 | | The Daily Reckoning | Monday, September 12, 2011 |
- Euro stocks get hammered on the “new old” Greek default story,
- $1.2 trillion in Fed funds you weren’t supposed to see (and who got it),
- Plus, Bill Bonner on “use it or lose it” public spending, a tax trip back to the Dark Ages and more...
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|  | | | Losing Faith in the “Power” of Central Bankers | | Why Investors are Finally Beginning to See the Truth About Government Intervention | |  | | Eric Fry |
Reporting from Laguna Beach, California...
Global equity markets are sinking again today, as the euro zone credit crisis deepens.
According to the rumor mill, a default by the Greek government is not merely inevitable, it is imminent. As a result, the cowboys up in Germany and France are circling the wagons.
“Germany may be getting ready to give up on Greece,” Bloomberg News reports, “as the credit markets signal growing concern about the smaller nation’s ability to repay investors. Yields on Greek two- year notes rose above 60 percent today for the first time...
“After almost two years of fighting to contain the region’s debt crisis and providing the biggest share of three European bailouts [to Greece, Ireland and Portugal],” Bloombergcontinues, “German Chancellor Angela Merkel is laying the groundwork for what markets say is almost a sure thing: a Greek default.”
Of course, a Greek default has been a sure thing ever since the European Union and IMF started shipping euros down to Athens more than a year ago. Bailouts, rescue packages and official protestations to the contrary are all part of the “Inevitable Default Playbook.”
Over the weekend, Greek Prime Minister, George Papandreou, vowed “to save the country from bankruptcy.” The Prime Minister promised, “We will remain in the euro.”
Ergo, a default is both inevitable and imminent.
“It feels like Germany is preparing itself for a debt default,” says Jacques Cailloux, chief European economist at Royal Bank of Scotland. “Fatigue is setting in.”
The threat of a Greek default is not exactly a new story. In fact, it is a very old story here at The Daily Reckoning. As early as February 2010, your editors began linking the words “Greece,” “default” and “inevitable.” Your editors would re-position these words from time to time, just to keep the story fresh. But the essential message never changed: This thing that cannot possibly last will not last. Greece will default. It’s inevitable.
But since inevitable is not the same thing as imminent, the financial markets of Europe and the US kept powering ahead for months, without worrying about the due date of inevitable.
Obviously, investors are worrying now. Stocks are suffering worldwide, and no stocks are suffering more than European bank stocks. The share prices of Europe’s largest banks are down 50% to 70% over the last three months. Here in the States, the financials are also performing dismally. Just today, the share price of Goldman Sachs dropped back below $100 for the first time since March 2009.
Somebody is worried...and that worry is also extending to the forex markets, where the euro has dropped to 6-month lows against the dollar and 10-year lows against the yen.
As investors scurry away from the risk of additional losses, they are also fleeing a delusion that has been condemning their capital to inevitable (there’s that word again) losses. This costly delusion is that central banks and other governmental agencies possess the power to improve economic conditions.
For several months, at least, investors have been able to see that government finances throughout the Western World were in shoddy shape...and becoming even shoddier as these governments catapulted billions of dollars and euros into their sluggish economies, hoping something good would happen.
Despite this obvious distress, however, global stock markets have been rallying for most of the last two years. Why? Because investors trusted the power of governments to overcome the forces of recession and debt liquidation. Investors placed their faith in the gospel of omnipotent central banking, just as they had always done since the days of Alan Greenspan.
But that faith is wavering. Investors are becoming disenchanted with their golden calf.
The long-running faith in the power of central banking traces its roots to the great American folktale, Maestro Alan Greenspan. Remember that delightful tale? Alan was the guy who could steer a massive $13 trillion economy just by tweaking one little bitty interest-rate. He was the guy who could produce a rally on Wall Street, simply by raising his eyebrows a certain way during congressional testimonies, or by clearing his throat a certain way when discussing Fed policy.
Alan was the guy who always had the right answer, even when there wasn’t one. He always knew exactly what to do, even when nothing should’ve been done. He was more than a Maestro; he was a wizard. No one doubted his power to improve the US economy. And he was also omniscient. He always knew what the proper level of interest rates should be, even when Mr. Market vehemently disagreed.
Whether by luck or genius, Greenspan played a hot hand for many years. His “masterful” monetary policy received credit for placing two chickens in every pot and an “affordable mortgage” in every household balance sheet.
As a result, investors not only placed their faith in Greenspan’s “power” to produce economic growth (and stock market rallies), they also came to believe that governments and central banks, in general, possessed the power to nurture economic growth and/or dampen the effects of recession.
But as it turned out, Greenspan did not have all the answers. In fact, he did not have any answers at all. He had gimmicks and quick- fix levers to pull — the one constant ingredient being EZ credit. Greenspan responded to every mini-crisis of his tenure by slashing short-term interest rates.
These quick fixes did not actually fix anything, but they did enable the US economy to lurch from bubble to bubble until the financial system had become so fatally levered that a large-scale credit crisis became inevitable.
The nation marveled at the Maestro’s golden touch, and revered his reputation...until about 2007, when the Greenspan legacy came under review for possible downgrade...outlook “negative.”
As the housing bubble burst, and the balance sheets of America’s largest financial institutions began melting faster than the Wicked Witch of the West, many American investors started to have second thoughts about the wizard-formally-known-as-Alan-Greenspan. They began to realize that Greenspan was merely human, and that central bankers do not possess superhuman powers.
And yet, vestiges of the “benign government intervention” delusion remain. Some investors still trust the European Union to “fix” the Greek debt problem, and clearly, some Americans still trust President Obama to “create jobs.”
Here at The Daily Reckoning, we do not.
We distrust central bankers to fix economies and we distrust politicians to create jobs. But that does not mean we lack a belief system. On the contrary, we possess a strong and enduring faith in politicians to borrow money and in central bankers to print it. That’s what they do; that’s what they have always done.
Trusting the power of central bankers and politicians may be a decent, short-term trade; but distrusting that power is a great, long-term investment.
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| | The Daily Reckoning Presents | | A Raging Case of Bailout Fatigue | |  | | Doug Hornig |
I’ve used the term “outrage fatigue” on numerous occasions as a way of explaining why there has been such a muted outcry from the general population, as the tally of financial atrocities committed against American citizens has exploded.
August 22 was just another average day with another average headline that could easily have been ripped from some radical economic watchdog website (liberal or conservative, either one): Wall Street Aristocracy Got $1.2 Trillion from Fed.
But the line wasn’t the work of someone out there on the anti- capitalist or anti-government fringe. It was attached to an article from the very mainstream Bloomberg News.
Bloomberg has been engaged in a long, frustrating FOIA litigation battle with the Federal Reserve over that entity’s reluctance publicly to reveal what it has been doing with our money. Slowly, the stone wall has been coming down. And looking at what’s behind it, it’s pretty obvious why the Fed would have preferred to keep its deeds locked away from all prying eyes.
Thus the above headline. And here’s an ugly truth that goes along with it: It’s a near certainty that the vast majority of those who saw it — probably not too many in number, since the story got scant coverage on the network news — said to themselves, Yeah, we already knew that. Ho hum.
Call it “bailout fatigue.”
Because, guess what? This is not a recycled story from last year. This is news that we didn’t know before the 22nd.
This money is not a part of the $16.1 trillion in emergency loans the Fed handed to US and foreign financial institutions between Dec. 1, 2007 and July 21, 2010, according to figures produced by the first-ever, one-time-only GAO audit of the central bank ordered by Dodd-Frank. Nor is it part of the $2 trillion quantitative easing program. Nor is TARP’s $700 billion in there, either.
Read that again. This $1.2 trillion — and perhaps we also have trillion fatigue, because that’s a lot of money — is separate from all that other stuff. It’s another hitherto secret funding program that we never would have heard of if Bloomberg hadn’t torn it from the Fed’s mouth like a rotten tooth.
The list of who got the bucks is a basic guide to the American banking industry. $107 billion to Morgan Stanley. $99 billion to Citigroup. $91 billion to Bank of America. Over $75 billion to State Street and just under that to Goldman Sachs and JPMorgan Chase. And the list goes on. And on. And on. Even the disgraced Countrywide Financial got in on the act, claiming about $12.5 billion.
In addition, as the Fed was bailing the leaky American boat, it must have asked itself, Why stop here? There are foreigners out there who need our help just as much.
So, almost half of the Fed’s top 30 borrowers were European firms. They included the Royal Bank of Scotland, which was propped up to the tune of $84.5 billion, the most of any non-US lender, and Zurich-based UBS, which got $77.2 billion. The big foreign borrowers also included Dexia, Belgium’s biggest bank by assets, the French Société Générale, Deutsche Bank, Barclays, and Crédit Suisse.
“These are all whopping numbers,” says Robert Litan, a former Justice Department official who investigated the savings and loan crisis in the 1990s. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”
So much for the free market, where failed business ventures...well, fail. But not to worry, the Fed did it all for us.
“We designed our broad-based emergency programs to both effectively stem the crisis and minimize the financial risks to the US taxpayer,” says James Clouse, deputy director of the Fed’s division of monetary affairs in Washington.
Furthermore, the Fed’s official line now is that “nearly all of our emergency-lending programs have been closed. We have incurred no losses and expect no losses.” In fact, $13 billion in interest income was supposedly realized.
That works out to an average of, yes, one percent.
Now that’s a pretty nice loan rate if you can get it. They could, and they did. Citigroup, for example, was the most frequent US borrower, in hock to the Fed on seven out of every 10 days from August 2007 through April 2010. On average, the bank had a daily balance at the Fed of almost $20 billion.
And the ability to raise truckloads of money for almost no interest raises another disturbing question: Did the banks really need this cash to stay afloat?
University of Pennsylvania finance professor Richard Herring, an authority on financial crises, is suspicious, saying that some banks may have used the program to maximize profits by borrowing “from the cheapest source, because this was supposed to be secret and never revealed.”
But regardless of whether banks needed the Fed’s money for survival or used it because it offered the opportunity to turn a quick, easy buck, the central bank’s lender-of-last-resort role amounts to a free insurance policy for banks, Herring notes.
Access to Fed backup support “leads you to subject yourself to greater risks,” Herring says. “If it’s not there, you’re not going to take the risks that would put you in trouble and require you to have access to that kind of funding.”
All of this might conceivably make citizens revolt against an entity that uses their money to secretly fund the “Wall Street aristocracy.” It might make them vote for a Gary Johnson or a Ron Paul, someone who favors dismantling the Fed.
Or not. When a story as big as this one generates a bare minimum of media coverage, you know it’s probably headed for that huge waste bin in the corner of the parking lot. The one marked Bailout Fatigue.
Regards,
Doug Hornig,
for The Daily Reckoning
P.S. No one can afford bailout fatigue, since the question regarding US debt is no longer “if,” but rather “when” the financial collapse will come. Truth be told, the process is already under way...but there’s still time to prepare. You can protect yourself, your family, and your investments — and even profit. Learn how big the problem is and how you can prepare by attending a free, online event. The American Debt Crisis will be held on September 14 at 2 p.m. EDT. Register today!
| | | | When Will Obama Confess to the Secret “Timebomb” Event Ahead? |
Obama and Congress won’t even talk about it...but we’ve got a much bigger problem ahead than anybody cares to admit...and it could hit harder than the 2008 banking collapse.
What problem?
Nothing less than a secret new meltdown for world oil supplies — with gas potentially doubling in price and oil potentially about to hit $300 — and it could hit as early as the end of this year.
Find out how in this urgent new report...
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| | | | Bill Bonner | | US Debt and the Roadblocks to Renaissance | |  | | Bill Bonner |
Reckoning from Charlottesville, Virginia...
It would be almost laughably easy to bring a real renaissance in the US.
But first you have to understand the real problem. It’s not a lack of stimulus... Or, the inequality of income distribution... Or because the feds didn’t regulate enough. Or that bankers are greedy...or that capitalism won’t work.
The problem is debt. There’s too much of it.
And there’s too much of it because the feds encouraged people to borrow and spend too much. That’s what a pure paper dollar system does. The US spends. Money goes overseas. But instead of returning it to the Treasury and exchanging it for gold, the foreigners keep the money overseas. It’s used as bank reserves. In effect, Americans never have to settle up. The debt just builds and builds and builds. Accumulated US trade deficits since 1971 tote to some $8 trillion. That’s the difference between what Americans have spent overseas...and what they’ve sold to foreigners.
And it is still growing by about $50 billion a month.
Much of this money does eventually come back to the US. But it comes back as debt. The foreigners lend it back to the US government. This helps enable US government debt to grow at about $100 billion a month.
Too much debt causes problems. It turns malignant. Economies can’t ‘recover’ until the debt is reckoned with. But reckoning with debt is painful. The bankers (who hold much of the bad debt) and the politicians (who often work for the bankers) don’t want to suffer pain. They want someone else to suffer it...preferably someone in the future, someone who is not yet of voting age.
But it doesn’t work. As the economy slows under the weight of debt, the pain spreads.
Last week, President Obama announced a $447 billion jobs program. The Dow went down 300 points.
That is all we know. And all we need to know. Investors no longer believe that stimulus measures will produce the long-awaited recovery. Stocks are headed down.
Bernanke has pledged to keep lending at negative interest rates for the next 2 years.
And now Obama has come up with nearly a half-trillion in new spending (making nonsense of the recent debt-ceiling discussions).
They’ve fired both barrels, in other words — fiscal and monetary — and the Great Correction didn’t flinch.
Why? Because the Obama plan adds debt; the very thing the economy needs least of all.
And more thoughts...
What do employers think of the plan to put Americans back to work? Here’s The New York Times, on the case:
Jen-Hsun Huang, chief executive of the chipmaker Nvidia, said the incentives that President Obama has proposed won’t cause the company to hire any more people or change the kinds of people it hires.
That sentiment was echoed across numerous industries by executives in companies big and small on Friday, underscoring the challenge for the Obama administration as it tries to encourage hiring and perk up the moribund economy.
The plan failed to generate any optimism on Wall Street as the Standard & Poor’s 500-stock index and the Dow Jones industrial average each fell about 2.7 percent.
As President Obama faced an uphill battle in Congress to win support even for portions of the plan, many employers dismissed the notion that any particular tax break or incentive would be persuasive. Instead, they said they tended to hire more workers or expand when the economy improved.
Economists estimated that President Obama’s plan, costing an estimated $447 billion if it were ever fully adopted, could create anywhere from 500,000 to nearly two million jobs next year.
Most of those jobs would be added, economists say, as workers spend the additional take-home pay that would result from a proposed payroll tax cut for employees. As consumers increase spending, that can prompt more hiring by retailers, washing machine makers, restaurants and more.
Some of the new jobs would also probably come from measures like the proposed $35 billion to retain or hire teachers, police and firefighters, as well as $30 billion to refurbish school buildings and $50 billion to build or repair highways, railroads, transit systems and waterways. *** And oh yes...how could you cause an economic renaissance in the US? Simple. Get rid of the zombies. The whole society is chock full of them. Expensive, time- and money-consuming zombies.
A friend (who works for a government bureaucracy) explained:
“I’m a managerial accountant at the [federal agency]. I see how it works from the inside. Nobody asks whether what we’re doing makes any real difference. They just ask how much money we’ll get next year. Then, they sit around trying to figure out ways to increase our appropriations. We really couldn’t spend our budget for this year — not effectively. But you know what they say: ‘use it or lose it.’ They’ll get more money next year.”
Every aspect of life is zombified. Even the US military. The Pentagon has become a huge spending machine, just like other federal bureaucracies. Does all its spending make the nation safer?
Nobody asks. Nobody cares.
But how do you get rid of the zombies?
Just cut off their food supply.
Instead of futzing around with a ‘jobs program,’ just cut taxes to 10%. No deductions. No explanations. No credits. No nonsense. You pay 10% on all your income. Period.
Heck, serfs in the Dark Ages only had to pay 10% of their incomes (usually in the form of labor) to their lords and masters. Why should Dear Readers have to pay more?
A flat 10% tax rate would cut off the flow of blood to the zombies. Most would die off. Bad debt would implode. Bad businesses would go broke. Bad assets would become worthless.
Then, with the necrotic economic tissue cleaned away...the economy could heal. And then, grow.
Regards,
Bill Bonner
for The Daily Reckoning
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