Tuesday, November 16, 2010

Today's Links

1--Ireland at the brink, The Guardian

Excerpt: "The Irish problem is spreading, but it could get more volatile," said Ashok Shah, chief investment officer at London Capital, a fund management firm. "They have to get this bailout, they have a period of time before it gets impossible, before nasty things happen. The longer they leave it, the more difficult it will get."

Portugal has seen its borrowing costs rocket along with Ireland's as speculation has grown that it too may have to consider a bailout. Its finance minister, Fernando Teixeira dos Santos, told the Wall Street Journal his country had been hit by a contagion effect caused by fears about Ireland's ability to pay its debts....

Weekend reports that Ireland was holding bailout talks with the EU helped ease pressure on Irish borrowing costs today, with the yield on benchmark 10-year Irish bonds easing to 8.1% from a peak of over 9% last week. The premium that investors demand to hold Irish 10-year bonds over benchmark German bunds (known as the spread) also fell to 545 basis points, down from a record 652 basis points last Thursday.

2--The end of Irish sovereignty, The Guardian

Excerpt: he response of Brian Lenihan, the Irish finance minister, to the growing number of flashing blue lights outside was to make a distinction between the state, which was insolvent but liquid, and the banks, which were both broke and cashless. It may look like good politics to call this a banking crisis rather than a national one. But there is a problem with this logic. Having underwritten the banks two years ago with a deal that guaranteed virtually all the bondholders' risk, the Irish taxpayer has seen the cost of the bank bailout rise to between a quarter and a half of GDP. As Morgan Kelly, the economist who predicted the banking crash, wrote recently, this open-ended commitment to cover bank losses plainly exceeds the fiscal capacity of the state. The banks' problems in determining how much further they have to fall are now plainly Ireland's too.

Ireland has resisted pressure to ask for help because the terms of the bailout from the EFSF or the IMF would be punitive and the state would be forced to surrender some sovereignty over the budget..... What Iceland went through could be mild in comparison if what follows is a full-scale mortgage default crisis, compounded by a further collapse of property prices.

No government ever wants to go cap in hand to the IMF or the EFSF. It is humiliating, and in Ireland's case has painful historical resonances. Entry both to the EU and to the eurozone represented a welcome release from the dependency on the much larger economy across the water. The Tiger economy was not just a neoliberal dream. It represented a quick breakout from an old problem. It was a national aspiration, which is now dying as another generation of young Ireland seeks work abroad. The Irish people need to hold to account those who took the decisions that led to this crisis, and draw the right conclusions – never again to allow their economy to be built on dreams and air.

3--Doomsday for the dollar, The Globe and Mail

Excerpt: In Seoul, G20 leaders agreed to "build a more stable and resilient international monetary system," which Mr. Sarkozy presented as evidence that he's not alone in looking for a better way to organize global currency policy.

"Two years ago, people looked at us like we were weird," Mr. Sarkozy said, referring to the French government's criticism since the financial crisis of excessive volatility in foreign exchange markets. "Now the G20 is agreed that we have to improve our world order."

Many will scoff and sneer at all of this. Back when the smaller group of seven advanced economies was running the show, former officials will snidely say they had to put up with talk of overhauling the monetary order once every seven years when France's turn came to set the agenda....

The U.S. system of government is proving incapable of delivering the sound economic policy necessary to ensure that the dollar's value remains stable. The biggest reason the Federal Reserve is proceeding with its dollar-weakening strategy of creating money to buy financial assets is because Congress is incapable of doing anything to address the country's unacceptably high unemployment rate. A critical mass of fast-growing economies is rightly asking why policy makers and politicians in Washington should have such an outsized role in determining the well-being of sovereign countries.

4--Irish Bank Run, Credit Writedowns

Excerpt: What are the realistic scenarios for Ireland?

1. The Irish get funds from the EFSF and the IMF now rather than waiting. They push ahead with austerity and rescind the bank creditor guarantees while protecting depositor guarantees. In my view, this would satisfy the EU’s desire for fiscal consolidation while making the bank backstop credible. Depositors would know their money is safe.

2. The ECB buys up a bunch of Irish sovereign debt to bring yields down while the Irish government denies it needs the money. They push ahead with austerity, which is voted for on Dec 7. I don’t like this scenario. The sovereign gets the ECB backstop. But rates will not come down. The Irish will still be forced into the EFSF and the arms of the IMF anyway and the prospect of bank runs could continue. Deadweight losses are likely. This is a failed strategy.

My understanding is that plans are now to use bailout money to shore up bank capital in Ireland. This is not a good idea at all – and I don’t think the Irish public would support this. Bank creditors need to be cut loose to de-couple the bank and sovereign credit issues. Moreover, the German public doesn’t want any more bailouts. So Chancellor Merkel has to talk tough. This is the reason for talking about a debt restructuring that requires bondholders who buy post-2013 take a haircut under a permanent bailout mechanism. But this also opens up the issue of haircuts for existing bondholders. I don’t see any way around this issue without talking about haircuts in a permanent version of the EFSF. Has this spooked markets? Yes. But, I say get on with it; the bailout is inevitable. Delaying is only going to make large losses in a restructuring that much more likely.

5--Krugman KOs GOP crackpots, Paul Krugman, New York Times

Excerpt: Brad DeLong is exercised, and rightly so, over the fact that some good economists have joined the crazies in signing the Republican anti-QE letter. How is this possible? he asks. After all, we’re not even talking about Keynesianism here, we’re talking about monetarism — at least in terms of the spirit of the thing. For Friedman’s whole case against the Fed was not, fundamentally, about monetary aggregates; they were just intermediate targets. It was that the Fed was supposed to do whatever it took to avoid an economic plunge, and didn’t. So calling on the Fed not to act now is a betrayal of Friedmanism as well as Keynesianism.

But it’s not really a mystery what’s going on here. In part, the GOP letter-signers are against doing anything that might help Obama, of course. But more fundamentally — and this is a point I think conservatives who believe they can remain reasonable about macro fail to grasp — this is about philosophy of government. If your bedrock faith is that government is always the problem, never the solution, then you’re not, ultimately, going to be willing to draw a line around the central bank and say that it’s OK for that semi-autonomous part of the government to engage in active problem-solving.

6--The Problem, Paul Krugman, The New York Times

Excerpt: ...We’re told that we can’t have fiscal expansion, because that’s Big Government. And now we’re being told that we can’t have monetary expansion, which might induce businesses and low-debt consumers to spend more, because that’s debasing the dollar. Oh, and while we’re on that, we can’t allow the dollar to fall, which might help exports.

So, what? Yes, corporations are sitting on lots of cash — but why should they expand capacity when weak consumer demand means they aren’t using the capacity they have?

I really don’t understand the logic of the liquidationists here. But then, I don’t think logic has much to do with it.

7--Conditions deteriorated in November for New York State manufacturers, Calculated Risk

Excerpt: From the NY Fed: The Empire State Manufacturing Survey indicates that conditions deteriorated in November for New York State manufacturers. For the first time since mid-2009, the general business conditions index fell below zero, declining 27 points to -11.1. The new orders index plummeted 37 points to -24.4, and the shipments index also fell below zero. The indexes for both prices paid and prices received declined, with the latter falling into negative territory. The index for number of employees remained above zero but was well below its October level, and the average workweek index dropped to -13.0....

CR--I'll have more when the Philly Fed index is released on Thursday, but this was far below the expectations of a reading of 15.

8--The scoop on those retail numbers, Tim Duy, Fed Watch

Excerpt: Retail sales surprised on the upside in October. From the Wall Street Journal:

American consumers are showing clear signs of stepping up their spending.
Retail sales rose 1.2% to $373.1 billion in October, compared with September, the largest monthly jump since March and the fourth-consecutive month of increased spending.

How excited should we be?

...we see something closer to what some might call the "new normal" for consumer spending. Not devastating, but lackluster in comparison to the pre-recession trends.

Bottom Line: In general, the retail sales report was good news, as it is another indicator that drives a stake into the heart of the double-dip story. But keep in mind that the data continues to illustrate the good cop, bad cop conflict in the economy. Policymakers should be concerned about the distance between new trends and old, lest they risk falling into the trap of diminished expectations, believing that 9% unemployment should be the new normal. Market participants, however, may simply be content with confirmation that the foundation for ongoing corporate revenue growth remains secure.

9--US Hopes to Establish Bases as Yemen Fight, antiwar.com

Excerpt: US officials are looking to dramatically escalate their on the ground presence in Yemen, and new reports from the Wall Street Journal suggest that the US is hoping for Yemen to allow the establishment of “forward operating bases” for US troops in southern Yemen.

the deployment of US military “advisors” in a nation ahead of an eventual full scale military operation is nothing new, and while officials are still keeping their exact strategy somewhat vague it appears clear that the Obama Administration is escalating to what could only be called a war-like posture in Yemen.

At the same time, the CIA is looking to hugely increase its own presence on the ground, with large numbers of operatives looking to deploy in the country and reports suggesting that the US has already moved to deploying CIA Predator drones in the region, though they have yet to carry out the same sort of mass assassination campaign they have in Pakistan’s tribal areas.

1 comment:

  1. Why don't the Irish borrow money from the Chinese (like Greece, Spain and Portugal)? I blog about this at http://stuartbramhall.aegauthorblogs.com/2010/10/23/currency-wars-the-real-battlefield/). I also think Obama should tell the truth about the real reason we are at war in Pakistan (and Afghanistan) - namely the Chinese-built deepwater port in Gwadar, Pakistan - which will virtually guarantee China a monopoly on Iranian oild and natural gas. (see http://stuartbramhall.aegauthorblogs.com/2010/09/26/iran-china-and-the-gwadar-port/ and http://stuartbramhall.aegauthorblogs.com/2010/09/29/balochistan-the-place-to-watch/)

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