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History Teaches Us that We Learn Nothing from History, Part 2: It’s 1931 all over again

Fol­low­ing last week­end’s epic fail announced $125 bil­lion bank bailout in Spain, the ever present ques­tion of “what’s next” has been loom­ing larg­er than usu­al this past week. Espe­cial­ly since the details of the bailout are yet to be deter­mined. After all, if an amount of mon­ey that could cut Spain’s unem­ploy­ment rate in half for a year could end up fiz­zling in under 5 hours, some­thing does­n’t add up. Dra­mat­ic pol­i­cy fail­ures like this often lead to some sort of soul search­ing and grasp­ing for his­tor­i­cal lessons that might apply to the cur­rent conun­drum. Let’s watch:

Ghost of Nazi Past Haunts Aus­ter­i­ty-Gripped Europe: Euro Cred­it
By John Glover — Jun 22, 2012 2:21 AM CT

The specter of the 1930s finan­cial cri­sis that cul­mi­nat­ed in the rise of Adolf Hitler’s Nazi par­ty and the Sec­ond World War is stalk­ing Europe.

In May 1931, Cred­i­tanstalt, found­ed in Vien­na by the Roth­schild bank­ing dynasty and the biggest lender in what remained of the Hab­s­burg Empire, suf­fered a run. Its col­lapse after a merg­er with an insol­vent rival sparked a cri­sis that left Ger­many and cen­tral Europe strewn with failed banks, caused defaults in Europe and Latin Amer­i­ca, knocked the pound off the gold stan­dard, and forced the New York Fed­er­al Reserve by Octo­ber to raise its dis­count rate by 2 per­cent­age points.

“The biggest eco­nom­ic cat­a­stro­phe of the last cen­tu­ry has been, of course, the big cri­sis after 1929,” Ewald Nowot­ny, gov­er­nor of the Aus­tri­an cen­tral bank, said at a con­fer­ence this week in Vien­na. “I tru­ly can say that when we had the big cri­sis of 2007 and 2008, it was in the back of the mind of every­body, all of us, every cen­tral banker, that we must avoid the mis­takes of the 1930s.”

What Harold James, pro­fes­sor of his­to­ry and inter­na­tion­al affairs at Prince­ton Uni­ver­si­ty, calls the “vicious cycle” of con­ta­gion between banks and sov­er­eigns is spin­ning today, just as it was 80 years ago. Spain’s 10-year bor­row­ing cost has aver­aged 6.6 per­cent this month, more than a per­cent­age point high­er than a year ago, after it sought 100 bil­lion euros ($127 bil­lion) to bol­ster its banks.

Local Tax­pay­ers

The Euro­pean Union’s accord with Spain, trig­gered by the col­lapse of Bankia SA, the country’s third-biggest lender, will leave the nation with debt about equiv­a­lent to its annu­al gross domes­tic prod­uct. Ireland’s 63 bil­lion-euro bailout of its banks pushed sov­er­eign debt to 108 per­cent of GDP last year from 44 per­cent in 2008.

The crit­i­cal thing now and in the 1930s is that you can’t dis­tin­guish between bank and sov­er­eign debt,” said Bri­an Read­ing, an econ­o­mist at Lom­bard Street Research in Lon­don. “As long as bank­ing sys­tems remain nation­al, it doesn’t much mat­ter how inter­na­tion­al the bank is, local tax­pay­ers are on the hook for it if it col­laps­es.

Under Germany’s aus­ter­i­ty poli­cies in the 1930s, tax­es rose, ben­e­fits and wages were reduced and unem­ploy­ment soared, stok­ing the pop­u­lar ire that Hitler har­nessed. Extrem­ists are gain­ing ground now as unem­ploy­ment in Greece pass­es the 20 per­cent mark after five years of reces­sion. The far-right Gold­en Dawn won 6.9 per­cent of the vote and 18 seats in the country’s most recent elec­tions. France’s anti-immi­grant, anti-euro Nation­al Front won two seats in par­lia­men­tary elec­tions June 17.

Weak Merg­ers

Cred­i­tanstalt in 1931, like Spain’s Bankia now, was cre­at­ed by merg­ers with lenders weak­ened by tox­ic loans and cap­i­tal short­falls. After Cred­i­tanstalt failed, the gov­ern­ment stepped in to prop it up, fatal­ly hurt­ing its own cred­it. A run on Austria’s bonds and the schilling ensued, accord­ing to Michael Bor­do, nation­al fel­low of the Hoover Insti­tu­tion on cam­pus of Stan­ford Uni­ver­si­ty in Palo Alto, Cal­i­for­nia.


Yes, the many lessons civ­i­liza­tion learned from the eco­nom­ic cat­a­stro­phes of the 1930’s that led to the rise of fas­cism — the same ones aggres­sive­ly unlearned over the past half a cen­tu­ry — are appar­ent­ly get­ting relearned. For instance, if you’re going to con­duct a major bailout of a sys­tem­i­cal­ly impor­tant bank, make sure it’s actu­al­ly big enough to get the job done. And if you’re going to do an inter­na­tion­al big bank bailout for a coun­try, don’t do it in such a man­ner that the bailout saves the bank but kills coun­try’s cred­it. Learn­ing from his­to­ry nev­er gets old

Spain’s bor­row­ing costs hit 12-year high
Rates on 12 to 18-month bonds top 5% as PM fails to per­suade euro­zone lead­ers at G20 that bailout is not nation­al debt

Giles Trem­lett in Madrid
guardian.co.uk, Tues­day 19 June 2012 10.55 EDT

Spain’s econ­o­my con­tin­ued to ride the bailout roller­coast­er on Tues­day as bor­row­ing costs remained at unsus­tain­ably high lev­els and the gov­ern­ment paid its high­est rate in a dozen years to raise mon­ey.

A €3bn (£2.4bn)bond issue proved, how­ev­er, that Spain could still bor­row on the mar­kets — even if inter­est rates on 12 to 18-month bonds have now risen to more than 5%.

Prime min­is­ter Mar­i­ano Rajoy, mean­while, report­ed­ly failed to per­suade euro­zone col­leagues that a bailout of up to €100bn for Span­ish banks should not be count­ed as nation­al debt — a move that would have eased grow­ing pres­sure for a full bailout of Spain.

“Con­nect­ing bank­ing risk and sov­er­eign risk has become very dam­ag­ing,” Rajoy told fel­low world lead­ers at the G20 meet­ing in Mex­i­co, accord­ing to Span­ish reporters who accom­pa­nied him.

Although oth­ers in Europe would also like to reduce the link between bank­ing risk and coun­try risk, the euro­zone finance min­is­ters who decide on bailouts were report­ed­ly against the idea. “The rules do not per­mit it,” one senior offi­cial told El País news­pa­per.

The €100bn, which is expect­ed to be chan­nelled through Spain’s bank restruc­tur­ing fund, will increase Spain’s nation­al debt by up to 15%.

Spain is expect­ed on Thurs­day to state the glob­al fig­ure of how much it will take from the €100bn cred­it line offered to its banks by the Euro­pean Union’s bailout fund. That deci­sion would be made after a first — and rapid — round of inde­pen­dent audits of Spain’s bank­ing sys­tem.

A deci­sion by the Bank of Spain to post­pone a sec­ond round of audits from late July until Sep­tem­ber did noth­ing to set­tle mar­ket nerves. Yields on Spain’s bench­mark 10-year bonds dropped slight­ly, but still stayed over the cru­cial 7% rate that many econ­o­mists con­sid­er unsus­tain­able.

Finance min­is­ter Luis de Guin­dos insist­ed that Spain did not deserve to be pay­ing such a high penal­ty, claim­ing that reforms would soon reduce the bud­get deficit and set growth going again. “The way mar­kets are penal­is­ing Spain today does not reflect the efforts we have made or the growth poten­tial of the econ­o­my,” he said. “Spain is a sol­vent coun­try and a coun­try which has a capac­i­ty to grow.”

Bud­get min­is­ter Cristóbal Mon­toro con­tin­ued to call for the Euro­pean Cen­tral Bank (ECB) to resume buy­ing Span­ish bonds in order to keep bor­row­ing costs down — and some ana­lysts saw ECB action as inevitable as fears over con­ta­gion in Italy grew.

But oth­ers thought it was too late to see off a full bailout of Spain’s entire econ­o­my. “It is inevitable,” said Harvin­der Sian, of RBS. “The mar­ket has made its state­ment. There has to be a change in the way the Euro­peans are attack­ing the cri­sis.”

Many ana­lysts now con­sid­er that the deci­sions which will shape the future of Spain are no longer in the hands of its own politi­cians. “The Span­ish gov­ern­ment is close to exhaust­ing its domes­tic pol­i­cy options, with the mar­kets increas­ing­ly demand­ing a game-chang­ing response from the EU/ECB to the lat­est phase of the cri­sis,” said Raj Badi­ani of IHS Glob­al Insight.


Ok, well, not ALL the lessons have been learned. But at least it appears that Banki­a’s bailout will be big enough. Per­haps that will help calm the mar­kets:

Spain: Audi­tors deter­mine bank bailout could cost as much as $78B in worst case sce­nario

By Asso­ci­at­ed Press, Pub­lished: June 21

MADRID — Spain’s trou­bled banks could need as much as €62 bil­lion ($78.6 bil­lion) in new cap­i­tal to pro­tect them­selves from eco­nom­ic shocks, accord­ing to inde­pen­dent audi­tors hired by the gov­ern­ment to assess the country’s strug­gling finan­cial sec­tor, offi­cials said Thurs­day.

The Span­ish gov­ern­ment will use the audi­tors’ report as the basis for their appli­ca­tion for a bank bailout loan from the 17 coun­tries that use the euro. With ten­sions ris­ing over the future of the euro­zone, Spain is expect­ed to sub­mit its spe­cif­ic request for out­side assis­tance no lat­er than Mon­day, said Jean-Claude Junck­er, who chairs meet­ings of zone’s finance min­is­ters.

“We invit­ed Spain to pur­sue this clear and ambi­tious strat­e­gy, which needs to be imple­ment­ed swift­ly and com­mu­ni­cat­ed ear­ly,” Junck­er said after Span­ish Econ­o­my Min­is­ter Luis de Guin­dos pre­sent­ed the audit results to the min­is­ters who are mem­bers of the so-called Eurogroup.

Deputy Bank of Spain Gov­er­nor Fer­nan­do Restoy not­ed that this worst-case sce­nario cit­ed by the audi­tors was far below the €100 bil­lion ($126.7 bil­lion) loan offered by the eurozone’s finance min­is­ters two weeks ago.

Spain’s bank­ing sec­tor is strug­gling under tox­ic loans and assets from the col­lapse of the country’s prop­er­ty mar­ket in 2008. Con­cerns that Spain’s econ­o­my is so weak that it could not afford the cost of prop­ping up its banks has sent its bor­row­ing costs soar­ing to lev­els not seen since it joined the Euro­pean sin­gle cur­ren­cy in 1999.


In the audi­tors’ stress test for the worst-case eco­nom­ic sce­nario — a fall in gross domes­tic prod­uct of 6.5 per­cent over the peri­od 2012–2014 — most of the banks were deemed to be in a “com­fort­able” posi­tion, Restoy said.

“We’re not talk­ing about the imper­a­tive cap­i­tal neces­si­ties of the banks. We’re not talk­ing about some­one urgent­ly need­ing such and such an amount of cap­i­tal to deal with their oblig­a­tions,” said Restoy. “We’re talk­ing about the cap­i­tal that would be need­ed if we were to see a sit­u­a­tion of extreme ten­sion which is very unlike­ly to come about.”

“We should keep in mind we are not talk­ing about how much cap­i­tal an enti­ty needs to sur­vive. We’re talk­ing about how much cap­i­tal an enti­ty will need to con­front a sit­u­a­tion of extreme stress,” he added.

Euro­zone finance min­is­ters offered Spain a bailout loan of up to €100 bil­lion on June 9. The terms of the loan — for which Spain, rather than banks, will ulti­mate­ly be respon­si­ble for — still have to be nego­ti­at­ed.


The release of the audits prob­a­bly won’t erase mar­ket ner­vous­ness about Spain, said Mark Miller, an ana­lyst with Cap­i­tal Eco­nom­ics in Lon­don.

“At face val­ue it looks as if there is a rea­son­able safe­ty mar­gin giv­en that up to €100 bil­lion is poten­tial­ly avail­able,” he said. “Hav­ing said that, the extent of the eco­nom­ic sit­u­a­tion in Spain could even dete­ri­o­rate beyond what is being described as an adverse sce­nario.”


Well there’s some good news for a change. Sure, the $125 bil­lion ‘bailout’ of Spain’s banks will be added to Spain’s nation­al debt, poten­tial­ly dri­ving the coun­try into insol­ven­cy. But at least that entire $125 bil­lion prob­a­bly won’t be nec­es­sary. After all, the audi­tors con­clud­ed that only $78 bil­lion would be need­ed under a ‘worst case sce­nario’ of a 6.5% fall in GDP from 2012–2014. Spain’s econ­o­my shrank at an measly annu­al­ized rate of 1.2% in the fourth quar­ter of last year, so it will take some real­ly bad poli­cies or shocks if we’re going to see that ‘worst case sce­nario’ come to fruition. For instance, the imme­di­ate prob­lem fac­ing Spain is the record high inter­est rates it’s pay­ing in the debt mar­kets and the threat that it sim­ply won’t be able to stay sol­vent. So any­thing that active­ly encour­ages ‘the mar­ket’ to expect Spain to default could poten­tial­ly trig­ger the cat­a­clysmic Span­ish default sce­nario might trig­ger a ‘worst case sce­nario’. You know, some­thing like Ger­many’s Chan­cel­lor send­ing sig­nals that the euro­zone’s ‘core’ (which is pret­ty much just Ger­many at this point) isn’t seri­ous about address­ing Spain’s imme­di­ate debt cri­sis and is ok with a default or even the unrav­el­ing of the euro­zone. And we all know that could nev­er hap­pen:

Finan­cial Times
June 22, 2012 7:07 pm
Euro­zone rift deep­ens over debt cri­sis

By Guy Din­more in Rome and Peter Spiegel in Lux­em­bourg

Lead­ers of the eurozone’s four largest economies pledged on Fri­day to back a €130bn growth pack­age and defend the com­mon cur­ren­cy but remained divid­ed over the cred­it cri­sis as Ger­many con­tin­ued to resist pro­pos­als to issue com­mon debt and use bailout funds to sta­bilise finan­cial mar­kets.

The meet­ing in Rome was intend­ed to demon­strate a com­ing togeth­er ahead of next week’s EU sum­mit, but end­ed in dis­agree­ment over the need for short-term inter­ven­tion in the mar­kets and how to achieve greater polit­i­cal and finan­cial union.

At a joint press con­fer­ence Angela Merkel, Ger­man chan­cel­lor, declined to endorse affir­ma­tions by all three of her co-heads of gov­ern­ment — Italy’s Mario Mon­ti, François Hol­lande of France and Spain’s Mar­i­ano Rajoy — of the need to use the eurozone’s bailout funds to “sta­bilise finan­cial mar­kets”.

“We need to use all exist­ing mech­a­nisms to sta­bilise mar­kets, to give con­fi­dence, to fight spec­u­la­tion,” Mr Hol­lande said. “This would be an impor­tant step,” he added, endors­ing a pro­pos­al by Mr Mon­ti that the bailout fund should be used to buy the debt of “vir­tu­ous” coun­tries on the open mar­ket.

Instead, Ms Merkel said Europe need­ed to respect exist­ing rules and had to work towards com­mon struc­tures to reg­u­late the euro rather than have poli­cies ema­nat­ing from “17 par­lia­ments each with nation­al sov­er­eign­ty”.

“If I am giv­ing mon­ey to Span­ish banks ... I am the Ger­man chan­cel­lor but I can­not say what these banks can do,” she said.


Yes, there’s no way we’re going to see a repeat of the 1930’s glob­al finan­cial pan­ic. The his­tor­i­cal lessons are just too com­pelling for a repeat of those mis­takes:

April 20, 2011, 11:01PM EST
Bloomberg Busi­ness­week
Lessons from the Cred­it-Anstalt Col­lapse
Europe is in far bet­ter shape than when the Aus­tri­an bank failed in 1931, but the risk of a domi­no effect remains

By Peter Coy

In May 1931, a Vien­nese bank named Cred­it-Anstalt failed. Found­ed by the famous Roth­schild bank­ing fam­i­ly in 1855, Cred­it-Anstalt was one of the most impor­tant finan­cial insti­tu­tions of the Aus­tro-Hun­gar­i­an Empire, and its fail­ure came as a shock because it was con­sid­ered impreg­nable. The bank not only made loans; it acquired own­er­ship stakes in all kinds of com­pa­nies through­out the sprawl­ing empire, from sug­ar pro­duc­ers to the new auto­mo­bile mak­ers. Its head­quar­ters city, Vien­na, was a place of wealth and splen­dor, famous for its opera, balls, choco­late, psy­cho­analy­sis, and the extrav­a­gant archi­tec­ture of the Ringstrasse. The fall of Cred­it-Anstalt-and the domi­noes it helped top­ple across Con­ti­nen­tal Europe and the con­fi­dence it shred­ded as far away as the U.S.-wasn’t just the fail­ure of a bank: It was a fail­ure of civ­i­liza­tion.

Once again, Europe’s bank­ing sys­tem, and by exten­sion its social fab­ric, is threat­ened by bad loans. What had been slow-mov­ing fis­cal dis­as­ters in Greece, Ire­land, and Por­tu­gal have gath­ered speed in recent weeks despite res­cue pack­ages designed to calm mar­kets and pre­vent spread­ing the con­ta­gion to Spain, Bel­gium, and beyond. Por­tu­gal’s 10-year bor­row­ing costs hit a record 9.3 per­cent on Apr. 20, up from 7.4 per­cent just a month before, even as author­i­ties met in Lis­bon on an €80 bil­lion ($116 bil­lion) financ­ing pack­age. The high­er that cred­i­tors dri­ve up inter­est rates, the more unaf­ford­able the debt becomes-cre­at­ing the con­di­tions for the very fail­ure they fear. “All of the res­cue pack­ages don’t real­ly ensure that we can escape this adverse feed­back loop that these coun­tries are being trapped in,” Christoph Rieger, head of fixed-income strat­e­gy at Frank­furt-based Com­merzbank (CRZBY), told Bloomberg Tele­vi­sion on Apr. 19.


The tip­ping point came ear­ly in 1931 when a bank direc­tor named Zoltan Haj­du refused to sign off on Cred­it-Anstalt’s books with­out a com­pre­hen­sive reeval­u­a­tion of the bank’s assets. The bank revealed loss­es that it kept revis­ing upward as the weeks passed. Depos­i­tors with­drew funds. The Aus­tri­an gov­ern­ment stepped in to guar­an­tee all the bank’s deposits and oth­er lia­bil­i­ties-but that only brought the gov­ern­men­t’s own cred­it­wor­thi­ness into ques­tion. “In today’s lan­guage,” says Schu­bert, “Cred­it-Anstalt was too big to fail, but too big to save.”

Harold James, a British his­to­ri­an at Prince­ton Uni­ver­si­ty, described what hap­pened next in his 2001 book The End of Glob­al­iza­tion: Lessons from the Great Depres­sion. “The Vien­nese pan­ic brought down banks in Ams­ter­dam and War­saw. In June and July the scare spread to Ger­many, and from there imme­di­ate­ly to Latvia, Turkey, and Egypt (and with­in a few months to Eng­land and the U.S.).” Aus­tria got an under­sized loan from the Bank for Inter­na­tion­al Set­tle­ments and some help from the British branch of the Roth­schild fam­i­ly. But French politi­cians reject­ed an inter­na­tion­al res­cue with­out polit­i­cal con­ces­sions from Ger­many that weren’t forth­com­ing.

Thus the fail­ure of Cred­it-Anstalt accel­er­at­ed the finan­cial pan­ic that turned a reces­sion into a glob­al depres­sion. Eco­nom­ic dis­tress in Aus­tria con­tributed to the out­break of vio­lent con­flict between social­ists and fas­cists in 1934. Jews became scape­goats. In 1938, Nazi Ger­many occu­pied Aus­tria, and Adolf Hitler was received by ador­ing crowds in Vien­na. Albeit indi­rect­ly, the fail­ure of Cred­it-Anstalt helped clear the path for some of the dark­est events of the 20th cen­tu­ry.


The scari­est thing about the Cred­it-Anstalt default is that it occurred in a small, periph­er­al coun­try, just as today’s worst prob­lems are con­cen­trat­ed so far in Greece, Ire­land, and Por­tu­gal, which com­bined make up just 5 per­cent of the 27-nation Euro­pean Union’s gross domes­tic prod­uct. “Aus­tria is a tiny, tiny lit­tle place, and you would­n’t imag­ine it could set off a chain of domi­no reac­tions. But it did. I do see exact­ly that poten­tial now,” says James.

For that rea­son, Ger­man econ­o­mist Hol­ger Schmied­ing says Europe should do every­thing in its pow­er to pre­vent or at least delay defaults by nation­al gov­ern­ments. Schmied­ing, chief econ­o­mist of the Ger­man pri­vate bank Joh. Beren­berg Gossler, says keep­ing Greece and oth­ers from default­ing for as long as pos­si­ble-if not for­ev­er-will give banks in Ger­many, France, and oth­er nations that have lent to them the time they need to rebuild their cap­i­tal so they can with­stand the hit from loan loss­es. The Bank for Inter­na­tion­al Set­tle­ments says that as of last Sep­tem­ber, Ger­man banks had over €220 bil­lion worth of expo­sure to Greece, Ire­land, and Por­tu­gal, and French banks had over €150 bil­lion worth.

For all of Europe’s bick­er­ing over aid to Greece, Ire­land, and Por­tu­gal, the Con­ti­nent is more unit­ed and finan­cial­ly sta­ble now than in the inter­war peri­od. “Unlike Aus­tria in 1931, the euro zone has the resources to bail out the threat­ened banks with­out real­ly trig­ger­ing a full-blown debt cri­sis,” says Michael D. Bor­do, a Rut­gers Uni­ver­si­ty eco­nom­ic his­to­ri­an. The more Europe takes the lessons of Cred­it-Anstalt to heart, the less like­ly it is to make the same mis­takes again. The intro­duc­tion of Schu­bert’s book begins with the famous line of George San­tayana, the Span­ish philoso­pher, who said, “Those who can­not remem­ber the past are con­demned to repeat it.” J. Brad­ford DeLong, an econ­o­mist at the Uni­ver­si­ty of Cal­i­for­nia at Berke­ley, thinks Europe has absorbed San­tayana’s mes­sage-to an extent. “Because we remem­ber the Cred­it-Anstalt, we will not make that mis­take,” DeLong says. “We will make dif­fer­ent ones.”

Lessons learned.


14 comments for “History Teaches Us that We Learn Nothing from History, Part 2: It’s 1931 all over again”

  1. Well this is kind of nice to see: The new ‘pro-bailout’ gov­ern­ing coali­tion in Greece appears to be famil­iar­iz­ing itself with now-taboo basic eco­nom­ic con­cepts. Con­cepts like, for instance, usury:

    Greece Seeks at Least Two-Year Exten­sion to Bailout Goals
    By Maria Petrakis and Tom Stoukas — Jun 23, 2012 7:53 AM CT

    Greece will push its cred­i­tors to extend fis­cal dead­lines under the country’s bailout pro­gram by at least two years, accord­ing to a pol­i­cy doc­u­ment drawn up by the three par­ties in the country’s gov­ern­ing coali­tion.

    New Democ­ra­cy, Pasok and the Demo­c­ra­t­ic Left agree that plans to cut 150,000 pub­lic-sec­tor jobs should be scrapped, the doc­u­ment, received by e‑mail from the Greek gov­ern­ment today, showed. Pro­pos­als also include reduc­ing sales tax for cafes, bars, restau­rants and the agri­cul­tur­al indus­try, and increas­ing the thresh­old for pay­ing income tax.

    The gov­ern­ment affirmed its com­mit­ment for the need to reduce deficits, con­trol debt and imple­ment the struc­tur­al reforms the coun­try needs, the pol­i­cy state­ment showed.

    Prime Min­is­ter Anto­nis Sama­ras held his first Cab­i­net meet­ing on June 21 after his New Democ­ra­cy par­ty won Greece’s gen­er­al elec­tion on June 17 on pledges to rene­go­ti­ate parts of the 130 bil­lion-euro ($163 bil­lion) sec­ond bailout from the Euro­pean Union and Inter­na­tion­al Mon­e­tary Fund while keep­ing Greece in the euro. Sama­ras joined forces with Pasok, which fin­ished third on June 17, and sixth-placed Demo­c­ra­t­ic Left.

    Greece has slipped behind bud­get-cut­ting tar­gets that euro- area nations and the IMF imposed in exchange for 240 bil­lion euros in aid pledges in the past two years.


    The part­ners sup­port state-asset sales, a key plank of plans to reduce Greece’s debt, and will nego­ti­ate with cred­i­tors that some of them, like the nation­al rail com­pa­ny OSE, be car­ried out through pub­lic-pri­vate part­ner­ships, accord­ing to the doc­u­ment.

    The Greek state is seek­ing to raise 50 bil­lion euros from state assets, half of which are real estate, by 2020 to meet con­di­tions of its bailout agree­ment. The process was halt­ed after the country’s first elec­tion on May 6 pro­duced no gov­ern­ment.

    So the state-asset sales are still on track, but at least there appears to be some sort of push back against puni­tive poli­cies that are lit­tle more than ‘feel good’ mea­sures designed to pla­cate a sense that ‘those lazy Greeks need to be punished’!(amongst oth­er things) Not that a mod­er­ate pull­back in these aus­ter­i­ty demands will make much of a dif­fer­ence at this point, but still. Baby-steps in the right direc­tion are still bet­ter than long strides down the path to obliv­ion.

    And, of course, there’s always the pos­si­bil­i­ty that these pleas won’t make a bit dif­fer­ence:

    Schaeu­ble says “no” to throw­ing mon­ey at euro cri­sis

    BERLIN | Sun Jun 24, 2012 1:53pm EDT

    (Reuters) — Throw­ing more mon­ey at the euro­zone debt cri­sis will not solve the prob­lem because the trou­bles have to be resolved at the cause, Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble said on Sun­day.

    Schaeu­ble also said in an inter­view with Ger­man TV net­work ZDF that Greece has not done enough to ful­fill promis­es it made in exchange for bailout funds. Schaeu­ble also crit­i­cized the recent inter­ven­tions by U.S. Pres­i­dent Barack Oba­ma.

    “We have to fight the caus­es,” Schaeu­ble said. “Any­one who believes that mon­ey alone or bailouts or any oth­er solu­tions, or mon­e­tary pol­i­cy at the ECB — that will nev­er resolve the prob­lem. The caus­es have to be resolved.”

    Schaeu­ble added: “It’s not going to help to take mon­ey to it. The deci­sive thing is to cred­i­bly fight the caus­es of the cri­sis. It’s suc­ceed­ing very well in Ire­land and Por­tu­gal. It’s not suc­ceed­ing very well in Greece. But it must suc­ceed in Greece. There’s no oth­er way to do this.”

    Schaeu­ble said Greece has clear­ly not done enough.

    “Greece has­n’t tried enough so far, that has to be said quite clear­ly,” Schaeu­ble said. “That has to be said with respect for the domes­tic polit­i­cal dif­fi­cul­ties. But no one on earth who has fol­lowed this issue would think that Greece has ful­filled what it has promised.

    “Italy and Spain are dif­fer­ent on this ques­tion,” he added. “They’re mak­ing great reform efforts.”


    Yes Greece, why can’t you sim­ply address the core caus­es of your eco­nom­ic funk: inher­ent cur­ren­cy union struc­tur­al flaws every­one was warned about and the dan­gers of an unproven ‘inter­nal deval­u­a­tion’ scheme Greek sloth. If you final­ly address this ’cause’, you’ll get a cook­ie, just like one Spain was giv­en.

    Real­ly Greece, why can’t you just be more like Ire­land?

    Posted by Pterrafractyl | June 24, 2012, 4:17 pm
  2. As Krug­man points out, the par­al­lels between today and 1931 include trans-Atlantic pol­i­cy fail­ures:

    Op-Ed Colum­nist
    The Great Abdi­ca­tion
    Pub­lished: June 24, 2012

    Among econ­o­mists who know their his­to­ry, the mere men­tion of cer­tain years evokes shiv­ers. For exam­ple, three years ago Christi­na Romer, then the head of Pres­i­dent Obama’s Coun­cil of Eco­nom­ic Advis­ers, warned politi­cians not to re-enact 1937 — the year F.D.R. shift­ed, far too soon, from fis­cal stim­u­lus to aus­ter­i­ty, plung­ing the recov­er­ing econ­o­my back into reces­sion. Unfor­tu­nate­ly, this advice was ignored.

    But now I’m hear­ing more and more about an even more fate­ful year. Sud­den­ly nor­mal­ly calm econ­o­mists are talk­ing about 1931, the year every­thing fell apart.


    And it’s hap­pen­ing again, both in Europe and in Amer­i­ca.


    Yet let’s not ridicule the Euro­peans, since many of our own pol­i­cy mak­ers are act­ing just as irre­spon­si­bly. And I’m not just talk­ing about Con­gres­sion­al Repub­li­cans, who often seem as if they are delib­er­ate­ly try­ing to sab­o­tage the econ­o­my.

    Let’s talk instead about the Fed­er­al Reserve. The Fed has a so-called dual man­date: it’s sup­posed to seek both price sta­bil­i­ty and full employ­ment. And last week the Fed released its lat­est set of eco­nom­ic pro­jec­tions, show­ing that it expects to fail on both parts of its man­date, with infla­tion below tar­get and unem­ploy­ment far above tar­get for years to come.

    This is a ter­ri­ble prospect, and the Fed knows it. Ben Bernanke, the Fed’s chair­man, has warned in par­tic­u­lar about the dam­age being done to Amer­i­ca by the unprece­dent­ed lev­el of long-term unem­ploy­ment.

    So what does the Fed pro­pose doing about the sit­u­a­tion? Almost noth­ing. True, last week the Fed announced some actions that would sup­pos­ed­ly boost the econ­o­my. But I think it’s fair to say that every­one at all famil­iar with the sit­u­a­tion regards these actions as pathet­i­cal­ly inad­e­quate — the bare min­i­mum the Fed could do to deflect accu­sa­tions that it is doing noth­ing at all.

    Why won’t the Fed act? My guess is that it’s intim­i­dat­ed by those Con­gres­sion­al Repub­li­cans, that’s it’s afraid to do any­thing that might be seen as pro­vid­ing polit­i­cal aid to Pres­i­dent Oba­ma, that is, any­thing that might help the econ­o­my. Maybe there’s some oth­er expla­na­tion, but the fact is that the Fed, like the Euro­pean Cen­tral Bank, like the U.S. Con­gress, like the gov­ern­ment of Ger­many, has decid­ed that avoid­ing eco­nom­ic dis­as­ter is some­body else’s respon­si­bil­i­ty.

    None of this should be hap­pen­ing. As in 1931, West­ern nations have the resources they need to avoid cat­a­stro­phe, and indeed to restore pros­per­i­ty — and we have the added advan­tage of know­ing much more than our great-grand­par­ents did about how depres­sions hap­pen and how to end them. But knowl­edge and resources do no good if those who pos­sess them refuse to use them.

    And that’s what seems to be hap­pen­ing. The fun­da­men­tals of the world econ­o­my aren’t, in them­selves, all that scary; it’s the almost uni­ver­sal abdi­ca­tion of respon­si­bil­i­ty that fills me, and many oth­er econ­o­mists, with a grow­ing sense of dread.

    Posted by Pterrafractyl | June 24, 2012, 7:25 pm
  3. Rus­sia and Chi­na: You’re friend­ly neigh­bor­hood lenders you real­ly hope approves your appli­ca­tion for a loan because if they turn you down it’s loan shark time:

    NY Times
    Cyprus Becomes 5th E.U. Mem­ber to Seek Res­cue
    Pub­lished: June 25, 201

    PARIS — Cyprus on Mon­day said it was for­mal­ly request­ing a bailout from the Euro­pean Union in a bid to bol­ster its strug­gling banks, mak­ing it the fifth euro zone coun­try to request a res­cue.

    The announce­ment came after weeks of con­cern that the cri­sis in Greece and a poten­tial Greek exit from the euro could bring down the econ­o­my in the small island nation, whose banks are heav­i­ly exposed to Greece.

    The slim vic­to­ry of a pro-euro par­ty in recent Greek elec­tions helped to tem­porar­i­ly alle­vi­ate that con­cern, even as econ­o­mists said Cyprus could need as much as €10 bil­lion, or $12.5 bil­lion, to shore up its ail­ing banks and cash-strapped pub­lic sec­tor.


    Cyprus needs to find €1.8 bil­lion, or about 10 per­cent of its gross domes­tic prod­uct, to recap­i­tal­ize its sec­ond-largest bank, Cyprus Pop­u­lar Bank, by a June 30 dead­line, accord­ing to Cypri­ot offi­cials. In total, Cypri­ot banks have out­stand­ing loans or oth­er mon­ey at risk total­ing €152 bil­lion, or eight times the size of the country’s gross domes­tic prod­uct, accord­ing to the Inter­na­tion­al Mon­e­tary Fund. Such expo­sure has made the coun­try vul­ner­a­ble to finan­cial upheaval.

    Cyprus has asked the Euro­pean Union not to impose demands for harsh aus­ter­i­ty and to focus the res­cue pack­age on the country’s banks, Cypri­ot offi­cials say. The coun­try has been so deter­mined to avoid Dra­con­ian caveats — includ­ing calls from some coun­tries that it sus­pend its 10 per­cent cor­po­rate tax rate — that it had recent­ly sought aid from Rus­sia and Chi­na.

    Michalis Sar­ris, a for­mer World Bank econ­o­mist and finance min­is­ter who is now chair­man of Cyprus Pop­u­lar Bank, said Mon­day that Cyprus was in talks with Chi­na over a pos­si­ble loan. Chi­na was poten­tial­ly inter­est­ed in a stake in a Cypri­ot bank, in return for a toe­hold in the country’s bur­geon­ing gas indus­try, offi­cials said.

    But with time run­ning out, offi­cials said Cyprus, which has been shut out of inter­na­tion­al mar­kets for more than a year, had lit­tle choice but to request aid from the Euro­pean Finan­cial Sta­bil­i­ty Facil­i­ty.

    Mr. Sar­ris said that exten­sive expo­sure of Cypri­ot banks to Greece and the country’s exclu­sion from inter­na­tion­al finan­cial mar­kets had made ask­ing for a bailout a mat­ter of urgency.

    But he also said that Cyprus’s prob­lems paled in com­par­i­son with Greece and that the country’s small size and its lack of rel­a­tive profli­ga­cy com­pared with Greece made it bet­ter posi­tioned to weath­er the cri­sis.

    “The sit­u­a­tion here is dif­fer­ent than in Greece,” he said. “What we are look­ing at is a rel­a­tive­ly mild adjust­ment that won’t inflict too much pain.”

    While Cyprus’s prob­lems threat­ened to add to the finan­cial insta­bil­i­ty in Europe, more con­cern­ing for offi­cials and investors is the fear that Italy, the third-largest econ­o­my in the euro zone, after Ger­many and France, will itself end up need­ing help.

    Cypri­ot offi­cials said Mon­day that they would con­tin­ue to seek loans from Rus­sia and Chi­na to but­tress poten­tial E.U. finan­cial sup­port. Cyprus last year secured a €2.5 bil­lion loan from Rus­sia at a below-mar­ket rate of 4.5 per­cent to cov­er its refi­nanc­ing needs for this year.

    Over the week­end, the Cypri­ot pres­i­dent, Demetris Christofias, the only com­mu­nist leader in the Euro­pean Union, railed against the 27-mem­ber bloc, not­ing in an inter­view with To Vima, a Greek news­pa­per, that the Euro­pean Com­mis­sion, the Euro­pean Cen­tral Bank and the Inter­na­tion­al Mon­e­tary Fund had oper­at­ed like a “colo­nial force” by forc­ing aus­ter­i­ty mea­sures and unbri­dled free-mar­ket poli­cies on bailed-out coun­tries.

    But on Mon­day, as the rat­ings agency Fitch down­grad­ed Cyprus debt to “junk” sta­tus, prompt­ed by the amount of res­cue mon­ey that would be need­ed to bail out its banks, eco­nom­ic neces­si­ty appeared to trump all oth­er con­sid­er­a­tions.


    Posted by Pterrafractyl | June 25, 2012, 7:37 pm
  4. Alas, Krug­man still holds him­self with­in the main­stream of the last cen­tu­ry of eco­nom­ic prac­tice, even though he lob­bies for a kinder, gen­tler Key­ne­sian­ism. The con­cept that an ongo­ing, ever­grow­ing and per­pet­u­al stream of pub­lic debt is a valid way to finance gov­ern­ments is a fraud and against com­mon sense. It is almost equiv­a­lent to an indi­vid­ual who is forced to bor­row ever-increas­ing amounts to sup­ple­ment his income from real pro­duc­tion, while his lender is free to change terms and inter­est rates on the fly. At some point the debt bur­den will cut into his sub­sis­tence needs and his real pro­duc­tiv­i­ty will begin to fall. At this point a smart lender would ease the debt squeeze because he knows that the max­i­mum appro­pri­a­tion of wealth involves the vic­tim still func­tion­ing and pro­duc­ing.

    That upper lim­it on theft from an indi­vid­ual does­n’t apply as strict­ly to state debt because the vic­tim ( the pop­u­lace as a whole ) is vir­tu­al­ly immor­tal and can be squeezed to the point of gen­er­al social break­down. Indi­vid­ual death and suf­fer­ing is not rel­e­vant. This death camp style of eco­nom­ics only requires a nev­er end­ing stream of labor­ers. ( If the Nazis had won WW2 and mur­dered the last Jew, the con­cen­tra­tion camps would have kept going with a sup­ply of Slavs, Africans, etc. )

    Eas­ing the debt bur­den of these coun­tries involves lenders vol­un­tar­i­ly for­go­ing some por­tion of their income stream in order to pre­serve the sys­tem as a whole. It will not be an act of kind­ness. The ongo­ing nego­ti­a­tions are about
    who will not get paid and how much. The pub­lic can’t win, since any work­able solu­tion only means that the lend­ing class is func­tion­ing as an aligned body, tem­porar­i­ly ‘sac­ri­fic­ing’ near-term indi­vid­ual prof­it for the sake of future prof­it.

    With­in the log­ic of this insane sys­tem, cur­ren­cy infla­tion or quan­ti­ta­tive eas­ing could be used to effec­tive­ly erase a por­tion of the debt of states, but that solu­tion would unhap­pi­ly affect oth­er types of debt as well, less­en­ing the flow of wealth from oth­er sources and expos­ing the bizarre mechan­ics of the over­all sys­tem.

    Unfor­tu­nate­ly, the plan­et is entrapped in the machine because it is the cur­rent pri­ma­ry basis for real pro­duc­tion and social order, as crip­pled as both those are. Krug­man is advis­ing the finan­cial elites to tem­porar­i­ly coop­er­ate to save the whole plan­e­tary struc­ture of debt. If he went as far as to ques­tion the moral valid­i­ty of that struc­ture, he would be expelled from the main­stream of econ­o­mists who can get space in the New York Times.

    Posted by Dwight | June 26, 2012, 6:12 am
  5. @Dwight: I just tuned into the Thom Hart­mann show today and the top­ic at hand is “what is the pur­pose of an econ­o­my?” as a meta-ques­tion. It’s a vital ques­tion because we def­i­nite­ly have to rethink how we struc­ture our economies, fast, now that human­i­ty and the bios­phere are fac­ing the prospect of hit­ting hard phys­i­cal walls. One of the rea­sons I find Key­ne­sian­ism so impor­tant nowa­days is sim­ply because it inject­ed a whole slew of new ideas into con­ver­sa­tion that just weren’t there before in the days of “clas­si­cal” eco­nom­ics. While I can’t speak for Krug­man, I’d imag­ine that he takes the “we’ve learned a lot about how economies work but we’re still learn­ing” approach, which is fun­da­men­tal­ly dif­fer­ent from the “there can be no oth­er mod­el, this is it folks” men­tal­i­ty ingrained in clas­si­cal econ. At least that’s how clas­si­cal econ seems to be applied...like a reli­gion with unchal­lenge­able dog­ma. Key­ne­sian­ism rep­re­sents a sort of eco­nom­ic Enlightenment...it’s not the end all and be all of eco­nom­ics but it’s an exam­ple of an attempt to rethink our assump­tions. It’s not alone in that (e.g. Marx and Engles had some inter­est­ing insights). I just find Key­ne­sian­ism to be an invalu­able addi­tion to the ideas that might guide the cre­ation of mar­ket-based economies.

    I also don’t think gov­ern­ment debt-based spend­ing dur­ing eco­nom­ic down­turns is nec­es­sar­i­ly a path to even­tu­al debt-doom (although it could be, espe­cial­ly when it’s all blown on bank bailouts). The jus­ti­fi­ca­tion for deficit spend­ing can be sort of sum­ma­rized by “you got to spend mon­ey to make mon­ey”, “oppor­tu­ni­ty cost”, and “get­ting more from less using bet­ter technology/design/methods/idea/whatever”: Three con­cepts that the busi­ness com­mu­ni­ty seems to under­stand when it comes to pri­vate enter­pris­es but can’t quite accept when it comes to a soci­ety at large. If the econ­o­my is down and peo­ple are out of work, we can just let them lay idle and erode their skills OR we could hire them to do some­thing the needs to be done, like edu­cat­ing the them­selves and/or the next gen­er­a­tion and just fig­ure out how we can get more out of the dwin­dling resources we have, how we can craft bet­ter rules of play (reg­u­la­tions). That’s a REAL dynam­ic econ­o­my, unlike the “dereg­u­late for dynamism and free-mar­kets for­ev­er” garbage we’re fed. Under our cur­rent mod­el, and in a col­laps­ing world, get­ting “more for less” is now large­ly con­strained to “more prof­it and less costs via more pover­ty for more peo­ple”.

    The oth­er real­ly valu­able con­cept we need to remem­ber from Keynes is the idea that we have find new ways to derive enjoy­ment in life while using less AND work­ing less. The 15 hour work­week he pre­dict­ed was pos­si­ble might be one of the few ways we can come to a new social con­tract where peo­ple for­go some mate­r­i­al wealth in return for more time...time we can spend try­ing to get more from less (just imag­ine the inven­tions that would arise if peo­ple had all that time on their hands). We need a new vir­tu­ous cycle fast. It won’t be Key­ne­sian­ism itself. It will be some­thing new. But there are a lot of ideas of his that we real­ly need to remem­ber right now.

    Posted by Pterrafractyl | June 26, 2012, 12:05 pm
  6. @pterrafractyl.. Most of that grant­ed and all not­ed, yes, there is noth­ing inher­ent­ly evil about gov­ern­ments bor­row­ing — it’s a tech­nol­o­gy and it’s neu­tral. From whom and for what are piv­otal ques­tions. Valid debt is that which caus­es over­all debt to be less, as a per­cent­age of pro­duc­tion. That’s it in a nut­shell. Plus, we can bor­row from our­selves as eas­i­ly as bor­row from pri­vate par­ties. The mon­ey comes from the debt in either case. A full employ­ment mod­el pays for itself in increased pro­duc­tion if cap­i­tal gain is suf­fi­cient­ly taxed and if the eco­nom­ic sur­plus is not wast­ed in war. And, hor­ror of hor­rors for the Ran­dites and con­trary to their pre­dic­tions, the gov­ern­ment can actu­al­ly shrink when peo­ple are pros­per­ous enough to not need the pover­ty ser­vices it pro­vides or the enforce­ment umbrel­la that grows up along­side pover­ty. That’s the vir­tu­ous cycle I think you mean.

    But none of that can hap­pen with­out good intent. Gen­er­al pros­per­i­ty has to be a con­scious tar­get with pol­i­cy direct­ed at that tar­get, not at sub­si­dies of financiers, hop­ing they’ll pass it down ( bor­row­ing from them in the first place is a sub­sidy ). We have enough his­to­ry and data to know that gen­er­al pros­per­i­ty is def­i­nite­ly not a nat­ur­al out­growth of the unreg­u­lat­ed mar­ket. If that’s rad­i­cal, call me Karl. We’re pret­ty much on the same page.

    Posted by Dwight | June 26, 2012, 4:13 pm
  7. @Dwight: Krug­man’s lat­est post is a direct answer to the ques­tion of “how does more debt help in the con­text of a debt-dri­ven deprepes­sion”. It’s use­ful in that it pro­vides an expla­na­tion from a pure­ly tech­ni­cal frame­work that oper­ates with­in the log­ic of the eco­nom­ic struc­ture as it exists todays (as opposed to our “if only civ­i­liza­tion was­n’t such a train­wreck” frame­works, heh). The gist of it being that, when debt bub­bles burst and an econ­o­my falls into a depres­sion, the “nat­ur­al” inter­est rates on sav­ings can become near zero or even neg­a­tive (neg­a­tive inter­est rates aren’t so bad in a defla­tion­ary or high risk environment....just ask the investors in Ger­man Bunds this year). And since get­ting neg­a­tive real inter­est rates is such a dif­fi­cult task for some­thing like the Fed­er­al Reserve to achieve, the sys­tem ends up with inap­pro­pri­ate­ly high real inter­est rates (even if the nom­i­nal rate is near zero) that encour­age poten­tial lenders to just keep pil­ing their mon­ey into bonds or oth­er “safe” assets instead of lend­ing to the bor­row­ers and allow­ing the econ­o­my to start turn­ing around. So pub­lic spend­ing becomes the pri­ma­ry tool that’s left because of this “zero bound­ary” quirk in inter­est rates and avail­able pol­i­cy tools.

    This whole sit­u­a­tion also reminds us of what you just brought up: why do we rely­ing on “pri­vate lenders” as the pri­ma­ry source of our mon­ey sup­ply (which is what the Fed is) instead of, say, a Nation­al Bank that does­n’t charge soci­ety for the ‘lux­u­ry’ of cred­it? If mon­ey was a social tool, we could turn on the nation­al mon­ey-spig­ot dur­ing defla­tion­ary times to get our­selves out of this mess. Instead, we have to wait for the pri­vate sec­tor to cre­ate that mon­ey by issu­ing cred­it in the form of a loan (i.e. the fun of frac­tion­al reserve bank­ing). And when they won’t (because of the zero-bound­ary effects that dis­in­cen­tivize lend­ing), we’re left with option of issu­ing pub­lic debt or just let­ting the econ­o­my fall into a tail­spin. Some­how issu­ing pub­lic cred­it from pub­lic insti­tu­tions is bad and pri­vate cred­it cre­ation is the only allow­able path for­ward.

    And yeah, there are rea­son­able con­cerns about out of con­trol pub­lic cred­it cre­ation under such a sys­tem (while pri­vate mega cred­it bub­bles like what we just expe­ri­enced, com­pli­ments of the banks, are just fine and “nat­ur­al” appar­ent­ly). But also as you point out, any sys­tem we make will be sub­ject to calami­ty if the peo­ple run­ning it aren’t doing so with good intent. Rot­ten elites will ruin any nation in any sys­tem, pub­lic or pri­vate.

    Posted by Pterrafractyl | June 26, 2012, 8:18 pm
  8. @Pterfractyl... In the west we hold to an ide­o­log­i­cal bias that mon­ey means some­thing and so we avoid neg­a­tive inter­est, unlike the Asians, who know it’s all a shell game. I wish Krug­man would dif­fer­en­ti­ate between invest­ment in the real econ­o­my and spec­u­la­tion. I believe his delever­ag­ing sce­nario relates to a shift of cap­i­tal from spec­u­la­tion to the real econ­o­my. Any invest­ment could be viewed as an admix­ture of the two but they are real­ly dis­tinct process­es, each with a dif­fer­ent result. As spec­u­la­tive invest­ment becomes a larg­er part of over­all invest­ment the real econ­o­my dete­ri­o­rates. Here’s my ama­teur take on neg­a­tive inter­est rates. Its a huge gen­er­al­iza­tion and leaves out many ele­ments, as I am wont to pro­duce.

    Neg­a­tive inter­est rates are large­ly a con­se­quence of spec­u­la­tion, elec­tron­ics and tax pol­i­cy. In the past the glob­al spec­u­la­tive mar­ket ( gam­bling with most­ly bor­rowed mon­ey ) was held to some lim­its by sim­ple time con­straints, reg­u­la­tion. pub­lic­i­ty and tax­es. It took time to com­plete a trans­ac­tion. The price rise caused by pur­chase ( not the pri­ma­ry rea­son to invest in a par­tic­u­lar thing but still a fac­tor ) could kick in and be seen by oth­ers who might sell, drop­ping the return of the spec­u­la­tor when he sold. Now a spec­u­la­tive buy and sell can be com­plet­ed before its spe­cif­ic effect on the mar­ket is evi­dent, the trade is untaxed and the lev­el­ing effects of the trade show up only lat­er for oth­ers to deal with. Pic­ture the prob­a­bly apoc­ryphal tale of May­er Roth­schild’s machi­na­tions with British bonds done a mil­lion times dai­ly with high-speed com­put­ers.

    As spec­u­la­tive return ris­es and becomes more depend­able, invest­ment in real pro­duc­tion suf­fers. In the abstract we’ve cre­at­ed a mar­ket where the mere act of buy­ing some­thing caus­es its price to rise and that price rise can be cap­tured in the ‘sell’ if the trans­ac­tion is fast enough and if tax­a­tion and trans­ac­tion fees don’t cut into the mar­gin. For all that to be pos­si­ble there has to some con­trol of infor­ma­tion flow, even if only a strate­gic delay. and there also must be a large seg­ment of investors not involved in high-speed spec­u­la­tion to absorb the loss­es from mil­lions of low-mar­gin trades. These ‘investors’ include the nom­i­nal­ly non-investor pub­lic who are invol­un­tary par­tic­pants. Con­se­quent­ly, there are recur­rent bub­bles every­where in every­thing, last­ing min­utes or years. It is an insid­er mar­ket based on bub­bles. Deriv­a­tives mul­ti­ply the prob­lem but aren’t the source.

    When the cen­tral bank to com­mer­cial bank rate goes very low or neg­a­tive it means that the antic­i­pat­ed rate of return on spec­u­la­tion is falling ( because of its over­all destruc­tive effects on the real econ­o­my ) and clos­ing in on the antic­i­pat­ed price infla­tion rate, mak­ing even spec­u­la­tion bare­ly prof­itable. This is when every­one sits on their assets and things grind to a halt. Pover­ty spreads, the cost of labor approach­es sub­sis­tence, caus­ing ris­ing return on invest­ment in the real econ­o­my, which can then can catch up to falling spec­u­la­tive return. The machine lurch­es for­ward, reluc­tant­ly.

    Satan cre­at­ed both women and the busi­ness cycle to plague us end­less­ly.

    Posted by Dwight | June 28, 2012, 7:22 am
  9. @Dwight: Speak­ing of neg­a­tive inter­est rates, the ECB has been active­ly con­sid­er­ing tak­ing the euro into the “twi­light zone” over the last cou­ple of days:

    Draghi May Enter Twi­light Zone Where Fed Fears to Tread
    By Jana Randow — Jun 27, 2012 6:41 AM CT

    Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi is con­tem­plat­ing tak­ing inter­est rates into a twi­light zone shunned by the Fed­er­al Reserve.

    While cut­ting ECB rates may boost con­fi­dence, stim­u­late lend­ing and fos­ter growth, it could also involve reduc­ing the bank’s deposit rate to zero or even low­er. Once an obsta­cle for pol­i­cy mak­ers because it risks hurt­ing the mon­ey mar­kets they’re try­ing to revive, cut­ting the deposit rate from 0.25 per­cent is no longer a taboo, two euro-area cen­tral bank offi­cials said on June 15.

    “The Euro­pean reces­sion is wors­en­ing, the ECB has to do more,” said Julian Cal­low, chief Euro­pean econ­o­mist at Bar­clays Cap­i­tal in Lon­don, who fore­casts rates will be cut at the ECB’s next pol­i­cy meet­ing on July 5. “A neg­a­tive deposit rate is some­thing they need to con­sid­er but tak­ing it to zero as a first step is more like­ly.”

    Should Draghi elect to cut the deposit rate to zero or low­er, he’ll be enter­ing ter­ri­to­ry few pol­i­cy mak­ers have dared to ven­ture. Sweden’s Riks­bank in July 2009 became the world’s first cen­tral bank to charge finan­cial insti­tu­tions for the mon­ey they deposit­ed with it overnight. The Fed reject­ed cut­ting its deposit rate from 0.25 per­cent last year. With Europe’s debt cri­sis damp­ing infla­tion pres­sures and curb­ing growth, the ECB may feel the ben­e­fits out­weigh the neg­a­tives.
    ‘Psy­cho­log­i­cal Effect’

    “A rate cut could have an impor­tant psy­cho­log­i­cal effect in the cur­rent envi­ron­ment,” said Christoph Kind, head of asset allo­ca­tion at Frank­furt Trust, which man­ages about $20 bil­lion. “Neg­a­tive inter­est rates aren’t an irra­tional con­cept. I’m not sure, though, whether in the case of the ECB it will have the desired effect.”

    The ECB uses three inter­est rates to steer bor­row­ing costs in finan­cial mar­kets. The main refi­nanc­ing rate deter­mines how much banks pay for ECB loans, while the deposit and mar­gin­al rates pro­vide a floor and ceil­ing for the inter­est banks charge each oth­er overnight.

    If the deposit rate was cut to zero or low­er, it would dis­cour­age banks from park­ing excess liq­uid­i­ty with the ECB overnight, poten­tial­ly prompt­ing them to lend the cash instead. Almost 800 bil­lion euros ($1 tril­lion) is being deposit­ed with the ECB each day.

    On the oth­er hand, a deposit rate cut could hurt banks’ prof­itabil­i­ty by low­er­ing mon­ey-mar­ket rates, poten­tial­ly ham­per­ing cred­it sup­ply to com­pa­nies and house­holds and reduc­ing banks’ incen­tive to lend to oth­er finan­cial insti­tu­tions.
    Mon­ey Mar­kets

    “It won’t help the prospect of a func­tion­ing mon­ey mar­ket because banks won’t be com­pen­sat­ed for the risk they’re tak­ing,” said Orlan­do Green, a fixed-income strate­gist at Cred­it Agri­cole Cor­po­rate & Invest­ment Bank in Lon­don. It would make more sense to low­er the bench­mark rate, thus reduc­ing the inter­est banks pay on ECB loans, and keep the deposit rate where it is, Green said.


    Twin Ben­e­fits

    The ECB has been exam­in­ing the pos­si­ble impact on mar­kets of a deposit rate cut, help­ing to ease pol­i­cy mak­ers’ con­cerns, accord­ing to a euro-area offi­cial who asked not to be named because the delib­er­a­tions are not pub­lic.

    Cal­low said low­er­ing the deposit rate would encour­age banks in fis­cal­ly-sound coun­tries like Ger­many, which are flush with excess cash, to lend to trou­bled banks on the euro-area periph­ery, which are depen­dent on ECB fund­ing.

    That would have the twin ben­e­fits of reduc­ing banks’ addic­tion to ECB fund­ing and shrink­ing excess liq­uid­i­ty in the sys­tem.

    “A deposit rate at zero will be of par­tic­u­lar sup­port to banks in south­ern Europe because it could help encour­age some flow of cred­it,” said Cal­low. “A neg­a­tive deposit rate can be dam­ag­ing for mon­ey mar­kets.”

    Neg­a­tive rates would destroy the busi­ness mod­el for mon­ey- mar­ket funds, which would face the prospect of pay­ing to invest, said Soci­ete Gen­erale econ­o­mist Klaus Baad­er.

    ‘Twi­light Zone’

    Euro­pean mon­ey-mar­ket funds totaled 1.1 tril­lion euros at the end of March, accord­ing data from Fitch Rat­ings Co.

    “But the ECB doesn’t set pol­i­cy to keep alive cer­tain parts of the finan­cial sec­tor,” he said. “Pol­i­cy mak­ers want to show that they haven’t exhaust­ed their options yet.”

    Anoth­er con­se­quence of an ECB deposit rate cut may be that some banks take advan­tage of a clause in the three-year loans allow­ing them to pay the mon­ey back after a year, which would reduce excess liq­uid­i­ty in the sys­tem.

    That could be the basis for a com­pro­mise between the ECB and the Bun­des­bank, whose Pres­i­dent Jens Wei­d­mann has repeat­ed­ly warned of the risks relat­ed to too-gen­er­ous liq­uid­i­ty pro­vi­sion, said Carsten Brzes­ki, senior econ­o­mist at ING Group in Brus­sels.

    “Reduc­ing excess liq­uid­i­ty with a rate cut should sound rather inter­est­ing for the Bun­des­bank,” he said. “Maybe that’s the twi­light zone where Draghi and Wei­d­mann will meet.”

    Great, so going neg­a­tive on the ECB’s overight rate will either encour­age the wealth­i­er banks to lend to the trou­bled insti­tu­tions (raise their lend­ing risk to make cash) OR turn the banks’ emer­gency ECB three-year loans back to the ECB two year’s ear­ly (pulling the out of the sys­tem). And the Bun­des­bank is said to be inter­est­ed “pay back early”-option. I won­der how this is going to go.

    It will be inter­est­ing to see what hap­pens if they go down this route. As the arti­cle indi­cates, the mon­ey-mar­kets are a key source of cred­it for busi­ness­es. But it’s also a key source of funds for mak­ing spec­u­la­tive finan­cial bets and cred­it cre­ation. Bor­row­ing at the low­est rate pos­si­ble and then invest­ing in some sort of riski­er debt is cred­it cre­ation dis­tilled and a basic part of bub­ble­nom­ic 101 and our econ­o­my. And mon­ey mar­kets are key to that...they set the floor on short term rates avail­able to investors So if the mon­ey mar­kets gets disrupted/starved there’s a lot of delever­ag­ing com­ing. Things could get tense in the world of lever­aged finance if the ECB does, indeed, enter the Twi­light Zone and the mon­ey-mar­kets con­tract. Park­ing assets at the ECB is gen­er­al­ly lim­it­ed to high­ly liq­uid assets (like trea­suries) and it’s using that asset as col­lat­er­al for cash for a day. For a small fee. In reverse, banks can lend cash to the cen­tral bank, tak­ing liq­uid­i­ty out of the sys­tem to get the small­est inter­est pos­si­ble. It’s how big banks stash cash under the matress.

    And when banks first turn their assets over to bor­row cash, then bor­row against that cash for more cash, and then lend that cash back the ECB, you get some­thing like what’s appar­ent­ly been going on since the ECB’s big tril­lion+ euro three-year lend­ing pro­gram got under­way. In March, the ECB lent out 530 bil­lion euros and saw its overnight deposits jump from 475.2 bil­lion euros on the to 776.9 bil­lion overnight. It’s still around there. So that’s quite a bit of cashthat could be pushed off of the side­lines if the overnight deposit rate goes neg­a­tives.

    Plus there’s last week’s tem­po­rary “loos­en­ing of col­lat­er­al restric­tions” rul­ing by the ECB. They’re accept­ng junk. Now banks can hand over home and auto loans with junk rat­ings (-BBB S&P). So if the ECB takes the deposit rate neg­a­tive, it sounds like assets (includ­ing junk) could still be swapped for cash but the incen­tive to take that cash and rein­vest in the ECB overnight funds would be mit­i­gat­ed. With a flood o sub­prime secu­ri­ties head­ing towards the ECB anoth­er overnight deposit surge could be in the cards. If that hap­pens the Twi­light-Zone of neg­a­tive rates could end up send­ing A LOT of cash scat­ter­ing out of the ECB.

    You have to won­der how long it took after the adop­tion of a ear­ly forms of mar­ket economies before ancient cul­tures devel­oped a word anal­o­gous to “a giant spec­u­la­tive clus­ter­fuck”. Just imag­ine what barter-bub­ble dynam­ics look like. Or even wierder, barter-mar­ket bub­ble dynam­ics. Fas­ci­nat­ing­ly, we might actu­al­ly get to see that last sce­nario, assum­ing things get out of whack in Volos. Let’s hope that does­n’t hap­pen:

    Greek Town Adopt­ing Sys­tem of ‘Bar­ter­ing on Steroids’
    By Clark Boyd · June 14, 2012

    Buy­ers and sell­ers gath­er in a swel­ter­ing, pre­vi­ous­ly aban­doned build­ing in the Greek city of Volos, some 200 miles north of Athens. There’s a bit of every­thing avail­able here — books, eggs, clothes, kids’ toys, and even an old fax machine.

    But there isn’t a euro in sight. On the eve of a vote which may deter­mine whether Greece stays in the euro zone, these Greeks have moved beyond the euro, at least here. This mar­ket is the brain­child of a net­work of peo­ple who have chucked the euro in favor of the TEM — the Greek short­hand for “Alter­na­tive Local Cur­ren­cy.”

    “In the net­work, peo­ple can trade their goods and ser­vices. They don’t need mon­ey for that. They just need time and the desire to do it,” said Chris­tos Papaioan­nou, one of the network’s founders. It’s kind of like bar­ter­ing on steroids, he added.

    “We can see it as exchang­ing favors, if I do a ser­vice for you, then you owe me a favour, and I can use that favour to get some ser­vice from some­one else. So, we don’t have to exchange direct­ly, I can get it from some third per­son.”

    Let’s say some­one offers a hair­cut. The net­work deter­mines that’s worth 10 cred­its. (To make it eas­i­er to set prices, one TEM is val­ued at one euro.) The hair­cut­ter can then spend those cred­its on prod­ucts at the mar­ket, or on ser­vices offered by some­one else.

    To be clear, there is no real “cur­ren­cy” that changes hands — no scrip. Instead, cred­its are tracked, goods and ser­vices are list­ed, offered and accept­ed, through an open-source com­put­er pro­gram designed for this kind of “com­mu­ni­ty bank­ing.”

    The orig­i­nal idea for the net­work pre­dates the eco­nom­ic cri­sis, said Papaioan­nou, adding it’s about com­ing up with dif­fer­ent ways for peo­ple to inter­act eco­nom­i­cal­ly, so “that peo­ple do things togeth­er, and take things in their own hands, basi­cal­ly.”

    It’s an idea that appeals to Euripi­des Siouras, who joined the TEM net­work in Decem­ber 2010. “I thought that the exist­ing eco­nom­ic sys­tem was some­thing like a war. It wasn’t made for the cit­i­zens,” Siouras said.


    Please don’t intro­duce us to barter-mar­ket bub­ble dynam­ics, Val­os. Some­thing like this could be an invalu­able social tool in so many sit­u­a­tions across the world when the finan­cial econ­o­my falls apart/blows up and the real econ­o­my can’t func­tion. This is one of the coolest sto­ries I’ve ever read. They took the plunge, tried it out and it sounds that this hyprid barter-mar­ket thing real­ly works in a pinch. How awe­some. Very very nice Val­os.

    Posted by Pterrafractyl | June 30, 2012, 3:19 am
  10. The Greek expe­ri­ence with cred­it bub­bles and mon­ey lenders goes way back. From ‘A His­to­ry of Greece to the Death of Alexan­der’ — Bury, speak­ing of events cir­ca 600 B.C.:

    Dra­con’s code was some­thing, but it did not touch the root of the evil. Every year the oppres­sive­ness of the rich few and the impov­er­ish­ment of the small farmer were increas­ing. With­out cap­i­tal, and oblig­ed to bor­row mon­ey, the small pro­pri­etors mort­gaged their lands, which fell into the hands of cap­i­tal­ists, who lent mon­ey at ruinous inter­est. It must be remem­bered that mon­ey was still very scarce and that the peas­ants had now to pur­chase all their needs in coin. Even in Atti­ca the small peas­ant could not cope with the larg­er pro­pri­etor. Thus the lit­tle farms of Atti­ca were cov­ered with stones, on which the mort­gage bonds were writ­ten ; the large estates grew apace ; the black earth, as Solon said, was enslaved. The con­di­tion of the free labour­ers was even more deplorable. The hek — the sixth part of the pro­duce, which was their wage, no longer, suf­ficed, under the new eco­nom­i­cal con­di­tions, to sup­port life, and they were forced into bor­row­ing from their mas­ters. The inter­est was high, the laws of debt were ruth­less, and the per­son of the bor­row­er was the pledge of repay­ment and for­feit­ed to the lender in reduced to case of inabil­i­ty to pay. The result was that the class of free labour­ers was being grad­u­al­ly trans­formed into a class of slaves, whom their lords could sell when they chose. 

    Thus while the wealthy few were becom­ing wealth­i­er and greed­i­er, the small pro­pri­etors were becom­ing land­less, and the land­less freemen were becom­ing slaves. And the evil was aggra­vat­ed by unjust judg­ments, and the per­ver­sion of law in favour of the rich and pow­er­ful. The social dis­ease seemed like­ly to cul­mi­nate in a polit­i­cal rev­o­lu­tion. The peo­ple were bit­ter against their remorse­less oppres­sors, and only want­ed a leader to rebel. To any stu­dent of con­tem­po­rary pol­i­tics, observ­ing the devel­op­ment in oth­er states, a tyran­ny would have seemed the most prob­a­ble solu­tion.

    This instance of cri­sis was avert­ed by a dis­tinct­ly non-free-mar­ket device. Large swaths of unpayable debt were sim­ply can­celed by decree.

    This solu­tion is unlike­ly in the present. The Greek elites under­stood that their pow­er rest­ed on a bound­aried local pro­duc­tive econ­o­my that was being stran­gled and which obvi­ous­ly had been drained of all its spec­u­la­tive val­ue. In a glob­al econ­o­my in which pro­duc­tion suf­fers some here and some there and where the pre­dictable results of impov­er­ish­ment are dif­fuse, the point of break­down is not so appar­ent and so the cred­i­tors are each indi­vid­u­al­ly reluc­tant to release their grip.

    Posted by Dwight | July 1, 2012, 9:08 am
  11. Paul Krug­man reminds us of anoth­er his­tor­i­cal les­son not learned:

    The New York Times
    The Con­science of a Lib­er­al
    Move­able Feast Macro­eco­nom­ics
    Paul Krug­man
    Feb­ru­ary 1, 2013, 6:58 pm

    Ah, Paris in the 1920s. It was the era of Hem­ing­way and F. Scott Fitzger­ald, Gertrude Stein and Alice B. Tok­las, sov­er­eign debt and sta­bi­liza­tion. Wait, what?

    OK, I’ve writ­ten before about the notion that France in the 20s offers the clos­est thing I can find in the his­tor­i­cal record to a cri­sis of the kind the deficit scolds keep warn­ing us about. We’re not at all like Greece; we have our own cur­ren­cy, and our debts are in that cur­ren­cy. So we can’t run out of cash, even if the bond vig­i­lantes turn out to be real and lose faith in Amer­i­ca. At worst, we’re some­thing like France in the 1920s, with its float­ing exchange rate and large wartime debt — except that our debt isn’t near­ly as bad as a share of GDP, and we don’t have the lin­ger­ing gold stan­dard men­tal­i­ty that pre­vailed across the West­ern world back then.

    So, what actu­al­ly hap­pened to 1920s France?


    Krug­man goes on to show how France in 1921 had over twice as much debt as Greece had in 2009 and how France’s cur­ren­cy did indeed suf­fer a large col­lapse in val­ue. Prices rough­ly dou­bled from 1919 — 1926 and briefly spik­ing anoth­er 20% before taper­ing off. And in spite of the large cur­ren­cy depre­ci­a­tions and steeply ris­ing prices, the French econ­o­my grew strong­ly. If France had­n’t had the option of depre­ci­at­ing its debt and cur­ren­cy at the end of WWI it would have been eco­nom­i­caly screwed. This hap­pened in par­al­lel to post WWI Ger­many, which was egre­gri­ous­ly indebt­ed, and forced to induce hyper­in­fla­tion by cir­cum­stance. The French expe­ri­ence is much more applic­a­ble to the con­tem­po­rary glob­al state of affairs regard­ing lev­els of nation­al debts, deficits, and the “dan­gers” of gov­ern­ment stim­u­lus spend­ing vs aus­ter­i­ty. It’s a reminder of the his­tor­i­cal les­son that his­to­ry might pro­vide many lessons but some are more applic­a­ble than oth­ers. It depends on cir­cum­stance:

    The New York Times
    The Con­science of a Lib­er­al
    Par­ty­ing Like It’s 1923: Or, The Weimar Temp­ta­tion

    Paul Krug­man
    Decem­ber 27, 2010, 3:11 pm

    There’s an obser­va­tion I’ve tried to make in a num­ber of columns and blog posts, but maybe haven’t got­ten across as clear­ly as I should: name­ly, the extent to which cur­rent eco­nom­ic dis­course is being warped by what we might call the Weimar Temp­ta­tion, the desire to see every­thing in terms of the evils of deficits and the mon­ey print­ed to cov­er them.

    The hyper­in­fla­tion sto­ry is, after all, sat­is­fy­ing both intel­lec­tu­al­ly and moral­ly. A weak, spend­thrift gov­ern­ment can’t lim­it its spend­ing to match its rev­enues; it los­es the con­fi­dence of investors, so it has to print mon­ey to make up the dif­fer­ence; and too much mon­ey chas­ing too few goods leads to ever-high­er infla­tion.

    Eco­nom­ics teach­ers love this sto­ry; hey, I love it. It’s clear, it’s sim­ple, you can walk through it on the black­board, and yes, it real­ly does hap­pen. It’s a great set-piece, both for the text­book and for intro macro class­es.

    But there’s always the temp­ta­tion to apply the sto­ry too wide­ly. Part­ly this is the drunk-and-the-street­light effect: you look for dropped keys where the light is bright­est, even though that’s not actu­al­ly where you dropped them. Part­ly it’s ide­ol­o­gy: the hyper­in­fla­tion sto­ry is a com­fort­able one for peo­ple who want to make gov­ern­ment always the prob­lem, nev­er the solu­tion.

    And the remark­able thing is how many peo­ple are deter­mined to Weima­rize recent events, even though the actu­al expe­ri­ence of the past three years has been an object les­son in the fact that some­times that frame­work just doesn’t fit. In late 2008 there was, maybe, an excuse for look­ing at the big rise in the mon­e­tary base and think­ing that infla­tion was com­ing — although not if you had actu­al­ly looked at Japan­ese expe­ri­ence. At this point, how­ev­er, it’s just bizarre to use that obvi­ous­ly failed frame­work rather than the well-devel­oped the­o­ry of the liq­uid­i­ty trap, which has sailed through recent events with fly­ing col­ors.

    But it keeps hap­pen­ing any­way. A few months back, in a dia­logue in Korea with Niall Fer­gu­son, I sug­gest­ed a macro­eco­nom­ic ver­sion of Godwin’s Law: the first per­son to bring up the Weimar hyper­in­fla­tion is con­sid­ered to have lost the debate. He was, um, not hap­py. And despite all the evi­dence, a lot of peo­ple are obvi­ous­ly deter­mined to keep on par­ty­ing like it’s 1923.

    Note that Krug­man wrote that blog post regard­ing the per­pet­u­al hyper­in­fla­tion hys­te­ria a lit­tle more than two years ago. Its still applic­a­ble. No joke. Soci­eties that wor­ry about the vol­ume of their mon­e­tary bases too seri­ous­ly might over­look the sane and fair solu­tions that fit the soci­ety’s cur­rent sit­u­a­tion and instead risk seri­ous calami­ty.

    This has been a Krug­man Moment.

    Posted by Pterrafractyl | February 2, 2013, 5:38 pm
  12. That was then:

    The New York Times
    Treasury’s Got Bill Gross on Speed Dial

    Pub­lished: June 20, 2009

    New­port Beach, Calif.

    Every day, Bill Gross, the world’s most suc­cess­ful bond fund man­ag­er, with­draws into a con­fer­ence room at lunchtime with his lieu­tenants to dis­cuss his firm’s invest­ments. The blinds are drawn to keep out the sun­shine, and he for­bids any fid­dling with Black­Ber­rys or cell­phones. He wants every­one dis­con­nect­ed from the out­side world and focused on what mat­ters most to him: min­ing rich­es for his clients at Pim­co, the swift­ly grow­ing mon­ey man­age­ment firm.


    And with the col­lapse of Wall Street, Mr. Gross has emerged as one of the nation’s most influ­en­tial financiers. His fre­quent appear­ances on CNBC draw buzz, as do his wicked­ly humor­ous month­ly invest­ing columns on the Pim­co Web site. Trea­sury sec­re­taries call him for advice. War­ren E. Buf­fett, the Berk­shire Hath­away chair­man, and Alan Greenspan, the for­mer Fed­er­al Reserve chair­man, sing his prais­es.

    “He’s a very indi­vid­u­al­is­tic per­son. He doesn’t come at analy­sis or invest­ment judg­ment in the words, ter­mi­nol­o­gy or ambi­ence that I have been used to over the decades,” Mr. Greenspan says. “That may be the secret of his suc­cess. There is no doubt there is an extra­or­di­nary intel­lect there.” Mr. Greenspan, it should be not­ed, now works for Pim­co as a con­sul­tant.


    That’s one of the rea­sons the gov­ern­ment has court­ed him close­ly.Last fall, the Fed­er­al Reserve Bank of New York, run at the time by Mr. Gei­th­n­er, hired Pim­co — along with Black­Rock, Gold­man Sachs and Welling­ton Man­age­ment — to buy up to $1.25 tril­lion in mort­gage bonds in an effort to keep inter­est rates from sky­rock­et­ing.

    Last Decem­ber, when it was press­ing Bank of Amer­i­ca to com­plete its ill-fat­ed acqui­si­tion of Mer­rill Lynch, the Fed­er­al Reserve also looked to Pim­co for advice. Accord­ing to recent­ly released mes­sages that Fed staff mem­bers sent one anoth­er that month, Pim­co eval­u­at­ed the two banks and con­clud­ed that Mer­rill wouldn’t sur­vive with­out a cap­i­tal infu­sion or addi­tion­al gov­ern­ment aid.

    Today, Mr. Gross is eager to buy the same sub­prime loans he once refused to touch, as part of the Treasury’s dis­tressed-asset ini­tia­tive. After all, the think­ing goes, if any­body can fig­ure out how much all this debt is worth, it’s Pim­co. But Pimco’s involve­ment in so many aspects of the bailout has made many oth­er financiers and ana­lysts uncom­fort­able. They say its prox­im­i­ty to the Trea­sury Depart­ment and the Fed may allow it to reap bil­lions of easy dol­lars through fed­er­al con­tracts and pref­er­en­tial invest­ment oppor­tu­ni­ties.

    A fre­quent com­plaint is this: Why is the Fed­er­al Reserve pay­ing Pim­co to buy mort­gage secu­ri­ties on its behalf, when the firm is already a huge buy­er and sell­er of the same bonds? “That’s the equiv­a­lent of a no-bid con­tract in Iraq,” fumes Bar­ry Ritholtz, who runs an equi­ty research firm in New York and writes The Big Pic­ture, a pop­u­lar and well-regard­ed eco­nom­ics blog. “It’s a license to steal.”


    This is now:

    The Wall Street Jour­nal
    Sep­tem­ber 13, 2012, 5:40 p.m. ET

    Pim­co’s Gross Reaps Ben­e­fits from Bets on Fed MBS Pro­gram


    Bill Gross, the man­ag­er of the world’s biggest bond fund, stands out as one of the fixed-income investors best posi­tioned to ben­e­fit from the Fed­er­al Reserve’s lat­est mon­e­tary stim­u­lus.

    Half of the $272.5 bil­lion Total Return Fund that Mr. Gross man­ages at Pacif­ic Invest­ment Man­age­ment Co. is ded­i­cat­ed to mort­gage-backed secu­ri­ties after an exten­sive port­fo­lio shuf­fle in recent months that saw him simul­ta­ne­ous­ly offload longer-dat­ed Trea­sury bonds. After the Fed announced it would buy more MBS as part of its new stim­u­lus pro­gram Thurs­day after­noon, these secu­ri­ties enjoyed a strong ral­ly while the longest matur­ing Trea­surys sold off.

    The fund “is well posi­tioned for this announce­ment,” said Mr. Gross in an emailed response to ques­tions Thurs­day after­noon.

    Mr. Gross said Fed Chair­man Ben Bernanke “is express­ing an intent to be ‘all in’ until” unem­ploy­ment falls and job growth ris­es to a suf­fi­cient­ly high lev­el. “To me that point seems at least sev­er­al years away so that mort­gage or oth­er pur­chas­es will con­tin­ue beyond 2012,” he said.

    Mr. Gross has sys­tem­at­i­cal­ly con­cen­trat­ed his fund on MBS for months as he placed bets that the ele­vat­ed unem­ploy­ment rate and still tepid pace of eco­nom­ic recov­ery would push the Fed to pro­vide addi­tion­al sup­port for the econ­o­my.


    This is a reminder that the biggest ben­e­fi­cia­ries of gov­ern­ment finan­cial bailouts tend to be the biggest crit­ics:

    MSN Mon­ey
    Bill Gross fears our bor­row­ing could doom us
    The bond king is wor­ried that mas­sive cred­it expan­sion — not just deficit spend­ing — is a threat to the glob­al econ­o­my. His advice includes buy­ing hard assets like gold.

    By Charley Blaine Fri 3:31 PM

    Even as the stock mar­ket is at five-year highs and the econ­o­my is look­ing stronger, Bill Gross is gloomy about the future. Very gloomy.

    The prob­lem the man­ag­ing direc­tor of PIMCO sees is that the domes­tic econ­o­my is going to be suf­fo­cat­ed by debt. Not just gov­ern­ment debt. But by con­sumer debt and cor­po­rate debt as well.

    The result will be that every­one will be work­ing just to ser­vice their debts, and the econ­o­my won’t grow. Every­thing will just stall out.

    That’s what he told read­ers of his pop­u­lar Invest­ment Out­look essay, released this week.


    More­over, in Gross’ view, the mod­ern bank­ing sys­tem is set up to pro­duce infla­tion and gen­er­ate real threats to the econ­o­my. Hence the title “Cred­it Super­no­va!”

    If you deposit mon­ey in a bank, the bank keeps some of the mon­ey as a reserve and lends the rest out. The bor­row­er, in turn, deposits the mon­ey he’s been loaned, and the mon­ey gets loaned out again. The process repeats itself again and again. That’s how mon­ey gets cre­at­ed and an econ­o­my expands.

    Until the sys­tem gets out of con­trol with way too much bor­row­ing. Which is where Gross thinks it’s head­ed.

    The mod­ern bank­ing sys­tem in the Unit­ed States and else­where moved through a peri­od of self-sus­tain­ing cred­it to spec­u­la­tive cred­it expan­sion and now is into what the late econ­o­mist Hyman Min­sky called Ponzi finance. That’s where every­one needs addi­tion­al cred­it just to cov­er increas­ing­ly bur­den­some inter­est pay­ments, with accel­er­at­ing infla­tion the end result.


    Ah, gold bug­gery and hyper­in­fla­tion­ary fears. Sounds famil­iar.

    Posted by Pterrafractyl | February 2, 2013, 6:57 pm
  13. http://www.israelnationalnews.com/News/News.aspx/186521#.VEk51MmwRXA

    Israel Con­demns Latvi­a’s ‘Butch­er of Riga’ Musi­cal

    Her­berts Cukurs took part in Nazi atroc­i­ties against Latvi­a’s Jews — now the coun­try is turn­ing a ‘heinous crim­i­nal to cul­tur­al hero.’
    By Ari Yashar
    First Pub­lish: 10/23/2014, 6:44 PM

    The For­eign Min­istry on Thurs­day “strong­ly con­demned” the Lavian musi­cal pro­duc­tion hon­or­ing the mem­o­ry of Lat­vian Nazi war crim­i­nal Her­berts Cukurs, infa­mous­ly known as the “Butch­er of Riga” for his atroc­i­ties against Jews in the Riga ghet­to.

    “There must be no tol­er­ance for any attempt to turn a heinous crim­i­nal into a cul­tur­al hero. This is a cyn­i­cal attempt to deny his­to­ry and con­sti­tutes an insult to all vic­tims of the Nazis and their col­lab­o­ra­tors,” said the state­ment.

    The min­istry added “Israel both wel­comes and shares in the crit­i­cism issued by the Lat­vian author­i­ties and the inter­na­tion­al com­mu­ni­ty against the pre­sen­ta­tion of the musi­cal.”

    On Octo­ber 11 the musi­cal launched a nation­wide tour in Latvia, fea­tur­ing singer Juris Miller, in part of a recent push to white­wash the record of the Nazi col­lab­o­ra­tor.

    Cukurs was a Lat­vian avi­a­tor and deputy com­man­der of the Ara­js Kom­man­do, a noto­ri­ous Nazi killing unit in Latvia sim­i­lar to the SS that report­ed­ly killed tens of thou­sands of Jews, itself respon­si­ble for killing half of Latvi­a’s Jew­ish pop­u­la­tion.

    Despite the over­whelm­ing amount of wit­ness tes­ti­mo­ny to Cukurs’s bru­tal atroc­i­ties, he nev­er stood tri­al thanks to hav­ing fled to Brazil. How­ev­er, the Mossad caught up with him, assas­si­nat­ing the Nazi mem­ber in Mon­te­v­ideo in 1965.

    Latvia has been see­ing a resur­gence of anti-Semi­tism, with Nazi col­lab­o­ra­tors in March hold­ing their annu­al march in Riga.

    The musi­cal white­wash­ing of Cukurs brings to mind anoth­er sim­i­lar musi­cal, “The Death of Kling­hof­fer,” which opened on Mon­day at New York’s Met­ro­pol­i­tan Opera.

    The play has been wide­ly con­demned for glo­ri­fy­ing and jus­ti­fy­ing the Pop­u­lar Front for the Lib­er­a­tion of Pales­tine (PFLP) ter­ror­ists who mur­dered 69-year-old wheel­chair-bound Leon Kling­hof­fer and tossed his body off of a cruise ship 29 years ago.

    Posted by Vanfield | October 23, 2014, 9:30 am
  14. Here’s a fun his­tor­i­cal edi­tion of every­one’s favorite game “Is it a zom­bie or a cock­roach?”. Keep in mind this isn’t nor­mal­ly a game you can win, at least not when you’re deal­ing with with con­tem­po­rary zombie/cockroach ideas under­min­ing your soci­ety (every­one still los­es in that case even if you answer cor­rect­ly giv­en the cir­cum­stances). But you can poten­tial­ly win the game when deal­ing with his­tor­i­cal zombie/cockroach ideas...assuming the zombie/cockroach has some­how been slain by now. Of course, that means, in this case, you’ve already lost. Oh well. Enjoy the game!

    The New York Times
    The Con­science of a Lib­er­al

    Open Let­ters of 1933
    Paul Krug­man
    Oct 27 7:34 am

    My friend and old class­mate Irwin Col­lier, of the Free Uni­ver­si­ty of Berlin, sends me to an open let­ter to mon­e­tary offi­cials warn­ing of the dan­gers of print­ing mon­ey and debas­ing the dol­lar, claim­ing that these poli­cies will under­mine con­fi­dence and threat­en to cre­ate a renewed finan­cial cri­sis. But it’s not the famous 2010 let­ter to Ben Bernanke, whose sig­na­to­ries refuse to admit that they were wrong; it’s a let­ter sent by Colum­bia econ­o­mists in 1933 (pdf):

    In our opin­ion, one of the most seri­ous forces retard­ing the move­ment of recov­ery is the ever-increas­ing pub­lic dis­trust of the dol­lar. Unless con­fi­dence is speed­i­ly restorred by appro­pri­ate admin­is­tra­tive action and by Con­gres­sion­al resis­tance to the demands of the infla­tion­ists, the coun­try is like­ly to wit­ness a major finan­cial cri­sis in the next few months.

    It’s all there: decry­ing infla­tion amid defla­tion, invo­ca­tion of “con­fi­dence”, a chin-stroking pose of being respon­si­ble while urg­ing poli­cies that would per­pet­u­ate depres­sion. Those who refuse to learn from the past are con­demned to repeat it.

    Bonus ques­tion! What crea­ture best sym­bol­izes the kind of econ­o­mists and pol­i­cy mak­ers that will­ing­ly ped­dle zombie/cockroach ideas to the mass­es that have been dis­cred­it­ed decades ago. Hint: It’s not a zom­bie or a cock­roach although it’s tan­gen­tial­ly relat­ed to both.

    Posted by Pterrafractyl | October 29, 2014, 1:23 pm

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