Thursday, December 2, 2010

Today's Links

1--Ireland’s Reparations Burden, Barry Eichengreen, The Irish Economy

Excerpt: The Irish “program” solves exactly nothing – it simply kicks the can down the road. A public debt that will now top out at around 130 per cent of GDP has not been reduced by a single cent. The interest payments that the Irish sovereign will have to make have not been reduced by a single cent, given the rate of 5.8% on the international loan. After a couple of years, not just interest but also principal is supposed to begin to be repaid. Ireland will be transferring nearly 10 per cent of its national income as reparations to the bondholders, year after painful year.

This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know. A populist backlash is inevitable. The Commission, the ECB and the German Government have set the stage for a situation where Ireland’s new government, once formed early next year, rejects the budget negotiated by its predecessor. Do Mr. Trichet and Mrs. Merkel have a contingency plan for this?

Nor is the situation economically sustainable. Ireland is told to reduce wages and costs. It must engage in “internal devaluation” because the traditional option of external devaluation is not available to a country that lacks its own national currency. But the more successful it is at reducing wages and costs, the heavier its inherited debt load becomes. Public spending then has to be cut even deeper. Taxes have to rise even higher to service the debt of the government and of wards of the state like the banks....

For internal devaluation to work, therefore, the value of debts, expressed in euros, has to be reduced. This would have been particularly easy in the Irish case. A bright red line could have been drawn between the third of the government debt that guarantees the obligations of the banks, on the one hand, and the rest of the government’s debt, on the other. The third representing the debts of the Irish banking system could have been restructured. Bondholders could have been offered 20 cents on the euro, assuming that the Irish banks still have some residual economic value. If those banks are insolvent, the bondholders could – and should – have been wiped out.

2--Fed Opens Books, Revealing European Megabanks Were Biggest Beneficiaries, Huffington Post

Excerpt: The Federal Reserve on Wednesday reluctantly opened the books on its monumental campaign to save the financial system in the midst of the recent crisis, revealing how it distributed some $3.3 trillion in relief.

The data revealed that the Fed's aid was scattered much more widely than previously understood. Two European megabanks -- Deutsche Bank and Credit Suisse -- were the largest beneficiaries of the Fed's purchase of mortgage-backed securities. The Fed's dollars also flowed to major American companies that are not financial players, including McDonald's and Harley-Davidson, through unsecured short-term loans....

Deutsche Bank, a German lender, has sold the Fed more than $290 billion worth of mortgage securities, Fed data through July shows. Credit Suisse, a Swiss bank, sold the Fed more than $287 billion in mortgage bonds....

The Fed effectively telegraphed its intentions to the Street before buying the bonds. Legendary money manager Bill Gross, who oversees more than $1.2 trillion at Pacific Investment Management Co. said last month during a television interview that part of his success over the last 18 months was due to buying securities in front of the Fed, and selling them to the Fed at a premium, allowing him to profit handsomely. Gross runs PIMCO's $252.2 billion Total Return Fund.

Morgan Stanley sold the Fed more than $205 billion in mortgage securities from January 2009 to July 2010, while it's much bigger rival, Goldman Sachs, sold $159 billion. Citigroup, the nation's third-largest bank by assets, sold the Fed nearly $185 billion in mortgage bonds. Merrill Lynch/Bank of America sold about $174 billion.

3--Concern on debt contagion deepens, Irish Times

Excerpt: Global concern about the debt crisis rocking the euro zone mounted today, with Washington sending a top US Treasury envoy to Europe and G20 officials discussing the turmoil in a conference call.

A day after investors pushed the risk premiums on Spanish and Italian government debt to new highs, the bond spreads of countries on Europe's southern periphery narrowed and the euro steadied on speculation that the European Central Bank could unveil new anti-crisis steps at a meeting tomorrow.

But calmer markets failed to remove deep worries about contagion in the 16-country euro region that has pushed European policymakers onto the defensive and forced them to search for new ways to stabilise their 12-year-old currency project.

An EU-IMF rescue of Ireland last weekend and public reassurances from European politicians and central bankers have been largely ignored by investors, who have targeted Portugal, Spain and Italy, intent on testing the EU's resolve and crisis-fighting resources.

4--Ireland's debt servitude, Ambrose Evans Pritchard, Telegraph

Excerpt: Stripped to its essentials, the €85bn package imposed on Ireland by the Eurogroup and the European Central Bank is a bail-out for improvident British, German, Dutch, and Belgian bankers and creditors. The Irish taxpayers carry the full burden, and deplete what remains of their reserve pension fund to cover a quarter of the cost.


Let me add that the ECB ran a monetary policy that was too loose even for the eurozone as a whole, holding rates at 2pc until well into the credit boom and allowing the M3 money supply to expand at 11pc (against a 4.5pc target). The ECB breached its own inflation ceiling every month for a decade. It did this to help Germany through its mini-slump, and in doing so poured petrol on the bonfire of the PIGS. So please, NO MORE HYPOCRISY FROM BERLIN...

The question is, should the Dail vote against the austerity budget on December 7, Pearl Harbour Day. And should the next government – with Sinn Fein in the coalition? – tell the EU to go to Hell, do an Iceland, wash its hands of the banks, and carry out a unilateral default on senior debt by refusing to extend the guarantee? The risks are huge, but then the provocations are also huge. And there is a score to settle. Did the EU not disregard the Irish `No’ to Lisbon, just as it disregarded the first Irish `No’ to Nice? Did it not trample all over Irish democracy?...

"Nothing quite symbolized this State’s loss of sovereignty than the press conference at which the ECB man spoke along with two IMF men and a European Commission official. It was held in the Government press centre beneath the Taoiseach’s office. I am a xenophile and cosmopolitan by nature, but to see foreign technocrats take over the very heart of the apparatus of this State to tell the media how the State will be run into the foreseeable future caused a sickening feeling in the pit of my stomach."


5--EU rescue costs start to threaten Germany itself, Ambrose Evans-Pritchard, Telegraph

Excerpt: The escalating debt crisis on the eurozone periphery is starting to contaminate the creditworthiness of Germany and the core states of monetary union. Credit default swaps (CDS) measuring risk on German, French and Dutch bonds have surged over recent days, rising significantly above the levels of non-EMU states in Scandinavia.

"Germany cannot keep paying for bail-outs without going bankrupt itself," said Professor Wilhelm Hankel, of Frankfurt University. "This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings."...

Reports that EU officials are hatching plans to double the size of EU's €440bn (£373bn) rescue mechanism have inevitably caused outrage in Germany. Brussels has denied the claims, but the story has refused to die precisely because markets know the European Financial Stability Facility (EFSF) cannot cope with the all too possible event of a triple bail-out for Ireland, Portugal and Spain.

6--Pettis on eurozone pathways and endgames, Naked Capitalism

Excerpt: Michael Pettis, like Simon Johnson a few days ago, has tried mapping out what he thinks future scenarios for the eurozone might be, and what that means in terms of possible winners and losers.

One of Pettis’ strengths is that he takes the time to be explicit about his reasoning, which gives readers the opportunity to see where they might beg to differ. And as much as I like his post, I think he makes one fatal assumption at the top, that the eurozone has more time than it really does. Here’s his frame:

If Europe is going to “resolve” the current crisis in an orderly way, it is going to have to move very quickly – not just for the obvious financial reasons, but for much narrower political reasons. I am pretty sure that the evolution of European politics over the next few years will make an orderly solution progressively more difficult.

For ten years I have used mainly an economic argument to explain why I believed the euro would have great difficulty surviving more than a decade or two. It seemed to me that the lack or fiscal centrality and full labor mobility (and even some frictional limits on capital mobility) would create distortions among countries that could not be resolved except by unacceptably high levels of debt and unemployment or by abandoning the euro. My skepticism was strengthened by the historical argument – no fiscally fragmented currency union had ever survived a real global liquidity contraction….

….in spite of very clear historical precedent, very few analysts, even the greatest euro-skeptics, are wondering about of the changes in electoral politics that are likely to take place in Europe over the next few years as a consequence of the euro adjustment. For example Wolfgang Munchau has an excellent article in the Financial Times in which he concludes, like I did in my post last week, that:

The eurozone is maneuvering itself into a position where it confronts the choice between two alternatives considered “unimaginable”: fiscal union or break-up.

7--Goldman, Citi, Morgan Stanley Used Fed Facilities Heavily, Wall Street Journal

Excerpt: Wall Street was a heavy user of the Federal Reserve’s extraordinary credit facilities during the financial crisis, Fed data released Wednesday showed.

Goldman Sachs Group Inc., for instance, tapped the Fed’s Primary Dealer Credit Facility 84 times. And Morgan Stanley borrowed from the Fed’s Primary Dealer Credit Facility 212 times between March 2008 and March 2009, in an indication of just how close Wall Street’s second-largest investment bank came to the brink of collapse during the financial crisis.

The Fed created the Primary Dealer Credit Facility, or PDCF, to provide discount window loans to investment banks, a privilege previously reserved for more tightly regulated commercial banks. Eventually both Goldman Sachs and Morgan Stanley were granted bank holding company status.

Commercial banks also were big users of the facilities, often through their investment banking arms.

Citigroup Inc. used the Primary Dealer Credit Facility almost daily through its investment banking unit, borrowing as much as $17.9 billion in late November 2008, around the time the government stepped in to prevent Citi’s cardiac arrest. The use tapered off in April 2009.

Bank of America Corp. used the PDCF nearly every trading day from Sept. 18, 2008 to May 12, 2009, more than 1,000 times in total. The bank’s single biggest use of the facility was for $11 billion in October 2008 and seven times it took more than $10 billion at a time.

From the PDCF, J.P. Morgan appeared to use the funding as a parent company far fewer times than rivals, only using it once in September 2008 and twice in October 2008. However, the Fed’s data also show Bear Stearns & Co. used the facility almost daily from April 2008 to late June 2008, after J.P. Morgan had bought the investment bank in March of that year.

8--End this Fed, Matt Stoller, New Deal 2.0

Excerpt: Liberals must move beyond our consumer-driven approach and think about reform of the credit system and of the monetary order, as Elizabeth Warren has done through her remarkable tenure on the Congressional Oversight Panel. The basic problem is the one that poet and economist Jane D’Arista puts forward in her 1991 paper No More Bank Bailouts. (And yes, she wrote that in 1991, so it is worth listening to her.) The link between the Federal Reserve and the ‘real economy’ is broken. When banks were the main conduit between the financial world and economic activity, translating savings into investment, the Fed could manipulate the economy by manipulating the banking sector. But now that shadow banks dominate our credit markets, and the Fed has allowed hot money to take over monetary policy, the Fed’s tools just don’t work. That’s why quantitative easing is foolish. We must dispatch with the ridiculous notion that pushing hundreds of billions of dollars into a broken banking system will have useful consequences.

Instead, let’s recognize that the Fed doesn’t fulfill either part of its mandate, and work toward a better and more plausible system of monetary stability. That’s not a long-term process, it’s a constant process. D’Arista argues that the Fed must connect itself to the shadow banking system and force credit to flow. This necessarily implies important changes in how the Fed interacts with financial services firms and entities. ...

Liberals should stop their love affair with conservative technocratic myths of monetary independence, and cease seeing this Federal Reserve as a legitimate actor. At the very least, we need to begin noticing that these people do in fact run the country, and should not. We must also begin to internalize the new forces of openness and rethink how a monetary system can function in an internet-enabled society. This will require thinking about Fed 2.0 from the perspective of the social web, as well as building upon the increase in transparency being forced on governing elites by such groups as Wikileaks. The top-down backroom system just won’t work if it relies on retaining secrets between Bank of America and the Fed that a third party or a court can release. The Fed can’t print its way out of a public that has lost faith in the banking system and the dollar. If we rethink money creation properly, however, we will be able to remove money creation from the hands of the oligarchs, and strike deeply at the uncompetitive nature of the American political economy. I do not know how to do this, but it is possible.

9--30 Weeks Of Consecutive Equity Fund Outflows, zero hedge

Excerpt: No matter the amount of propaganda, the amount of manipulation, and Fed intervention, retail refuses to come back to the market. America's love affair with stocks is over, has bypassed the marriage stage and gone straight to the bitter divorce. Per ICI, the week ended November 24 saw $2.6 billion in outflows from domestic equity funds, and a total of over $91 billion year to date.

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