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.
”

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. © — 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.”
...

@Pterrafractyl: Glad to see you’re on our side. =)

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...”

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.”
...
”

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.
...
”

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.
...
”

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...

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.”

...
”

...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):

...
”

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.
...

[...] 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 [...]

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??

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.”
....

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.

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.

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!

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.

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.

@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.

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.

...

@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!

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!

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.

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.

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.

@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 mon­ey-laun­der­ing issues (and that’s just part of the prob­lem).

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.

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.

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.

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?