns. And as a bonus, the heavier the debt burden of American citizenry, the less able we are able to organize and claim our democratic rights as citizens. Debtcroppers don’t start companies and innovate, they don’t take chances, and they don’t claim their political rights. Think about this when you hear the calls from ex-Morgan Stanley banker and current World Bank President Robert Zoellick and his nebulous mutterings pining for the gold standard. Or when you hear Warren Buffett partner Charlie Munger talk about how the bailouts of the wealthy were patriotic, but we mustn’t bail out homeowners for fear of ‘moral hazard’. Or when you hear Pete Peterson Foundation President and former Comptroller General David Walker yearn nostalgically for debtor’s prisons.
Unclogging our constipated economy is not a complex problem — we must simply wipe out the bad debt that cannot be paid back. The complexity of the problem lies in the politics. Debtcroppers have no power, except to stop paying their debts. The constituents I worked with on a fraudulent foreclosure eventually did just that. She and her husband, unshackled by panic, began rebuilding their lives, throwing away their indentured servitude to the bank that abused them. They found their dignity, and used the court system to claim their rights as citizens. They fought the man, successfully, and wiped out their debt. And that is a very scary threat to the creditor class, perhaps the only thing they are really scared of.
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| Robert Lenzner |
In housing, the Case-Shiller home price index fell almost 3% on an annualized basis in August and September, the weakest performance since May of 2009 when the recession still going on. In 19 of the top 20 cities, prices were down on a seasonally adjusted basis. During the July, August, September period sales of new homes fell at a sickening 41% annual rate to 293,000 units the lowest level ever recorded going back to 1963, when the figures were first kept.
In unemployment, emergency benefits to extend 99 weeks (almost two years) of unemployment benefits are running out or for some 4 million to 5 million people from December through April. This is proof positive that we are on the cusp of a deepening poverty at the very moment of political stalemate. Rosenberg says government handouts are responsible for 20% of disposable income in the country, so pray for the stability of the Social Security system. In personal Income, this loss of unemployment benefits means a loss of income equal to about $300 a week, or about $80 billion totted up, unavailable for consumption
I have seen no other market strategist get down to the prospects for the people at the bottom of the income ladder. Did you know that 38% of middle income families plan to spend less than $500 on holiday gifts, double the number last year?
Nitty Gritty Numbers Suggest a Downward Spiral – Robert Lenzner, Forbes
By most counts, the U.S. economy started growing in the middle of last year. For many Americans, though, it does not feel as if the Great Recession has ended—unemployment and underemployment are still alarmingly high, and job growth is weak. Many causes have been suggested for both the economic collapse and mediocre recovery, but one that is hardly ever mentioned is income inequality. This is a mistake. Growing income inequality in the United States and the policy responses it has spawned have done tremendous damage to our economy. And because we continue to ignore this underlying problem, the risks of our policies leading to another calamity will not go away, no matter what we do to reform the financial sector.
Since 1968, income inequality has been steadily increasing in the United States. I am not referring to the Croesus-like income of a John Paulsen, the hedge fund manager who in 2008 netted over $3 billion, about 75,000 times the average household income. I refer to a more worrying everyday phenomenon that confronts most Americans, the disparity in income growth rates between a manager at the local supermarket and the typical factory worker or office assistant. Since the 1970s, the wages of the former, typically workers at the 90th percentile of the wage distribution in the United States, have grown much faster than the wages of the latter, the typical median worker. Or consider the table below, which shows that the wages of occupation groups that are paid more than the national average in 2002 have grown much faster since then than the wages of occupation groups below the average:
The Inequality Gap Is Ruining the American Economy—and Bernanke Is Just Making it Worse Raghuram G. Rajan
Purveyors of C.D.O.’s maintain that buyers who lost billions in these mortgage-related instruments were, of course, sophisticated.
But as a recent report from the inspector general of the National Credit Union Administration shows, it is neither credible nor factual that only savvy investors bought C.D.O.’s.
The report analyzes the April 2009 collapse of the Eastern Financial Florida Credit Union. Based in Miramar, Fla., this state-chartered institution was created in 1937 to serve the Miami employees of what later became Eastern Airlines. The institution added other Florida employee groups and was serving 208,000 members when it failed last year.
Eastern Financial had $1.6 billion in assets at the end of 2008. The company was placed in conservatorship on April 24, 2009. It was taken over by the Space Coast Credit Union of Melbourne, Fla. The failure will cost the National Credit Union Share Insurance Fund, the federal agency that guarantees credit union deposits, an estimated $40 million.
Because it was based in Florida, the doomed credit union had its share of bad real estate loans on its books. But the inspector general’s autopsy report said that the major cause of the Eastern Financial collapse was its decision to dive head-first into toxic C.D.O.’s just as the mortgage mania was faltering.
Between March 2007 and June 22, 2007, the credit union committed nearly $100 million to buy 16 of these instruments; most contained dicey home equity loans.
The timing of these purchases is intriguing. The spring of 2007 was when Wall Street’s mortgage machinery was sputtering; New Century Financial, a big subprime lender, filed for bankruptcy that April. Brokerage firms that had provided funding to lenders like New Century and Countrywide began pulling in their credit lines. At the same time, it became a matter of some urgency for these firms to jettison mortgage-related securities in their pipelines.
Who sold Eastern Financial its toxic securities? Alas, the inspector general identifies neither the C.D.O.’s the credit union bought nor the firms that peddled them.
But the report did note that the instruments Eastern Financial bought were private placements, “which provided less readily available market data to perform analysis and provide better understanding of underlying assets and grading system, tranches, etc.” In other words, the most obscure C.D.O.’s imaginable.
“This situation illustrates yet again why over-the-counter securities and derivatives are not suitable for federally insured banks and other ‘soft’ institutional clients,” said Christopher Whalen, editor of The Institutional Risk Analyst. “Wall Street securities dealers who knowingly cause losses to federally insured depositories should go to jail.”
Credit unions are nonprofit entities and typically do not engage in the risky investing that bank executives did during the credit bubble. Federal credit unions are also limited in the types of securities they can buy. While they can purchase mortgage-backed securities, they are barred from buying C.D.O.’s.
State-chartered credit unions have more leeway to invest in exotic instruments if their home states allow it. Florida, California and Michigan are three such states. But according to the National Credit Union Administration, less than 1 percent of all credit union investments fall into the exotic category.
THOSE state-chartered institutions that can buy C.D.O.’s and other riskier investments must set aside reserves of 100 percent of mark-to-market losses in such securities when they decline in value. This is intended to deter credit union executives from venturing down the risk spectrum.
The Florida credit union met that requirement, but clearly the deterrence didn’t work. Eastern Financial’s failure may be an outlier, but it makes for a terrific case study.
Indeed, the inspector general’s analysis is depressingly familiar. Eastern Financial’s management and board “relied too heavily on rating agencies’ grading of C.D.O. investments,” it concluded, and failed to evaluate and understand their complexity.
Almost immediately after the credit union bought the C.D.O.’s, they fell in value. By September 2007, the credit union had recorded $63.4 million in losses on the products, almost two-thirds of the original investment. By the time of its failure, the credit union had charged off all 18 C.D.O. investments, resulting in total losses of nearly $150 million.
Richard Field, managing director of TYI, which develops transparency, trading and risk management information systems, says the Eastern Financial collapse is yet another example of why investors in complex mortgage securities need to be able to consult complete loan-level data on what is in these pools.
“A sizable percentage of the problems in the credit markets and bank solvency are directly related to this lack of information,” Mr. Field said.
But the Eastern Financial insolvency also illustrates why regulators should make Wall Street adhere to concepts of suitability for institutions as well as individuals, Mr. Whalen said.
“The dealers who sold the C.D.O.’s to this credit union should be sanctioned,” he said. “It might even be possible to pursue the dealer who sold the C.D.O.’s under current law. At a minimum, the Securities and Exchange Commission should impose retail investor suitability standards onto banks and public sector agencies to end the predation by large Wall Street derivatives dealers.”
Will the National Credit Union Administration pursue any of the credit union’s executives or the firms that sold it the toxic securities? “We always consider potential claims of third-party liability in cases of this magnitude,” said John J. McKechnie III, director of public and congressional affairs at the administration.
A Credit Union That Played With Fire Gretchen Morgenson, New York Times
My Nov. 10, 2008 column warned that big government was walking away as the knockout winner over the private sector in the financial crisis. But it’s going much further than I’d feared. The federal government has accelerated its takeover of the economy, adding a mega-trillion-dollar health care entitlement, despite the damage to health care and the national debt this will cause. Washington is frenetically cutting unfunded checks. Capital is being channeled away from small businesses toward big government. Looming on the horizon is the bailout of state and local governments, which will concentrate more and more of the nation’s debt onto the diminishing base of federal taxpayers.
Washington’s excess spending is now running $1.5 trillion annually, and both the Treasury and the Federal Reserve are relying heavily on short-term credits for funding. The marketable national debt has ballooned to more than $8 trillion, but wait … the Obama Administration has budgeted an increase to $20 trillion over the next few years, bringing it to more than 90% of GDP. Even that huge sum–$100,000 for every working-age American–doesn’t include the rapidly escalating debts of Fannie Mae ( FNM – news – people ) and Freddie Mac ( FRE – news – people ) or the government’s unfunded liabilities for Social Security and Medicare. And to keep the debt estimate down the budgeteers are making wishful assumptions that millions of high-paying jobs will reappear and health care reform will pay for itself.
Washington Possessed: It’s Worse Than I Feared – David Malpass, Forbes
Marx Versus Capitalism Versus You
At Naked Capitalism:
It is a measure of how un-self critical modern economics has been, that the Marxists are starting to appear to be making the most sense of the current crises. The supine acceptance that “the market is always right” — a truism only to traders and vested interests — means that there has been precious little understanding developed about how markets can go wrong. Or what is wrong, as well as right, with markets and the modern practices of capitalism. An article in the London Review of Books came to my attention recently by Benjamin Kunkel that shows how Marxist analysis is actually looking quite pertinent to the current mess.
Read the Rest…