Subprime Meltdown, the US Housing Market & the Direction of the US Economy in 2009 and 2010

[mauslick]

well this is where we differ, I"ve been a proponant of the buy high sell low stategy

then there is always lip balm today's only real store of value

[beng]

then there is always lip balm today's only real store of value

LMFAO



Interesting article

Wire: BLOOMBERG News (BN) Date: Dec 11 2011 23:01:03
No One Says Who Took $586 Billion in Fed Swaps Done in Anonymity

By Scott Lanman and Bradley Keoun
Dec. 12 (Bloomberg) -- For all the transparency forced on
the Federal Reserve by Congress and the courts, one of the
central bank’s emergency-lending programs remains so secretive
that names of borrowers may be hidden from the Fed itself.
As part of a currency-swap plan active from 2007 to 2010
and revived to fight the European debt crisis, the Fed lends
dollars to other central banks, which auction them to local
commercial banks. Lending peaked at $586 billion in December
2008. While the transactions with other central banks are all
disclosed, the Fed doesn’t track where the dollars ultimately
end up, and European officials don’t share borrowers’ identities
outside the continent.
The lack of openness may leave the U.S. government and
public in the dark on the beneficiaries and potential risks from
one of the Fed’s largest crisis-loan programs. The European
Central Bank’s three-month dollar lending through the swap lines
surged last week to $50.7 billion from $400 million after the
Nov. 30 announcement that the Fed, in concert with the ECB and
four other central banks, lowered the interest rate by a half
percentage point.
“Increased transparency is warranted here,” given the
size of the Fed’s aid and current pressures on European banks,
said Representative Randy Neugebauer, a Texas Republican who
heads the House Financial Services Subcommittee on Oversight and
Investigations.
Whether the U.S. should make disclosure of the recipients a
condition of the swap lines is “probably a discussion we need
to have,” possibly in a hearing that includes Fed Chairman Ben
S. Bernanke, Neugebauer said.

Unprecedented Transparency

The secrecy surrounding foreign central banks’ emergency
lending contrasts with unprecedented transparency at the Fed,
which was compelled by the 2010 Dodd-Frank Act and court-upheld
Freedom of Information Act requests to release details on more
than a dozen programs used to combat the U.S. financial crisis
from 2007 through 2010. Bernanke this year began holding regular
press conferences and has said he is considering ways to make
the Fed’s objectives more clear to the public.
Michelle Smith, a Fed spokeswoman, said there is “no
formal reporting channel” for the identities of borrowers from
other central banks, which are the Fed’s only counterparties on
the swap lines and assume any credit risk.
“U.S. taxpayers have never lost a penny” on the program,
she said. “Decisions about disclosure by foreign central banks
of their financial arrangements with financial institutions in
their jurisdictions is an issue for the foreign central banks.”

Turmoil Overseas

Americans may have to accept nondisclosure as a condition
of protecting the U.S. economy from turmoil overseas, said Dean
Baker, co-director of the Center for Economic and Policy
Research in Washington.
“As much as we might like to say they should have at least
as much transparency as the Fed, I don’t know if we want to say,
‘Well, if you don’t, you’re not going to get the money,’” Baker
said. U.S. policy makers should encourage international
standards for disclosure through talks at forums such as
meetings of the Group of 20 nations, he added.
The swaps are separate from Fed emergency loans to banks
and other businesses that peaked at $1.2 trillion in December
2008, including about $538 billion that European financial
companies borrowed directly, according to a Bloomberg News
examination of available data.
The Fed last week released a letter from Bernanke and a
staff memo criticizing recent news articles for portraying its
crisis-lending efforts as secret, saying that it made aggregate
amounts of the loans public. Bloomberg, which published a Nov.
28 article on the topic, said in a point-by-point response that
it considered the data secret because the terms of the loans and
names of borrowers were withheld. The Fed had resisted
disclosing them for more than two years.

Century-Old Program

The Dodd-Frank Act overhauling U.S. financial law included
legislation proposed by Senator Bernard Sanders, a Vermont
independent, that required the Fed in December 2010 to disclose
recipients of aid it provided during the crisis, except for
banks that used the liquidity-swap lines or the discount window
-- a century-old emergency-lending program. Under Dodd-Frank,
new Fed borrowers from the discount window are subject to
identification with a two-year delay.
Bloomberg LP and News Corp.’s Fox News Network LLC won a
court case forcing the Fed last March to name the crisis
discount-window borrowers. There hasn’t been any case or law
requiring disclosure of banks that borrowed via the swap lines.
“That is certainly a legitimate piece of information for
the American people,” and “we’re going to be vigilant in
increasing transparency,” said Warren Gunnels, Sanders’ senior
policy adviser.

Borrowing Dollars

Foreign central banks borrowed dollars from the Fed for
terms as long as three months in return for euros, pounds and
yen. The ECB accounted for 80 percent of total swap-line loans
during the mortgage-induced financial crisis, according to the
U.S. Government Accountability Office, the congressional
auditor. The ECB won’t publicly disclose names of borrowers
under any circumstances and doesn’t share the identities outside
the 17 euro-area central banks, a spokesman wrote in an e-mail.
“These banks have a right to enjoy the standard
confidentiality attached to banking transactions,” the
spokesman wrote.
European officials may be concerned that future lending
might be inhibited by a “stigma phenomenon” if past borrowers
are made public, said Ralph Bryant, former director of the Fed’s
international-finance division and now a senior fellow at the
Brookings Institution in Washington. The concept is “usually
overplayed by people, but it’s not something that’s trivial.”

‘Matter of Principle’

The Bank of Japan, which tapped 3.9 percent of the
aggregate swap dollars according to the GAO, has no plans to
publicize borrowers’ identities and declined to comment on
whether it shares the names with the Fed, a spokesman said. The
Swiss National Bank, which accounted for 4.6 percent, “as a
matter of principle” doesn’t publish counterparties, said
Walter Meier, a spokesman.
The Bank of England doesn’t publish details of individual
financial institutions’ use of its facilities. Confidence in
banks “can best be sustained” if support is disclosed “only
when conditions giving rise to potentially systemic disturbance
have improved,” it said in its annual report.
Fed policy makers let the program expire in February 2010
then revived it after three months to try to contain Europe’s
debt crisis. Nineteen months later, European officials still
struggle to contain the market turmoil, which has spread to
sovereign bonds in France and Italy as investors increasingly
question governments’ ability to repay debt.

Expanding Crisis

The expanding crisis spurred the Fed and other central
banks in November to extend the program by six months to Feb. 1,
2013, and lower borrowing costs by half a percentage point to
make them more attractive. Last week, European leaders agreed to
make loans of as much as 200 billion euros ($267.7 billion) to
the International Monetary Fund and tightened rules to curb
future debts.
The Fed swap program had a combined balance of $2.3 billion
in loans outstanding as of Dec. 7 for all five participating
central banks. That doesn’t account for the ECB’s latest dollar
auction because the loans hadn’t settled yet.
The GAO, which released its emergency-lending report in
July, wasn’t required to delve into the final destinations of
the swap dollars, said Orice Williams Brown, the agency’s lead
official on Fed audits. As a result of the study, the GAO
learned that UBS AG’s October 2008 bailout from the Swiss
government included an “atypical use” of swap-line dollars
“generally not exceeding about $13 billion,” the report said.

Didn’t Know

Bernanke didn’t know which financial institutions got
dollar loans, he said during a July 2009 House Financial
Services Committee hearing.
Not having the identities would restrict the Fed’s ability
to understand the “overall risk exposure of the institutions
it’s supervising,” said Robert Eisenbeis, a former research
director at the Federal Reserve Bank of Atlanta who’s now chief
monetary economist for Sarasota, Florida-based Cumberland
Advisors Inc.
The Fed may not need all the details, said Al Broaddus,
former president of the Federal Reserve Bank of Richmond. The
ECB and other central banks “are obliged to pay the Fed back.
They’re the ones that are taking the credit risk with the
institutions that are actually being lent to.”
In 2008, the dollar-based money markets that many foreign
banks used to finance their holdings of U.S. mortgage-backed
securities froze, forcing them to turn to the Fed to fill the
funding gap. Much of the borrowing was done through U.S.
branches that are legally eligible to draw emergency loans from
the Fed’s lender-of-last-resort programs, according to the
Bloomberg examination.

Biggest Foreign Borrower

The U.K.’s Royal Bank of Scotland Group Plc was the biggest
foreign borrower, drawing $84.5 billion in October 2008. UBS,
based in Zurich, got $77.2 billion, while Frankfurt-based
Deutsche Bank AG took $66 billion and London-based Barclays Plc
borrowed $64.9 billion, according to the Bloomberg data.
One of the borrowers, Dexia SA, is being broken up after
running out of short-term funding. The French-Belgian lender had
120.6 billion euros of central-bank liabilities on Dec. 31,
2008, according to a company report; $58.5 billion came directly
from the Fed, the Bloomberg examination showed.
Fed officials, including Governor Daniel Tarullo, have
emphasized the need for improved monitoring and control of risks
throughout the banking system, as well as global coordination
among financial-policy makers. Regulators “must not lose sight
of the importance of supervisory cooperation in pursuit of the
shared goal of a stable international financial system,” he
said in a Nov. 4 speech.

Full Disclosure

Ohio Senator Sherrod Brown, a Democrat who heads the
Banking Subcommittee on Financial Institutions and Consumer
Protection, said he isn’t sure swap-line borrowers should be
made public. Still, the Fed “should follow the money in terms
of disclosure, period,” he said. “Full disclosure from start
to finish is the goal.”
Massachusetts Representative Barney Frank, the senior
Democrat on the House Financial Services Committee, said he saw
no need for the disclosure because the Fed has no role in
approving the ultimate borrowers.
“What the Fed is doing with regard to the ECB is very
important for the American economy,” Frank said. “Our interest
is to make sure we get paid back. I think the ECB is a pretty
good debtor and a pretty reliable one.”

‘Fundamental Problem’

Joseph Stiglitz, a Nobel Prize-winning economist who led
President Bill Clinton’s Council of Economic Advisers, said the
“fundamental problem” is that capital markets need information
to work properly, yet the Fed is saying, “we believe in
capital-market discipline without information.”
“It would be very useful to see” those names, said
Stiglitz, a professor at Columbia University in New York. With
the dollar auctions of foreign central banks shielded from
disclosure, “what we have now is a very partial picture.”

[mauslick]

well this thread started in what 2008.....?

so it the world (financially speaking) better or worse?

who's predictions were correct?

where are thing's going next?

what are the good investments? stocks, bonds, securities, commodities, precious metals, medical, technnical, weapons, ammuntions, defense contracters, diamonds, lip balm?

let hear it.....

[a_riot]

Yes, all in just about two years, by 2012 US dollar will collapse yes, there will be a great civil unrest. Yes, statists, the collectivists will cease the moment and establish dictatorial government. US IS FINISHED. US, the republic, the remnants of founding principles died on 2008.

Well you have a few days left until 2012 whereby the entire US collapses into anarchy with rampant hyperinflation, and major civil unrest takes up arms against the dictatorship of the collectivist Obama regime. I guess all that could happen in the next few days like you promised us it would in no uncertain terms from beneath your tin foil hat inside your bunker.


I think the smart money would say its unlikely, nay, highly improbable though.





Silver Chart


Dollar Chart

[mauslick]

where are you at if you bought the dollar at .98?
and silver @ 12.00?

[livingVoice]

It's funny that people are still arguing about the past. It's for the academic elites .

[a_riot]

Yes, all in just about two years, by 2012 US dollar will collapse yes, there will be a great civil unrest. Yes, statists, the collectivists will cease the moment and establish dictatorial government. US IS FINISHED. US, the republic, the remnants of founding principles died on 2008.

Well I guess we can toss yet another one of your bonehead predictions out the window. Its 2012, and the dollar isn't collapsing. My prediction is that you will make a new but similar prediction, but extending it to 2014, so that you can continue your nonsensical rants for another two years. You are looking more and more like a real idiot at this point after obsessively following all my posts and continually haranguing me, since my predictions have turned out to be far more accurate than yours. I've still got all my assets safely tucked away in my Orange Savings Account. How's your silver doing?


Silver Chart


Dollar Chart

[mauslick]

all those who bought the dollar at .98 are killing it!!!

[a_riot]

Bill Gross @ PIMCO now says QE3 likely. Umm we knew that?

Bill Gross @ PIMCO must be licking his backside these days.

Got silver? Too bad...

"The $244.1 billion Pimco Total Return Fund (PTTRX) finished 2011 on a sour note.

As pointed out earlier, the world’s biggest bond fund was headed towards its first-ever calendar year outflow. With the latest estimates by Morningstar listing the mutual fund’s bleeding in December at $1.4 billion, the annual total was raised to around $5 billion in net redemptions. The Chicag0-based investment research shop puts PTTRX’s negative flows at more than $13 billion since November 2010.

Just before a steep run by Treasuries moved into high gear, Gross pulled out of the market, pointing to growing U.S. budget deficits and concern over slowing global growth in developed markets. The benchmark 10-year U.S. Treasury note wound up returning 17% last year, spurring Gross to issue an unusual “mea culpa” letter to his investors."

Pimco Total Return Bleeds $5 Billion; Gross Tweaks Portfolio

[nezraM]

all those who bought the dollar at .98 are killing it!!!

"Oil up the printing press Timmay~"

[mauslick]

looks like timmy g. is not staying for the second term, can't run the press fast enough?, couldn't convince the chinese to buy more debt?, goldman sachs wants him back? he's got a back room deal to stay in the 1%?......
he's buying gold and silver and moving to argentina?

[a_riot]

looks like timmy g. is not staying for the second term, can't run the press fast enough?, couldn't convince the chinese to buy more debt?, goldman sachs wants him back? he's got a back room deal to stay in the 1%?......
he's buying gold and silver and moving to argentina?

Still waiting for the hyperinflation you folks keep on about. When will the USD be worthless? Tomorrow, next year, next decade, next century? Inquiring minds want to know.

[mauslick]

please go back through my posts and remind my where I mentioned hyperinflation

all I posted above was some off the wall speculation at to where tim geithner my make his money next......

[AZGolf]

So today's BLS numbers show the labor participation rate still falling.

http://data.bls.gov/timeseries/LNS11300000



With fewer and fewer people working, what kinds of things should we be investing in? It would seem that most consumer goods will fall off due to fewer people working and thus fewer wage-earners to buy things. I'm struggling here to see where the upside is to an economy with fewer workers. There has to be something that's still going to benefit, right?

At first I thought that companies like Manpower might benefit because there would be more people looking for work but that isn't the case. Unemployment (which is based on how many people are looking for work) is actually falling, meaning people are simply deciding not to get jobs anymore. Sure enough the 2-yr graph of Manpower vs S&P500 shows the SP500 ahead by at least 35% or so. If fewer people are working then there's fewer jobs to place people in and lower unemployment means fewer are even attempting to look for jobs.

So who benefits? Where's the money going in an economy where an ever-shrinking percentage of the population works for a living?

[mauslick]

money stays in the banks they use if for play money

[AIRider]

money stays in the banks they use if for play money

Exactly, they don't need people to work, they play money with each other.

[beng]

money stays in the banks they use if for play money

The underemployment numbers are interesting... the other trend is "private" work. People taking jobs as nannys, construction workers, delivery guys, ect.... downgrading to jobs that are under the table pay and for less money than they used to make in the public sector. I know a few people who were out of work for a while that went this route.

[titleist1976]

The underemployment numbers are interesting... the other trend is "private" work. People taking jobs as nannys, construction workers, delivery guys, ect.... downgrading to jobs that are under the table pay and for less money than they used to make in the public sector. I know a few people who were out of work for a while that went this route.

Me too... and way too over qualified to work wherever they are applying.

Good luck to your G-men this weekend.

[Diamond Dave]

The underemployment numbers are interesting... the other trend is "private" work.

Call me skeptical, but under the table work can't be larger than low single digits.

I'm struggling here to see where the upside is to an economy with fewer workers. There has to be something that's still going to benefit, right?

Better voter pool for Obama. He seems to think we can just keep handing out money with no strings attached; unemployed, struggling homeowners, "middle class".

At first I thought that companies like Manpower might benefit because there would be more people looking for work but that isn't the case. Unemployment (which is based on how many people are looking for work) is actually falling, meaning people are simply deciding not to get jobs anymore.

I had an interesting discussion with a friend earlier this week about this same topic. He works for the same staffing firm I used to. 2011 was a record year for them. It was a bigger year than when staffing mortgage loan processing centers paid me 6 figures. He said that from a staffing standpoint, this recession is quite different than when planes were flying into buildings in 2001. He said that with the heavy pressure to be Lean/6 sigma/etc companies are doing more with less. What really struck a chord is that he said most of the really good workers got jobs within the first 6mos after being laid off. The people that are unemployed for more than a year are essentially the low hanging fruit or disposable workers. I've even bee preaching that for the last 2yrs; staffing agencies are absolutely pulling their hair out trying to fill open jobs each week. Some jobs are 2wk assignments and others are long-term contract or contract to hire. From my experience, the have jobs that staffing agencies have are within 10-15% of a person's realistic wage. Unemployed people fall into 3 categories right now: they aren't taking jobs because they get free money. They aren't taking jobs because they refuse to take a marginal pay reduction from a previous job. Or lastly, they are just so clueless about how to present themselves in an interview or they have no idea how to find jobs or they really are just worthless, disposable workers and the economy doesn't have room for that kind of worker right now.

So who benefits? Where's the money going in an economy where an ever-shrinking percentage of the population works for a living?

Think of it as some people aren't affected, so they have bigger issues to worry about right now. The money is surely going into durable goods that people on a tight budget are forced to purchase. I think it's a really strange political time as a result. Some people think you need to earn money rather than have the government pay you with (the money collected from increasing taxes), while other people think some people have "more money than they need" so they would rather use that "extra" money to pay for new government programs for the people that don't have any.

I mean come one, Obama's homeowner relief plan is a total ploy to gain voters. It's a small fraction of homeowners that still have jobs and haven't missed any of their last 6 mortgage payments. It's the people that can't get a job that are in dire straights by now. Now savings, an adjustable mortgage; they need to sell because keeping them in their house really isn't helping them. They may need to start over, but that's not something the government needs to step in to solve. It's a person's lack of financial planning or the result of financial blunders that have put them in their current situation. A few thousand dollars isn't going to fix their pain. Keeping them in their house is only lengthening their pain.

[beng]

The Mafia... go BIG or go home

Wire: BLOOMBERG News (BN) Date: Feb 17 2012 15:26:28
Record $6 Trillion of Fake U.S. Bonds Seized in Mafia Probe (2)


By Elisa Martinuzzi
Feb. 17 (Bloomberg) -- Italian anti-mafia prosecutors said
they seized a record $6 trillion of allegedly fake U.S. Treasury
bonds, an amount that’s almost half of the U.S.’s public debt.
The bonds were found hidden in makeshift compartments of
three safety deposit boxes in Zurich, the prosecutors from the
southern city of Potenza said in an e-mailed statement. The
Italian authorities arrested eight people in connection with the
probe, dubbed “Operation Vulcanica,” the prosecutors said.
The U.S. embassy in Rome has examined the securities dated
1934, which had a nominal value of $1 billion apiece, they said
in the statement. Officials for the embassy didn’t have an
immediate comment.
The financial fraud uncovered by the Italian prosecutors
in Potenza includes two checks issued through HSBC Holdings Plc
in London for 205,000 pounds ($325,000), checks that weren’t
backed by available funds, the prosecutors said. As part of the
probe, fake bonds for $2 billion were also seized in Rome. The
individuals involved were planning to buy plutonium from
Nigerian sources, according to phone conversations monitored by
the police.
The fraud posed “severe threats” to international
financial stability, the prosecutors said in the statement.
HSBC spokesman Patrick Humphris in London declined to comment
when contacted by telephone.

Money Laundering

Zurich’s public prosecutor’s office provided material to
their Italian counterparts in Potenza in 2011, according to
Corinne Bouvard, a spokeswoman for the senior public
prosecutor’s office of the canton of Zurich. The Swiss part of
the investigation ended on July 22, she said.
The Italian investigation initially focused on a Sicilian
who was living in Potenza and was “already known for money
laundering and exporting currency abroad,” according to the
statement from the Potenza prosecutor’s office.
Phony U.S. securities have been seized in Italy before and
there were at least three cases in 2009. Italian police seized
phony U.S. Treasury bonds with a face value of $116 billion in
August of 2009 and $134 billion of similar securities in June of
that year.
The U.S. Secret Service averages about 100 cases a year
related to bonds and other fictitious instruments.

[titleist1976]

I see your professor finally gave back your computing/internet devices.

[AutobahnTDI]

Are we done melting down? No activity in here for a long time...

[beng]

News of the day...

Groupon is an accounting cluster ****

Male CFOs get paid 16% more than female counterparts

Discuss!

[pops]

Hi Beng, just dropped by to say hello.

Kind of stopped participating when gold passed $1000....

[AIRider]

I'm looking at global payments, might jump in. Temporary situation, a potential 10%

[titleist1976]

News of the day...

Groupon is an accounting cluster ****

Male CFOs get paid 16% more than female counterparts

Discuss!

At least IBM's female CEO was accepted into Augusta National... well, that's what I'm taking from both side's "No Comment" comment.

[beng]

At least IBM's female CEO was accepted into Augusta National... well, that's what I'm taking from both side's "No Comment" comment.

Thats something

Here... lets debate the Euro

Wire: Bloomberg View (BV) Date: Apr 1 2012 23:00:34
Why the Euro Was a Mistake and Needs to Break Up: Charles Dumas


(For more Bloomberg View, click on VIEW .)

By Charles Dumas
April 2 (Bloomberg) -- Since the launch of the euro in
January 1999, Germany and the Netherlands have experienced a
growth slowdown and loss of wealth for their citizens that would
not have happened had they never joined the euro.
We know this to be true, because we can compare the
progress of these two Northern European economies with that of
Sweden and Switzerland, which kept their freely floating
currencies in 1999 and continued to grow as before. Indeed, over
the period of the euro’s existence, the German and Dutch
economies have grown significantly more slowly than those of the
U.S. and the U.K., despite the debt crisis now engulfing the
“Anglo-Saxons.”
Sweden and Switzerland grew as fast or faster in 2001-11 as
they did in 1991-2001. The German and Dutch economies, by
contrast, not only slowed down in 2001-2011 (to 1.25 percent
from 3 percent in the case of the Netherlands), they also
suppressed wage growth to adjust for the effects of the euro. As
a result, real consumer-spending growth fell to a feeble one
quarter of a percent a year in these countries. A recent report
on the Netherlands’ experience in the euro calculated that if
growth and consumer spending had followed the pattern of
Sweden’s and Switzerland’s in the decade from 2001, Dutch
consumers would have been 45 billion euros ($60 billion) a year
better off.

Angry, of Course

No wonder the Germans and Dutch are angry. But their anger
should be directed at the governments that took them into the
euro, not at the hapless citizens of Mediterranean Europe, who
now are also suffering the effects of the common currency.
Sweden and Switzerland didn’t have to make any such
sacrifice of ordinary people’s prosperity, while at the same
time they enjoyed stronger employment as well as budget and
current-account balances. That leads to only one conclusion: The
euro was a mistake from the outset. It should be abandoned in
unison and soon. Nobody should be surprised by the persistence
of divergent cost and price inflation that has occurred among
the 17 countries that have adopted the euro. That divergence
produced major discrepancies in competitiveness that continued
to grow over the euro’s 13-year existence. Italy’s relative
unit-labor costs, for example, are now 37 percent higher than in
1998, before the euro’s introduction, while Germany’s are 11
percent lower.
At the same time, wide disparities in the sustainable
growth rates of the common currency’s economies have created a
natural source of imbalances. These include a buildup of
excessive private-sector debt that has crippled nations with
fast-growth potential, such as Spain and Ireland, since the
financial crisis. Contributing to this imbalance, the European
Central Bank’s “one size fits none” short-term interest rate,
though nominally the same for all member countries, has varied
widely and counterproductively in real terms. Real interest
rates in low-inflation, slow-growth Germany were higher, further
inhibiting its economy. In high-inflation, fast-growth Spain,
real rates were lower, encouraging the excessive accumulation of
private debt.
The blithe assumption that such imbalances would be evened
out by the ready mobility of labor was always flawed: In the
absence of a common language, tax structure and social-security
entitlements, workers were never likely to cross borders to take
up job opportunities in sufficient numbers. The policy focus on
keeping the budget deficits of euro members to common targets
was irrelevant to these problems, and in any case was ignored
even by the policy’s main proponent: Germany.

Abysmal Result

So 13 years later, where are we? Greece, if you look at the
government’s monthly cash figures rather than the massaged
numbers of the troika, now has a budget deficit of more than 11
percent of gross domestic product, a 4 percent to 5 percent
primary deficit (excluding interest), and total debt of 135
percent of GDP net, 168 percent gross. The austerity program the
Greeks are following -- their only option, given that without
control of their own currency they cannot devalue -- has made
both the deficit and debt ratios greater. Austerity has caused
deflation of nominal spending and incomes, which have fallen by
more than 5 percent, cutting tax revenue. Government debt will
surge under any scenario within the euro: If Greece stays in,
the correct “haircut” for its debt is 100 percent. But it could
well be forced to leave later this year.
On current prospects, Italian net government debt, which is
now 100 percent of GDP, according to the Organization for
Economic Cooperation and Development, will be 110 percent by the
end of 2013. There is no prospect of improvement, owing to
Italy’s negligible growth trend within the euro. Other euro-area
economies are in worse shape.
Portugal’s government-debt ratio is close to Italy’s, but
business debt is, on average, 16 times net cash flow. That means
the vast majority of Portuguese corporate debt is now junk,
given that junk classification occurs at 10 times annual pretax-
and-interest cash flow. A recession could sharply shrink
business cash flow and cause a banking crash, meaning that
Portugal will probably have to leave the euro shortly after
Greece.
Spain’s business sector is also in the junk zone, because
Spanish corporate debt stands at 12 times net cash flow. Real-
estate and other asset prices, meanwhile, are heavily
overvalued. Spain’s recession may slash asset values and wither
cash flow, leading again to a banking crisis and soaring
government debt. Spain, Portugal and Ireland have much greater
total debt, once the private sector is included, than Italy or
Greece -- and austerity programs are drying up the cash flow
needed to return to solvency. Austerity can only work for these
countries -- with the exception of Ireland -- if they leave the
euro.

Artificially Competitive

All these symptoms of the euro’s poor design are linked.
Wage suppression in Germany and the Netherlands has created
artificial cost competitiveness, boosting exports to, and
exacerbating inflation in, Mediterranean Europe. Lower wages in
Northern Europe, meanwhile, have ensured weak demand for imports
from the South. The resulting trade surpluses enjoyed by Germany
and the Netherlands were, and will be, wastefully invested in
such assets as U.S. subprime-mortgage paper and Greek government
bonds.
In the future, the euro can survive only if these surpluses
are given away as unrequited transfers -- more or less what is
happening now, in the form of bailouts. With 2012-13 prospects
for global growth much weaker than in 2010-11, dependence on the
German “export machine” will blight the whole European economy,
heightening the malignant effects of the euro.
To prevent a meltdown, the ECB has engaged in unprecedented
and dubious practices to expand the euro system’s central-bank
balance sheet, accepting junk collateral against the provision
of banking liquidity. The risks are increasingly confined to the
central bank of the host country, which may make future exits
from the euro easier. But liquidity provision will not stop
fiscal tightening from deepening recessions in Mediterranean
Europe, widening deficits and debt ratios, and threatening
banking crises.
Most support for deficit countries so far has been
indirect, coming via the ECB, the European Financial Stability
Facility and the International Monetary Fund, but it’s likely to
become more explicit in the future. And the totals are large.
Taking care of the virtually worthless debts of Greece and
Portugal, and the budget deficits of Italy and Spain over the
next four years could amount to a total of 1.25 trillion euros.
If Italy and Spain additionally have to be helped to refinance
maturing bonds issued in the past, this cost may double. That
would threaten the financial position of some of the core euro-
area countries -- including downgrades of their credit ratings.

Simultaneous Exit

Sequential disorderly exits from the euro need to be
avoided because of the huge and extended financial turbulence
they would cause. Yet it is likely that the politicians running
euro-area economies will be driven to make the fundamental
reforms required for a return to long-term growth only if some
countries do leave the currency. As a result, the simultaneous
return to freely floating national currencies offers both the
best economic outlook for the member states, and the least
damaging euro-decommissioning process.
This would be challenging, of course, but it could be done.
All domestic deposits, transactions and obligations (including
home mortgages) would be converted 1-to-1 into each new home
currency. The ECB would become the guardian of a legacy
“European Transition Currency” into which cross-border euro
contracts would be converted at the 1:1 ratio, but without
money-creating powers. The ECB would have to be recapitalized by
euro members that are financially strong. Major transition loans
to deficit countries would be needed to permit them to re-
establish national currencies that would then float freely.
And leaving the euro area is likely to be cheaper than
staying in it. A recent report on the Netherlands and the euro
estimated the net initial cost to that country of leaving would
be 51 billion euros, an amount the economy would more than
recoup within two years, by not having to continue contributing
to euro-area bailouts.
The need for radical action is urgent. Spain, for example,
already has an unemployment rate of 23 percent -- and 49 percent
among youth -- and yet within the euro, it is engaged in a
savage further fiscal deflation that is bound to raise
joblessness much higher. The politics of Mediterranean Europe
could soon be seriously destabilized. It is less than 40 years
since the dictatorships of Franco in Spain, Salazar and Caetano
in Portugal, and Papadopoulos in Greece ended. Their equivalents
may not be about to return yet, but the risk of turmoil is
increasing rapidly.

(Charles Dumas is chairman of Lombard Street Research, a
London-based independent consulting firm committed to monetarist
economics. The opinions expressed are his own.)

[Vision33r]

News of the day...

Groupon is an accounting cluster ****

Male CFOs get paid 16% more than female counterparts

Discuss!

Gay males gets paid more than straight males, what else is new?

[livingVoice]

Looks like Wall Street is drumming up the energy play . The banks and tech has its run recently. Energy has been lagging somewhat. The fund managers probably are shifting money into energy ETF's. Been seeing those guys selling energy on CNBC a lot lately.

[beng]

Bump for QE3

So when does rampant inflation take hold? 18 months? 2 years?

[bubbagti]

So when does rampant inflation take hold? 18 months? 2 years?

This is what I'm wondering. When do all of these saved up cash reserves actually get introduced to the market?

[mauslick]

careful what you ask for......

but I hear the buzz of helicopters everywhere

[GeoffD]

Bump for QE3

So when does rampant inflation take hold? 18 months? 2 years?

The Treasury seems to be acting like it's coming.

The UK average maturity is 14 years. In the US, there is still enough short term debt that hyperinflation would cripple the federal budget with interest payments.

[vwconvert]

It's been pointed out in a few financial sites that the Fed has to "credibly commit to be irresponsible" for some of these policies to have a real effect. I am not sure the Fed's plan is to let inflation get out of control. But they have to convince you and me that this is the plan. Judging by the cyberspace rioting that is going on on sites like Zero Hedge, I'm thinking its working.

[a_riot]

It's been pointed out in a few financial sites that the Fed has to "credibly commit to be irresponsible" for some of these policies to have a real effect. I am not sure the Fed's plan is to let inflation get out of control. But they have to convince you and me that this is the plan. Judging by the cyberspace rioting that is going on on sites like Zero Hedge, I'm thinking its working.

The thing I don't understand, coming from the approach that Bernanke is trying to do good rather than harm is, why does Bernanke want to goose the stock market? If we all decide to take our savings out of our FDIC guaranteed accounts and buy stocks, then the market makers will simply dump and leave us holding the bag. I don't see how that would help unemployment, the economy, or anyone but the banks and market makers. If he is trying to save the banks from their own greed and overleveraging then it seems to make more sense. But that just leads to more dangerous malinvestment.

To my mind, if improving the economy and unemployment is the goal, then its smarter to have the gov't spend money on needed infrastructure, energy, tech, medicine and other long term investments that actually might have some return beyond just selling a piece of paper to a bigger fool. That would increase employment, increase tax revenue, increase the velocity of money, improve things for main street, and all these things would then increase the price of stocks in most cases. If you are going to borrow money from future taxpayers, then why not spend it on things that they might actually get some benefit from like better roads, bridges, schools, hospitals, etc? Bernanke's trying to push a string, and I don't think its going to work.