Killing Ireland to threaten Spain

This article by a professor of economics at Dublin College is easily the most informative summary of the disaster presently facing Ireland, and by extension, the financial world.

The one thing you need to understand about the Irish bailout is that it had nothing to do with repairing Ireland’s finances enough to allow the Irish Government to start borrowing again in the bond markets at reasonable rates: what people ordinarily think of a bailout as doing.

The finances of the Irish Government are like a bucket with a large hole in the form of the banking system. While any half-serious rescue would have focused on plugging this hole, the agreed bailout ostentatiously ignored the banks, except for reiterating the ECB-Honohan view that their losses would be borne by Irish taxpayers. Try to imagine the Bank of England’s insisting that Northern Rock be rescued by Newcastle City Council and you have some idea of how seriously the ECB expects the Irish bailout to work.

Instead, the sole purpose of the Irish bailout was to frighten the Spanish into line with a vivid demonstration that EU rescues are not for the faint-hearted. And the ECB plan, so far anyway, has worked. Given a choice between being strung up like Ireland – an object of international ridicule, paying exorbitant rates on bailout funds, its government ministers answerable to a Hungarian university lecturer – or mending their ways, the Spanish have understandably chosen the latter.

I didn't realize that Geithner, the ex-NY Fed Secretary of the Treasury, was so directly involved in saddling the Irish taxpayer with the losses that would have otherwise been taken by the banks that were bailed out. I don't see how it is possible to read this and still convince oneself that the world's economic and financial problems of 2008 are in the past it's perfectly clear that the global financial system hasn't been fixed in any way, shape, or form, it is only that extend-and-pretend has gone from the national to the intercontinental level.

As I noted yesterday, despite my very contrarian predictions of a continued decline in housing prices, I actually appear to have underestimated the speed, and likely the eventual extent, of the collapse. In the same way, my predictions that the banks and governments of the world would reinforce their failure by taking it to the next level appears to have somewhat on the conservative side as well.

Ireland and Greece are already toast. They are almost guaranteed to default sometime within the next two years. What sort of domino effect this will kick off can't be accurately predicted, but it seems reasonable to assume that the bankruptcy of an entire nation or three will be more calamitous than the mere failure of a single Austrian Creditanstalt.

Another kick of the can

The EU and the IMF managed, with extreme difficulty, to kick the can one more time than anyone thought they would be able to. But the cans keep getting bigger and heavier. And in the meantime, Paul Craig Roberts points out that the financial powers' savage treatment of the Greeks, and determination to wring them dry in order to avoid paying out on the losing derivative bets by their banks, is teaching countries outside the system that there is nothing in it for them.

When a member of the EU itself is being looted and driven into the ground by its compatriots, how can Russia, China, and Iran expect better treatment? If the West has no good will toward Greece, where is the West’s good will toward Russia?

The Greek government was forced to capitulate to the EU, despite the support it received from the referendum, because the Greeks relied on the good will of their European partners and underestimated the mendacity of the One Percent. The Greek government did not expect the merciless attitude of its fellow EU member governments. The Greek government actually thought that its expert analysis of the Greek debt situation and economy would carry weight in the negotiations. This expectation left the Greek government without a backup plan. The Greek government gave no thought to how to go about leaving the euro and putting in place a monetary and banking system independent of the euro. The lack of preparation for exit left the government with no alternative to the EU’s demands.

The termination of Greece’s fiscal sovereignty is what is in store for Italy, Spain, and Portugal, and eventually for France and Germany. As Jean-Claude Trichet, the former head of the European Central Bank said, the sovereign debt crisis signaled that it is time to bring Europe beyond a “strict concept of nationhood.” The next step in the centralization of Europe is political centralization. The Greek debt crisis is being used to establish the principle that being a member of the EU means that the country has lost its sovereignty.

The notion, prevalent in the Western financial media, that a solution has been imposed on the Greeks is nonsense. Nothing has been solved. The conditions to which the Greek government submitted make the debt even less payable. In a short time the issue will again be before us. As John Maynard Keynes made clear in 1936 and as every economist knows, driving down consumer incomes by cutting pensions, employment, wages, and social services, reduces consumer and investment demand, and thereby GDP, and results in large budget deficits that have to be covered by borrowing. Selling pubic assets to foreigners transfers the revenue flows out of the Greek economy into foreign hands.

Unregulated naked capitalism, has proven in the 21st century to be unable to produce economic growth anywhere in the West. Consequently, median family incomes are declining. Governments cover up the decline by underestimating inflation and by not counting as unemployed discouraged workers who, unable to find jobs, have ceased looking. By not counting discouraged workers the US is able to report a 5.2 percent rate of unemployment. Including discouraged workers brings the unemployment rate to 23.1 percent. A 23 percent rate of unemployment has nothing in common with economic recovery.

Even the language used in the West is deceptive. The Greek “bailout” does not bail out Greece. The bailout bails out the holders of Greek debt. Many of these holders are not Greece’s original creditors. What the “bailout” does is to make the New York hedge funds’ bet on the Greek debt pay off for the hedge funds. The bailout money goes not to Greece but to those who speculated on the debt being paid. According to news reports, Quantitative Easing by the ECB has been used to purchase Greek debt from the troubled banks that made the loans, so the debt issue is no longer a creditor issue.

And so the world spirals closer to widespread violence. Having repeatedly ruled out the possibility of change through the ballot box, what else does that leave? Frankly, I'm a little surprised that the Greeks haven't resorted to politics by other means yet.

ISIS has already brought the War in Iraq home to America. It seems highly unlikely that they will be the only ones to do so.

These actions by the global financial community smack of either desperation or provocation. I can't tell if they actually want war - as Gen. Butler would say they do - or if their position is so precarious that they are willing to run the risk of war just to buy a little more time before the crash.

Either way, it doesn't bode very well for the rest of us.

WND column

Transfer or Tea Party?

Most Americans opposed TARP. They saw no reason to use taxpayer money for bailing out the very financial institutions that had been parasitically feeding off them for decades. But America is not a democracy. It is no longer even a representative democracy. The banking bailout, the GSE bailout and the subsequent automotive bailout were all rammed down the unwilling throats of the American public by the Goldman-controlled Treasury Department with the help of the Bush administration and congressional Democrats. It was rather like a doctor forcing a rape victim to pay for her own chemotherapy because it would benefit her rapist.*

Bipartisan support for the bailout made it clear to all and sundry that at the end of the day, the supposed divide between the Republican and Democratic parties is an imaginary one. Republicans and Democrats are nothing more than a unitary bank party.


*I know this makes no sense. That's the point. Neither did the bailouts.

Credit contagion

Well, three of five isn't bad as the Eurozone is on the verge of melting down again:

The EU authorities have begun to vent their fury against Ireland over its refusal to accept a financial rescue, fearing that the crisis will engulf Portugal and Spain unless confidence is restored immediately to eurozone bond markets.... A simultaneous bail-out for both Ireland and Portugal might run to €200bn, depleting much of the EU rescue line. The European Financial Stability Facility (EFSF) can raise up to €440bn on the bond markets but only two thirds of this would be available. The IMF is expected to loan a further €3 for every €8 from the EU under the bail-out formula.

The great concern is that the crisis could spread to Spain, which has a far bigger economy that Greece, Portugal, and Ireland combined. Foreign banks have €850bn of exposure to Spanish debt.

In RGD, I correctly identified Ireland and Spain as the likely culprits for the modern version of 1931's Creditanstalt collapse. But I have to admit, I did not see Greece or Portugal being a probable issue; Estonia doesn't count because it is not part of the Eurozone until 2011, assuming that there is still is Eurozone in 2011. But Greece was faking its economic statistics - they released yet another and increasingly bad debt/GDP report yesterday and I only looked at Portugal's real estate sector, so presumably their excessive debt was concentrated elsewhere.

"According to Austrian theory, the effects of the housing bust on the overall economy should be much greater in countries like Estonia, Spain, and Ireland than in Austria, Germany, and Poland, and to the extent that inexpensive debt was made available to that and other sectors of the economy, we would expect to see that signs of the resulting economic contraction are similarly greater as well. Therefore we should see unemployment rising faster, prices falling further, GDP contracting more, and government deficits growing larger in the three housing boom countries than in the three non-boom ones. Due to the Austrian doubts about the reliability of macroeconomic data, greater credence should be given to historical statistics that are less easily manipulated, such as government deficits and interest rates, rather than GDP, unemployment, and inflation."

Ireland is right to refuse the EU-IMF bailout. Notice that the bailout is not, as it is improperly characterized, a bailout of Ireland per se. It is actually a bailout of the banks that invested in Irish government debt and it is intended to put the people of Ireland on the hook for it in much the same way that Americans were put on the hook for the cost of the TARP bailouts.

Although it isn't mentioned in the article, I noticed that Australia's bond spreads have risen even higher than Portugal's in the two-year. Australia has had a serious housing bubble too, one that continued into 2010, so don't be surprised if there is news of a Australian crisis in the near future.

The prostitutes protest in vain

Powerline's John Hindraker finally sees fit to take exception to an unconstitutional action by the Congress. And, as you'd expect of a staunchly tone-deaf Republican, he's outraged by the Congressional attack on the bailout bonuses:

I'm stupefied to find that some people are defending the constitutionality of Nancy Pelosi's discriminatory, confiscatory and retroactive tax on people who receive bonus income from companies that got TARP money. I would have considered it a bright line rule that the government can't identify a class of unpopular people and impose a special tax on them. What's next? A 100% income tax on registered Republicans, retroactive to last year? If Pelosi's bill passes muster, why not?

Spare me. Hindraker and his fellow Republicans defended one abuse of the Constitution after another when it was George Bush and the Republican-led Congress spying on Americans and invading countries without declaring war. They ridiculed Ron Paul when he pointed out those and other massively unconstitutional issues such as the paper dollar, foreign aid, and the various military occupations around the world. They worked hard to elect the Senate's champion of the unconstitutional banking bailouts, John McCain, and many of them, including Hindraker, publicly supported the bailouts.

Now he's trying expressing outrage over one more Congressional unconstitutionality that might take a bonus away from a high-income banker? This isn't just hypocrisy, it's utter political idiocy. Good luck getting the pitchfork-bearing masses worked up about the theoretical plight of a banking employee married to a wealthy lawyer. (That was a remarkably explicit example, by the way, does his wife work for Wells Fargo or something?) Regardless, the lawyer Hindraker clearly doesn't understand that most Americans would vastly prefer to see this theoretical lawyer garrotted with piano wire than to see his wife take home a $10,000 bonus from a bailout bank if given a choice between the two. Hindraker may consider a mere $10k bonus to be a paltry sum, but it is 18 percent of the 2007 median Minnesota household income.

And Wells Fargo wasn't "forced" to take the bailout money. (Hindraker omits to mention that it was the Republican Bush administration, not the Democratic Congress or the Obama administration that "forced" them to take it.) Wells Fargo could have refused it. They didn't.

The United States entered the lawless territory of a banana republic a long time ago. It's a pity that it took influential Republicans like the Powerline guys so long to notice it, but that's what happens when you prefer to defend the people in power and ignore the abuses they are committing. Back in September, when it still mattered, Hindraker said his "instinct has been to support the bailout proposal". Now his instincts tell him that "there is nothing wrong with the AIG bonuses".

With all due respect, Mr. Hindraker, your instincts suck. You were on the wrong side then and you're on the wrong side now. Once you have embraced the expansion of federal power, you don't get to complain that you don't like the particular direction in which it is now expanding. If, under heavy pressure from the Republican White House, Congress hadn't handed over billions to the banks, the bonus tax that so outrages Hindraker wouldn't exist. But if you're going to hook for a living, you'd better understand that every now and then, your pimp is going to bitch-slap you.

Bailout: the blog view

John Hawkins of Right Wing News asks the nominally right-wing blogosphere four questions about the bailout:

1) Is the PRIMARY cause of this crisis...

A) Deregulation, market forces, and Wall Street?: 7% (4)

B) Government interference in the market?: 93% (56)


2) Do you support the bailout?

A) Yes: 29% (18)

B) No: 71% (44)

Interesting, when the nominally conservative commentariat appeared to support the bailout in similar percentages. No wonder conservatives are increasingly moving towards the blogs and away from their media-appointed champions who increasingly look like the PR specialists for the other side. I understand that the Democrats are largely to blame for the housing problem, but I really do not see how the economic situation can help McCain in any way.

After all, as that great conservative George Bush has declared, when people are hurting, the government has to act.

Speaking on our behalf

A press release from Congressman Thaddeus McCotter's office prior to the vote:

WASHINGTON, D.C. - Republican House Policy Chairman, Representative Thaddeus McCotter (R-MI), the first Republican member of Congress to publicly oppose Wall Street's trillion dollar bailout, remains adamantly opposed to the legislation despite the Paulson bailout's cosmetic changes:

"We are faced with the first financial panic of the global economy. Thus, the Congressional action taken today will set a precedent affecting the prosperity of Americans for decades to come. The proposed $700 billion dollar Wall Street bailout bill is not a Republican solution; it is not a Democratic solution; it is not an
American solution. The proposed $700 billion dollar Wall Street Bailout is a socialist solution - one that, by threatening hardworking Americans' prosperity, unconscionably ransoms hardworking Americans' money and reduces their liberty. As such, it is a generational threat to Americans' liberty and prosperity.

Congress cannot re-inflate the bubble to save the American economy."

I just thought the dude deserved a victory lap, since he certainly kicked some ass on behalf of America's economic liberty today. And based on that last bit about what Congress can't do, (as opposed to what it shouldn't do), I'm guessing he's more Austrian than Keynesian.

UPDATE - The congressman sends another email:

It is time for the President of the United States to:

Calm the Congressional and global investor panic his administration has exacerbated.

Demand the resignation of Treasury Secretary Paulson, who no longer serves a constructive role in the enactment of the legislation necessary to end this period financial difficulty and uncertainty.

Deputize and dispatch a new representative to the Congressional negotiations, such as former Treasury Secretary James A. Baker, III, who has credibility with both markets, Congress, markets and, most importantly the American public.

Rule out pushing a financial recapitalization model based upon taxpayers purchasing ‘toxic assets’ from financial institutions, which the American public rightful believes unjust.

I'm not keen on that Baker notion, but the rest of it is eminently reasonable, even if I would have preferred to see him call for something rather more TV-friendly than mere resignation for Mr. Paulson. The key thing is to understand that Congress should not do ANYTHING, because anything it does will make the situation worse. Well, anything it's remotely likely to do, anyway. The reason Wall Street's demise won't harm the economy anywhere nearly as much as everyone seems to think is quite simple. Wall Street doesn't fund any actual productive investment anyhow!

Entrepeneurship and freedom create wealth. Borrowing money doesn't, they're like steroids, enabling unnaturally fast development that will kill the user more often than not.

How should America respond?

"To preserve their [the people's] independence, we must not let our rulers load us with perpetual debt. We must make our selection between economy and liberty, or profusion and servitude" - Thomas Jefferson

I completely agree with Thomas Jefferson; in my view, the attempted bailout must be shouted down. The reckless air of entitlement demonstrated by veteran Wall Street champions like Larry Kudlow - who seriously states that he cannot support a bailout if limits are placed on executive compensation because that would "represent a huge first step into government interference" - is unbelievable. How would THAT be the FIRST step considering that this is the fifth federal intervention this year alone? Keep in mind that the very men demanding that Congress pillage the taxpayers on their behalf are precisely the same men who paid themselves 38 billion in bonuses just last year - let them bail their corporations out of their own pockets, not ours. If they're so desperate for a bailout, then why doesn't the government simply take that 38 billion and use it for the initial funding? Taking ten years of bonus money from the Wall Street crew would provide more than half the funds supposedly required.


UPDATE - "Britain’s five leading high street banks have as much as £95.3 billion ($175 billion) of distressed assets on their books that may qualify for the American bailout scheme." I don't know about you, but I suspect the average American doesn't truly give the smallest damn that can be detected on a helium ion microscope if a British or Indonesian bank happens to lose money on its investments.

Another bailout for bankers

Unsurprisingly, upon further review, the Bush mortgage bailout plan is only meant to keep mortgage bankers afloat by preserving the loans, it's not intended to help people keep their homes in any way, shape or form:

Every word in the proposal is intended to maximize the net present value of recoveries, nothing else.... Scheme Part 1: Say the subject property was valued at $100,000 with an 80/20 financing package in place. Now the property is worth $90,000. Using only the 1st lien, the LTV is only 88.9% ($80,000/$90,000), far below the 97% LTV. The idea is to get these suckers (borrowers) to refinance into one of those FHASecure while the 2nd lien holder agrees to subordinate to a new 1st. The old securitized 1st is now home free with a FHA/government bailout while the 2nd, though still in an over-encumbered position, has just received a reprieve. How brilliant.

Scheme Part 2: If the property has dropped to approximately $83,000 or below, then Scheme part 1 is not feasible. So it is best to keep this borrower paying in a 120%+ CLTV property. As you can see, with the property value so low, they know with certainty that a default would be a total wipe of the 2nd and a severe loss to the 1st.

This two part scheme assures that there are no crumbs left on the table for the borrowers. In summary, regardless of its devious intent, this bailout plan will not work.

The greed and shortsightedness of the financial predators is truly astonishing. Even animals usually know better than to ruthlessly wipe out the prey that sustains them.

Interview with Congressman McCotter

Congressman Thaddeus McCotter is a Michigan Republican who was the first member of the House of Representatives to publicly oppose Treasury Secretary Henry Paulson's plan to spend $700 billion bailing out bankrupt Wall Street institutions. After the House of Representatives voted against the legislative proposal, the congressman called on President Bush to fire Paulson.


Congratulations on successfully shooting down the bill.

Well, we don't view it as a victory here, it's just the responsibility to get the job done for the American people.

What were your main reasons for opposing the Paulson plan, even in the revised form that you voted on today?

It's not about me. I suppose this is a representative government. From the MINUTE the Paulson plan was introduced, the American people said no. And then as this administration foisted that proposal upon this Congress, the American people said no. And then as Congress, despite warnings from people like me, set an artificial deadline of midnight Sunday, the American people said no. And when the artificial deadline was met with a bad proposal, which was the Paulson proposal, the American people still said no. The only thing we can take out of this is that fortunately the Paulson proposal did not pass.

Now, Congress is going to act. It is going to act in a responsible and timely fashion on a piece of legislation that the American people know is fair to their interests and will help with this economic situation. In the final analysis, the Paulson plan fundamentally failed in that it wanted the American taxpayer to buy noxious, toxic assets out of the marketplace. You have to remove both the plan and Mr. Paulson from the process. I've asked the President to demand Mr. Paulson's resignation and deputize someone else so that the Congress and the White House can get on with a plan the American people will accept.

Speaking of what the American people will accept, I took a poll of my readers and the Right Wing News took a poll of its readers. Only 15 percent of the Right Wing News readers supported the bailout, and only about one percent of my readers did. Are the administration and the other members of Congress who supported the bill unaware of the strength of public opposition to the plan or do they just not care?

I'll let them speak for themselves, but I think that what you're finding is the same thing other members of Congress are finding. First, there's an argument that the American people don't seem to understand what is happening if this bill failed. I think the opposite is true. The American people, from the MINUTE this Paulson bailout was announced, understood what it meant and they decided they did not like it. What happened was an arrogant administration forced it upon Congress and finally, finally, thanks to the U.S. House, the people's voice was heard and obeyed. Now we can finally get down to the serious business of doing what is in the best interests of the American people.

What basic economic theory is operative in Congress right now?

Right now, the only thing that was operative, that was put in front of us, was Paulson's plan, which was to buy those toxic assets at public expense. There are several other models out there that other nations have used far more often and far more successfully than the flawed model Paulson put in there for the Wall Street bailout. What we want is something that will spur private recapitalization so the money comes in off the sidelines where it's parked, and also provides an appropriate government backstop that is necessary and just for the American people's economic prosperity. Those are the two fundamental principles. As you can see, private recapitalization and appropriate government backstop that is just and fair to Americans, is an entirely different path than the one taken by Paulson with his first, only, last resort of a public bailout of Wall Street.

Conventional Keynesian theory, to which I do not subscribe–

Nor do I!

One of my readers went to high school with you. He told me that you're Austrian-aware.

Roepke, I'm more of a Roepke guy. I don't go as far as Von Mises. A humane economy, not an insane economy.

Fair enough. But the basic Keynesian model states that savings equals investment and there hasn't been much savings in the American economy because interest rates have been so low for so long. Where is this private capitalization supposed to come from with artificially suppressed interest rates that in real terms may actually be negative?

I would actually go one step further because I think you're getting very close to the same position I'm at. Savings are deferred consumption channeled into investment. What happens under the despicable Keynesian model, the disastrous Keynesian model, is this – savings start to reduce. And what the government does then is to pump expanded credit into the system. It creates investment inflation. This is exactly where we are and it's called a bubble. And the market has endeavored, as it always does, to correct that investment inflation, so Mr. Paulson and Mr. Bernanke wanted the taxpayers to inject $700 billion to keep the bubble inflated! And it's not going to work!

What you have to do is get the private money to come in and look at the assets, start to clear that out through proper legislation to incentivize it, and then get an appropriate government backstop. Now, in the long term picture, it is all about reincentivizing American savings to increase that pool of capital here. It is also about attracting American capital that is parked offshore back for repatriation; the last time we did it there was over $300 billion that came back into the American economy. Benedict Arnold, as the Democrats have put it, Benedict Arnold cleaning up Wall Street. And then what you can also do is incentivize PRIVATE foreign investment to come back into the United States through appropriate legislation.

As opposed to the sovereign funds they're currently relying on.

Right, the sovereign wealth funds I oppose. They're government-run, and when the government of any nation, especially nations that are antithetical to the interests of the United States such as Communist China, when they come in and buy a private asset, it's been nationalized. It's been socialized! And when socialism is imported into the United States economy, the free market gets smaller and everyone's liberty and prosperity is imperiled.

The dollar has lost 95.2 percent of its value to inflation since 1913, even by the official figures. From 1813 to 1907, its value actually increased 52 percent. Given the demonstrable failure of the Federal Reserve to either control inflation or maintain a stable financial system, why is there still such support for it in Congress?

I think that the argument that is made is probably because, as Roepke pointed out, people seem to think that inflationary periods are quite pleasurable until they realize that there's a deflationary period to match it when the market corrects itself. Plus, the more government under the Keynes model has a role within people's economic lives, the more important government is, the more powerful it is. In short, you're asking people to refrain from using their publicly entrusted subservient positions, as members of Congress or members of the government, from interfering in a marketplace to make themselves popular for a short period of time.

Now, I've got time for one more. Give me your best shot.

There's a lot of suspicion that Congress is going to go to the Brussels model and make you vote until you get it right. How are the House Republicans going to deal with that?

It is up to the American people. The American people have spoken clearly, and it is incumbent first and foremost upon this administration to admit that the American people have rejected the Paulson bailout model for our economic rescue. It is that simple! If the administration continues to push this forward, even if that bill passes against the wishes of the American People, nothing is going to be accomplished. Even by its proponents it is being sold as a short-term STABILIZATION measure that doesn't address the root problems that we have.

The American people will not stand to be dictated to by an administration or by a Congress that is deaf to its expressed wishes. That's why we are a free people and will remain so.

Standoff in Cyprus

The IMF/EU bank heist is being put on hold because the president can't get the votes to approve the theft.  Zerohedge reports:

Moments ago the state-run CYBC media reported perhaps the most material news ahead of tomorrow's Cyprus parliamentary vote, which at this point will likely be rescheduled once more, for the simple reason that yet another key Cypriot party, DIKO, has come out and decided to vote against the depositor-loss law on the Parliament's docket tomorrow. This is notable because while yesterday JPM, in its "bazooka" assessment speculated that DIKO would vote for the law which made sense previously as DIKO had supported president Anastasiades in his election bid, which gave a pro-bailout vote a one vote margin. As a result of today's flip, the party's 9 votes will now be aligned with the "anti" votes of AKEL  and EDEK, whose combined 33 votes mean the proposed bailout law has no chance of passing as they have the needed 29 votes to block any bail-in out proposal!

That's 33 against and 20 for.  It should be interesting to learn to what extent the EU and the Cypriot president were bluffing when they claimed a financial armageddon would result from a failure of the bailout plan.  I suspect it's going to look at lot more like the consequences of the US sequester, which absolutely no one in the USA appears to have even noticed.

Jim Sinclair notes: "The government leaders in Cyprus are trying to back-pedal right now in order to save their lives. Let me say it again, they are trying to save their own lives. Remember, ‘revenge is best served cold.’ This means the revenge never comes at the moment of the miscreant act. But it will come in time.  To take money from the leading economic entities in Russia, is to take money from the former KGB officers, and taking money from them is extremely dangerous. I think the reality has quickly set in for the leaders of Cyprus that they have aided in the confiscation of the most serious and dangerous money you could possibly touch. It has these leaders more afraid for their lives than their bank accounts."

UPDATE: "the Eurogroup will give Cyprus more flexibility on bank levy, and that Cyprus should safeguard depositors under €100,000, even as the full €5.8 billion deposit goal must still be hit."

Perhaps my math skills are insufficient to grok the sense, but I don't see how increasing the hit Russian depositors are going to take from 10% to 15.6% is going to make frightened parliamentarians any more sanguine about voting for the $75 billion bank heist.

"A major, MAJOR game changer"

The CEO of Saxo Bank comments on the Cypriot bank raids:

This is full-blown socialism. It is difficult to describe the weekend bailout package to Cyprus in any other way. The confiscation of 6.75 percent of small depositors' money and 9.9 percent of big depositors' funds is without precedence that I can think of in a supposedly civilised and democratic society. But maybe the European Union (EU) is no longer a civilised democracy?

I heard rumours about this when I visited Limassol last week, but dismissed them as completely outlandish. And yet, here we are. The consequences are unpredictable, but we are clearly looking at a significant paradigm shift.

This is a breach of fundamental property rights, dictated to a small country by foreign powers and it must make every bank depositor in Europe shiver. Although the representatives at the bailout press conference tried to present this as a one-off, they were not willing to rule out similar measures elsewhere - not that it would have mattered much as the trust is gone anyway. It is now difficult to expect any kind of limitation to what measures the Troika and EU might take when the crisis really starts to bite.

If you can do this once, you can do it again. if you can confiscate 10 percent of a bank customer's money, you can confiscate 25, 50 or even 100 percent. I now believe we will see worse as the panic increases, with politicians desperately trying to keep the EUR alive.

Depositors in other prospective bailout countries must be running scared - is it safe to keep money in an Italian, Spanish or Greek bank any more? I dont know, must be the answer. Is it prudent to take the risk? You decide. I fear this will lead to massive capital outflows from weak Eurozone countries, just about the last thing they need right now. Even from the EU as a whole, I suspect, as the banking union is in place in most countries already.

Another open question is what will happen to the huge number of brokerages based in Cyprus? There is about 100 or more FX and other brokers currently operating under the relatively light Cypriot regulation. How will this impact the trustworthiness of these many small institutions? What IS the exact impact on the client deposits they might be holding in Cyprus? Will anyone dare to do business with them going forward?

This is a major, MAJOR game changer and the fallout will be with us for a long time to come. I believe it could be the beginning of the end for the Eurozone as this is an unbelievable blow to the already challenged trust that might be left among investors. Talk about a possible own goal.

Market reaction? it must be very good for gold - and for safe-haven countries like Switzerland, Singapore and economically more healthy non-Euro countries in, for example, Scandinavia. I would think the EUR and associated markets will be undermined by increasing lack of confidence when the full implications become clear for investors.

This is full-blown socialism and I still cannot believe this really happened.

I think it is safe to say that it is very bad news when the actions of the international bankers appalls even their lesser brethren, and when the initial test-action exceeds the worst expectations of about only people to correctly anticipate it coming.

And note that they expect similar actions to take place in the USA as well.  Meanwhile, none of the smugly verbose defenders of the people on the Left appear to have even noticed anything has happened... most likely because this sort of thing is completely beyond their capacity to even comprehend, let alone analyze or anticipate.

You will recall that I have been warning readers to stay out of the stock market and the banking system to the greatest extent possible for some time now.  This is only one of the many reasons why.  Those who were confident in the security of their 401ks should probably reconsider their opinions in light of these mandatory depository "contributions" to the cause of debt restructuring.  As Karl Denninger puts it: "$100 bills in your hand have just been declared to be worth somewhere between 7-10% more than those "deposited" and "stored" in a bank."

I have to admit, once more I'm shown to be somewhat of an optimist.  I expected them to begin with pension and 401k seizures, I never imagined they would go right for the deposits.  But then, as a gangster of an earlier era said, the banks are where the money is.  And in case you were wondering what was going to bring the heavily overbought stock market's 10-day winning streak to a customarily nasty end, you would appear to have gotten your answer.

UPDATE: Germany and the IMF were originally demanding 40 PERCENT of all bank deposits.

UPDATE II: The Monday bank holiday in Cyprus has already been extended to Tuesday, and will likely be extended to Wednesday as well.  Pay attention, this is how it will happen elsewhere.  If you wait until the announcements hit, you will not be able to do anything until it is too late.

UPDATE III: Now the Cypriot Parliament is belatedly wondering if robbing the entire savings class is a health-conscious decision and dragging its heels. "Cyprus' parliament on Sunday postponed a debate and vote on a controversial levy on all bank deposits that the cash-strapped country's creditors had demanded in exchange for (EURO)10 billion ($13 billion) in rescue money.  The vote, which had been expected later Sunday, has been pushed back to Monday afternoon, parliamentary official Antonis Koutalianos said.  The announcement set off an immediate scramble among top European officials, with reports that the European Central Bank was pressuring Cypriot authorities to hold the vote without delay."

I expect the confiscations will go through, such things almost always do, but notice how it is always the executive branch that is the first to surrender.  And what a surprise, that the anti-democratic fascists of the EU failed to take into account that they'd have to get the support of the parliament in order to complete their little bank heist.  Also, look for the "Russian money laundering" angle to be talked up on the financial news in an attempt to justify the theft and reduce fears outside of Cyprus, which is, of course, the only place that any thing of the sort could possibly happen just this one time due to impossible-to-foresee emergency circumstances.

UPDATE IV: In what surely is completely unrelated news, the Russian Navy had an announcement today as well: "Russia will dispatch a permanent group of five to six combat ships to the Mediterranean Sea, Russian Navy chief Admiral Viktor Chirkov said. Frigates and cruisers will make up the core of the fleet."

Of bailouts and bullet- biting

It may be illuminating to compare what I wrote in RGD to the various ways countries mentioned in it have responded to the debt crisis. Consider the following quote from the book:

"According to Austrian theory, the effects of the housing bust on the overall economy should be much greater in countries like Estonia, Spain, and Ireland than in Austria, Germany, and Poland, and to the extent that inexpensive debt was made available to that and other sectors of the economy, we would expect to see that signs of the resulting economic contraction are similarly greater as well. Therefore we should see unemployment rising faster, prices falling further, GDP contracting more, and government deficits growing larger in the three housing boom countries than in the three non-boom ones."

From today's NYT on the Spanish bank bailout:

Two weeks after Prime Minister Mariano Rajoy of Spain vowed “there will be no Spanish banking rescue,” and after days of delay in which Mr. Rajoy pressed European officials for sounder rescue terms, Spain has now joined Greece, Ireland and Portugal as the latest bailout recipient. Catastrophe averted? Hardly.

Spain, check. Ireland, check. But no Estonia? What happened there? Why hasn't Estonia required a bank bailout? The answer can be found in the rationale given by Fitch Ratings decision to affirm the little country's credit rating.

"The rating decision reflects “the country’s near seamless transition to full membership of the euro zone starting on 1 January 2011, coupled with a more balanced economic recovery and the continued deleveraging of the private sector”.... Estonia was the only euro-area member to report budget surpluses for the last two years and had the lowest public debt among the region’s 17 members in 2011 at 6 percent of gross domestic product."

Translation: Estonia is the only one of the three housing boom countries I noted in RGD that chose to bite the bullet and accept economic contraction and debt default rather than attempt to put off dealing with it in the interest of its banking sector. As even Paul Krugman has begrudgingly noted, they've hit bottom and are now in an ongoing process of recovery. But first they took a 20 percent hit to GDP, which is very much in line with what I said would have to be the case in RGD. All the multiple bailouts in Europe and the USA have accomplished is ensure that the trough will have to be bigger and deeper in the end.

The FDIC is running out of cash

After noticing that the estimated cost of the five banks that failed yesterday accounted for a little more than 28 percent of the FDIC's Deposit Insurance Fund, I wondered how much the FDIC could possibly have left in the DIF considering that 51 other bank failures have occurred since the last FDIC Quarterly was published. According to Table I-B. Insurance Fund Balances and Selected Indicators, the FDIC began Q1 2009 with $17,276 million in the DIF and finished it with $13,007 million after shutting down 21 banks during that time.

Since then, Calculated Risk has recorded 52 more bank failures in its ongoing Bank Failure Friday series. This morning, I went through and added up the estimated losses that the FDIC reports each time it seizes a bank. As of yesterday, the cumulative estimated cost to the Deposit Insurance Fund since the beginning of the second quarter reached $15,992 million. This suggests that the FDIC is now $2.98 billion in the red after yesterday's bank failures and will soon be requesting a bailout by the federal government. However, it may be even worse, since the $2,232 million in estimated losses during the first quarter translated into a $4,629 million reduction in the DIF balance.


Because two bailouts totaling $25.75 billion were attempted in 1986 and 1987 before the FSLIC was shut down in 1989, I suspect at least one major bailout will be attempted before the deposit insurance system either snaps back to its 1.5 reserve ratio or collapses altogether. (Update: Calculated Risk emailed to point out that the FDIC has a $30 billion credit line with the Treasury, which will likely be quietly increased rather than risk a negative public reaction to yet another government bailout.) However, given the 150 insured depository institutions which are presently reported as having $193 billion in deposits at risk, I can only conclude that the odds tend to favor the latter. The all-time low in the reserve ratio was -0.25% in 1991, as the FDIC digested the failed FSLIC's obligations. The reserve ratio is only -0.06% based on estimated losses so far this year, but can be expected to continue falling as more banks fail.


NB: the gap between bank numbers 59 and 65 in the graph is not a mistake. That reflects the 6 banks owned by Security Bank Corporation in Macon, Georgia, which the FDIC reported as a single cost.

Myth squared

As DG, who emailed this image from a 2007 AIG ad notes, gravity has seldom been so comprehensively defied. AIG's commitment to reality is obviously on the tenuous side, as their outrageous decision to give bailout money to European banks and ex-employees clearly demonstrates. That little girl isn't going to be a rocket scientist; even if she manages to obtain an astrophysics degree she's more likely to end up teaching queer theory in Indian film.

I have no problem with Sen. Grassley's comment encouraging AIG executives to commit seppeku, as it would save Americans the trouble of having to hang the banking executives by their own entrails. And isn't it interesting to see Obama and the Democrats in Congress are demonstrating what wholly-owned Wall Street slaves they are and have always been? While most people are idiots, they really can't expect to be able to shovel money to the banks one day, then shake their fists in feigned anger over what the bankers have done with that money the next. Especially when the Magic Negro received more than one hundred thousand dollars from AIG in 2008. Is Obama going to demand that he return his own little bonus from the bankers?

Everyone knows the assertion that there's nothing the administration, Congress, or any federal administration can do about the bonuses, or the bailout money, is total nonsense. The feds have no trouble emptying out bank accounts anytime they feel like it, regardless of what the law or any corporate contract says. And the argument that the bonuses are necessary in order to retain "the best and brightest" - you know, the very individuals who ran AIG into the ground - have already been shown to be false by the fact that a number of them have already left the company.

So, no more bailouts. No more bonuses. No more corrupt government "fixes". Americans must demand that all the bailout money be returned immediately and all the insolvent institutions liquidated. That's capitalism. That's the free market. And that's the way out of the mess.

Too little, too late

Republicans really should have broken with Bush back in 2004 at the very latest:

A bailout-weary Congress killed a $14 billion package to aid struggling U.S. automakers Thursday night after a partisan dispute over union wage cuts derailed a last-ditch effort to revive the emergency aid before year's end.

Republicans, breaking sharply with President George W. Bush as his term draws to a close, refused to back federal aid for Detroit's beleaguered Big Three without a guarantee that the United Auto Workers would agree by the end of next year to wage cuts to bring their pay into line with Japanese carmakers.

None of the bailouts make sense or will do what they are nominally intended to do, so every failed bailout is a positive step. The longer the pain is postponed, the worse it will be. Trying to bailout boats with gaping holes in them simply isn't going to work.

For the benefit of banks

Just in case you were wondering if the government was actually more concerned about American citizens or its banker friends around the world:

In a change from the original proposal sent to Capitol Hill, foreign-based banks with big U.S. operations could qualify for the Treasury Department’s mortgage bailout, according to the fine print of an administration statement Saturday night. The theory, according to a participant in the negotiations, is that if the goal is to solve a liquidity crisis, it makes no sense to exclude banks that do a lot of lending in the United States. Treasury Secretary Henry Paulson confirmed the change on ABC's "This Week," telling George Stephanopoulos, calling the coverage of foreign-based banks "a distinction without a difference to the American people."

The financial community didn't want to take its medicine back in 1999, so they put it off. Now they're facing amputation, so they're putting it off again. In the long run, they're dead, of course, the problem is that each purchase of time to benefit the financial elite costs the American people dearly.

None of this is actually necessary. It's only necessary in order to preserve the Federal Reserve's failing monopoly over US money. Back when there were hundreds of competing bank currencies, a bank failure meant that those who held its currency suffered. Now that there's a government-granted monopoly, a failure means that everyone will suffer. The fact that centralized money operates no better than centralized anything else should not surprise anyone capable of understanding the supply-demand curve.

UPDATE - Even the Washington Post recognizes that this preemptive bailout scheme is an insane idea likely to cause more problems than it solves:"With truly extraordinary speed, opinion has swung behind the radical idea that the government should commit hundreds of billions in taxpayer money to purchasing dud loans from banks that aren't actually insolvent. As recently as a week ago, no public official had even mentioned this option. Now the Treasury, the Fed and congressional leaders are promising its enactment within days. The scheme has gone from invisibility to inevitability in the blink of an eye. This is extremely dangerous."

UPDATE II - As you'd expect, Ron Paul is one of the few politicians who actually understands what's going on and what should be done:

What's your take on this huge financial bailout?

"It's more of the same. More debt and more inflation and more pressure on the dollar. Ultimately, although the markets are responding very favorably at the moment, I think it is going to be devastating to the dollar and to our financial situation in this country."

So instead of having taxpayers buy the bad debt, the market should take care of it by itself?

"Sure, prices need to go down. Bad debt needs to be eliminated. The taxpayer ought to be protected. Taxes ought to be lowered...We are following the same routine that we did in the Depression, and that is artificially try to keep prices up. People were starving in the Depression and the only thing they did was try to keep wages artificially high and keep food prices high. We are doing the same thing now—we are trying to keep housing prices high. Low prices for houses mean poor people could buy a house. This is the most important part of a free market economy and that is free market pricing. Without free market pricing, the market can't work. And this is in a way a major effort to price fix."

They can fight economic gravity as hard as they want. But in the end, the plane is eventually going to run out of fuel and the landing will be a lot harder as a result. I don't have much sympathy for a country who rejected the chance to have Ron Paul at the helm and favored the likes of McCain and Obama.

This time it isn't different

The astonishing story of a thrice-failed Spanish bank:

Consider the story of Bankia.

Bankia was formed by merging seven bankrupt regional Spanish banks in 2010. The new bank was funded by Spain’s Government rescue fund… which received “preference shares” in return for over €4 billion (from taxpayers). These preference shares were shares that a) yielded 7.75% and b) would get paid before ordinary investors if Bankia failed again.

So right away, the Spanish Government was taking taxpayer money to give itself preferential treatment over ordinary investors. Indeed, those investors who owned shares in the seven banks that merged to form Bankia lost their shirts. They were wiped out and lost everything.

Bankia was then taken public in 2011. Spanish investment bankers convinced the Spanish public that the bank was a fantastic investment. Over 98% of the shares were sold to Spanish investors.

One year later, Bankia was bankrupt again, and required the single largest bailout in Spain’s history: €19 billion. Spain took over the bank and Bankia shares were frozen on the market (meaning you couldn’t sell them if you wanted to). When the bailout took place, Bankia shareholders were all but wiped out, forced to take huge losses as part of the deal. The vast majority of them were individual investors (the bank currently faces a lawsuit for over 140,000 claims of mis-selling shares).

So that’s two wipeouts in as many years.

The bank was taken public a year a second time later in May 2013. Once again Bankia shares promptly collapsed, losing 80% of their value in a matter of days. And once again, it was ordinary investors who got destroyed. Indeed, things were so awful that a police officer stabbed a Bankia banker who sold him over €300,000 worth of shares (the banker had convinced him it was a great investment).

Which brings us to today.

Bankia remains completely bankrupt. But its executives and the Spanish Government continue to claim that things are improving and that the bank is on the up and up. Indeed, just a few weeks ago, the Wall Street Journal wrote an article titled “Investors Show Interest in Bankia.” The story featured a quote from Spain’s Finance Minister that, “… it is logical. The perception of Spain has improved and Banki has improved a lot.”

Bear in mind, this is a bank that has wiped out investors THREE times in the last THREE YEARS. So that’s three different rounds of individual investors being told that Bankia was a great investment and losing everything. Every single one of these wipeouts was preceded by both bankers and Spanish Government officials claiming that “everything had been fixed” and that Bankia was a success story.

And now the Spanish Government is trying to convince them to line up for a fourth round.

Keep this in mind when you read the reassurances that this time, the green shoots really have been spotted, that the economy is growing at more than 4 percent per quarter, and stocks are cheap at their all-time highs if you only look at them in just the right way.

Cyprus: the test case

An insider's explanation of how the insane Cypriot situation came to pass and who was chiefly to blame for it:

As well as the full EU summit on Thursday and Friday, Anastasiades, a London-educated 66-year-old, was to attend the first full eurozone summit for 14 months late on Thursday. A senior EU policymaker said: "There will be a little discussion of Cyprus, but no decisions."

A senior EU diplomat predicted: "Nothing much will happen. It's the new president's first summit."

As it turned out, the centre-right Cypriot leader was given a 12-hour stay of execution until the early hours of Saturday on what, highly conveniently, was a Cyprus bank holiday weekend. He went home with a €10bn euro bailout and a eurozone taboo-busting obligation to expropriate every saver in every bank in Cyprus....

The IMF has long insisted on keeping the cost of the bailout well below the €17bn needed because of its fixation on ensuring medium-term debt sustainability. Lending Cyprus what it needed would have tipped the scales of sustainability.  The German government, months away from a crucial general election, was also very reluctant to see its taxpayers' money lent to secure the savings of wealthy Russians whose deposits are estimated to represent almost a third of Cypriot accounts.

The panic about banks closing down on Tuesday came from Asmussen, who warned the Cypriots that no deal meant no emergency liquidity help from the ECB, meaning the two biggest banks on the island could collapse.

"I was present," said Sklavos. Asked who pushed the hardest for the levy to be slapped on depositors, he said: "Wolfgang Schaeuble."

"It was a fait accompli. They had made their decision before the meeting had even begun. They don't care. They want Cyprus to be the guinea pig. They want to see if this thing works. If it does, then perhaps Spain or Italy will be next. If it doesn't, then who cares about Cyprus?"

And who is Wolfgang Schaeuble? He is the German Minister of Finance, Helmut Kohl's heir presumptive, and the most ardent EUnik in the CDU.  He was pushing the bank heist because he knows that Germans are going to be increasingly supporting anti-EU parties in the upcoming elections and feared the bad press of forcing the German taxpayer to bail out Russian savings accounts.

The bank raids begin

It would be reasonable to assume that the bank runs will be next:

£8.7billion EU bailout imposes tax on ALL bank accounts in Cyprus.  Under the deal, all bank deposits over €100,000 will be hit with a levy of 9.9 per cent. Those with smaller savings will pay 6.75 per cent.

The raid will raise €5.8 billion, which will be added to a €10billion bailout from Brussels. But financial experts said the raid – designed to stop Cyprus crashing out of the euro, potentially destroying the currency – would send shock waves through the eurozone.

If savers in other troubled nations fear their accounts might be next, they could withdraw their money and spark a catastrophic run on the banks.

Tell these people, who are losing between 7 percent and 10 percent of their savings, how vitally important it is for Cyprus to remain in the euro.  Especially when there isn't even the remotest prospect for this blatant theft to repair the situation or do anything more than buy a little more time.