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History Teaches Us that We Learn Nothing from History

Martin Bormann (right) with Himmler

COMMENT: The title of this quote is, appropriately enough, from a German. European nations are becoming fearful of domination by Germany, the only country with sufficient funds to bailout the ailing Eurozone.

The advent of the current situation is no accident. It has been planned for a long time and should come as a surprise to no one, particularly Europeans.

Writing in the New York Herald Tribune of 5/31/1940, Dorothy Thompson set forth the Third Reich’s plans for European and world domination, embodying a template formulated by Friedrich List in the 19th century.

. . . . The Ger­mans have a clear plan of what they intend to do in case of vic­tory. I believe that I know the essen­tial details of that plan. I have heard it from a suf­fi­cient num­ber of impor­tant Ger­mans to credit its authen­tic­ity . . . Germany’s plan is to make a cus­toms union of Europe, with com­plete finan­cial and eco­nomic con­trol cen­tered in Berlin. This will cre­ate at once the largest free trade area and the largest planned econ­omy in the world. In West­ern Europe alone . . . there will be an eco­nomic unity of 400 mil­lion per­sons . . . To these will be added the resources of the British, French, Dutch and Bel­gian empires. These will be pooled in the name of Europa Germanica . . .

“The Ger­mans count upon polit­i­cal power fol­low­ing eco­nomic power, and not vice versa. Ter­ri­to­r­ial changes do not con­cern them, because there will be no ‘France’ or ‘Eng­land,’ except as lan­guage groups. Lit­tle imme­di­ate con­cern is felt regard­ing polit­i­cal orga­ni­za­tions . . . . No nation will have the con­trol of its own finan­cial or eco­nomic sys­tem or of its cus­toms. [Italics are mine–D.E.] The Naz­i­fi­ca­tion of all coun­tries will be accom­plished by eco­nomic pres­sure. In all coun­tries, con­tacts have been estab­lished long ago with sym­pa­thetic busi­ness­men and indus­tri­al­ists . . . . As far as the United States is con­cerned, the plan­ners of the World Ger­man­ica laugh off the idea of any armed inva­sion. They say that it will be com­pletely unnec­es­sary to take mil­i­tary action against the United States to force it to play ball with this sys­tem. . . . Here, as in every other coun­try, they have estab­lished rela­tions with numer­ous indus­tries and com­mer­cial orga­ni­za­tions, to whom they will offer advan­tages in co-operation with Germany. . . .

Germany Plots with the Kremlin; T.H. Tetens; Henry Schuman [HC]; 1953; p. 92.

In FTR #746, we examined in detail the Greek economic debacle, which was not solely the product of fiscal irresponsibility, and greatly exacerbated by German policy.

Listeners may want to check out FTR #99, in order to better understand the realization of the blueprint detailed by Ms. Thompson and implemented by the Bormann capital network about which we speak so often.

“In Europe, New Fears of German Might” by Michael Birnbaum; The Washington Post; 10/22/2011.

EXCERPT: For decades, Germany’s role in Europe has been to supply the cash, not the leadership. With fresh memories of war, the continent was cautious about German domination — and so were the Germans themselves.

But the economic crisis has shaken Europe’s postwar model, and Germany increasingly calls the shots. As countries struggle to pay their debts, only Chancellor Angela Merkel has enough money to haul them out of trouble. And the price Merkel is demanding — more control over how they run their economies — is setting off alarm bells in capitals across the continent.

In Athens, protesters dressed up as Nazis routinely prowl the streets, an allusion to the old model of an assertive Germany. In Poland, accusations that Germany has imperial ambitions became a campaign issue in the recent presidential election.

And although German leaders have sought in recent weeks to soothe others’ fears in advance of high-level meetings in Brussels on Sunday and in coming days, the tone has sometimes sounded pugilistic.

“The question of who could accept a German model has been settled by the market,” said a spokesman for German Finance Minister Wolfgang Schaeuble. “We are really only talking about the details and the extent of the measures, not about their nature.” . . .

. . . . Still, many economists — including those at the International Monetary Fund — question whether the German model is really the best way to dig out of a recession, given the country’s outsize reliance on exports. And the sense of a fait accompli is raising hackles around Europe. Slovakia recently held up a plan to bolster the bailout fund before it approved it under heavy pressure from Germany. Even longtime allies such as Austria are resisting.

“I can absolutely not accept” that Germany and France make decisions, then present them to the rest of the euro zone, Austrian Foreign Minister Michael Spindelegger told Austrian television last week. “There’s no economic board or diktat. We have a euro zone with 17 countries.”

In Germany, the dissension is raising eyebrows.

“Everybody is calling for leadership,” said the country’s deputy foreign minister, Werner Hoyer, “but no one wants to be led.”

Discussion

31 comments for “History Teaches Us that We Learn Nothing from History”

  1. Paul Krugman reminds us of another set of lessons not learned:
    http://krugman.blogs.nytimes.com/2011/10/24/the-worst-institution-in-the-world/


    October 24, 2011, 12:53 pm
    The Worst Institution In The World

    Ryan Avent sends us to the Bank for International Settlements, which has decided to throw everything we’ve learned from 80 years of hard thought about macroeconomics out the window, and to embrace full-frontal liquidationism. The BIS is now advocating a position indistinguishable from that of Schumpeter in the 1930s, opposing any monetary expansion because that would leave “the work of depressions undone”.

    And these are the supposed guardians of the world monetary system.

    Posted by Pterrafractyl | October 27, 2011, 10:33 pm
  2. In light of the surprise Greek vote on whether to approve the proposed bailout package, it’s worth noting that big US banks have once again bet the farm on a government policy. In the lead up to the 2008 financial crisis, that bet was simply that the US government would bailout out all the banks in the event of a full systemic crisis brought on by a housing bust (a correct and very profitable wager). This time, the big banks are betting that the EU public will bail out the eurozone sovereign debts.

    Here’s one history lesson the big boys have learned well:
    “too big to fail” never fails.

    Default Risk in Europe Rises for U.S. Banks as Swaps Soar to $518 Billion
    Q
    By Yalman Onaran – Nov 1, 2011 9:37 AM CT

    U.S. banks increased sales of insurance against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the first half of 2011, boosting the risk of payouts in the event of defaults.

    Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose by $80.7 billion to $518 billion, according to the Bank for International Settlements. Almost all of those are credit-default swaps, said two people familiar with the numbers, accounting for two-thirds of the total related to the five nations, BIS data show.

    The payout risks are higher than what JPMorgan Chase & Co. (JPM), Morgan Stanley and Goldman Sachs Group Inc. (GS), the leading CDS underwriters in the U.S., report. The banks say their net positions are smaller because they purchase swaps to offset ones they’re selling to other companies. With banks on both sides of the Atlantic using derivatives to hedge, potential losses aren’t being reduced, said Frederick Cannon, director of research at New York-based investment bank Keefe, Bruyette & Woods Inc.

    Hedging Strategies

    Similar hedging strategies almost failed in 2008 when American International Group Inc. couldn’t pay insurance on mortgage debt. While banks that sold protection on European sovereign debt have so far bet the right way, a plan announced yesterday by Greek Prime Minister George Papandreou to hold a referendum on the latest bailout package sent markets reeling and cast doubt on the ability of his country to avert default.

    Five Banks

    Five banks — JPMorgan, Morgan Stanley, Goldman Sachs, Bank of America Corp. (BAC) and Citigroup Inc. (C) — write 97 percent of all credit-default swaps in the U.S., according to the Office of the Comptroller of the Currency. The five firms had total net exposure of $45 billion to the debt of Greece, Portugal, Ireland, Spain and Italy, according to disclosures the companies made at the end of the third quarter. Spokesmen for the five banks declined to comment for this story.

    In theory, if a bank owns $50 billion of Greek bonds and has sold $50 billion of credit protection on that debt to clients while buying $90 billion of CDS from others, its net exposure would be $10 billion. This is how some banks tried to protect themselves from subprime mortgages before the 2008 crisis. Goldman Sachs and other firms had purchased protection from New York-based insurer AIG, allowing them to subtract the CDS on their books from their reported subprime holdings.

    ‘AIG Moment’

    When prices of mortgage securities started falling in 2008, AIG was required to post more collateral to its CDS counterparties. It ran out of cash doing so, and the U.S. government took over the company. If AIG had collapsed, what the banks saw as a hedge of their mortgage portfolios would have disappeared, leading to tens of billions of dollars in losses.

    “We could have an AIG moment in Europe,” said Peter Tchir, founder of TF Market Advisors, a New York-based research firm that focuses on European credit markets. “Let’s say Greece defaults, causing runs on other periphery debt that would trigger collateral requirements from the sellers of CDS, and one or more cannot meet the margin calls. There might be AIGs hiding out there.”

    Counterparty CDS

    Banks also buy CDS on their counterparties to hedge against the risk of trading partners going bust, Duffie said. To ensure those claims are paid, the banks may be turning to institutions deemed systemically important, such as JPMorgan, according to Duffie. The bank, the largest in the U.S. by assets, accounts for a quarter of all credit derivatives outstanding in the U.S. banking system, according to OCC data.

    Goldman Sachs said it had hedged itself against the collapse of AIG by buying CDS on the firm. Company documents later released by Congress showed that some of that protection was purchased from Lehman Brothers Holdings Inc. and Citigroup, firms that collapsed or were bailed out during the crisis.

    U.S. banks are probably betting that the European Union will also rescue its lenders, said Daniel Alpert, managing partner at Westwood Capital LLC, a New York investment bank.

    “There’s a firewall for the U.S. banks when it comes to this CDS risk,” Alpert said. “That’s the EU banks being bailed out by their governments.”

    Posted by Pterrafractyl | November 1, 2011, 9:44 am
  3. @Pterrafractyl: Glad to see you’re on our side. =)

    Posted by Steven L. | November 1, 2011, 10:17 am
  4. In related news…something tells me this MF Global implosion is going actually be investigated:
    http://money.cnn.com/2011/11/01/news/companies/mf_global_jpmorgan/

    JPMorgan cries foul on MF Global
    By Aaron Smith @CNNMoney November 1, 2011: 2:31 PM ET

    NEW YORK (CNNMoney) — JPMorgan Chase, MF Global’s largest creditor, cried foul Tuesday about the brokerage firm’s bankruptcy filing.

    In an objection filed in federal bankruptcy court in New York, JPMorgan said it wants “to limit the relief” that MF Global is seeking from the court to protect the value of its cash collateral.

    MF Global filed for Chapter 11 protection Monday. The company, led by former New Jersey governor Jon Corzine, said it has more than $2.2 billion in debt.

    Most of the debt is held by unsecured creditors JPMorgan, which is owed more than $1.2 billion, and Deutsche Bank (DB), which is owed more than $1 billion. An additional $10 million is divided among 45 other creditors, including American Express (AXP, Fortune 500), KPMG and PricewaterhouseCoopers.

    JPMorgan is willing to the work with the debtors, but, in these circumstances, the debtors have to recognize their burden of giving JPMorgan as much adequate protection as they can provide,” said JPMorgan, in the court filing.

    JPMorgan requested limits on MF Global’s use of cash collateral during the bankruptcy process and asked for priority over other creditors in going after the brokerage’s assets.

    ….

    An instant classic: “…in these circumstances, the debtors have to recognize their burden of giving JPMorgan as much adequate protection as they can provide…”

    Posted by Pterrafractyl | November 1, 2011, 12:48 pm
  5. in light of the above comments regarding the big bets US banks made on a Eurozone bailout and the bankruptcy by MF Global, it’s worth noting that it sounds like MF Global went under by going long on Eurozone sovereign debt: http://blogs.wsj.com/deals/2011/11/01/mf-globals-downfall-raises-question-on-feds-primary-dealer-pick/

    November 1, 2011, 12:26 PM ET

    MF Global’s Downfall Raises Question on Fed’s Primary Dealer Pick

    By Min Zeng

    The Federal Reserve is among those feeling the pinch from the collapse of MF Global, which only eight months ago was added to the Fed’s list of 22 primary dealer banks.

    MF Global’s downfall seems unlikely to pose a systemic financial risk to either the U.S. economy or the Fed. But it’s possible it will make the selection procedure tougher for primary dealers, an elite group of institutions with which the New York Fed conducts monetary policy and which are obligated to participate in U.S. Treasury debt auctions.

    MF Global’s fortunes quickly went downhill over the past week amid concerns over its exposure to the euro zone’s sovereign debt. In this way, its travails underscore the potential contagion risks to the U.S. financial system via the primary dealer network.

    “At the very least these applications will undergo a much more stringent vetting procedure,” Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “The lesson of history after these sudden financial bankruptcies is that regulators come down harder than ever.”

    The Fed had tightened conditions for selecting dealers in January 2010, increasing capital requirements from $50 million to $150 million.

    No one can hold the Fed responsible for the risk of the firm,” said Michael Franzese, head of Treasury trading at Wunderlich Securities in New York. “You try and put adequate procedures in place so it doesn’t happen but you have to trust people to do the right thing.

    Posted by Pterrafractyl | November 1, 2011, 2:56 pm
  6. I’m linking this story about the $500+ billion Japan just spent devaluing its currency because, in many respect, the European Monetary Union should be viewed as a kind of permanent currency intervention scheme divided between the member states. The economically weaker countries (i.e. the P.I.I.G.S.) basically had artificially enhanced currencies and credit line while the stronger nations (Germany, France) saw their currencies artificially suppressed as a consequence of joining the Euro-zone.

    Suppressed currencies are economic manna for exporters, especially if the currency is normally relatively expensive. For the weaker Euro-zone nations, however, they are put into a serious bind. The countries shift to an artificially enhanced currency, coupled with an enhanced ability to borrow (public and private) AND restrictions on net government borrowing (via eurozone treaties). So they’re pretty much guaranteed to experience a domestic asset bubble (which is what happened, contrary to the “profligate P.I.I.G.S. government spending” meme. But if inflation kicks in and interest rates rise, or the bubbles burst and deficits temporarily surge, the government is forced slash public spending in order to clamp down on interest rates to stay within the guidelines of the treaty. So the country cannot fall into a financial situation necessitating a significant currency devaluation (relative to the other member states) and/or higher government deficits. Ever.

    So we should really be viewing any sort of “bailout” of P.I.I.G.S as, partially, just an argument over which members of the Euro-zone are going to make the indirect payments required to somehow smooth over the economic stresses imposed on the P.I.I.G.S (as opposed to the economic relief valve that the Euro-zone creates for the stronger members). If the bailouts end up being minimal, with the bulk of the costs falling on the P.I.I.G.S citizens via austerity programs, then it will be the P.I.I.G.S.’s public that pays the piper. Or it could be the private creditors (via a harsh “haircut” on devalued P.I.I.G.S. bonds) or the wealthier nations (Germany/France directly bailing out Greece without the “austerity” death sentence) that end up paying the costs. Or, the ECB could just print up free money and paper over the whole thing (but how are the “markets” supposed to have “confidence” without the proper real world pain and suffering?)

    So, with all that in mind, also keep in mind that currency manipulations can get really expensive: http://www.bloomberg.com/news/2011-11-02/japan-faces-510-billion-losses-from-yen-sales-jpmorgan-says.html

    Japan Faces $510 Billion Losses From Yen Sales, JPMorgan Chase & Co. Says
    Q
    By Shigeki Nozawa – Nov 1, 2011 10:13 PM CT

    Japan’s government faces almost 40 trillion yen ($512 billion) in losses from intervening in the foreign-exchange markets to stem the yen’s advance, according to estimates by JPMorgan Chase & Co.

    Valuation losses on Japan’s foreign-exchange reserves minus yen liabilities totaled 35.3 trillion yen at the end of 2010, according to Finance Ministry data. The losses may swell further as the yen is projected to climb to 72 versus the dollar by September 2012, said Tohru Sasaki, head of Japan rates and foreign-exchange research at JPMorgan Chase in Tokyo.

    Weaker Dollar

    If investors’ risk aversion subsides, it wouldn’t be surprising if the dollar were to weaken another 10 percent on a trade-weighted basis, Sasaki said. The U.S., which holds the world’s largest current-account deficit, is in an “unprecedented” situation, where it keeps interest rates near zero even though it needs to attract funds from overseas by offering higher yields, he said.

    Posted by Pterrafractyl | November 3, 2011, 7:47 am
  7. Something tells me we may see more “Why Not Give The [fill in the blank]s Their Say?” pieces like this going forward: http://www.nytimes.com/2011/11/04/business/why-not-give-the-greeks-their-say.html?_r=2&ref=business

    Why Not Give Greeks Their Say?
    By FLOYD NORRIS
    Published: November 3, 2011

    The fundamental nature of European governance is about to change.

    Either a large part of the Continent will move much closer to a federal government, with common fiscal policies and a substantial loss of sovereignty for many nations, or it will spin apart, with possibly severe economic and financial consequences.

    That has been clear for months, and markets have alternately soared and plunged as it appeared Europe was closer to or farther from reaching the first alternative.

    This week, it appeared that the prospect that scared European leaders the most was the specter of democracy. When the Greek prime minister, George A. Papandreou, proposed a referendum on whether Greece would go along with the agreement reached at the European summit meeting last week — one that calls for more austerity and that polls say is unpopular with most Greeks — much of Europe reacted with shock and alarm. How dare he do that?

    In the end, he could not persuade his own government, and there will be no vote. That should be a cause for sorrow in the rest of Europe, not joy. There is little reason to think that Greek citizens will be more cooperative now that it has been made clear their opinions are irrelevant to the people who run Europe.

    It is not only the Greek people who should be consulted about the major changes now under way in how they are governed. So should the people of other countries.

    Heretofore, the countries that joined the euro zone did so with the understanding that they could have the best of all worlds — the convenience of a common currency without the economic and political integration that would inevitably be needed if the countries did not pursue similar economic policies. That understanding was wrong.

    Posted by Pterrafractyl | November 4, 2011, 6:28 am
  8. There’s a NY Times piece on the MF Global implosion (following its bad bets on the Eurozone debts) that highlights a critical aspect of the modern financial paradigm: Part of the global derivatives market includes privately created derivative contracts made in secret that are basically bets on any sort of real-world event one can conceive of. In other words, we’ve create a “market” for betting on things like war, disasters, financial collapse and any kind of calamity one can imagine. And because this market is all secret, we’ve literally added an extra financial incentive for engaging in the kinds of conspiracies that might result in, say, war, disasters, financial collapse, etc. It’s like turning the planet into a mafia bankster’s playground:
    http://www.nytimes.com/2011/11/06/business/in-mf-global-sad-proof-of-europes-fallout.html



    In any case, the figures compiled by the D.T.C. don’t show the entire amount of credit insurance that has been written on Greece and other nations. D.T.C. says it believes its figures capture 98 percent of the market, but credit default swaps are often struck privately; not all of them are reported to regulators.

    Consider an investment vehicle known as a credit-linked note. In these deals, investors buy a note issued by a special-purpose vehicle that contains a credit default swap referencing a debt issuer, like a government. That swap provides credit insurance to the party buying the protection, meaning that the holder of the note is responsible for losses in a so-called credit event, like a default.

    Credit-linked notes are very popular and have been issued extensively by European banks. Many are governed by I.S.D.A. contracts, which define the terms of a credit event and require a ruling by the association on whether such an event has occurred.

    But some deals have different definitions or contractual language overriding the I.S.D.A. agreement. “The people writing these contracts may say, ‘I would like to be paid if there is a voluntary restructuring of debt, or if Greece goes back to the drachma, or if Greece goes to war with Cyprus,’ ” Ms. Tavakoli said. “I can declare a credit event where I am entitled to get paid if any of those events happen.

    Cash calls can also be generated by declines in the market price of the notes or increases in the cost of insuring the underlying sovereign debt issue, according to credit-linked note prospectuses.

    The other party has to agree to these terms up front. But, given the nature of these so-called bespoke deals, we don’t know the full extent of the insurance that investors have written on troubled nations or the circumstances under which the insurance must be paid. Neither do we know who may be facing severe collateral calls or demands for termination payments on the contracts.

    Of course, conspiring to tank the economy and then secretly betting to profit from it on a grand scale would never actually happen

    Posted by Pterrafractyl | November 5, 2011, 3:57 pm
  9. Two interesting statements on the eurozone, the first a prediction and the second a proclamation:

    1. http://www.reuters.com/article/2011/11/06/us-britain-euro-goldman-idUSTRE7A51P020111106

    Euro zone countries could split, says Goldman Sachs exec

    LONDON | Sun Nov 6, 2011 12:45pm EST

    (Reuters) – Countries in the euro zone will find it increasingly unattractive to stay in the single currency, if there is a German-led fiscal integration, the chairman of Goldman Sachs Asset Management said in a Sunday Telegraph interview.

    Portugal, Ireland, Finland and Greece could all pull out of the euro zone rather than operate under a single treasury, Jim O’Neill, whose division manages more than $800 billion (500 billion pounds) of assets, was cited as saying.

    He also called on the European Central Bank (ECB) to show more leadership to reassure “worried investors.”

    The Germans want more fiscal unity and much tougher central observation — with the idea of a finance ministry,” O’Neill said.

    “With that caveat, it is tough to see all countries that joined wanting to live with that – including the one that is so troubled here (Greece).”

    He added that only countries such as Germany, France and Benelux, were suited for a monetary union because their exchange rates were closely linked. But for others, it was questionable.

    O’Neill said countries such as Finland and Ireland that are neighbors of non-euro zone countries — the UK and Sweden — might prefer to quit the euro, which would bolster the strength of the single currency.


    Keep in mind that a strengthened Euro defeats half of its entire point for existing from the wealthier members’ perspectives. It will be interesting to see how appetizing a stronger, smaller eurozone would be the remaining member nations (would there be a new P.I.I.G., relatively speaking?).

    And when signals like the following are sent out by significant players in the eurozone debt markets, you have to wonder if we might see a whole new form of bank run emerge…banks running out of the member states and back home under a banner of nationalistic rhetoric:
    2. http://www.reuters.com/article/2011/11/04/commerzbank-idUSL6E7M406E20111104

    UPDATE 5-Commerzbank turns off money tap after Q3 Greece hit

    By Edward Taylor

    FRANKFURT, Nov 4 (Reuters) – Germany’s second-largest lender Commerzbank will refuse loans which don’t help Germany or Poland, as the euro zone crisis makes European banks more protectionist in choosing between writing new business and meeting stringent capital requirements.

    “We are not doing business which is not to the benefit of Germany or Poland,” Chief Financial Officer Eric Strutz told analysts on a conference call discussing third-quarter earnings on Friday. “We have to focus on supporting the German economy as other banks pull out.”


    Posted by Pterrafractyl | November 6, 2011, 6:07 pm
  10. …from a great Krugman post today: http://krugman.blogs.nytimes.com/2011/11/07/wishful-thinking-and-the-road-to-eurogeddon/

    Wishful Thinking And The Road To Eurogeddon

    Gavyn Davies has a very good piece today offering another way to think about the euromess. I say “another way to think” advisedly — his analysis of the basics is, as far as I can tell, identical to mine, but he offers a different angle of approach that may be better than the route the rest of us have been taking. Here’s Davies:

    It is normal to discuss the sovereign debt problem by focusing on the sustainability of public debt in the peripheral economies. But it can be more informative to view it as a balance of payments problem. Taken together, the four most troubled nations (Italy, Spain, Portugal and Greece) have a combined current account deficit of $183 billion. Most of this deficit is accounted for by the public sector deficits of these countries, since their private sectors are now roughly in financial balance. Offsetting these deficits, Germany has a current account surplus of $182 billion, or about 5 per cent of its GDP.

    The euro problem can then be defined a finding a way (1) to finance these imbalances in the short run (2) end the imbalances over the medium run.

    It’s also worth noting that we’re not talking about imbalances that have been going on forever. The internal imbalances of Europe are a recent development, coinciding with and almost surely caused in large part by the creation of the euro itself (GIPS is Greece, Italy, Portugal, Spain):


    Posted by Pterrafractyl | November 7, 2011, 11:32 am
  11. Well, it looks like a eurozone split is unofficially getting discussed between France and Germany. The formation of new “core” eurozone area of economically stronger members would also include dramatically increase “integration” of areas like personal and corporate taxes, and the rest of the EU would be a “confederation”. No shortage of twists and turns on this roller coaster:

    French and Germans explore idea of smaller euro zone

    By Julien Toyer and Annika Breidthardt

    BRUSSELS | Wed Nov 9, 2011 4:27pm EST

    (Reuters) – German and French officials have discussed plans for a radical overhaul of the European Union that would involve setting up a more integrated and potentially smaller euro zone, EU sources say.

    “France and Germany have had intense consultations on this issue over the last months, at all levels,” a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions.

    “We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don’t want to be part of the club and those who simply cannot be part,” the official said.

    French President Nicolas Sarkozy gave some flavor of his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe — the euro zone moving ahead more rapidly than all 27 countries in the EU — was the only model for the future.

    The discussions among senior policymakers in Paris, Berlin and Brussels raised the possibility of one or more countries leaving the euro zone while the remaining core pushes on toward deeper economic integration, including on tax and fiscal policy.

    “In doing this exercise, we will be very serious on the criteria that will be used as a benchmark to integrate and share our economic policies,” the senior EU official said.

    One senior German government official said it was a case of pruning the euro zone to make it stronger.

    “You’ll still call it the euro, but it will be fewer countries,” he said, without identifying those that would have to drop out.

    “We won’t be able to speak with one voice and make the tough decisions in the euro zone as it is today. You can’t have one country, one vote,” he said, referring to rules that have made decision-making complex and slow, exacerbating the crisis.

    Speaking in Berlin, Merkel reiterated a call for changes to be made to the EU treaty — the laws which govern the European Union — saying the situation was now so unpleasant that a rapid breakthrough was needed.

    From Germany’s point of view, altering the EU treaty would be an opportunity to reinforce euro zone integration and could potentially open a window to make the mooted changes to its make-up.

    This is something that has been in the air for some time, at least in high-level talks,” said one EU diplomat. “The difference now is that some countries are moving forward very quickly … The risk of a split, of a two-speed Europe, has never been so real.”

    In Sarkozy’s vision, the euro zone would rapidly deepen its integration, including in sensitive areas such as corporate and personal taxation, while the remainder of the EU would be left as a “confederation”, possibly expanding from 27 to 35 in the coming decade, with enlargement to the Balkans and beyond.

    Within the euro zone, the critical need would be for core countries to coordinate their economic policies quickly so that defenses could be erected against the sovereign debt crisis.

    “Intellectually speaking, I can see it happening in two movements: some technical arrangements in the next weeks to strengthen the euro zone governance, and some more fundamental changes in the coming months,” the senior EU official said.

    Posted by Pterrafractyl | November 9, 2011, 1:42 pm
  12. […] the European Union. They were suggested by a listener of Dave Emory’s For The Record show, Pterrafractyl. The majority of them are relevant for the understanding of this crisis and they complete very well […]

    Posted by Series of articles on the financial and economical debacle in Europe | lys-dor.com | November 10, 2011, 12:54 pm
  13. Hooray!

    November 10, 2011, 1:26 pmLegal/Regulatory
    In MF Global’s Wake, Regulators to Audit All Futures Firms
    By BEN PROTESS

    Federal regulators have ordered an audit of every American futures trading firm to verify that customer money is protected, a move that comes after roughly $600 million in client funds were discovered to be missing from MF Global, the bankrupt brokerage firm once run by Jon S. Corzine.

    The Commodity Futures Trading Commission, the federal regulator searching for the missing money at MF Global, will audit many of the nation’s largest futures commission merchants, according to a person briefed on the decision. Exchanges like the CME Group will examine smaller firms to ensure they are keeping customer money separate from company money, a fundamental rule on Wall Street.

    It looks like some tough action is on the way following the MF Global implosion….

    Gary Gensler, the commission’s chairman, abstained from voting after recusing himself from the investigation because of questions about his past association with Mr. Corzine. While the two were not close in recent years, Mr. Gensler worked for Mr. Corzine at Goldman Sachs in the 1990s. And Mr. Gensler supported Mr. Corzine’s campaign as a Democratic candidate for governor of New Jersey, with a $10,000 check.

    With Mr. Gensler out, a Republican member of the agency, Jill E. Sommers, will serve as the senior commissioner on the case, the agency said in the statement.

    Well it sounds serious since they’re recusing the folks with conflicts of interest. Jill Sommers may be a Republican appointee to the CFTC, but at least she doesn’t have any conflicts of interest:

    Remarks of Jill Sommers, Commissioner of the Commodity Futures Trading Commission

    Before the Futures Industry Association, Chicago

    October 16, 2007

    Thank you Ray. I am delighted to be back in Chicago today with my fellow newly appointed Commissioner, Bart Chilton. Having worked closely with the FIA over the years during my tenures with the Chicago Mercantile Exchange and ISDA, I see a lot of familiar faces in the room. This is a great opportunity for me to meet those of you I haven’t gotten a chance to know yet, and I look forward to working with all of you from my new perspective as a Commissioner of the CFTC.

    After graduating from the University of Kansas with a degree in Political Science, my career plan consisted of interning for a few months with Senator Bob Dole in Washington, D.C. I did not dream of staying in Washington, but life had a different path for me. I ended up working for Senator Dole, both in Washington and in Kansas, for almost five years. I left the Capitol to work for an agricultural consulting firm and became involved with futures issues. In 1998,I began working for the Chicago Mercantile Exchange in its Washington, D.C. office, where I was responsible for regulatory and legislative affairs. This gave me the unique opportunity to work closely with congressional staff on the Commodity Futures Modernization Act from the very beginning to the long awaited end. I left the CME in 2004, and most recently worked as Policy Director and Head of U.S. Government Affairs for ISDA.

    While working for the CME on the CFMA, I met my husband Mike, who is a congressional staffer for Republican Leader John Boehner. We live in Alexandria, VA and have three children, ages five, four and three.

    Umm…hooray??

    Posted by Pterrafractyl | November 10, 2011, 9:14 pm
  14. Heh, I had totally missed this doozy:

    Germany “Raises” €55.5 Billion, or 1% Of Its Debt/GDP Ratio, Thanks To Derivative “Accounting Error”
    Submitted by Tyler Durden on 10/28/2011 21:11 -0500

    As usual, the most surreal news of the day, perhaps week, is saved for Friday night, when we learn that Germany has magically raised over a quarter of its total EFSF obligation of €211 billion by way of what is essentially magic. The Telegraph reports that “Germany is €55bn richer than it previously thought because of an accounting error at state-owned bank Hypo Real Estate Holding. The mistake at “bad bank” FMS Wertmanagement, happened because collateral for derivatives wasn’t netted between the asset and liability side, an FMS spokesman said. As a result, FMS will only contribute about €161bn to Germany’s debt this year, down from €216.5bn in 2010.” Another way of representing the error is that it is equal to a ridiculous 1% of the country’s debt to GDP ratio. “Germany’s 2010 debt-to-GDP ratio also drops, to 83.2% from the previous 84.2%, a finance ministry spokesman said.” In other words, the modern world, best characterized by the imploding fiat ponzi, has discovered a way to raise capital (electronic, naturally) courtesy of CDS bookmarking errors. And now, we have seen it all.

    Since money is fungible, especially at the sovereign level, the “unlocked” capital which fortuitously was in a favorable netting direction (and we can’t wait to get our hands on the detailed explanation of just what the error was that resulted in €31 in 2011 and €24.5 billion in 2010 of additional “debt” issuance going to fund FMSW, also known as Germany’s bad bank, and now effectively being unwound) can and will used to plug bad Greek debt shortfalls at any other wards of the state which has material exposure to bad debt. Such as partially nationalized Commerzbank, which as we noted yesterday by way of German FAZ, is dumping all of its PIIGS (and potentially US) bond exposure into a bidless market with the same urgency as US banks offloading subrpime paper in the summer of 2007, in order to preserve liquidity and raise capital. Most importantly, this is also money that amounts to over 25% of the German obligation toward the EFSF of €211. So while one can dream up ridiculous stories of €55 billion accounting errors, the reality is that the source does not really matter: after all these are merely electronic ones and zeros. And the next time Germany needs to “raise some electronic cash” to fund even greater PIIGS related shortfall, it will simply find even greater “accounting errors” which magically give justification to shift a liability to an asset, and thus validate what is effectively non-sterilized printing of euros at the national level! Is this merely an appetizer of things to come, and an explanation of how Europe will “fund” the hundreds of billions in capital shortfall once the PIIGS start falling left and right like dominoes, tipped over by what is now the Greek default of October 27, 2011? Of course not: certainly this is nothing more than an innocent accident (for €55 billion) and anyone claiming otherwise is a conspiratorial anarchist.

    And the truly good news is that with roughly one quadrillion in derivatives floating out there, the bulk of which nobody has any clue what they are, where they are, and what they are collateralized by, it means that the world is free to find derivative-based “errors” which can magically fund well over two times the global debt which at last check was about $500 trillion. At the end of the day, no one is the wiser: after all this is merely the creation and destruction of electronic ones and zeros in the span of nanoseconds in one computer’s random access memory.

    Another lesson to be learned from this is that it’s all good as long as the accounting error makes money:

    Germany admits accounting blunder but no scapegoats

    By Erik Kirschbaum

    BERLIN | Thu Nov 3, 2011 3:53pm EDT

    (Reuters) – The German government has no plans to sack the bankers or accountants who made a 55-billion euro ($75 billion) bookkeeping blunder that exposed it to ridicule across Europe, the finance minister said Wednesday.

    Wolfgang Schaeuble said it was “an extremely annoying mistake” for the nationalised mortgage bank Hypo Real Estate (HRE) and the PwC accountancy firm to have let such an error slip through undetected.

    The Berlin government has been scathing about Greece’s bookkeeping practices during the euro zone crisis.

    “I don’t believe in looking for scapegoats,” Schaeuble told a news conference after summoning executives from HRE and the accountancy firm to his office.

    “Everyone promised improvements.”
    ….

    Posted by Pterrafractyl | November 11, 2011, 12:00 pm
  15. Reading stories like this from last year almost makes it seem like our business and political leaders have become the guy from Memento, suffering from some sort of brain trauma by the 2008 meltdown that has left them unable to create new memories or learn new lessons:

    Does fiscal austerity boost short-term growth? A new IMF paper thinks not

    Sep 30th 2010 | from the print edition

    MOST people, among them the tens of thousands of workers who rallied in Brussels on September 29th, believe that fiscal austerity leads to a shrinking economy, at least in the short run. Jean-Claude Trichet, president of the European Central Bank, disagrees. In June he said that “the idea that austerity measures could trigger stagnation is incorrect.” Arguing that a credible fiscal-consolidation plan would restore confidence, he said: “I firmly believe that in the current circumstances, confidence-inspiring policies will foster and not hamper economic recovery.”

    With rich-world budget deficits averaging about 9% of GDP in 2009—up from only 1% in 2007—and their average public-debt-to-GDP ratio expected to hit 100% by the end of this year, austerity is a bullet that few rich countries will be able to dodge. But is it right to claim, as Mr Trichet and other devotees of “expansionary fiscal consolidations” do, that belt-tightening can actually aid growth in the short term? The intellectual backing for these claims comes from a study by two Harvard economists, Alberto Alesina and Silvia Ardagna, which studied past fiscal adjustments in rich countries*. They found that, more often than not, fiscal adjustments that relied on spending cuts boosted growth, even in the very short run. But a new study by economists at the IMF reckons that the Harvard study was seriously flawed**.

    Austerity can have some short-term benefits. Imagine, for example, that consumer demand is depressed in part because people fear the prospect of a wrenching fiscal adjustment. Devising a credible austerity package could lead people to regard their economic future with less trepidation. This increased optimism may encourage people to spend more freely even in the short run. But are such benefits large enough to ensure that the net effect of fiscal consolidation is to boost growth? The IMF’s conclusion is that they are not.

    But then I recall that this pattern of behavior has been going on for a quite a while. So they’re not suffering from short-term memory loss. They’re just delusional lunatics.

    Posted by Pterrafractyl | November 11, 2011, 2:40 pm
  16. With the P.I.I.G.S. probably out of the picture going forward and Belgium and France now possibly facing expulsion from the eurozone ‘in’ group (they are so no longer cool), it’s worth noting that the goals set out by Merkel on the big EU treaty changes (like taking governments to court for too much borrowing), will potentially involve a much smaller eurozone:

    The Irish Times – Thursday, November 10, 2011
    Merkel calls for treaty change to stabilise currency

    DEREK SCALLY in Berlin

    GERMANY: CHANCELLOR ANGELA Merkel has ramped up her euro zone rescue rhetoric, saying treaty change to allow “binding” EU oversight of national budgets is an imperative step to stabilise the single currency.

    Hours later Dr Merkel described the debt crisis as a “turning point” in EU history, European Commission president José Manuel Barroso – also in Berlin – warned euro zone members against the “logic of intergovernmentalism” and said a “split EU” would result if euro zone members rushed through reforms and left euro accession members behind.

    Dr Merkel said she could no longer see a euro zone crisis solution that preserved the EU status quo, where national budgets had the potential to imperil the whole EU, with no means of intervention by European institutions.

    “I’m of the view that we need a treaty change,” she said. “If [stability pact] agreements are not observed, a European institution must have the right to intervene in a budget being queried.

    “With these measures in the background, national parliaments would, as a rule, present budgets that meet the goals of the stability and growth pact,” she said.

    “Otherwise I support giving the commission or another member state the right to take the country in question to the European Court.” Dr Merkel’s remarks come amid a growing debate in Germany about whether the EU can produce meaningful reforms among its 27 members, or whether a euro zone avant-garde should proceed faster.

    The notion of a 17-member euro zone avant-garde forging closer fiscal and economic ties via an intergovernmental deal has alarmed the European Commission.

    Mr Barroso said yesterday that his commission saw its responsibility to “steadfastly uphold its role as the guarantor of all member states”.

    “The EU as a whole and the euro area belong together,” he said in Berlin, and reminded his audience that, except for two euro zone opt-out countries, the EU treaties foresee all other members joining the single currency.

    He described it as an “absurd” idea for the 17 euro zone countries to agree deeper fiscal and monetary integration without bringing along non-euro members. This would in effect, he said, represent an “opt-out” of the monetary core of the union from the European Union as a whole.

    “Let me be clear – a split union will not work. That is true for a union with different parts engaged in different objectives; a union with an integrated core but a disengaged periphery; a union dominated by an unhealthy balance of power or indeed any kind of directorium,” he said. “All these are unsustainable and will not work in the long term.”

    You can’t say these aren’t interesting times.

    Posted by Pterrafractyl | November 14, 2011, 12:04 am
  17. It looks like Merkel is doubling down on the “either we form a ‘political union’ or the whole thing is kaput” rhetoric:

    Merkel Urges Overhaul of European Union
    Q
    By Tony Czuczka and Brian Parkin – Nov 14, 2011 6:14 AM CT

    German Chancellor Angela Merkel called for an overhaul of the European Union, advocating closer political ties and tighter budget rules, in her most explicit prescription for ending the debt crisis.

    Speaking to her Christian Democratic Union party’s annual congress in the eastern German city of Leipzig today, Merkel said leaders must create a “new Europe” by deepening ties in the 27-nation EU. At the same time, she repeated Germany’s rejection of jointly sold euro bonds.

    The task of our generation now is to complete the economic and currency union in Europe and, step by step, create a political union,” Merkel said. “It’s time for a breakthrough to a new Europe.”

    Merkel’s address marks an escalation in her rhetoric as the debt crisis that began in Greece in October 2009 sent Italian and Spanish borrowing costs to euro-era records last week and roiled French markets. After leadership changes in Italy and Greece, the chancellor is turning her attention to shaping the euro and the EU’s future.

    What she means is that either we get more Europe now or the project will die,” Ralph Brinkhaus, a CDU member of parliament’s finance committee, said in an interview. “This means that Germany must give up some sovereign rights and some party colleagues and voters may find this hard to swallow. But there’s no alternative.

    Save the EU

    Merkel renewed her warning that “if the euro fails, Europe fails” and said her mission was to save the “historic” EU project.

    “Big political changes are now sweeping through the euro zone, putting — at least for now — the many skeptical political observers to shame,” said Erik Nielsen, chief global economist at UniCredit SpA (UCG) in London. In Italy, Greece and Spain, which holds elections on Nov. 20, “people want ‘more Europe,’ not less.”

    New Europe, it’s what the public wants!

    Posted by Pterrafractyl | November 14, 2011, 7:54 am
  18. Here’s an article that captures an important parallel between the US and German economies during their most recent economic booms. It also helps explain the German domestic political pressures that come into play whenever more eurozone bailouts are discussed.

    Back in the early 2000’s, when the P.I.I.G.S. were handed still testing out their new eurozone platinum cards, Germany was undergoing “labor market reforms” (austerity measures for the workers) to keep down export costs (wages). So, while Germany has become the continent’s chief exporter and its companies are sitting on large piles of cash, the German worker has seen few of those gain over the last decade, with most of those gains going to the top:

    Is a German ‘Fourth Reich’ emerging?

    Europeans accuse Berlin of using the euro crisis to boost German power

    Siobhan DowlingNovember 15, 2011 06:07

    idea to send a German. And his name certainly didn’t help matters.

    When Horst Reichenbach arrived in Athens recently to head a new European Union task force to help the country deal with its debt, the Greek media instantly dubbed him “Third Reichenbach.”

    Cartoons appeared of him in Nazi uniform. A Greek tabloid showed a photo of his office with the headline: “The new Gestapo headquarters.”

    The view from Germany

    Only a few years ago, as economies elsewhere on the continent boomed, Germany was regarded as the sick man of Europe. It was still bearing the huge costs of reunification with East Germany. Unemployment was stubbornly high. A decade ago, it endured a tough restructuring of its economy, including unpopular labor and welfare reforms.

    “Germany did what Greece and Italy and France will now need to do,” said Ulrike Guerot, head of the Berlin office of the European Council on Foreign Relations. “We did this 10 years ago and we are now seeing the fruits of what we did.”


    Another key fact is that while other countries regard Germany as an economic colossus with the means (if not the will) to help, the reality for its workers is at odds with this image. While wages increased significantly in many other countries over the past decade, in Germany they have remained stagnant for years. A report released by the Berlin-based German Institute for Economic Research last week showed that when adjusted for inflation, wages actually declined by 4.2 percent over the past decade.

    In part, this is due to the mushrooming of low-paid, precarious jobs, a result of the labor law liberalization that helped boost growth. Yet even in highly unionized jobs, wages have not risen significantly.

    “There has been a large shift of income from labor to capital,” said Whyte, at the Centre for European Reform. “In other words, German firms are now sitting on large piles of cash, but German workers have not been getting pay rises.”

    Selling the bailout to Germans

    The plight of the German worker makes the bailouts a harder sell. The advantages of a strong euro zone aren’t clear to the many people who have not gained financially from the country’s increasing wealth.

    Many Germans basically have not seen the fruits of the euro and benefits of the single market in the first place, and now they feel like they are going to pay for the all others,” said Guerot, from the European Council on Foreign Relations. “It’s very hard to make the argument among Germans that they should put billions on the table for Italy or Greece to save the single market.”

    I’d snarkily recommend an “Occupy Berlin” sister movement at this point if it was necessary. It’s not.

    Posted by Pterrafractyl | November 15, 2011, 8:48 pm
  19. It begins?

    November 15, 2011 7:28 pm
    Eurozone bonds hit by mass sell-off

    By Richard Milne and David Oakley in London

    Eurozone bond markets suffered a mass sell-off on Tuesday as investor fears spread beyond Italy and Spain to triple A-rated France, Austria, Finland and the Netherlands.

    The premium that France and Austria pay over Germany to borrow rose to euro-era records of 192 basis points and 184bp respectively, levels investors say are no longer consistent with top credit ratings.

    “Markets are losing patience so they are going for the jugular, which is the core countries and not the periphery,” said Neil Williams, chief economist at Hermes, the UK fund manager. “There is convergence but it is convergence on the ­weakest.”

    The rise in bond yields affected all main eurozone countries apart from Germany, and suggests that the two-year-old sovereign debt saga could be entering a dangerous phase.

    It’s worth noting that a currency union consisting of a large number of members sort of lends itself to a weird musical-chairs/kill-of-the-hill situation when interlocking financial systems work out the toxic debt or whatever economic imbalances that build up. Then again, if you swapped out Germany for just about any other major economic power, things might look different and the whole eurozone may have imploded months ago because the Germany economy is sort of in a league of its own right now (assuming an intact eurozone going forward). But a musical-chairs/king-of-the-hill dynamic seems like something we’re going to see more of as currency unions catch on. That should be fun.

    Posted by Pterrafractyl | November 15, 2011, 9:37 pm
  20. @Pterrafractyl: The material that you post on these pages is pretty good. I think you definitely have enough talent to start your own blog/site. Then we could pull our forces together, exchange links, comment on each other sites, etc. Don’t you find it would be a good idea? I love to read you on Dave’s site but I think you definitely make the cut to go the next level. What we need now is to create a network of people who share our ideas and values. And you will always have the opportunity and pleasure to comment on Dave’s site at your will and discretion.

    Posted by Claude | November 15, 2011, 11:15 pm
  21. Counter-party risk? What’s that? They never covered that in my contemporary economic history class:

    JPMorgan, Goldman Keep Italy Debt Risk in Dark
    Q
    By Christine Harper and Michael J. Moore – Nov 15, 2011 6:01 PM CT

    JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally.

    Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS.

    As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether.

    JPMorgan said in its third-quarter SEC filing that more than 98 percent of the credit-default swaps the New York-based bank has written on GIIPS debt is balanced by CDS contracts purchased on the same bonds. The bank said its net exposure was no more than $1.5 billion, with a portion coming from debt and equity securities. The company didn’t disclose gross numbers or how much of the $1.5 billion came from swaps, leaving investors wondering whether the notional value of CDS sold could be as high as $150 billion or as low as zero.

    Counterparty Clarity

    “Their position is you don’t need to know the risks, which is why they’re giving you net numbers,” said Nomi Prins, a managing director at New York-based Goldman Sachs until she left in 2002 to become a writer. “Net is only as good as the counterparties on each side of the net — that’s why it’s misleading in a fluid, dynamic market.”

    JPMorgan sought to allay concerns that its counterparties are unreliable by saying in the filing that it buys protection only from firms outside the five countries that are “either investment-grade or well-supported by collateral arrangements.” The bank doesn’t identify the counterparties.

    Bungee Cords

    If the value of Italian bonds drops, as it did last week, a U.S. firm that sold a credit-default swap on that debt to a French bank would have to provide more collateral. The same U.S. company might be collecting collateral from a British bank because it bought a swap from that firm.

    As long as all three banks can make good on their promises, the trade doesn’t have much risk. It could all unravel if the British firm runs into trouble because it’s waiting for a payment from an Italian company that defaults. The collapse of Lehman Brothers Holdings Inc. in 2008 demonstrated some of the ripple effects that one failure can have in the market.

    FASB Rule

    The Financial Accounting Standards Board in 2008 started requiring companies to disclose the worldwide gross notional credit protection they’ve written and bought. As of Sept. 30, JPMorgan said it had sold $3.13 trillion of credit-derivative protection and purchased $3.07 trillion, up from $2.75 trillion sold and $2.72 trillion bought at the end of 2010, filings show. Goldman Sachs disclosed it had written $2.07 trillion and bought $2.20 trillion, about the same amount it reported at year-end.

    At the end of the second quarter, those two firms accounted for 43 percent of the $24 trillion of credit derivatives sold and bought by the 25 largest banks in the U.S., according to the Office of the Comptroller of the Currency. The top five account for 97 percent of the total, the data show.

    Guarantees provided by U.S. lenders on government, bank and corporate debt in Greece, Italy, Ireland, Portugal and Spain rose by $80.7 billion to $518 billion in the first half of 2011, according to the Bank for International Settlements.

    Posted by Pterrafractyl | November 16, 2011, 8:32 am
  22. @Claude: thanks for a the kind words and suggestions. Putting together a new site is an interesting idea. I have too much on my plate at the moment but it’s something to ponder for the future. Thanks for your efforts too!

    Posted by Pterrafractyl | November 16, 2011, 2:07 pm
  23. It looks like the kid gloves are finally coming off:

    NY Fed to Raise Margin Requirements on Mortgage Securities

    Published: Wednesday, 16 Nov 2011 | 5:18 AM ET

    By: Reuters

    The New York Fed said it will be increasing the collateral requirements on 21 primary-dealer banks in transactions dealing with mortgage-backed securities, in an effort to lower the settlement risks with its counterparties.

    “The Federal Reserve Bank of New York informed its primary dealers today that it will require dealers to margin against their outstanding agency MBS forward transactionswith the NY Fed. Dealers are required to post collateral in a number of other types of operations with the NY Fed,” a New York Fed spokesman told Reuters.

    Separately, the Journal said the Federal Reserve may impose a 2.5 percent initial margin on the dollar amount of the mortgage-backed securities transactions from the dealers.

    A dealer may need to put up $25 million in cash collateral for an MBS transaction of $1 billion, according to the paper.

    Oooo, ouch, that’s going to hurt the big boys unused to having to play it so safe. Have fun with your measly 40-to-1 bets, Suckers!

    Posted by Pterrafractyl | November 16, 2011, 2:14 pm
  24. More history lessons left unlearned:

    November 18, 2011, 12:57 pm
    The Brüning Thing

    Joe Weisenthal tells us about an analyst willing to risk a Godwin’s Law citation; Dylan Grice of SocGen points out that it was the deflationary policies of 1930-32, not the inflation of 1923, that brought you-know-who to power.

    Indeed. When we hear assertions that Germans are deeply hostile to loose money because of their historical memories, I always wonder why those memories are so selective. Why is 1923 seared into collective memory, while the Brüning disaster has apparently gone down the memory hole?

    This is important — and there’s not much time to get the record straight.

    Posted by Pterrafractyl | November 18, 2011, 11:06 am
  25. http://www.telegraph.co.uk/news/worldnews/europe/eu/8898213/German-memo-shows-secret-slide-towards-a-super-state.html

    German memo shows secret slide towards a super-state

    An intrusive European body with the power to take over the economies of struggling nations should be set up to tackle the eurozone crisis, according to a leaked German government document.

    By Bruno Waterfield, in Brussels
    17 November 2011

    The six-page memo, by the German foreign office, argues that Europe’s economic powerhouses should be able to intervene in how beleaguered eurozone countries are run.

    The confidential blueprint sets out Germany’s plan to tackle the eurozone debt crisis by creating a “stability union” that will be “immediately followed by moves “on the way towards a political union”.

    It will prompt fears that Germany’s euro crisis plans could result in a European super-state with spending and tax plans set in Brussels.

    The proposals urge that the European Stability Mechanism (ESM), a eurozone bailout fund that will be established by the end of next year, should be transformed into a version of the International Monetary Fund for the EU.

    The European Monetary Fund (EMF) would be able to take full fiscal control of a failing country, including taking countries into receivership.

    The leaked document, The Future of the EU: Required Integration Policy Improvements for the Creation of a Stability Union, comes as David Cameron meets Angela Merkel, the German chancellor, in Berlin today to talk about treaty changes and the eurozone crisis.

    The German plan begins with a proposal to create “automatic sanctions” that could be imposed on euro members spending beyond targets set by the European Commission. Germany is demanding that if euro rules are “consistently violated”, it should be able to demand action from the European Court of Justice.

    Germany, Finland, Austria and the Netherlands would be able to ask EU courts to impose sanctions, from fines to the loss of budgetary sovereignty, to protect the euro.

    The memo states the EMF would be given “real intervention rights” in the budgets of euro members who have received EU-IMF bailouts.

    Open Europe, a think tank, has called for Mr Cameron to demand concessions from Mrs Merkel in exchange for the plans, which need the consent of all 27 EU countries, giving Britain a veto.

    Posted by R. Wilson | November 19, 2011, 12:23 pm
  26. http://www.telegraph.co.uk/news/worldnews/europe/eu/8898044/Germanys-secret-plans-to-derail-a-British-referendum-on-the-EU.html

    Germany’s secret plans to derail a British referendum on the EU

    Germany has drawn up secret plans to prevent a British referendum on the overhaul of the European Union amid concerns it could derail the eurozone rescue package, leaked documents obtained by The Daily Telegraph disclose.

    By Bruno Waterfield, in Brussels
    18 Nov 2011

    Angela Merkel, the German chancellor, is today expected to tell David Cameron that Britain does not need a referendum on EU treaty changes, despite demands from senior Conservatives for more powers to be repatriated to Britain.

    The leaked memo, written by the German foreign office, discloses radical plans for an intrusive new European body that will be able to take over the economies of beleaguered eurozone countries.

    It discloses that the EU’s largest economy is also preparing for other European countries, which are too large to be bailed out, to default on their debts — effectively going bankrupt. It will prompt fears that German plans to deal with the eurozone crisis involve an erosion of national sovereignty that could pave the way for a European “super state” with its own tax and spending plans set in Brussels.

    Britain would be relegated to a new outer group of EU members who are not in the single currency. Mr Cameron will today travel to Brussels and Berlin for tense negotiations with Mrs Merkel amid growing disagreement between the leaders over how to deal with the eurozone.

    The Prime Minister is increasingly exasperated that Germany refuses to provide more financial help for Italy and other struggling countries amid concerns that the crisis is having a “chilling effect” on the British economy. Mrs Merkel yesterday said she expected Mr Cameron to “examine a stronger involvement with other countries” once the eurozone crisis had been resolved.

    She said: “We’ve seen a sovereign debt crisis evolve in some states and particularly those in the eurozone find themselves in the international focus.

    “It was right of David Cameron to concern himself with the UK’s debt issues when he became Prime Minister — that’s my firm conviction, and once the negative focus has moved away from Europe, he will examine a stronger involvement with other countries.”

    The eurozone contagion is threatening to spread to Spain and France. Yesterday, the price of Spanish government borrowing reached the “brink” of crisis point.

    The Spanish government sold 10-year bonds at a 6.975 per cent yield — just below the seven per cent level which has triggered international assistance elsewhere.

    Amid protests in Milan and Turin, Mario Monti, Italy’s unelected “technocrat” prime minister unveiled sweeping austerity reforms. Mr Monti warned that a break-up of the single currency would take eurozone economies “back to the 1950s” in terms of wealth.

    The six-page German foreign ministry paper sets out plans for the creation of a European Monetary Fund with a transfer of sovereignty away from member states.

    The fund will have the power to take ailing countries into receivership and run their economies. Even more controversially, the document, entitled The future of the EU: required integration policy improvements for the creation of a Stability Union, declares that the treaty changes are a first stage “in which the EU will develop into a political union”. “The debate on the way towards a political union must begin as soon as the course toward stability union is charted,” it concludes.

    The negotiating document also explicitly examines ways to limit treaty changes to speed up the reforms. It indicates that Mrs Merkel will tell Mr Cameron to rule out a popular EU vote in Britain.

    “Limiting the effect of the treaty changes to the eurozone states would make ratification easier, which would nevertheless be required by all EU member states (thereby less referenda could be necessary, which could also affect the UK),” read the paper.

    Senior government officials confirmed that they had dropped a previous demand that EU powers should be “repatriated” to Britain in return for the treaty changes requested by Germany, a move that will anger Conservative MPs.

    “I don’t think that anyone is seriously proposing going down that route,” a senior government source said.

    Open Europe, a think tank, last night called for Mr Cameron to demand something in return from Mrs Merkel for her “far-reaching plan”, which requires the unanimous consent of all 27 EU countries, giving Britain a veto.

    “It would be the first step towards a vision of ‘political union’ that would have major consequences for the future of the entire EU, and therefore the UK’s place within it,” said Stephen Booth, the think tank’s research director.

    “Merkel is daring Cameron to call her bluff, but if the UK is serious about taking a leadership role in shaping the EU, Cameron will have to take a stand sooner rather than later.”

    Bill Cash, chairman of the Commons European scrutiny committee, accused the Coalition of standing by in “no–man’s land” while Germany shaped the EU to suit its own interests.

    “We are going to get nothing significant in return for agreeing to this,” he said.

    Mr Cameron is today also expected to pressurise Mrs Merkel into lifting German opposition to the use of the European Central Bank to rescue the euro.

    However, last night, Mrs Merkel said: “If politicians think the ECB can resolve the problem of the euro’s weaknesses, then I think they are persuading themselves of something that won’t happen.

    Posted by R. Wilson | November 19, 2011, 12:27 pm
  27. @R. Wilson: Here’s another secret (well, ex-secret):

    Merkel tightens grip on eurozone: Why did Irish budget plans end up in Berlin?
    Document circulates revealing next year’s budget not yet approved by Irish PM
    Enda Kenny forced into embarrassing denial that his plans were being inspected by Berlin

    By Rob Davies and Hugo Duncan

    Last updated at 11:03 AM on 18th November 2011

    Fears that Germany’s grip on the eurozone is tightening increased last night after it emerged that details of Ireland’s budget plans were leaked to German politicians.

    A document circulated in the German Bundestag revealed Dublin’s proposals to save the debt-ridden country £3.25billion.

    The details were for next year’s budget, which have not yet been approved by the Irish Taoiseach Enda Kenny.

    He was forced into an embarrassing denial that his plans were being inspected in Berlin.

    Mr Kenny met German Chancellor Angela Merkel in Berlin earlier this week.

    Asked how such sensitive information ended up in the hands of a foreign power – just a day after their meeting – Mr Kenny said he had ‘no idea’.

    Ireland’s Department of Finance said it had no explanation for why the document – which was not signed by finance minister Michael Noonan – had ended up in German hands.

    Dublin is aiming to slash around £10billion from spending plans over the next four years in an austerity drive aimed at forging a lasting economic recovery.

    Earlier this week, Berlin declared that Europe is ‘speaking German and Britain must be less selfish’ towards the EU.

    The UK has a duty to help the eurozone despite being outside the single currency, according to one of Mrs Merkel’s closest allies.

    Even more provocatively, Volker Kauder, leader of Germany’s CDU parliamentary party, warned Britain could not block a financial tax that would cost the City billions.

    Putting aside the creepiness of seeing Ireland secretly seek out approval from their new bosses, I have to admit that, of all the major changes hitting the eurozone and EU, the one thing I wouldn’t mind seeing the financial activities in City of London come under some sort of Tobin Tax (Along with the rest of the planet’s financial centers). It would definitely help with the scam of high-frequency trading, although I don’t know if it would really solve the City of London’s rather large systemic moneylaundering issues (and that’s just part of the problem).

    Posted by Pterrafractyl | November 20, 2011, 7:22 pm
  28. A moment of “Fun with History”:
    Then:

    Inside Wall Street’s Black Hole</b

    by Michael Lewis Feb 19 2008

    For years, investors have relied on a complex formula to manage risk. But what happens if the Black-Scholes model is wrong—and we’re in bigger trouble than ever?

    The striking thing about the seemingly endless collapse of the subprime-mortgage market is how egalitarian it has been. It’s nearly impossible to draw a demographic line between the victims and the perps. Millions of ordinary people ignorant of high finance have lost billions of dollars, but so have the biggest names on Wall Street, and both groups made exactly the same bet: that real estate values would never fall. Stan O’Neal, the former C.E.O. of Merrill Lynch, was fired for the same reason the lower-middle-class family in the suburban wasteland between Los Angeles and San Diego may have lost its surprisingly nice home. Both underestimated the likelihood of an unlikely event: a financial panic. In retrospect, the small army of Wall Street traders who lost tens of billions of dollars in subprime-mortgage investments looks as naive and foolish as the man on the street. But there’s another way of viewing this crisis. The man on the street, for the first time, acted on the same foolish principles that have guided the behavior of sophisticated Wall Street traders for the past few decades.

    If you had to pick a moment when those principles first appeared a bit shaky, you could do worse than the 1987 stock market crash. Black Monday was the first of a breed: a panic that suggested disastrous economic and social consequences but in the end had no serious effects at all. The bursting of the internet bubble, the Asian currency crisis, the Russian government bond default that triggered the failure of the hedge fund Long-Term Capital Management—all of these extreme events seemed, in the heat of the moment, to have the power to change the world as we know it. None of them, it turned out, was that big of a deal for the U.S. economy or for ordinary citizens. But the 1987 crash marked the beginning of something else too—a collapse brought about not by real or even perceived economic problems but by the new complexity of financial markets.

    A new strategy known as portfolio insurance, invented by a pair of finance professors at the University of California at Berkeley, had been taken up in a big way by supposedly savvy investors. Portfolio insurance evolved from the most influential idea on Wall Street, an options-pricing model called Black-Scholes. The model is based on the assumption that a trader can suck all the risk out of the market by taking a short position and increasing that position as the market falls, thus protecting against losses, no matter how steep. Nearly every employee stock-ownership plan uses Black-Scholes as its guiding principle. A pension-fund manager sitting on billions of U.S. equities and fearful of a crash needn’t call a Wall Street broker and buy a put option—an option to sell at a set price, limiting potential losses—on the S&P 500. Managers can create put options for themselves, cheaply, by shorting the S&P as it falls, and thus, in theory, be free of all market risk.

    Good theory. The glitch was discovered only after the fact: When a market is crashing and no one is willing to buy, it’s impossible to sell short. If too many investors are trying to unload stocks as a market falls, they create the very disaster they are seeking to avoid. Their desire to sell drives the market lower, triggering an even greater desire to sell and, ultimately, sending the market into a bottomless free fall. That’s what happened on October 19, 1987, when the sweet logic of Black-Scholes was shown to be irrelevant in the real world of crashes and panics. Even the biggest portfolio insurance firm, Leland O’Brien Rubinstein Associates (co-founded and run by the same finance professors who invented portfolio insurance), tried to sell as the market crashed and couldn’t.

    Oddly, this failure of financial theory didn’t lead Wall Street to question Black-Scholes in general. “If you try to attack it,” says one longtime trader of abstruse financial options, “you’re making a case for your own unintelligence.” The math was too advanced, the theorists too smart; the debate, for anyone without a degree in mathematics, was bound to end badly. But after the crash of 1987, individual traders at big Wall Street firms who sold financial-disaster insurance must have smelled a rat. Across markets—in stocks, currencies, and bonds—the price of insuring yourself against financial disaster rose. This rise in prices and the break with Black-Scholes reflected two new beliefs: one, that huge price jumps were more probable and likely to be more extreme than the Black-Scholes model assumed; and two, that you can’t manufacture an option on the stock market by selling and buying the market itself, because that market will never allow it. When you most need to sell—or to buy—is exactly when everyone else is selling or buying, in effect canceling out any advantage you once might have had.


    Then again
    :


    Black-Scholes didn’t work; trillions of dollars’ worth of securities may have been priced without regard to the possibility of crashes and panics. But until very recently, no one has bitched and moaned about this problem too loudly. Lay folk might harbor private misgivings about the clergy, but as lay folk, they are reluctant to express them. Now, however, as the subprime market unravels, the beginnings of a revolt against the church seem to be taking shape.

    One of the revolt’s leaders is Nassim Nicholas Taleb, the bestselling author of The Black Swan and Fooled by Randomness and a former trader of currency options for a big French bank. Taleb can precisely date the origin of his own personal gripe with Black-Scholes: September 22, 1985. On that day, central bankers from Japan, France, Germany, Britain, and the United States announced their intention to torpedo the U.S. dollar—to reduce its value in relation to the other countries’ currencies. Every day, Taleb received a list of his trading positions from his firm and a matrix describing his risks. The matrix told him how much money he stood to make or lose, given various currency fluctuations. That September 22, when the central bankers announced their plan to lower the dollar’s value, he made money but didn’t know it. “I didn’t know what my position was,” he says, “because the movement was outside the matrix they’d given me.” The French bank’s risk-analysis program assumed that a currency crash of this magnitude would occur once in several million years and therefore wasn’t worth considering.

    In the past two years, Taleb has co-authored a pair of papers that have appeared in the sort of academic journals that originally published the Black-Scholes model. He and his co-author attack the model head-on in its own language (math), and as much as call for a retraction of the Nobel Prize awarded to Myron Scholes and Robert Merton for their work in creating the model. “This is what I’m saying to Merton and Scholes,” Taleb says. “You guys are just parasites. You’re not bringing anything useful to the market. You are lecturing birds on how to fly. You’re watching them fly. And then you’re taking credit for it.”

    Now:

    The Money Crisis’ First Blush

    By: Adrian Ash, BullionVault
    Posted Wednesday, 23 November 2011

    This SUMMER’S FIRST U.S. debt downgrade came after Washington failed to fix the debt ceiling one way or the other. Three months later, and Washington just failed again.

    Yet that first downgrade also saw 10-year Treasury yields fall to 3.0% as US debt prices rose. And today, with a second downgrade nailed on, that yield is already down below 2.0%.

    What gives? Why is the financial world piling into US debt – driving its price higher – even as the security of that very debt risks being de-rated further below the magic risk-free AAA mark?

    “Most risk and return models in finance start off with an asset that is defined as risk free,” explains an NYU professor. “The expected returns on risky investments are then measured relative to the risk-free rate.” The loss of “risk free” as a concept thus plays hell with Wall Street’s investment confidence, let alone its models.

    Pricing stock-market options using the Black Scholes equation, for instance, starts by assuming that “it is possible to borrow and lend cash at a known constant risk-free interest rate.” Remove the “risk free rate”, and things fall apart faster than Long Term Capital Management, the hedge fund built on Black-Scholes’ model, which collapsed when the world changed but the equation didn’t.

    So no risk-free rate, no baseline for banks or insurers, those multi-trillion-dollar industries pervading pretty much every deal, order and purchase you can think of today outside the black economy. But even cash-only gangsters aren’t free of the crisis hitting the financial world’s only other competitor for the role of “risk-free” reference point. Because in Eurozone bonds, the very denomination itself is now in question.

    Now again:

    MF Global and the repo-to-maturity trade
    Posted by Izabella Kaminska on Oct 31 19:26.

    If ever there was an example of an “overnight repo Black Swan” event, MF Global’s “repo-to-maturity” laddered trades seem to be it. Though, in this case, they’re probably better described as the realisation of the “short-term repo Black Swan”.

    A.k.a institutions’ growing tendency to risk it in the short-term repo universe, to beat the crappy returns being offered in the “risk-free” market.

    So, while most of the media has been commonly referring to MF’s sovereign bond positions as proprietary bets gone wrong, there’s more to it than just that.

    If anything this was a financing position (or liquidity trade) — not a bet on the future direction of the bonds themselves.

    What’s more, if executed properly the trade should — at least on paper – have posed little or no risk.

    Then and Now:

    Salomon Brothers Alums: Where Are They Now?
    Lisa Du | Nov. 17, 2011, 11:05 AM

    Although the Salomon name no longer adorns any financial giant, its legacy is common knowledge even for the financial neophyte.

    Its status in financial lore is thanks to its numerous innovations in the bond market, Michael Lewis’ semi-memoir Liar’s Poker (a mandatory read for anyone considering a foray into finance) and the firm’s very public Treasury bond scandal in 1991.

    But the investment bank and trading house was also chock full of employees — some reckless, some arrogant and some talented. Those former bankers have gone to both success stories or disastrous downfalls. (There are two MF Global executives in there too!)

    So from Mayor Bloomberg to John Gutfreund, we rounded them up.

    Michael Lewis

    THEN: Michael Lewis worked as a bond salesman in London for Salomon Brothers in the late 1980s.

    NOW: Writing best-sellers year-by-year. In the financial sphere, he’s received praise for The Big Short and Boomerang about the aftereffects of the financial crisis. In the cinematic world, two of his books — The Blind Side and Moneyball — have been made into critically acclaimed films.

    HOW HE GOT HERE: Lewis quit his job at Salomon to write Liar’s Poker. From there, the rest is history.

    Michael Stockman

    THEN: Got his career start as a mortgage trader at Salomon.

    NOW:Serving as Chief Risk Officer at MF Global, which filed for bankruptcy Oct. 31 and is now embroiled in legal troubles.

    HOW HE GOT HERE: Trade mortgages at Morgan Stanley and Goldman after Salomon, then went on to a long career in risk management — most recently as UBS America’s chief risk officer. Also did a stint as a visiting scholar at Dartmouth’s Tuck School of Business.

    John Meriwether

    THEN: John Meriwether was the head of fixed-income trading at Salomon and rose to vice-chairman in 1988. He resigned from the firm when it became embroiled in a scandal involving false bids for treasury bonds.

    NOW: His most recent hedge fund business, JM Advisors, only raised $28.85 million.Ouch.

    HOW HE GOT HERE: Meriwether seems prone to bad luck when it comes to investments. He started his own hedge fund Long Term Capital Management, which had a spectacular fall in 1998 after a bad bet on the Russian ruble and losing 90% of their assets. After that, Meriwether started JWM Partners, which also closed following the 2008 financial crisis.

    Jon Bass

    THEN: Spent 14 years as a managing director overseeing fixed-income sales at Salomon, and later Citigroup when it was acquired.

    NOW: Global head of institutional sales at MF Global, the brokerage that recently filed for bankruptcy and now facing legal troubles.

    HOW HE GOT HERE: Held leadership positions in sales at UBS and BTIG.

    Myron Scholes

    THEN: Joined Salomon in 1990 as a special consultant, then rose to managing director of fixed-income derivatives.

    NOW: Chairman of Platinum Grove Asset Management, and sits on the board of several companies.

    HOW HE GOT HERE: Scholes partnered with Meriwether to start Long Term Capital Management. Before the fund collapsed, Scholes won a Nobel prize in economics with Robert Merton for his pioneering work in derivatives valuation, the Black-Scholes model. He’s also seen his share of troubles in the LTCM fallout and when his fund suffered following the financial crisis.

    Today’s “Fun with History” moment was brought to you by Historians for Freddie Mac.

    Posted by Pterrafractyl | November 23, 2011, 6:32 pm
  29. It’s not a crisis. It’s a feature:

    In Debt Crisis, a Silver Lining for Germany
    By STEPHEN CASTLE
    Published: November 24, 2011

    BRUSSELS — Someone, somewhere, usually makes money from bad news. With Europe’s debt crisis, that — at least until this week — was Germany.

    The failed German bond auction on Wednesday might have brought to an end one turbulent chapter in the history of the Continent’s debt crisis, during which Berlin remained insulated from much of the fallout.

    Since 2009, Germany and a handful of other countries, like the Netherlands, have benefited significantly from cheaper borrowing costs as investors diverted cash from riskier assets and the bonds of southern European countries to debt issued by the Continent’s fiscal hawks.

    According to an estimate by Re-Define, an economic research institute in Brussels, Germany saved around 20 billion euros ($26.7 billion) in borrowing costs from 2009 to 2011, with an additional 20 billion euros in estimated savings locked in for the future. A separate analysis, by the De Volksrant newspaper in the Netherlands, put Dutch savings at around 7.5 billion euros for 2009-11.

    The drop in German borrowing costs, which according to Re-Define have fallen by more than half since the crisis hit, is more than a statistical quirk because it has helped shape the way the crisis has been handled within a two-tier euro zone.

    It helps explain why Germany has taken a tough line against “budget sinners” in the south like Greece, which have been virtually locked out of bond markets by high borrowing costs, and why Germany has been reluctant to create a “big bazooka” or huge bailout fund to stem the crisis. The bond markets delivered cheap money to Germany, and resulted in something Berlin badly wanted: economic overhauls in Southern Europe. “So in fact, in the German system, they think, ‘It’s not bad that those guys understand that they are really close to the abyss,’ ” said one European official, who did not want to be identified because of the sensitivity of the issue.

    The idea that those countries are learning something from the crisis, the official said, is “deep in the mentality” of Germany.

    Another thing “those countries” might want to learn soon is that treaty changes that allow for joint eurobond issuance at the cost of EU oversight over member state budgets just might create the greatest economic Frankstein’s Beast the world has ever seen: A centrally run economic governing council with a mandate to impose “austerity” (i.e. cut deficit spending on pesky social programs) whenever there’s a drop in revenue. It’s like the US setting up a permanent “Super Committee” for the expressed purpose of killing state-level social spending at the start of every recession.

    Hooray, state-enforced Guilded Ages forever!:

    EU Seeks Tougher Budget Oversight, Floats Euro-Bond Options
    November 24, 2011, 2:36 AM EST

    By Jonathan Stearns

    (Updates with comments by Barroso in fourth paragraph. For more on Europe’s sovereign-debt crisis, see EXT4.)

    Nov. 23 (Bloomberg) — European Union regulators pushed for more budget control over euro-area nations to ease the debt crisis, heeding German demands in return for offering less creditworthy governments the prospect of joint bond sales.

    Weeks after winning a year-long battle for stronger powers to sanction spendthrift euro countries, the European Commission proposed adding the right to screen national budgets earlier and monitor more closely nations such as Italy where rising borrowing costs threaten financial stability. The commission, the EU’s regulatory arm, also asked for tighter fiscal surveillance of nations such as Greece, Ireland and Portugal after they exit rescue programs.

    In exchange, the commission advanced the idea that the German government opposes of bonds sold jointly by the euro area’s 17 nations by outlining three options for such debt issuance. It said two of the three options would probably involve the lengthy process of changing the EU treaty and all of them would require reinforced fiscal oversight.

    The goal is “stronger budgetary discipline in the euro area,” commission President Jose Barroso said at a press conference today in Brussels. “Without stronger governance in the euro area, it will be difficult if not impossible to sustain a common currency.”

    Financial Downturn

    Facing Group of 20 calls to end the two-year-old debt crisis, prevent another financial downturn and preserve its monetary union, the euro area is fashioning a German-designed regulatory straitjacket for high-debt members. German Chancellor Angela Merkel wants the tighter framework as a condition for further financial support of weaker euro economies, which have received taxpayer-funded aid packages totaling 386 billion euros ($519 billion) and benefited from controversial European Central Bank bond purchases.

    ….

    Even if the joint eurobonds get issues, something tells me the P.I.I.G.S. are still heading to the slaughterhouse.

    Posted by Pterrafractyl | November 24, 2011, 6:35 pm
  30. Self-reinforcing Metaproblems:

    Ignorance is bliss when it comes to challenging social issues
    Mon, 11/21/2011 – 15:28

    The less people know about important complex issues such as the economy, energy consumption and the environment, the more they want to avoid becoming well-informed, according to new research published by the American Psychological Association.

    And the more urgent the issue, the more people want to remain unaware, according to a paper published online in APA’s Journal of Personality and Social Psychology.

    “These studies were designed to help understand the so-called ‘ignorance is bliss’ approach to social issues,” said author Steven Shepherd, a graduate student with the University of Waterloo in Ontario. “The findings can assist educators in addressing significant barriers to getting people involved and engaged in social issues.”

    Beyond just downplaying the catastrophic, doomsday aspects to their messages, educators may want to consider explaining issues in ways that make them easily digestible and understandable, with a clear emphasis on local, individual-level causes,” the authors said.

    Let’s see, ok, so we have a complex problem (pervasive ignorance brought about, in part, by our species’s self-inflicted stupidity in response to stress-inducing news), and part of the solution is to communicate it in a simple manner to the audience (everyone), emphasizing local, individual-level causes. And if you fail they’ll reflexively avoid thinking about it.

    How’s this one: Your society is being taken over by fascist thugs because you and everyone you know know nothing about almost everything.

    Too complex? Ok, how about just swapping out “brain” for “society” and “drugs” for “pervasive ignorance about complex issues”. It worked so well before.

    Posted by Pterrafractyl | November 24, 2011, 9:33 pm
  31. It’s just a tweak

    Plan by Merkel, Sarkozy to tweak EU pact seen as long shot
    By Sumi Somaskanda, Special for
    USA TODAY
    12/04/2011

    BERLIN – Counting down to a key European Union summit this week on the spiraling debt crisis, French and German leaders say they will push for treaty changes to allow for a closer fiscal union — a solution some say is likely to fail.

    “It’s all very nice and interesting, but it still has to be ratified by all 27 EU countries, and nobody knows if that’s realistic,” said Bert Van Roosebeke, an economist for the Center for European Policy in Germany.

    Closer integration of the currency union would mean member states ceding fiscal sovereignty to a central authority and would require the rules defining power of the European Union to be rewritten. Theoretically, voters in one EU nation can stop the proposal from becoming law.

    Also, those were tears of joy:

    UPDATE 2-Italy PM unveils sweeping austerity package

    Sun Dec 4, 2011 5:04pm EST

    * 30 billion euros in tax hikes, spending cuts

    * Monti renounces own salaries

    * Pension age to rise to 66 by 2018

    By Giuseppe Fonte

    ROME, Dec 4 (Reuters) – Prime Minister Mario Monti unveiled a 30 billion euro package of austerity measures on Sunday, raising taxes and increasing the pension age in a drive to shore up Italy’s strained finances and stave off a crisis that threatens to overwhelm the euro zone.

    Packed into a single emergency decree which comes into effect before formal parliamentary approval, the measures followed growing pressure for sweeping measures to restore confidence in the euro zone’s third-largest economy.

    Monti said the package, divided between 20 billion euros of budget measures over 2012-14 and a further 10 billion euros in measures to boost growth, was painful but necessary.

    We have had to share the sacrifices, but we have made great efforts to share them fairly,” he told a news conference, in which he said he had renounced his own salary as prime minister and economy minister.

    In a mark of the emotional impact of the cuts, Welfare Minister Elsa Fornero broke down in tears as she announced an end to inflation indexing on all but the lowest pension bands, a move that will mean an effective income cut for many pensioners.

    As part of a crackdown on tax evasion, cash transactions of more than 1,000 euros will be banned, and there were also measures to liberalise business opening hours and open up pharmacies and the transport sector to more competition.

    That proposed ban on cash transactions over 1000 euros was kind of surprising to see given the immense scope of the mafia’s influence there and its money-laundering needs and the intertwined nature of money-laundering with the economy from small front-business, to high finance and politics. It will have a fascinating impact on the Italian economy if it’s actually imposed. Will more laundering take place via small business (which might actually have a stimulative effect on the economy) or will more laundering-related financial transaction just go unreported and deeper underground? Who, oh who, will answer the godfathers’ money-laundering prayers?

    Posted by Pterrafractyl | December 4, 2011, 4:54 pm

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