Archive for category Europe
The World’s Policeman Has Become the World’s Enabler
Posted by Tom in Defense, Deficit, Democrats, Entitlements, Europe, Fed, Financial Policy, Fiscal Policy, Foreign Policy, Military Policy, Statism on January 1, 2012
It can’t continue. It has got to stop. Since the end of WWII we have been the western world’s policeman, unpaid despite the sacrifice of our blood and treasure. We rebuilt Europe and Japan following the war then we paid for and continue to pay for their defense. As a consequence we have enabled the socialistic welfare states of Europe to increase their welfare. Now, to the point where the weaker ones are bankrupt. To top that off our president is taking the country in the same welfare state direction and the Fed is attempting to continue helping Europe kick the can down the street supporting the zombie European nations.
I was impressed with Ed Crane’s comment in a WSJ op-ed on Ron Paul that the U.S. spends more than the rest of the world on defense–in essence defense of the western world! ”…an overreaching military presence around the world is inconsistent with small, constitutional government at home. The massive cost of these interventions, in treasure and blood, highlights what a mistake they are, as sensible people on the left and right recognized from the beginning. Of course we want a strong military capable of defending the United States, but our current expenditures equal what the rest of the world spends, which makes little sense. It is futile to try to be the world’s policeman…”
My point is that to the extent we overspend on defense, Europe doesn’t need to spend. Their taxes to the extent paid go to increase statist expansions and welfare in countries like Greece, Portugal, Italy and Spain.
To top that off, our Fed seems to think it legitimate to help finance Europe’s profligate ways. Jerry O’Driscoll exposes Bernanke’s covert effort to bail out the ECB in his recent WSJ op-ed highlighted in our blog. This is clearly ultra vires, beyond the legal power of the Fed and against what its chairman has publicly stated.
In effect we have given Europe the leeway to expand its welfare state beyond its capacity to pay for that expansion. Our president who has no concept of economics admires the European model and seeks to expand our own welfare state beyond its capacity to pay for the expansion. His statist stimulus expenditures were nothing more than payments to increase the size and scope of government. His Obamacare takeover of medicine is nothing more than an unsustainable entitlement addition to the already unsustainable entitlements of Medicare, Medicaid, and Social Security.
We have enabled Europe’s welfare/statist addiction at a time when we can’t afford our own addiction. That latter addiction is theft from our grandchildren. Immorality par excellence! It must stop!
“Bailout-er” of Last Resort–For Europe?
Posted by Tom in Economics, Europe, Fed, Financial Policy, Monetary Policy, National Debt on December 28, 2011
Jerry O’Driscoll penned a dynamite op-ed in today’s WSJ. It raises serious questions about the Fed’s role and is reprinted below:
The Federal Reserve’s Covert Bailout of Europe
When is a loan between central banks not a loan? When it is a dollars-for-euros currency swap.
By GERALD P. O’DRISCOLL JR.
America’s central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.
The Fed is using what is termed a “temporary U.S. dollar liquidity swap arrangement” with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.
Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman’s collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.
The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.
The ECB is entangled in an even bigger legal and political mess. What the heads of many European governments want is for the ECB to bail them out. The central bank and some European governments say that it cannot constitutionally do that. The ECB would also prefer not to create boatloads of new euros, since it wants to keep its reputation as an inflation-fighter intact. To mitigate its euro lending, it borrows dollars to lend them to its banks. That keeps the supply of new euros down. This lending replaces dollar funding from U.S. banks and money-market institutions that are curtailing their lending to European banks—which need the dollars to finance trade, among other activities. Meanwhile, European governments pressure the banks to purchase still more sovereign debt.
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The Fed’s support is in addition to the ECB’s €489 billion ($638 billion) low-interest loans to 523 euro-zone banks last week. And if 2008 is any guide, the dollar swaps will again balloon to supplement the ECB’s euro lending.
This Byzantine financial arrangement could hardly be better designed to confuse observers, and it has largely succeeded on this side of the Atlantic, where press coverage has been light. Reporting in Europe is on the mark. On Dec. 21 the Frankfurter Allgemeine Zeitung noted on its website that European banks took three-month credits worth $33 billion, which was financed by a swap between the ECB and the Fed. When it first came out in 2009 that the Greek government was much more heavily indebted than previously known, currency swaps reportedly arranged by Goldman Sachs were one subterfuge employed to hide its debts.
The Fed had more than $600 billion of currency swaps on its books in the fall of 2008. Those draws were largely paid down by January 2010. As recently as a few weeks ago, the amount under the swap renewal agreement announced last summer was $2.4 billion. For the week ending Dec. 14, however, the amount jumped to $54 billion. For the week ending Dec. 21, the total went up by a little more than $8 billion. The aforementioned $33 billion three-month loan was not picked up because it was only booked by the ECB on Dec. 22, falling outside the Fed’s reporting week. Notably, the Bank of Japan drew almost $5 billion in the most recent week. Could a bailout of Japanese banks be afoot? (All data come from the Federal Reserve Board H.4.1. release, the New York Fed’s Swap Operations report, and the ECB website.)
No matter the legalistic interpretation, the Fed is, working through the ECB, bailing out European banks and, indirectly, spendthrift European governments. It is difficult to count the number of things wrong with this arrangement.
First, the Fed has no authority for a bailout of Europe. My source for that judgment? Fed Chairman Ben Bernanke met with Republican senators on Dec. 14 to brief them on the European situation. After the meeting, Sen. Lindsey Graham told reporters that Mr. Bernanke himself said the Fed did not have “the intention or the authority” to bail out Europe. The week Mr. Bernanke promised no bailout, however, the size of the swap lines to the ECB ballooned by around $52 billion.
Second, these Federal Reserve swap arrangements foster the moral hazards and distortions that government credit allocation entails. Allowing the ECB to do the initial credit allocation—to favored banks and then, some hope, through further lending to spendthrift EU governments—does not make the problem better.
Third, the nontransparency of the swap arrangements is troublesome in a democracy. To his credit, Mr. Bernanke has promised more openness and better communication of the Fed’s monetary policy goals. The swap arrangements are at odds with his promise. It is time for the Fed chairman to provide an honest accounting to Congress of what is going on.
Mr. O’Driscoll, a senior fellow at the Cato Institute, was vice president at the Federal Reserve Bank of Dallas and later at Citigroup.
Europe’s Road to Serfdom
Posted by Tom in Constitution, Europe, Federalism, Government Regulation, Statism on November 24, 2011
Friedrich Hayek distrusted the central planners for the fatal conceit that they knew more than people working freely in society, in the marketplace, in the polity. This “rule by the few” has gained a major foothold, no, strangle hold, in Europe. The technocrats in Brussels rule by dictat!
Rany York sent the following video in which Nigel Farage, MEP and UKIP, describes the situation with some accurate historical perspective. He correctly points out the shaky assumptions on which the EU and European Monetary Union were based. His fiery indictment of the unelected technocrats should serve as a warning to us in America: our bureaucrats, agencies, commissions, and tzars are nothing other than unelected technocrats!
Witness the financial upheaval in European financial markets resulting in yesterday’s failed German bond auction, to see where socialism leads. Sadly our President and the leftist Democrats think we are somehow immune.
O’Driscoll Post: End of Euro?
Posted by Tom in Europe, Financial Crisis, Financial Policy, Fiscal Policy, Monetary Policy, National Debt on November 9, 2011
Jerry O’Driscoll”s post on the Cato blog today will get your attention; it follows verbatim:
“Global equity markets are falling, with the Dow Jones Industrial Average down around 250pts. A benchmark 10-year Italian government bond is yielding 7.4%. Every country whose sovereign debt went over the 7%-mark has required a bailout. I was in Italy a month ago, and the yield was under 6% (still pricey for a developed country).
A bailout of a country Italy’s size would be a gargantuan task — probably a larger effort than heretofore. It is beyond the capacity of the EU. Italy’s debt is just too large. I doubt China would purchase any real assets until labor-market reforms and pension reforms were enacted. China actually wants a return on its investments.
If the IMF gets involved, it would require massive new funds for which the US taxpayer would be on the hook for around 18%. I wonder how that would go over in the US House or even the Senate? That doesn’t mean the Obama administration won’t try to organize a rescue. The Fed has been backstopping the EU banks for some time.
Will the Euro survive? Will the global financial system survive?”
Jerry’s email answer to the last two questions was: “probably and possibly!” I’m not sure of the order he intended.
But see Italy Bond Attack Breaches Euro Defenses today on Bloomberg.com. The simple answer is that monetary governance without fiscal governance does not work. The sooner that is realized, the sooner sovereign bailouts will stop, and the sooner the European nations can begin a healthy recovery.
Boomerang–A Great Read
Posted by Tom in Bankruptcy, Banks, Budgets, California, Deficit, Europe, Fed, Financial Crisis, Monetary Policy, National Character, National Debt, Politics, Wall Street on November 5, 2011
I just finished Michael Lewis’s latest, Boomerang and can highly recommend it. As a non-economist reporter he tells the story of a world awash in cheap money and easy credit and tells it with reference to a few developed countries. Starting with Iceland, the first to go belly up when its fishermen decided to become investment bankers with credit advanced by European banks, he goes to the current zombie Greece. The Greeks borrowed not to invest but just to take exorbitant salaries and long vacations. Now the Irish, bless them, decided to become real estate developers in Ireland this with the funds borrowed from Irish and European banks; unfortunately the government decided to guarantee the banks against horrendous losses on the worthless real estate developments. Onto Germany whose citizens are disciplined not to over borrow or over spend, but whose banks were perfectly willing to lend to the Greeks and Irish without proper credit evaluation.
When he heads home to the US he focuses on his home state of California which is essentially bankrupt. First to fail though will not be the state government but the local municipalities the worst of which is Vallejo which filed for bankruptcy in May of 2008. There is, of course, more to come. Here’s a brief interview with the author:
Is Papandreou the Only European Leader With Balls?
Posted by Tom in Economics, Entitlements, Europe, Financial Crisis, Socialism, Welfare on November 2, 2011
Is Greek Prime Minister George Papandreou the only European leader with “balls?” With Germany and France continuing to kick the can down the road and none of the nations calling for a referendum on the can kicking, it seems that the Greek Prime Minister is the only one with any sense. He has called for a referendum from the voters on whether to accept the latest edition of the European bank bailout. These are the same voters who have been rioting. The same voters who have been sucking money out of Germany. The same voters who are accustom to handsome entitlements while cheating on their taxes. Politically, Papandreou is smart in letting the socialists rioters make their own democratic decision. Admittedly, it will not be a well informed decision. But then, in a socialist nation, how could it be?
The point for Europe, America, Asia and the world is the same: the sooner a real resolution is reached, the sooner a real recovery can commence. The contrary example is the real estate market in the U.S. where reaching the market bottom has been forestalled by Obama and the socialist left. The result has been the stagnation and real estate depression that we now witness. By the Greek call for a referendum, Papandreou has cut to the chase. And done so where democracy was born!
Economically, socialism doesn’t work, the European welfare state doesn’t work, and need I say that the American welfare state will not work? We cannot borrow and regulate ourselves into prosperity as Obama would have us believe.
Europe is broke. We are almost as broke. We have the advantage in that our fiscal policy and monetary policy are structured under one federal government. Europe, on the contrary, is a mess simply because it lacks that structure.
Hopefully the can kicking will stop and serious plans will be made to reorganize Europe so that it or its component nations can prosperously function in this economically interdependent world in which we live.
Sinking With Europe?
Posted by Tom in Economics, Europe, Fed, Financial Policy, Fiscal Policy, Foreign Policy, Monetary Policy, Welfare on November 2, 2011
The following is a republication of Jerry O’Driscoll’s op-ed in today’s WSJ, Why We Can’t Escape the Eurocrisis. The article also had lead position in today’s Real Clear Politics.
Why We Can’t Escape the Eurocrisis
EU and U.S. debt are interlinked through the banking system.
By GERALD P. O’DRISCOLL JR.
When is a bailout not a bailout? When the bailor is short of funds. The recently announced debt plan in the European Union comes up short in almost all respects.
The debt crisis is not just an EU problem, but a trans-Atlantic financial crisis. The overwhelming debt problems on either side of the pond are interlinked through the banking system.
First to the EU. The underlying dilemma is that governments have promised their citizens more social programs than can be financed with the tax revenue generated by the private sector. High tax rates choke off the economic growth needed to finance the promises. Economic activity gets driven into the underground economy, where it often escapes taxation.
Nowhere is this truer than in Greece, which has a long history of sovereign defaults in the 19th and 20th centuries. There is a bloated public sector, and competitive private enterprise is hobbled by regulation and government barriers to entry. Successive Greek governments ran chronic budget deficits, and the Greek banks lent to the government. Banks in other EU countries, such as France, lent to the Greek banks.
In Greece and elsewhere in the EU, the banks support the government by purchasing its bonds, and the government guarantees the banks. It is a Ponzi scheme not even Bernie Madoff could have concocted. The banks can no longer afford to fund budget deficits, yet they cannot afford to see governments default. Governments cannot make good on their guarantees of the banks.
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Details differ by country. In Ireland, problems began with an overheated property sector that brought down the banks. The economy went into depression, which threw the government’s budget into deficit. Further aggravating the deficit was the government’s decision to guarantee bank deposits, converting private, financial-sector debt into public-sector debt. The details differ from Greece, but the linkage between the government and the banks is the common factor.
France’s growth is weak to nonexistent. Germany’s economy has performed well since the recession, but concerns are growing regarding its banks’ exposure to greater EU risk. And U.S. banks and financial institutions are exposed to EU banks through funding operations, issuance of credit default swaps and unknown exposure in derivatives markets.
The Federal Reserve has engaged in currency swaps with the European Central Bank to support the dollar needs of EU banks. The ECB deposits euros (or euro-denominated assets) with the Fed and receives dollars in return. It promises to repay dollars plus interest.
The Fed maintains they cannot lose money because the ECB promises to repay the swaps in dollars. And yet, with the world awash in greenbacks, it is unclear why the Fed and the ECB even needed to engage in these transactions—except that it suggests funding problems at some EU banks. And if neither EU banks nor the ECB can secure enough needed dollars in global markets, there is a serious counterparty risk to the Fed. The ECB can print euros but not dollars. Sen. Richard Shelby (R., Ala.), ranking member of the Senate Banking Committee, was correct to raise concerns about the Fed’s policy last week. Losses on the Fed’s balance sheet hit the U.S taxpayer, not EU citizens.
The sad fact is that there is not enough money in the EU to pay off the public debts incurred by the governments. Most countries have long since squeezed as much tax revenue from their citizens as they can. That is why they have toyed with a tax on financial transactions, the one remaining untaxed activity in all of Europe.
Greece is the first of other sovereign defaults to come. With last week’s bailout, the EU leaders might have bought time, perhaps a year. But at some point, the ECB will cave and monetize the debt, leading to euro-zone inflation.
The debt calculus changed dramatically this week with the announcement of a Greek referendum on the bailout agreement next January. If voters reject the agreement, the ultimate outcome is unpredictable.
Americans must not be smug about the suffering of Europeans—our financial system is thoroughly integrated with theirs. Moreover, the International Monetary Fund will most likely be involved in the event of future bailouts and will likely need large funds from its members, which ultimately means the taxpayers.
And, of course, the U.S. has its own large and growing public debt burden. We have not gone as far down the road to entitlements, but we are catching up. If you want to know how the debt crisis will play out here, watch the downward spiral in the EU.
Meanwhile, expect more volatility in financial markets. U.S. traders in particular simply have not grasped the enormity of the EU debt crisis.
Mr. O’Driscoll, a senior fellow at the Cato Institute, is a former vice president of the Federal Reserve Bank of Dallas and later Citibank.
S&P Downgrade Is Merely a Symptom
Posted by Tom in Budgets, Deficit, Entitlements, Europe, National Debt, Welfare on August 8, 2011
Despite today’s worldwide market plunge and the pundits attributing it to the loss of the U.S. AAA rating, that loss is only a symptom of the underlying disease: major deficits for as far as the eye can see, resulting accumulated debt as an increasing percentage of GDP, and staggering unfunded (and undisclosed) liabilities. The U.S. is basically headed toward bankruptcy. If downgrades continue bond purchasers will demand more returns which in turn increase the deficits and debt.
On a macro basis we have two major customer economies in the dumps, Europe and the U.S., and one major exporter and lender, China, all suffering. Europe is of greater concern than the U.S., even though neither has cogent plans for a solution; it’s just that the U.S. has a better political structure to affect an eventual solution.
So, forgetting about the market, the real economy is facing a recession. Joe Morabito CEO of an international executive relocation business reports that the typical summer peak time has turned into a downer. Gene Humphrey CEO of a chip technology company reports that industry leaders are forecasting a downturn for the next two quarters because consumers have retreated from the market. This is “real economy” evidence that we are looking at a probable double dip, a second recession.
Politically, the parties blame one another. But the tea party gets the most blame. In fact, the tea party should get the most credit. Someone must yell from the rooftops STOP, CUT BIG GOVERNMENT!
Serious cuts in entitlements must start now. Gen involved. Call your representatives Convince your neighbors. Save your grandchildren.
Debt Problem? Solution: More Debt! And You’re A Lender!
Posted by Tom in Bankruptcy, Banks, Business, Deficit, Europe, Financial Policy, Foreign Policy, Monetary Policy, National Debt, State Finances on December 3, 2010
Makes absolutely no sense at all. Greece has a debt problem, can’t pay its debts when due; so the EU together with the IMF bail it out. How by lending it more money! Ireland has a problem, can’t pay its obligations when due, so the EU together with the IMF lend Ireland more money. Spain and Portugal see this and demand a larger bailout pool while the financial markets worry about “contagion.”
John Cochrane, a finance professor at the University of Chicago Booth School of Business, calls a spade a spade in yesterday’s WSJ op-ed, ‘Contagion’ and Other Euro Myths. The EU/IMF bail out facility promises that no sovereign bond holder will lose a cent at least for now. Basically what that says is that those lenders holding EU country debt now have a super guarantee. This is a guarantee to which they are not entitled. They did not bargain for this when they made the loans by buying the bonds. Their credit underwriting said that Spain, Greece, Ireland, and Portugal (the PIGS) were creditworthy at the interest rates charged. In short those lenders made underwriting mistakes.
So what happens when borrowers can’t pay? Normally, they restructure their obligations, sometimes extending maturities, and other times by having the principal balance reduced. In other words the lenders take a haircut. Why can’t this be done in Europe?
Now who are those dumb lenders, the sovereign bond holders, that the EU is so anxious to bail out? Well, they are the European and UK banks, principally those in France and Germany. To bail out dumb lenders or to guarantee them is bad policy. It denies the market discipline necessary for a functioning economy. It promotes moral hazard which simply means that those same lenders will not change their sloppy underwriting, will make more bad loans, and will expect future bailouts. Failure is just as essential to the marketplace as success.
As Cochrane points out the “contagion” boogyman is a myth: “The bailout is being justified on grounds of containing “contagion.” This is nonsense. The notion is that news of an Irish restructuring would scare investors in Spanish bonds, who would start looking at Spain’s ability to repay its debts and then demand higher interest rates.”
“But haven’t investors in Spanish bonds already noticed that there’s a bit of a problem? And wouldn’t news of a giant bailout make these investors question Spanish finances as much as would news of debt restructuring?”
“Any contagion is entirely self-inflicted. The only way Ireland’s fate affects Spanish investors is by changing the odds that the European Union (EU) will bail out Spain. And Spanish interest rates are rising, suggesting investors now think a Spanish bailout is less, not more, likely.”
On top of that all, U.S. taxpayers are putting money in to the unnecessary bailout facility. Yep, that’s right, the U.S. is the largest national contributor to the International Monetary Fund. So with our current weak economy, continuing deficits, and generation choking debt, we via the IMF are digging our hole deeper. The sad thing is that we have the ability to block the IMF action. But we don’t.
Question, will the United States face the same issues with our spendthrift sovereign states like CA, IL, and NY? Or will we get smart and (1) enact a state bankruptcy provision and (2) pass a constitutional amendment precluding bailouts? Something to ponder!
Stratfor Dispatch: Currency War and the G-20
Posted by Tom in China, Europe, Financial Policy, Foreign Policy, Monetary Policy on November 10, 2010
Today’s Stratfor summary of the currency brouhaha is the best and most succinct I’ve seen in a while. I heartily recommend subscribing, http://www.stratfor.com
Here is the link: http://www.stratfor.com/analysis/20101110_dispatch_currency_war_and_g_20