Eurozone buys some time

European finance ministers came out of their late-night, closed-door meeting Sunday with all guns blazing. The question is, how long will their ammunition last?

In essence, the European Central Bank will buy up the bad debt of Greece (which Moody’s said it is about to drop to junk status) and any other EU countries needing help and issue its own bonds to pay for them. In this way, the whole of the EU (along with help from the IMF) is stepping in to back up its floundering members, to the tune of nearly $1 trillion. That sounds impressive until you realize that Greece’s debt alone is over $400 billion. Greece is in the worst shape but it is also one of the smallest of the EU member economies. Throw in the rest of the PIIGS (or PIGIS as I recently saw it spelled)—Portugal, Ireland, Italy and Spain—and that trillion bucks disappears in a hurry. Oh, and then there’s Hungary, and Austria’s not looking so good, and ….

The stock markets loved it, of course, but that could change in a hurry. This mess has now cost German Chancellor Angela Merkel her majority in the Upper House and a legal challenge to the bailout in German courts is entirely possible. The UK is trying to form a new government which is almost certain to be weak and short-lived. French President Sarkozy may also soon be facing an opposition controlled National Assembly due to public anger over the bailout.

EU leaders are pedaling as fast as they can and this weekend’s plan is straining the union’s legal structure (much of it was enacted through “emergency” provisions). There is growing concern that this weekend was a dramatic push towards a United States of Europe and there is certainly no consensus for that.

Many commentators have described the EU plan as a TARP for Europe. Its goal is largely the same. TARP took bad bank and other corporate debt and put in on the Federal Reserve’s books. The EU is now taking bad sovereign debt and putting in on the books of the ECB. In short, debt is being paid with more debt but now with taxpayers' help. In both cases the hope is that over time somehow the mess will clear itself up. It is not at all clear that is the case and, even it were true, that the credit markets will give it that time. This is high stakes poker unlike anything we’ve ever seen.

Note: Good analysis and discussion of the EU bailout can be found at many of the financial and economics blogs I have refered to in the past, including: Bill McBride's Calculated Risk (always my first stop), Paul Krugman's Conscience of a Liberal, Yves Smith's Naked Capitalism, and The Baseline Scenario of Simon Johnson and James Kwak.

Note 2: Here's a succinct evaluation of the bailout's problems from Bloomberg's Businessweek:

The leaders of the euro-area countries have thrown 750 billion euros ($963 billion) at shoring up confidence in the single currency. But it doesn’t matter how many zeros you put on the end of a bad idea. It’s still a bad idea.

In reality, you can’t stabilize a sinking ship.

The new stability package suffers from the same problem as all the other ones the European Union has come up with in the months since the Greek crisis started rattling the markets last year: It tries to fix the symptoms, not the causes.

Greece has exposed deep structural problems within the euro. There is no mechanism to stop governments breaking the rules. There is no popular support for massive fiscal transfers between countries. The rules for the euro area have turned out to be unreliable. And there is no way to start stimulating economic growth again in the heavily indebted nations.

Those are the hard questions. Even 750 billion euros won’t get close to answering any of them.

What a day! What next??

The craziness continues. The New York Stock Exchange went into free-fall this afternoon but then bounced back. In that short time the DOW fell 1000 points, its largest ever point drop and biggest percentage drop since 1987. At the close the DOW was off 348 pts or 3 percent.

In Europe, the Greek parliament approved the proposed austerity measures needed to qualify for the international bailout, while outside demonstrators again clashed with police. The conviction is growing, however, that this is too little, too late—and not just for Greece.

Meanwhile back in the US, government and stock exchange officials are working late into the night trying to figure out just what the hell happened today. NASDAQ has already said it will cancel some trades it believes were erroneous. How they are determining this is not clear and there is already talk of law suits. Many “retail” traders found themselves locked out of the market during the plunge as servers and broker websites crashed all around the country. Financial web sites and blogs had similar outages.

Regardless of possible mistaken orders or technical glitches, today’s market roller coaster was primarily about growing anxiety around the world that the economic recovery may be going off the rails, if it hasn’t been a mirage all along. Since the financial meltdown in 2008, the world’s economic problems have come down to one four-letter word: DEBT. In the US it was the sub-prime mortgage collapse that sent the economy over the edge. Now comes the sovereign debt crisis of Greece and who knows how many other European countries. In both cases this debt is held by institutions around the world and so everyone is involved.

We are in an extremely unstable economic situation and perhaps political as well. Today’s fiasco on Wall Street has dealt a severe blow to confidence not only in future economic prospects but in the integrity of the market itself. Events like this combine with revelations like the Goldman Sacks fraud case to raise serious suspicions about whether the whole US financial system isn’t rigged and with some pretty heavy fingers on the scales.

The voices are growing louder and more numerous expressing concerns that we are teetering on the brink of a second major economic downturn. In recent months I’ve read several pieces pointing out that the Depression began with two crashes, the famous one in 1929 and a less well-known but even deeper one in 1932. One of these quoted articles from 1931 expressing confidence in the “recovery” and that the economy was on a rebound. Just today Robert Samuelson voices his concerns along these lines in Newsweek.

There are a lot of worries being expressed these days. Many have noted that the dithering of European leaders is much like that of politicians in the early 1930s. There is concern that US action since the 2008 financial meltdown has been mostly window dressing and that Wall Street’s influence in Washington is so strong that politicians are incapable of anything really substantive. Many say that the debt crisis of developed countries around the world is being avoided because no one—politicians or voters—wants to face the fact that the only solution is a significant reduction in living standards across the board. Coupled with this is the fear and anger that those with political and financial power are manipulating economic developments to insure their living standards are untouched. Suspicion or awareness of this at some level explains the protests and violence in Greece, which many expect to spread elsewhere in coming months.

The coming days and weeks and months will certainly be interesting.

To fix the banks, first find the fraud

Conclusion of a presentation by economist and University of Texas at Austin professor James K. Galbraith before Senate Judiciary's subcommittee on crime:

Some appear to believe that "confidence in the banks" can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.

But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.

In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.
 
You can read the whole speach here and it is well worth it. As the first comment says: Wow.

Eurozone tottering (cont.)

Greek protesters expressed their disdain today for austerity measures proposed by the government to qualify for international bailout funds. Unions marched in Athens' streets and a group broke through barricades to unfurl banners on the Acropolis.

Meanwhile, the financial world expressed its disdain for the whole EU debt mess by sending stock prices tumbling around the globe. The DOW dropped 225 points or 2%. There is growing concern that the cost of propping up all the EU's faltering economies will be more than anyone wants to afford. If so, then defaults by other EU PIIGS and beyond (Hungary?) will be inevitable and the affects will ricochet in all directions.

Eurozone tottering (cont.)--updated

Another day of meetings, phone calls, and statements of concern as Europe's debt crisis rolls on. The IMF is reportedly now ready to pony up $120 billion over 3 years to prop up Greece--much more than previous estimates. German politicians have also apparently hammered out a bailout plan. And Greece is said to have agreed to a severe austerity plan to reign in its out-of-control deficits.

The concern is whether all this is too little, too late. It is no longer just a Greek problem, with Portugal and Spain both beginning to experience the same financial pressures afflicting Greece. Bailing out all three countries could be more than the IMF and EU together could afford--if the crisis stopped there. Promises of austerity have been heard from the Greek government before but it is not at all clear whether the Greek people will go along with them.

Every day of "plans and proposals"--rather than actual decisions--only deepens the crisis and leaves more opportunities for the circling financial vultures.

Update: Paul Krugman in Friday's New York Times: So is the euro itself in danger? In a word, yes. If European leaders don’t start acting much more forcefully, providing Greece with enough help to avoid the worst, a chain reaction that starts with a Greek default and ends up wreaking much wider havoc looks all too possible.

Alice in Wonderland economics

Via Mike Shedlock we learn of another example of the craziness of today’s financial world. The Nevada Federal Credit Union is paying its customers to withdraw their money. Yes, their message is: Please take your business elsewhere, we don’t want it. Why? Because it is costing them to hold money. They cannot find any worthwhile loan opportunities (it is Nevada, after all) and they can't engage in the high risk investing/gambling that the big boys on Wall Street can. They are paying more in required deposit insurance (.4%) than they can earn with short term Treasuries (.25%).

Here is a simple example of how artificial is the Fed’s current policy of holding interest rates at nearly zero--in other words, more smoke and mirrors. Economists and financial bloggers like Shedlock have been saying for a couple years now that most government interventions to right our economic ship are counterproductive. Their goal is to restart the country’s economic engine but do nothing to fix its problems. When your car needs a tune-up, if not an overhaul, pouring additives in the tank may get you a few more blocks or miles, but you’re still going to end up on the side of the road with the hood up.

Why economics?

Some of you may wonder why I post on economics since most of the time I focus on religion and theology (I know my Lutheran news and gossip posts get a lot more hits than my economic ones ever do). While it has always been an interest of mine, last year’s financial crisis convinced me not only of the enormous impact economics has on everyone but also of its vital moral dimension.

The implosion of the banking system showed that something had gone seriously wrong with our economic system. That the multi-billion dollar taxpayer bailout was followed by billions in Wall Street bonuses proved something was seriously morally askew, as well.

I have been trying to follow all this as closely and carefully as my time allows. Internet bloggers not only provide a lot of helpful information and analysis but also lead to other authorities, books and articles. Needless to say, this is a HUGE subject with often violently contrasting viewpoints. One thing I have learned, however, is that most of the “experts” relied on by the mainstream media (MSM) are themselves part of the flawed system. Thus, for example, the economic talking heads on news shows who are financial advisers (as many are) will always be essentially optimistic about the economy. Otherwise people will have no incentive to give them their money to invest.

After sorting through the experts and finding those that seem sincere and honest (especially about their limitations), the message I have gotten loud and clear is that our financial problems are far from resolved. The bailouts in the fall of 2008 stopped the immediate crisis from turning into a financial meltdown. The serious economic problems which created this crisis are still almost entirely unresolved, however, and could easily erupt again.

I have become convinced that this is ultimately a spiritual crisis. The economic questions we are facing are not just technical but are fundamentally questions about values and life. This life is now so much more complex than our ancestors could have imagined, and more complex than most of us are aware. Our ignorance of both micro- and macro-economics leads us to feel overwhelmed and victimized, forced to rely on experts we know nothing about. Yet if we cannot come to a consensus about what constitutes essential economic health for ourselves and our communities, then the future of our democracy is seriously in danger.

So, you can expect more economics posts from me. I hope you’ll read them, read the articles they link to, and start your own economic education program. Economics is not money, numbers and statistics. As its Greek origin suggests, oikonomia is the management of our households, personal and collective. Right now, economic mismanagement is threatening the livelihood and future of every one of us.

A place to vent your outrage

The American Bankers Association is holding its annual meeting this coming week in Chicago and major demonstrations are planned for October 25-27. Scheduled events include a protest in front of Goldman Sachs' Chicago headquarters and a prayer vigil. Information is available at Showdown in Chicago. If you're wondering "where's the outrage?" (see below) you'll find a fair amount of it here.

Where's the outrage? (Sunday Reflections for October 25, 2009)

“Where the hell is the outrage?” That is the title of a long post this past week by financial advisor and blogger Mike Shedlock. The post was in response to the announcement of the multi-billion dollar profits and employee bonuses of the huge Wall Street investment bank Goldman Sachs.

Shedlock is a strong supporter of free-market capitalism so the fact that Goldman made profits and paid bonuses is not what upset him. It was how they did it. Goldman, of course, is one of the “too big to fail” banks which received billions in government bailout money last fall. Those tax dollars were intended to keep the banking system from imploding and enable banks to loan money again. Yet as most anyone who has tried to get a loan has discovered, credit is still tight for both individuals and businesses.

To the consternation of Shedlock and many others, the big banks that took government funds are now making money again but are doing so not by lending but through speculative investments. In other words, the government bailout kept the banks afloat but that’s about it. Little of that money has found its way into the economy as credit. Instead, most of it is creating billions in profits for bank shareholders and billions in bonuses for bank employees.

Why is this happening? Shedlock relates at length the countless ways Goldman Sachs has been able to influence government policy and regulation. Goldman alumnae are everywhere: from the Treasury to the Federal Reserve to the White House. They are in almost all the other major banks and in countless corporations. Treasury Secretaries Robert Rubin (Clinton), Henry Paulsen (Bush), and Timothy Geitner (Obama) all did time at Goldman. The company and its employees have poured millions into the election campaigns of both parties.

Goldman is the largest member of an elite society of banking and financial empires. For most people (including me), the Wall Street financial world is as bizarre and confusing as atomic physics. Few people deal with it directly yet, as last year’s financial debacle showed, it has enormous influence on the economic health of the nation and the world. Unfortunately what has been missing is any sense that such enormous power also carries with it enormous responsibility.

In response to another critique of Goldman’s practices, a past employee wrote this about the company’s unique environment:

I worked with a lot of great people who were compassionate, funny and even cool. I also met a lot of people who couldn't hide their snobbery even if someone paid them another million to do so. Most of the work is a grind and many supersmart people put their brains to work in this highly competitive place without really even looking up long enough to see the big picture. In their downtime they fix their bleary eyes on shopping and travel sites to get a hint of why they sacrificed so much in the first place. Money, prestige, cool stuff, hot dates, and good times. Oh, and some have families too (boats, multiple homes, private schools...).

Is this the American dream? Is this “the good life”? It takes highly intelligent, hard working people to execute the incredibly complicated (and mind-numbing) financial maneuvers of banking behemoths like Goldman Sachs. But to what end—either for those involved or for society?

In a recent speech, Obama economic advisor Larry Summers (not a Goldman alum) declared that it is time for change. "Financial institutions that have benefited from government support can, should and must use this moment to think about what they can do for their country. . . . [We have] one crisis every three years. Surely a system that produces this many accidents and accidents this severe is a system that is in very much need of reform."

Yet the need is much larger than preventing “accidents.” Credit and investment are essential to every economic participant. As the source of these funds, banks’ function is not unlike that of the public utilities which provide gas, water and electricity. Such companies could not stop delivering these essential commodities because they found a more profitable way to invest their money. The same should be true of banks and the credit they provide.

America, of course, is the world’s pre-eminent champion of free enterprise. Nonetheless, we practice capitalism not as an end in itself but because we believe it is the system most conducive to the prosperity of society as a whole, rather than the prosperity of a few. Businesses and the people who run them can be greedy or stupid—or both. Preventing these tendencies from causing harm to others is one of government’s essential roles.

Yet government can’t perform that role, if it has been co-opted by the interests it is trying to monitor and regulate. Nor can a free economy function when businesses are allowed to completely separate themselves from the social consequences of their practices and products. Nor can democracy function when it becomes obvious that certain segments of society are being grossly favored over others and the mechanisms for correcting such inequity have broken down.

With Goldman Sachs—a company salvaged just a year ago at enormous tax payer expense—about to pay out bonuses larger than what most people make in a lifetime, yet at the same time failing to provide the supposedly essential service it was rescued for, it’s hard not to see that there has been a catastrophic breakdown in our social compact. This is a recipe for both continued suffering and injustice as well as dangerous social discontent.

Thus says the LORD: For three transgressions of Israel, and for four, I will not revoke the punishment; because they sell the righteous for silver, and the needy for a pair of sandals — they who trample the head of the poor into the dust of the earth, and push the afflicted out of the way. (Amos 2: 6-7)

Not a good day

A smattering of reports and developments roiled the economic waters. The green shoots are really struggling.

• Another high unemployment report (supposedly) sent stocks lower. (I say "supposedly" because I think these simplistic explanations for market moves are normally just media spin.) It seems nealry impossible now to avoid double-digit unemployment by the end of the year (and probably sooner).
• Unusually, bonds fell as well (more typically bonds and stocks move in opposite directions). Reports indicate that Standard & Poors will soon be downgrading the debt of the UK and suspicions are growing that the same will happen to US debt. At the same time the credit of several European countries and multiple European banks recently have been downgraded.
• To no one's surprise the large Florida thrift BankUnited was shut down by the Feds today. This will result in a large hit to the FDIC, second only to that of California's IndyBanc which collapsed last year.
• Finally, AIG Chairman and CEO Edward Liddy announced he is throwing in the towel. Liddy was brought in after AIG's implosion last year and was literally working for nothing. In interviews he came across as someone who was sincerely trying to make the best of an awful situation and was working out of a genuine sense of social obligation. He took a lot of heat for the incompetence of his predecessors. Called out of retirement as head of Allstate, he's obviously had enough. This has to be viewed as very unfortunate as it is unlikely that there are very many people of his abilities and character available for such assignments as we tried to rebuild our tattered economy.

All-in-all, just not a very good day.

To loan or not to loan

A new post at Economist's View raises again a question that keeps bouncing around regarding the economic recovery strategy: Should people be saving or borrowing? The quoted article's main point is the contention that excess consumer borrowing rather than stock speculation was the cause of the Great Depression. Ever since last fall's financial crisis, the government's primary stated objective has been to get banks loaning money again--even though everyone agrees excess debt was what created the crisis in the first place. The article and many of the comments cast serious doubt on this strategy. Rather than saving the banks, they argue, this sector needs to contract. Rather than extending credit it needs to remain tight, with the inevitable resulting foreclosures and bankruptcies.

In this view the options seems to be: take the pain now and fix the system once and for all, or minimize the pain and drag out the problem for years to come. This also may be at the heart of the conflict between the aggressive US/UK approach and the more restrained strategy of the continental Europeans. In the latter case, one of the main reasons they are more willing to "endure" the crisis rather than rush to ameliorate it is their more extensive social safety net of public health care, extensive unemployment benefits, etc. If the US had such programs in place, would Washington be advocating a different policy? Are we doing what's right, or are we taking the easy way because we don't have the political stomach to do what's actually necessary?

Krugman sounds the alarm

Paul Krugman is really, really upset--and he's not alone. The Geithner toxic assets plan will be announced Monday but details are already available. Read Krugman's take below. As this and the AIG bonuses fiasco are showing, what to do with the insolvent bank, mortgage and insurance institutions is the big issue, more so than the stimulus plan. Krugman thinks Obama could be making huge and potentially fatal (for his administration) mistake here. Hopefully he's wrong--and if not, that Obama is paying attention.

"Despair over financial policy"

"More on the bank plan"

Meanwhile, a cry has gone up (!) for Prof. Krugman to come the rescue and replace Mr Geithner.


But as Calcutated Risk reminds us Krugman himself thinks this is a bad idea:

And for those of you wondering about yours truly — I’m temperamentally unsuited, have never had any desire for the job, and probably have more influence as an outside gadfly than I ever could in DC.

The Credit Crisis--in pictures!

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

No one fully understands the credit crisis, of course, but the basics of how we got here are pretty clear. This video is a great presentation of the chain of events that brough us to our current economic debacle. In particular, it demonstrates what the appeal of reckless mortgages was to investors, and the impact of the fatal combination of enormous amounts of dollars overseas (due to our trade deficit) with artificially low interest rates here in the US (due to the Fed's attempt to fuel our faltering economy). If you are a visual/graphical learner, this is especially for you.