Banks need capital, but indebted governments can't afford to bail them out again right now (not that bailing out the banks causes any unintended consequences or anything; it certainly doesn't incentivize risky behavior). It's too bad we can't close our eyes, click our heels together, and go back to the old days of drinking the sweet nectar of a fiat-financed bubble.Next is "Lawrence Summers and Obama's Clueless Housing Solution":The governments can however, provide a guarantee that is credible because they have the power to tax. It will take a new legally-binding agreement for the eurozone to mobilize that power, and that will take time to negotiate and ratify. In the meantime, they can call upon the European Central Bank, which is already fully guaranteed by the member states on a pro-rata basis. To be clear, I am not talking about a change to the Lisbon Treaty but a new agreement. A treaty change would encounter too many hurdles.Since the government has the legal authority to pillage its citizens of their earned wealth, if it makes a financial guarantee, the market will of course buy it because the money can always be forcibly taken from the citizenry if need be. These guarantees mean the banks are basically nationalized and prevented from going under. The prospect of civil unrest or capital flight due to increased taxes won't happen if we ignore it. If worse comes to worst, the ECB can always print euros. Screw the old Lisbon Treaty; we can write a new one.
In an effort to defend HAMP, the recently proposed overhaul of his former boss's abysmal housing refinance program, the man who ran the Treasury under President "more home ownership" Clinton offers some advice on how to fix the housing market. In the rag of big government known as the Washington Post, Lawrence Summers penned an editorial which pins down the cause of the housing bubble but fails miserably at offering a credible solution. Get ready for some laughs:Time for some real news, the grand non-bargain for the Euro zone reached yesterday has Greece bondholders voluntarily (you are supposed to laugh at that description) going to the barber to get half of their investment buzzed right off, via Bloomberg:The central irony of a financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it can be resolved only with more confidence, borrowing and lending, and spending. This is true, above all, of housing policies. Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) whose purpose is to mitigate cyclicality in housing and that today dominate the mortgage market, have become a textbook case of disastrous and pro-cyclical policy. [My emphasis.]Right out of the gate, Summers comes out as fool. He diagnoses the cause of the housing crisis only to recommend the same prescription that caused the dilemma to begin with. Like a patient who is losing too much blood, Dr. Summers recommends that massive blood loss be cured by...you guessed it: more blood loss. He makes no mention of the Federal Reserve and the abundant credit and artificially low interest rates that fueled the crisis. Keynesian apologists never acknowledge the printing-press elephant in the room; such would be the equivalent of blasphemy.
European leaders cajoled bondholders into accepting 50 percent writedowns on Greek debt and boosted their rescue fund’s capacity to 1 trillion euros ($1.4 trillion) in a crisis-fighting package intended to shield the euro area.And here when I thought I had seen enough kicking of the fiscal can down to road, a big punt comes along. 1 trillion euros is a joke and the EFSF will need much more. This is just another band aid and as Zerohedge points out, the math isn't adding up like usual:
The 17-nation euro and stocks climbed while bond spreads narrowed after leaders emerged early today from a 10-hour summit in Brussels armed with a plan they said points the way out of the quagmire, albeit with some details still to be ironed out.
Albert Edwards of SocGen sums it up:
- Greece has €350 billion in total debt including about €70 billion in Troika "post-petition" loans; these are untouched.
- Of the €280 billion, roughly €75 billion is held by the ECB: this, like the Troika loans, will be untouched.
- This leaves just ~€200 billion in actual debt to undergo a haircut.
- Apply a 50% haircut to this debt (ignoring the fact that of this about €35 billion is held by Greek pension funds, and once the realization that Greek pensions have been cut in half dawns upon the population, the result will be the biggest riots ever seen in Athens yet).
- Total debt to be cut: just about €100 billion.
- Hence, of the total €350 billion, just €100 billion is eliminated, most of it used to backstop and service Greek pension and retirement obligations
- €250, or the residual, of €350, the original, means 72%, or a 28% haircut.
- Greek GDP was €230 billion on December 31, 2010 and declining fast.
- And that is how a 50% haircut is "cut" almost in half
"The increasingly frenzied attempts of eurozone governments to persuade financial markets that they can draw a line under this crisis will ultimately fail – even if this week’s measures bring some short-term relief. I have minimal confidence that governments can turn this around within the confines of the eurozone project. You might be surprised though that I feel more bullish! Why? Both Dylan and I have come to the view that the ECB will be forced, by events, to monetise debt in the GIIPS and beyond. And if investors believe the governments in Spain and Italy are bust, then Germany, France, and not forgetting the UK and US, are far, far worse." (my emphasis)Like I and anybody with a brain larger than kitten's has acknowledged, the European Central Bank will ultimately print to rectify bank balance sheets, Germany Supreme Court decision or not.
The European Union’s ability to write down 50 percent of banks’ Greek bond holdings without triggering $3.7 billion in debt insurance contracts threatens to undermine confidence in credit-default swaps as a hedge and force up borrowing costs.As Janet Tavakoli points out, there is a lack of "standards" when it comes to credit default swaps with the ISDA. Since the Greece haircut was deemed voluntary (chuckles again), it looks like those who were overly cautious of politicians in a social democracy making too many promises with taxpayer money are screwed over while the big banks who sold such credit default swaps are protected. Sleazy contract law? Yup, smells like kleptocracy, especially with JP Morgan pulling the reigns.
As part of today’s accord aimed at resolving the euro region’s sovereign debt crisis, politicians and central bankers said they “invite Greece, private investors and all parties concerned to develop a voluntary bond exchange” into new securities. If the International Swaps & Derivatives Association agrees the exchange isn’t compulsory, credit-default swaps tied to the nation’s debt shouldn’t pay out. (my emphasis)
So while joke after pathetic joke keep coming out of Europe, Think Progress's Matt Yglesias tries his best to figure out why tuition costs in American higher education keep going up without making a peep about government guaranteed loans and occupational licensing:
The figures on college tuition increases amidst the continuing recession are really amazing. Most of the people I interact with who are involved in the university system like to talk about cuts in public funding in this context, and if you look at the public/private gap in tuition increases, that’s clearly part of the problem. But the private non-profit four-year college sector increased prices 4.5 percent.Who cares what Universities are spending money on? What matters is how they are able to afford it and why has society become so ingrained with the mindset that fresh high school graduates need to go into $50,000 in debt to get an education in unmarketable majors like "political science" (my degree is virtually the same thing, so I can speak to such matters). It certainly has nothing to do with government intervention and providing a virtually endless supply of student loans, right Matt? Take a look at this pathetic hypothesizing that would make Paul Krugman proud:
It’s a number that far exceeds the overall level of inflation or income growth in the economy. It’s not because America’s private non-profit four-year colleges got a lot better. Nor is it clear what production inputs saw that kind of leap. College education is not hyper-sensitive to rising gasoline prices. Schools are spending much more money, but on what?
The normal hypothesis would be some kind of shortage of highly specialized labor. Just because unemployment is high doesn’t mean Google can hire software engineers for cheap. There are only so many good ones to go around. Similarly, the spike in joblessness hasn’t led to a surplus of experienced heart surgeons. So labor costs in specific markets can go way up even amidst generalized malaise. Colleges, like hospitals and innovative tech firms, employ highly skilled labor that may be in short supply. But I certainly don’t get the impression from my friends in PhD programs that the academic job market is suffering from critical labor supply bottlenecks. It’s just the reverse. You’re constantly hearing about the glut of people going on the market and unable to find work. Something has gone badly, fundamentally wrong with the basic model.So after wasting a paragraph on the non-lack of associate professor candidates, Yglesias remains baffled. After all, government apologists can't ever fathom the simple fact the easy money from the government creates market distortions and mixed pricing signals. Why is this guy famous again?
I will end with mentioning Jonathan Weil's great piece on the revolving door between Washington and Wall Street and specifically the Big Four accounting firm Deloitte & Touche LLP in Bloomberg today:
This isn’t only a Deloitte problem. On its website, Baker Botts says it also represents Big Four auditor Ernst & Young LLP and Grant Thornton LLP. Gibson Dunn counts all four Big Four firms as clients, including PricewaterhouseCoopers LLP and KPMG LLP. The board won’t say if Doty or Ferguson has been disqualified from any matters as a result.
And talk about being wired: The SEC’s chief accountant, James Kroeker, is a Deloitte alumnus. At the Financial Accounting Standards Board, which writes U.S. accounting rules, the wife of one board member, Russell Golden, is a Deloitte partner.
Other Big Four firms have had similar kinds of links over the years. (One former oversight board member, Kayla Gillan, became SEC Chairman Mary Schapiro’s deputy chief of staff in 2009, then quit this year to join PricewaterhouseCoopers’ “regulatory relations” group.) It’s something special, though, when a single firm can knock out most of its chief regulator’s board. In that respect even the bankers at Government Sachs, aka Goldman Sachs Group Inc. (GS), would have reason to envy the auditors at DeFeds & Touche.No news here except to maybe Yglesias who believes only angles run the government.
Update- By far the best description of the Euro crisis yet via Charles Hugh Smith:
The best way to understand the EU's current situation is to imagine an astoundingly dysfunctional family of deep-in-denial-addicts, screaming co-dependent parents, and grown-up grifters acting like spoiled brats, all trapped in a rat-infested, flooded flat that's had the gas turned off for lack of payment--and there's a plutonium life preserver glowing in the knee-high water.
Update 2- Albert Jay Nock's insanely accurate description of the current education system Yglesias can't seem to pinpoint the problem with:
Then the general estimate, the currency value, of education — the generally-accepted idea of what education is and ought to be — was set by the worst form in circulation, a form which had virtually nothing to do with education, but only with training; and those forms which had more to do with education were forced out. Then finally, after the system had passed a certain point of development in size, power, and prestige, the percentage of net profit (putting the matter in commercial terms) began to show a steady decline.In regard to Thomas Jefferson's push for universal education:
Furthermore, the curiously composite public character of the system, as I observed it in the late '20s, interested me as having likewise come out inevitably according to pattern; the pattern set in earlier times by the Church, and now by the State. As a State-controlled enterprise maintained by taxation, virtually a part of the civil service (like organised Christianity in England and in certain European countries) the system had become an association de propaganda fide for the extreme of a hidebound nationalism and of a superstitious servile reverence for a sacrosanct State.
In another view one saw it functioning as a sort of sanhedrim, a levelling agency, prescribing uniform modes of thought, belief, conduct, social deportment, diet, recreation, hygiene; and as an inquisitional body for the enforcement of these prescriptions, for nosing out heresies and irregularities and suppressing them. In still another view one saw it functioning as a trade-unionist body, intent on maintaining and augmenting a set of vested interests; and one noticed that in this capacity it occasionally took shape as an extremely well-disciplined and powerful political-pressure group.
I think, however, he would have risked a wry smile at the spectacle of our colleges annually turning out whole battalions of bachelors in the liberal arts who could no more read their diplomas than they could decipher the Minoan linear script.Damn, now I know why Rothbard loved this guy. He was decades ahead of many people and still puts fools like Yglesias to shame even from the grave.
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