Friday, 28 October 2011
Why Economists Get It Wrong
Credit Default Swaps Useless as Hedge Against Default; CDS on Greece a Purposeful Sham; Derivatives King Always Wins
As a result of labeling 50% haircuts "voluntary", Credit Default Swap contracts have proven to be useless when it comes to protecting against sovereign default. The serious implication is investors will need to find another way to hedge.
Occupy Wall Street Launching First Nationwide General Strike In America Since 1946
The strike will occur on November 2nd.
One of the founders of the Tea Party – conservative Karl Denninger – supports the strike (and see this).
Occupy Wall Street in New York has also been considering a proposal for a general strike. And there are also rumors of a global general strike next year.
GENERAL STRIKE NOVEMBER 2nd
To The Naysayers For November 2nd (And 25-27)
So you have a job and thus you won't risk anything to stop spending and participate in a General Strike.
Cool. That's your choice, of course.
But let me ask this: If not now, when?
See, this fraud has been going on for 30 years. But it has picked up to a fever pitch in the last four. FedUpUSA and Tickerforum organized marches on Wall Street and in Washington DC in 2008 after the unlawful actions related to Bear Stearns and the rest of the financial system. Pretty much nobody showed up. Those who do deserve praise (and gratitude), but they were few in number.
Now "Occupy Wall Street" (in its various incantations) has thousands in the streets in peaceful protest and has called for a General Strike; a subject I raised in 2008 as well.
And again, people say "oh, no, I can't do that."
Ok.
But again: If not now, when?
Do you feel "better" that the DOW is up 300 points today? You did in 2009 when Kanjorski made fraud on balance sheets a business model, right? So let's tabulate the results of legislating fraud as a business model.
Did it get you a job? Why no, it did not.
Did it make college more affordable by resolving the cost-push problem? No, it made it worse.
Did it solve the medical cost problems that bankrupt millions? No, it made it worse.
Did it solve the housing crisis? No, it made it worse.
Ah, I get it. It's not "bad enough" yet.
Well, here's the deal folks: This is a lawful and peaceful action.
Now the inconvenient question: What do you think is going to happen when, not if, the government funding model breaks down and the Federal Government is forced to curtail 60-75% of its spending overnight? When the Social Security and Medicare stops? When the food stamps.... stop? When the military benefits.... stop? Will the people's reaction to that be lawful and peaceful?
Better think that one over folks..... because virtually all of you aren't considering this at all, and those who naysay now are betting not only their future but that of their children that when it does get worse it will be "business as usual."
You may be right, but that's the wager you're taking, and I don't like the odds.
Before you say "oh that can't happen, especially not here" you might want to look at Greece, where it is, at Italy, where it will, and in Egypt, where it did, and everyone said it wouldn't happen in those three cases too.
And that's just in the last couple of years.
Something to think about.
Professor Willem Buiter, Citigroup's chief economist, gave some interesting evidence to the UK House of Lords’ European Union economic and financial affairs sub-committee today, as it looked to understand the eurozone debt crisis
Buiter Says All Banks at Risk if Euro Crisis Escalates Further
Citigroup Inc. Chief Economist Willem Buiter said all banks in advanced economies could be at risk if European leaders lose control of the region’s sovereign- debt crisis.
“If things get out of hand in the euro area, no bank in the financial-integrated world will stand,” Buiter told lawmakers at a parliamentary hearing in London today.
Banks and other systemically-important financial institutions need to be recapitalized before any sovereign restructurings of euro-zone members with high debt levels such as Greece or Portugal, the economist said. “If they don’t, we are setting ourselves up for a financial crisis following the sovereign crisis,” he said.
http://www.bloomberg.com/news/2011-10-18/buiter-says-all-banks-at-risk-if-euro-crisis-escalates-further.html
Think the all-clear has been sounded on a Greece default? Not so fast, says Barclays Capital.
They warn that that credit default swaps on Greece could still be triggered despite the so-called “voluntary” exchange. They note that there’s a key unknown about how much “voluntary” participation is being counted on by European officials to make the deal work. And even if they reach that unknown number, there’s still the little matter of whether Greece will be able to pay its remaining debts…
Here’s what they have to say:
Chancellor makes pledge after eurozone deal but says Britain will not contribute directly to EU bailout mechanism
George Osborne warns of 'blank spaces' in Eurozone rescue package
George Osborne has warned there are still “blank spaces” in the rescue deal agreed last night by European leaders to tackle the continent’s debt crisis.
A Greek default in all but name
By Robert J. Samuelson,
There’s an Orwellian quality to Europe’s latest financial rescue. Words lose their ordinary meaning. Greece, for example, has clearly defaulted, but no one says so. In July, private lenders agreed “voluntarily” to accept an estimated 21 percent reduction in their loans to Greece. Now that’s been pushed to 50 percent, and private lenders’ consent is still described as “voluntary.” Well, it’s about as “voluntary as when one hands over one’s wallet in response to the choice of, ‘Your money or your life,’ ” notes Douglas Elliott of the Brookings Institution.
What constitutes a default? Here is Standard & Poor’s definition: “We generally define a sovereign default as the failure to meet [the] interest or principal payments . . . contained in the original terms of the rated obligation.” Not much doubt there: A 50 percent “haircut” wasn’t part of the original bonds. But for political and legal reasons, it’s inconvenient to declare a default. Instead, the Europeans call the write-down “private-sector involvement,” or PSI. How reassuring.
Greece Deal Won't Lead to Lehman-Like Event: Dallara
The deal that allowed Greece to renegotiate its debt will not lead to a credit event on the scale of the Lehman Brothers failure that triggered the US financial crisis, the lead negotiator in the talks told CNBC.
Charles Dallara, head of the Institute of International Finance, said the Greek debt deal is "voluntary" and agreed to after a "marathon session" with European leaders that lasted well into the night. He said it is unlikely to cause a major problem in the market for credit default swaps
which are triggered in the case of debt defaults.
Sarkozy to explain euro crisis, budget pain on TV
Greece entry into euro zone a mistake at the time: Sarkozy
http://www.theglobeandmail.com/report-on-business/top-business-stories/greece-entry-into-euro-zone-a-mistake-at-the-time-sarkozy/article2216087/
When reporting on the announcement of the math-free deus ex machina bail out that was announced last night, which nobody still has any grasp over, but it had a "trillion" in there somewhere so that alone sent the market scurrying, we suggested that it would take about 24-48 hours for reality to start settling in. It may have been considerably less. As the Telegraph reports, "A trillion euro bail-out to save the EU’s single currency is in danger of unraveling after Germany’s central bank warned that the rescue measure was too dependent on the high-risk deals that caused the economic crisis." So what did the Bundesbank do to send tremors that threaten to fracture the brittle nanometer ice-plated facade under which the most tempestuous riptide in European history is contained? Well, first it appears to have used a calculator, something nobody else in the European Council seems to be capable of. Second, it realized that heaping leverage upon leverage to
fix a problem, something even a five year old (non-Ivy league trained) would tell you is lunacy, may not be the best approach to fix the problems at hand.
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