Posted on November 16, 2011 by | Comments Off on

European Debt Crisis

Roundtable Discussion

and

Special Post-Program Workshop for Teachers:
Teaching Applications for the Secondary Classroom
 

Roundtable Panelists
John Keating
Associate Professor, Department of Economics, KU

Stephanie Kelton
Associate Professor, Department of Economics, University of Missouri-Kansas City

Robert Rohrschneider
Sir Robert Worcester Distinguished Professor in Public Opinion and Survey Research, Department of Political Science, KU
Moderator
Victor Bailey
Charles W. Battey Distinguished Professor of Modern British History, Department of History, and Director, Hall Center for the Humanities, KU

Roundtable Discussion

Thursday, Nov. 17, 3:30-4:30
Alderson Auditorium, Kansas Union

 
———————-

Teacher Workshop

 
4:30-5:30, Curry Room, Kansas Union
 Participate in a discussion of the Roundtable and receive
free teaching materials and refreshments.
Sponsored by the KU Center for Economic Education

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Both sessions are free.Roundtable does not require reservations.

To attend the Teacher Workshop, contactNadia Kardash [email protected] to reserve a space.Register early; limited seating and materials available.

 

Eurpean Debt Crisis Roundtable
Sponsored by: 
European Studies Program
Center for Global & International Studies
Hall Center for the Humanities
Departments of Classics, French & Italian, Germanic Languages

& Literatures, Slavic Languages & Literatures, and Spanish & Portuguese

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Best Satire of Faux Austrian Economics Ever

Posted on November 15, 2011 by | Comments Off on Best Satire of Faux Austrian Economics Ever
By WilliamK. Black
Someone has created a fabulous, richly detailedparody of Austrian economics.  They callit The Daily Bell and claim that itsperspective reflects Austrian economics. In reality, it satirizes faux Austrian economics’ sycophancy towardelite white-collar criminals. 
 
I was delighted to learn that they used my recentcolumn: The Virgin Crisis: Systematically Ignoring Fraud as a Systemic Risk as the vehicle for their send-up.
 
The send-up captures precisely faux Austrianeconomists’ disdainful response to adverse data – they ignore it. 
The article hits its peak in capturing the servileapologies that Austrian economists offer in defense of the elite white-collarcriminals who make a mockery of Austrian claims of “free markets.”  The satirist emphasizes the Austrians’hypocrisy (they love police enforcing a “rule of law” and “property rights”against blue-collar folks), by calling the FBI the “Stasi” (the East German’ssecret police) when they enforce the rule of law and property rights againstelite white-collar criminals.  Thesatirist then mocks the Austrians by picturing them as eager to prevent theimprisonment of elite white-collar felons. Faux Austrian economists’ heroes have always been elite felons.  The author of the satire ridicules theJustice Department’s (DOJ) abject failure to investigate, much less prosecute,the elite felons of finance that drove our ongoing crisis.  He skewers DOJ for going AWOL during thiscrisis by employing over-the-top mockery. The author states that DOJ is so effective in prosecuting the elite white-collarcriminals that drove this crisis and sanctions them so viciously that they havecreated an “ever-expandinggulag of slave-laborers.”  One man’s“Club Fed” is a faux Austrian’s “gulag.” The reality, of course, is that no Wall Street bankster inhabits thisnon-existent white-collar gulag.  Thatgap between reality and the hysterical claims of tortured banksters is whatmakes the passage hilarious.
 
The authorof the satire of Austrian economics uses the nom de plume of Anthony Wile, which is a fabulous insiderjoke.  The real Anthony Wile was theinfamous subject of an SEC action for securities fraud.  What a brilliant conceit – assuming the nameof a man identified by the SEC as one of the perpetrators of a crudewhite-collar fraud to advance the proposition that only fascists wouldprosecute elite white-collar frauds. Here are the lowlights of what the SEC investigation of the real AnthonyWile and his colleagues found:

U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 21696 / October 15, 2010

Securities and Exchange Commission v. Brian N. Lines, Scott G.S. Lines, LOM (Holdings) Ltd., Lines Overseas Management Ltd., LOM Capital Ltd., LOM Securities (Bermuda) Ltd., LOM Securities (Cayman) Ltd., LOM Securities (Bahamas) Ltd., Anthony W. Wile, Wayne E. Wile, Robert J. Chapman, William Todd Peever, Phillip James Curtis, and Ryan G. Leeds, 1:07-CV-11387 (DLC) (S.D.N.Y., filed Dec. 19, 2007)

Court Enters Final Judgments against Brian N. Lines, Scott G.S. Lines, Anthony W. Wile, Wayne E. Wew (formerly Wayne E. Wile), Lines Overseas Management Ltd., LOM Securities (Bermuda) Ltd., LOM Securities (Bahamas) Ltd., LOM Securities (Cayman) Ltd., and LOM Capital Ltd. in Market Manipulation Case

The Securities and Exchange Commission today announced that the Honorable Denise Cote of the United States District Court for the Southern District of New York entered judgments of permanent injunction and other relief against Brian N. Lines, Scott G.S. Lines, Anthony W. Wile, Wayne E. Wew, Lines Overseas Management Ltd., LOM Securities (Bermuda) Ltd., LOM Securities (Bahamas) Ltd., LOM Securities (Cayman) Ltd., and LOM Capital Ltd. on October 15, 2010. (The LOM companies collectively are referred to hereinafter as the “LOM Entities”). All of the foregoing defendants, with the exception of LOM Securities (Bahamas) Ltd. and LOM Securities (Cayman) Ltd., were enjoined by the Court from violating certain of the antifraud provisions of the federal securities laws, as described below. The Court also ordered broad ancillary relief against the defendants, including as to certain defendants, disgorgement, civil money penalties, and compliance with undertakings to not trade in penny stocks quoted on certain U.S.-based electronic quotation services and, for the LOM Entities, to not maintain accounts for U.S.-resident customers. Brian and Scott Lines and the LOM Entities were ordered to disgorge over $1.9 million in profits and prejudgment interest and pay civil penalties totalling $600,000.


Without admitting or denying the Commission’s allegations, the defendants consented to the entry of the judgments against them. These judgments resolve the Commission’s claims against these defendants in a civil action that was filed on December 19, 2007, in which the Commission alleged that that these defendants had participated in a fraudulent scheme to manipulate the stock price of Sedona Software Solutions, Inc. (“SSSI”), and, except for Wile and Wew, also had participated in a second stock manipulation scheme involving SHEP Technologies, Inc. (“SHEP”) f/k/a Inside Holdings Inc. (“IHI”).


In addition to entering permanent injunctions, the Court ordered Brian and Scott Lines, who are brothers and during the relevant time were the controlling persons of the LOM Entities, to pay, jointly and severally with the LOM Entities, disgorgement of $1,277,403, prejudgment interest of $654,918. The Court also imposed civil penalties in the following amounts: $450,000 for the LOM Entities, $100,000 for Brian Lines; and $50,000 for Scott Lines. In addition to entering permanent injunctions against Anthony Wile and Wayne Wew, the Court ordered Wile to pay a civil penalty in the amount of $35,000, and Wew to disgorge approximately $8000 and pay a $10,000 civil penalty.
In its Complaint in the civil action, the Commission alleged that, in early 2002, Brian and Scott Lines assisted two LOM customers, defendants William Todd Peever and Phillip James Curtis, to secretly acquire a publicly-traded OTCBB shell company named Inside Holdings, Inc. (“IHI”). Peever and Curtis then arranged for a reverse merger of IHI with SHEP Ltd., a private company that purportedly owned certain intellectual property. Peever and Curtis paid three touters to publish a series of highly positive reports recommending investments in the newly-merged entity, SHEP Technologies, Inc. The Commission’s complaint alleged, in pertinent part, that during the first half of 2003, Peever, Curtis, and the Lines brothers sold over three million SHEP shares into this artificially-stimulated demand in an unregistered distribution of SHEP stock. As part of the alleged scheme, the Lines brothers, Peever, and Curtis failed to file required reports regarding their beneficial ownership of IHI and SHEP stock, and Brian Lines caused several false reports to be filed with the Commission in order to conceal that Peever and Curtis, among others, owned substantial positions in, and had been selling, SHEP stock.


As further alleged in the Commission’s Complaint, in late 2002, Anthony Wile and another individual formed Renaissance Mining Corporation (“Renaissance”) and thereafter engaged in substantial promotional activities that created the misleading impression that Renaissance had acquired three Central American gold mines and was the “Leading Gold Producer in Latin America.” In fact, Renaissance had only executed a non-binding Letter of Intent to acquire those mines and lacked the funding necessary to consummate the acquisition. The Complaint further alleges that Wile acted in concert with the Lines brothers, who acquired a publicly-traded shell, Sedona Software Solutions, Inc., using LOM accounts in the names of nominees to disguise their ownership of the Sedona shell, as part of a plan to merge Sedona with Renaissance.


The Complaint alleges that, in early 2003, Wile and his associate primed the market for Renaissance/Sedona by disseminating materially false and misleading information that misrepresented the ownership of the gold mines and created the impression that the Renaissance/Sedona merger had been completed. Wile and his associate also arranged for the Renaissance/Sedona offering to be touted to prospective investors by Robert Chapman, the publisher of an on-line investment newsletter, and three other newsletter writers, all of whom purchased Renaissance shares for nominal sums. Through this deceptive promotional campaign, Wile and his associate informed the market that there would be an opportunity to invest in Renaissance by acquiring Sedona stock at approximately $10 per share beginning on January 21, 2003.


According to the Complaint’s allegations, on that date, Wile orchestrated a pre-arranged manipulative trade between his uncle, defendant Wayne E. Wile (who subsequently changed his name to Wayne Wew), and Brian Lines to artificially drive up the price of Sedona stock from $.03 per share to over $9.00 per share and stimulate trading in the stock. The Complaint alleged that Scott Lines solicited investors, including at least one LOM customer in the United States, to purchase Renaissance stock in anticipation of the merger between Renaissance and Sedona, without disclosing that he and Brian Lines owned the Sedona shell corporation. The Complaint further alleged that, after Renaissance and Sedona had announced their pending merger, the Lines brothers sold 143,000 shares of Sedona stock in an unregistered distribution to numerous public investors at between $8.95 and $9.45 per share, reaping over $1 million in illegal profits. On January 29, 2003, the Commission suspended trading in Sedona’s stock.


Final judgments were entered by the Court against each defendant and provide the following relief, respectively:

(i) Brian Lines is permanently enjoined from violating the antifraud, securities offering registration, and securities ownership disclosure provisions of the federal securities laws, Sections 5 and 17(a) of the Securities Act of 1933 (“Securities Act”) and Sections 13(d) and 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 13d-1, 13d-2, and 16a-3 thereunder; (2) ordered to pay disgorgement, jointly and severally with Scott Lines and the LOM Entities, in the amount of $1,277,403, plus prejudgment interest thereon in the amount of $654,918; (3) ordered to pay a civil penalty in the amount of $100,000; and (4) ordered to comply with an undertaking to not trade for a period of three years in penny stocks that are quoted or displayed on the OTC Bulletin Board Montage, Pink Sheets, or the ArcaEdge Electronic Limit Order File;
 
(ii) Scott Lines is permanently enjoined from violating the antifraud, broker-dealer registration, securities offering registration, and securities ownership disclosure provisions, Sections 5 and 17(a)(2) and (3) of the Securities Act and Sections 13(d), 15(a), and 16(a) of the Exchange Act and Rules 13d-1, 13d-2, and 16a-3 thereunder; (2) ordered to pay disgorgement, jointly and severally with Brian Lines and the LOM Entities, in the amount of $1,277,403, plus prejudgment interest thereon in the amount of $654,918; (3) ordered to pay a civil penalty in the amount of $50,000; and (4) ordered to comply with an undertaking not to trade for a period of two years in penny stocks that are quoted or displayed on the OTC Bulletin Board Montage, Pink Sheets, or the ArcaEdge Electronic Limit Order File;
 
(iii) Lines Overseas Management Ltd. is permanently enjoined from violating the antifraud, securities offering registration, and securities ownership disclosure provisions, Sections 5 and 17(a)(2) and (3) of the Securities Act, and Section 13(d) of the Exchange Act and Rules 13d-1, 13d-2, and 16a-3 thereunder; (2) ordered to pay disgorgement, jointly and severally with Brian Lines, Scott Lines and the other settling LOM Entities, in the amount of $1,277,403, plus prejudgment interest thereon in the amount of $654,918; (3) ordered to pay a civil penalty in the amount of $450,000, jointly and severally with the other settling LOM Entities; and (4) ordered to comply with an undertaking to: (a) not trade for a period of two years in penny stocks that are quoted or displayed on the OTC Bulletin Board Montage, Pink Sheets, or the ArcaEdge Electronic Limit Order File; (b) not accept or maintain any account for or on behalf of any United States customer for a period of two years; and (c) hire an independent consultant for two years to monitor compliance with these undertakings;
 
(iv) LOM Capital Ltd. and LOM Securities (Bermuda) Ltd. are permanently enjoined from violating the antifraud and securities offering registration provisions, Sections 5 and 17(a)(2) and (3) of the Securities Act and, in addition, LOM Securities (Bermuda) is permanently enjoined from violating the broker-dealer registration provision, Section 15(a) of the Exchange Act; (2) ordered to pay disgorgement, jointly and severally with Brian Lines, Scott Lines and the other settling LOM Entities, in the amount of $1,277,403, plus prejudgment interest thereon in the amount of $654,918; (3) ordered to pay a civil penalty in the amount of $450,000, jointly and severally with the other settling LOM Entities; and (4) ordered to comply with an undertaking to: (a) not trade for a period of two years in penny stocks that are quoted or displayed on the OTC Bulletin Board Montage, Pink Sheets, or the ArcaEdge Electronic Limit Order File; (b) not accept or maintain any account for or on behalf of any United States customer for a period of two years; and (c) hire an independent consultant for two years to monitor compliance with these undertakings;
 
(v) LOM Securities (Bahamas) Ltd. and LOM Securities (Cayman) Ltd. are permanently enjoined from violating the securities offering registration provision, Section 5 of the Securities Act; (2) ordered to pay disgorgement, jointly and severally with Brian Lines, Scott Lines and the other settling LOM Entities, in the amount of $1,277,403, plus prejudgment interest thereon in the amount of $654,918; (3) ordered to pay a civil penalty in the amount of $450,000, jointly and severally among the settling LOM Entities; and (4) ordered to comply with an undertaking to: (a) not trade for a period of two years in penny stocks that are quoted or displayed on the OTC Bulletin Board Montage, Pink Sheets, or the ArcaEdge Electronic Limit Order File; (b) not accept or maintain any account for or on behalf of any United States customer for a period of two years; and (c) hire an independent consultant for two years to monitor compliance with these undertakings;
 
(vi) Anthony Wile is permanently enjoined from violating the antifraud and securities offering registration provisions, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 5 and 17(a) of the Securities Act; (2) ordered to pay a civil penalty in the amount of $35,000; (3) barred from serving as an officer or director of a public company for a period of five years; and (4) barred from participating in an offering of penny stock for a period of three years;
(vii) Wayne Wew (formerly Wayne E. Wile) is permanently enjoined from violating the antifraud provisions, Sections 17(a)(2) and (3) of the Securities Act; (2) ordered to pay disgorgement in the amount of $5,422, plus prejudgment interest thereon in the amount of $2,608; and (3) ordered to pay a civil penalty in the amount of $10,000.
 

As part of a global settlement with the LOM Entities, Brian Lines, and Scott Lines, the Commission agreed to dismiss with prejudice the pending civil enforcement action against LOM Holdings Ltd., which is the parent holding company for the LOM Entities.
The Court previously had entered permanent injunctive relief against defendants Peever, Curtis, and Chapman. The Commission’s claims for monetary relief against those defendants remain pending before the Court.


For additional information, please see Litigation Releases Nos. 20407 (Dec. 17, 2007); 20733 (Sept. 22, 2008); and 21577 (June 28, 2010).”
 
http://www.sec.gov/litigation/litreleases/2010/lr21696.htm
The faux Austrian satirical web site uses thispathetic episode as another opportunity for humor when it presents a faux bioof the not-as-wily-as-he-thought Wile: 
 
“He has put thisknowledge to good use, working with top mining executives and ventureentrepreneurs to generate some of the most successful business efforts of the2000s.” 
 
There is a similar gem prominently featured on theweb site: the admonition that the key to a successful society is “personalaccountability.”  What a perfectaccompaniment to an article demanding that the elites who grew wealthy throughfraud not be prosecuted.  The satiristhas a great gift for irony.
 
Prior variants of Wile’s website contained thisdefense of Wile.
http://thedailybell.com/2012/Anthony-Wile
(accessed 11/13/2011)
“In 2000, Wile experienced a brief role as the CEO of astart-up junior mining company that became the subject of a civil attack by theSEC. Wile and others fought for more than seven years at greatpersonal and financial expense before eventually settling the case withoutadmitting any wrongdoing. The assets of the company in question weresubsequently purchased by a New York Stock Exchange listed company and theproperties have now produced more gold than was initially suggested. Hundredsof investors lost literally tens of millions in deserved future profits becausethe SEC accused the company of over-promising a merger that was actually takingplace. Perhaps this experience adds to Wile’s fervor to expose the power eliteand their societal manipulations.”
 [Perhaps? This is supposed to be Wile’s web site. Why is Wile guessing at the source of Wile’s “fervor?”  For that matter, why is Wile referring tohimself as “Wile” rather than “I?”  Whyaren’t Wile’s actions (as found by the SEC staff’s investigation) nasty“societal manipulations?”  Why isn’t Wilepart of the “power elite?”  Note that theSEC’s characteristic failure to actually litigate its cases or get admissionsof the facts means that Wile gets to pose as the victim of some kind of evilconspiracy.  The Department of Justice,equally characteristically, failed to prosecute despite SEC staff investigationfindings that should have led to felony charges.  Some gulag!]
 
It is time for a word about real Austrianeconomists.  They hate elite frauds andwant them prosecuted vigorously.  Ludwigvon Mises and Friederich Hayek are the two most famous Austrian economists.
 
Hayek, F.A.  The Road to Serfdom
 
“To create conditionsin which competition will be as effective as possible, to prevent fraud anddeception, to break up monopolies— these tasks provide a wide and unquestionedfield for state activity.”
 
The Constitution of Liberty
 
“There remains,however, one other kind of harmful action that is generally thought desirableto prevent and which at first might seem distinct.  This is fraud and deception.  Yet, though it would be straining the meaningof words to call them ‘coercion,’ on examination it appears that the reasonswhy we want to prevent them are the same as those applying to coercion.  Deception, like coercion, is a form ofmanipulating the data on which a person counts, in order to make him do whatdeceiver wants him to do.  Where it issuccessful, the deceived becomes in the same manner the unwilling tool, servinganother man’s ends without advancing his own. Though we have no single word to cover both, all we have said ofcoercion applies equally to fraud and deception.
 
With this correction,it seems that freedom demands no more than that coercion and violence, fraudand deception, be prevented, except for the use of coercion by government forthe sole purpose of enforcing known rules intended to ensure the bestconditions under which the individual may give his activities a coherent, rationalpattern.”  
 
“Liberty not only means that the individual has boththe opportunity and the burden of choice; it also means that he must bear theconsequences of his actions….  Libertyand responsibility are inseparable.”
 
Mises, L.
 
“Governmentought to protect the individuals within the country against the violent andfraudulent attacks of gangsters, and it should defend the country againstforeign enemies.”
 
The faux Austrian website and the faux (or real, whocan tell) Wile piles layer upon layer of satire.  The website contains articles that make theterm “bizarre” deeply inadequate.  One ofthe site’s favorite motifs is that an international conspiracy of the topbankers that caused the ongoing global crisis is using the Occupy Wall Street(OWS) movement to demand that the fraudulent bop bankers that caused the crisisbe prosecuted.  The dastardly OWS personcarrying the water for this conspiracy of international bank elites is DavidDeGraw.
 
“[T]hereis an Anglo-American power elite trying to establish a world government. Wecannot necessarily explain WHY anyone would want to do such a thing. Butapparently someone does. Actually more than a “someone” – a handfulof impossibly wealth banking families, located mainly in the one-square-mileCity of London.
 
These families – and one family in particular – apparentlyhave control of a worldwide central banking apparatus. With the ability toprint money-from-nothing around the world, the Rothschilds have amassed afortune that may be in excess of US$300 trillion. (Nobody really knows.)”
 
This too is a wonderful satiric technique.  I particularly like the “Nobody really knows”parenthetical as a modifier for a (gigantic) number that has already been madea non-number by the use of the word “may” (with a lead-in sentence renderedimpotent by the use of “apparently”).  Atrue Austrian-school economist, however, would never admit that central bankscould create over $300 trillion in money (over 15 times the GDP of the U.S.)without producing even material inflation over the last 30 years.  So, where do the Rothschilds invest ordeposit their over $300 trillion?  Giventhe fact that the Austrian school considers even massive income disparities irrelevant,it must be a very good thing for the world (from an Austrian perspective) thatthe Rothschilds have created such a massive increase in societal wealth withoutproducing anything that even approached hyper-inflation.    
 
David DeGraw must be the most skilled operative inthe world if the Rothschilds have chosen him to run their “false flag”operation that recruited the OWS as their secret ally.  Indeed, the Rothschilds are so clever thatthey doubtless picked DeGraw as their operative because he has been apersistent critic of central banks (the devils incarnate in this satire), thenpicked me because I am a persistent critic of central banks and want us toprosecute the elite banksters that drove the crisis.  Why?  Wecan’t explain WHY.   
 
I learned that the Rothschilds hate and wish todestroy the largest banks.  The largestbanks, however, are the central banks leading supporters.  Why? We can’t explain WHY.  All of thiswould be confusing if the blog had any pretense to rationality or reality.
 
The web site and interviews on the web with whoeverplays Mr. Wile are so loopy, with such vibrant excursions into multipleTwilight Zones that it is hard to pick a favorite satirical delusion.  In an hour of bemused perusing I learned thatOsama bin Laden had been dead for years (the raid on his compound in Pakistanwas a fake), it is likely that we used military force in Libya because theywere about to mint a gold coin that would become their national currency, theWorld Trade Center towers were blown up by the U.S., and hyper-inflation isabout to go global any minute. 
 
I grew up largely in Dearborn, Michigan (home ofFord Motor Company).  Henry Ford wasinfamous for distributing The Protocolsof the Learned Elders of Zion (the Czarist forgery exposing the Jewishconspiracy to rule the world), so I found that reading the Rothschild rant waslike noshing on comfort food. 
 
Sorry, have to cut this short, but I just received acall from the City of London.  Mr.Rothschild may be calling (nobody really knows).  And if nobody really knows, it could be true.  Why? We don’t know WHY. 


Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.


Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.Follow him on Twitter: @WilliamKBlack

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Fed Under Fire

Posted on November 14, 2011 by | Comments Off on Fed Under Fire

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ECB: Europe’s Last Hope?

Posted on November 14, 2011 by | Comments Off on ECB: Europe’s Last Hope?

Marshall Auerback on the need for the ECB to perform its duties as lender of last resort.

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Iceland’s New Bank Disaster

Posted on November 14, 2011 by | Comments Off on Iceland’s New Bank Disaster

By OlafurArnarson, Michael Hudson and Gunnar Tomasson*

Theproblem of bank loans gone bad, especially those with government-guaranteessuch as U.S. student loans and Fannie Mae mortgages, has thrown into questionjust what should be a “fair value” for these debt obligations. Should “fairvalue” reflect what debtors can pay – that is, pay without going bankrupt? Oris it fair for banks and even vulture funds to get whatever they can squeezeout of debtors? 

Theanswer will depend largely on the degree to which governments back the claimsof creditors. The legal definition of how much can be squeezed out is becominga political issue pulling national governments, the IMF, ECB and otherfinancial agencies into a conflict pitting banks, vulture funds anddebt-strapped populations against each other.
Thispolarizing issue has now broken out especially in Iceland. The country is nowsuffering a second round of economic and financial distress stemming from thecollapse of its banking system in October 2008. That crisis caused a huge lossof savings not only for domestic citizens but also for international creditorssuch as Deutsche Bank, Barclay’s and their institutional clients.
Stuckwith bad loans and bonds from bankrupt issuers, foreign investors in the old bankssold their bonds and other claims for pennies on the dollar to buyers whose websites described themselves as “specializing in distressed assets,” commonlyknown as vulture funds. (Persistent rumors suggest that some of these areworking with the previous owners of thefailed Icelandic banks, operating out of offshore banking and tax havens and currentlyunder investigation by a Special Prosecutor.)
Atthe time when those bonds were sold in the market, Iceland’s government owned100% of all three new banks. Representing the national interest, it intendedfor the banks to pass on to the debtorsthe write-downs at which they discounted the assets they bought from the oldbanks. This was supposed to be what “fair value” meant: the low marketvaluation at that time. It was supposed to take account of the reasonableability of households and businesses to pay back loans that had becomeunpayable as the currency had collapsed and import prices had risenaccordingly.
TheIMF entered the picture in November 2008, advising the government toreconstruct the banking system in a way that “includes measures to ensure fairvaluation of assets [and] maximize asset recovery.” The government createdthree “good” new banks from the ruins of its failed banks, transferring loansfrom the old to the new banks at a discount of up to 70 percent to reflecttheir fair value, based on independent third party valuation.
Thevultures became owners of two out of three new Icelandic banks. On IMF advicethe government negotiated an agreement so loose as to give them a huntinglicense on Icelandic households and businesses. The new banks acted much asU.S. collection agencies do when they buy bad credit-card debts, bank loans orunpaid bills from retailers at 30% offace value and then hound the debtors to squeeze out as much as they can, byhook or by crook.
These scavengers of the financial system arethe bane of many states. But there is now a danger of their rising to the topof the international legal pyramid, to a point where they are in a position tooppress entire national economies.
Iceland’s case has a special twist. By lawIcelandic mortgages and many other consumer loans are linked to the country’ssoaring consumer price index. Owners of these loans not only can demand 100% offace value, but also can add on the increase in debt principal from theindexing. Thousands of households face poverty and loss of propertybecause of loans that, in some cases, have more than doubled as a result of thecurrency crash and subsequent price inflation. But the IMF and Iceland’sGovernment and Supreme Court have affirmed the price-indexation of loan principaland usurious interest rates, lest the restructured banking system come togrief.
Thisis not what was expected. In 2009 the incoming “leftist” government negotiatedan agreement with creditors to relate loan payments to the discounted transfervalue. On IMF advice, the government handedover controlling interest in the new banks to creditors of the old banks. Theaim was to minimize the cost of refinancing the banking system – but not todestroy the economy. Loans that were transferred from the old banks to the newafter the 2008 crash at a discount of up to 70% to reflect their depreciatedmarket value. This discount was to be passed on to borrowers (households and smallbusinesses) faced with ballooning principal and payments due to CPI indexing ofloans.
Butthe economy’s survival is not of paramount interest to the aggressive hedgefunds that have replaced the established banks that originally lent to theIcelandic banks. Instead of passing on the debt write-downs to households andother debtors, the new banks are revaluing these loan principals upward. Theirdemands are keeping the economy in a straight jacket. Instead of debtrestructuring taking place as originally hoped for, the scene is being set fora new banking crisis.
Somethinghas to give. But so far it is Iceland’s economy, not the vulture funds. With theIMF insisting that the government abstain from intervention, the government’sapproval rating has plunged to just 10% of Icelanders for floundering so badlywhile the new owners call the shots.
TheNew Banks have written off claims on major corporate debtors, whose continuedoperations have ensured their role as cash cows for the banks’ new vultureowners. But household debts acquired at 30 to 50 percent of face value havebeen re-valued at up to 100 percent. The value of owners’ share equity hassoared. The Government has not intervened, accepting the banks’ assertion that theylack the resources to grant meaningful debt relief to households. So unpayablyhigh debts are kept on the books, at transfer prices that afford a windfall tofinancial predators, dooming debtors to a decade or more of negative equity.
Withthe preparatory work done, the time has come for the Vultures to cash inthrough re-sale of New Bank equity shares by yearend. The New Banks have kepttheir corporate cash cows afloat while window-dressing owners’ equity withunrealistic valuations of consumer debts that cannot be paid, except at thecost of bankrupting the economy.
Thereis a feeling that Iceland’s government has been disabled from acting as anhonest broker, as bank lobbyists have worked with Althing insiders – now backedby the IMF – to provide a windfall for creditors.
Theproblem becoming a global one. Many European countries and the United States facecollapsed banks and derailed banking systems. How are the IMF and ECB torespond? Will they prescribe the Icelandic-type model of collaboration betweenGovernment and hedge funds? Or should the government be given power to resist driveby vulture funds to profiteer on an international scale, backed byinternational sanctions against their prey?
The policy danger now facing Europe

Aneconomic crisis is the financial equivalent of military conquest. It is anopportunity for financial elites to make their property grab as ForeclosureTime arrives. It also becomes a political grab to make real the financialclaims that had become uncollectible and hence largely fictitious“mark-to-model” accounting. Populist rhetoric is crafted to mobilize thewidespread financial distress and general discontent as an opportunity to turnlosers against each other rather than at the creditors.
This is the point at which all the years offinancial propaganda pay off. Neoliberals have persuaded the public to believethat banks are needed to “oil the wheels of commerce” – that is, provide the creditbloodstream that brings nourishment to the economy’s moving parts. Only undersuch crisis conditions can banks collect what has become a fictitious buildupof debt claims. The overgrowth of mortgage debt, corporate debt, student loans,credit-card debt and other debts are fictitious because under normalcircumstances there is no way for them to be paid.
           
ForeclosureTime is not sufficient, because much property has fallen into negative equity –about a quarter of U.S. real estate. And for Ireland, market value of realestate covers only about 30% of the face value of mortgages. So Bailout Timebecomes necessary. The banks turn over their bad loans to the government inexchange for government debt. The Federal Reserve has arranged over $2 trillionof such bank-friendly swaps. Banks receive government bonds or central bankdeposits in exchange for their bad debts, accepted at face value rather than at“mark-to-market” prices.
Atleast in the United States and Britain, the central bank can print as much domesticcurrency as is necessary to pay interest and keep these government bondsliquid. Public agencies then take on the position of creditor vis-à-vis debtorsthat can’t pay.
Thesepublic agencies then have a choice. They may seek to collect the full amount(or at least, as much as they can get), as in the case of Fannie Mae andFreddie Mac in the United States. Or, the government may sell the bad debts tovulture funds, for a fraction of their face value.
After the September 2008 crash, Iceland’s governmenttook over the old, collapsed, banks and created new ones in their place.Original bondholders of the old banks off-loaded the Icelandic bank bonds inthe market for pennies on the dollar. The buyers were vulture funds. Thesebondholders became the owners of the old banks, as all shareholders were wipedout. In October, the government’s monetary authority appointed new boards tocontrol the banks. Three new banks were set up, and all the deposits, mortgagesand other bank loans were transferred to these new, healthier banks – at asteep discount. These new banks received 80 percent of the assets, the oldbanks 20 percent.
Then,owners of the old banks were given control over two of the new banks (87% and95% respectively). The owners of these new banks were called vultures not onlybecause of the steep discount at which the financial assets and claims of theold banks were transferred, but mainly because they already had bought controlof the old banks at pennies on the dollar.
Theresult is that instead of the government keeping the banks and simply wipingthem out in bankruptcy, the government kept aside and let vulture investorsreap a giant windfall – that now threatens to plunge Iceland’s economy intochronic financial austerity. In retrospect, none of this was necessary. Thequestion is, what can the government do to clean up the mess that it hascreated by so gullibly taking bad IMF advice?
Inthe United States, banks receiving TARP bailout money were supposed tonegotiate with mortgage debtors to write down the debts to market prices and/orthe ability to pay. This was not done. Likewise in Iceland, the vulture fundsthat bought the bad “old bank” loans were supposed to pass on the debtwrite-downs to the debtors. This was not done either. In fact, the loanprincipals continued to be revalued upward in keeping with Iceland’s uniqueindexing designed to save banks from taking a loss – that is, to make sure thatthe economy as a whole suffers, even suffering a fatal austerity attack, sothat bankers will be “made whole.” This means making a windfall fortune for thevultures who buy bad loans on the cheap.
Isthis the future of Europe as well? If so, the present financial crisis willbecome the great windfall for vulture banks, and for banks in general. Whereasthe past few centuries have seen financial crashes wipe out the savings andcreditor claims (bonds, bank loans, etc.) that are the counterpart to baddebts, today we are seeing the bad debts kept on the books, but the banks andbondholders that provided the bad loans being made whole at taxpayer expense.
Thisis not how economic democracy was expected to work during the 19th-centurydrive for Parliamentary reform. And by the early 20th century,social democratic and labor parties were supposed to take the lead in movingbanking and credit along with other basic infrastructure into the publicdomain. But today, from Greece to Iceland, governments are acting as enforcersor even as collection agents on behalf of the financial sector – as the OccupyWall Street movement expresses it, the top “1%,” not the bottom 99%.
Icelandstands as a dress rehearsal for this power grab. The IMF and Iceland’sgovernment held a conference in Reykjavik on October 27 to celebrate theostensible success in their reconstruction of Iceland’s economy and bankingsystem.
Inthe United States, the crisis that Obama Chief of Staff Rahm Emanuel celebratedas “too good to let go to waste” will be capped by scaling back Social Securityand Medicare as soon as the autumn Doomsday Clock runs down and theCongressional Super-Committee of 12 (with President Obama holding the 13thvote in case of a tie) gets to agree to make the working population pay WallStreet for its bad loans. The Greek austerity plan thus serves as a dressrehearsal for the U.S. – with the Democratic Party playing the role ascounterparts to Greece’s Socialist Party that is sponsoring austerity, andexpelling labor union leaders from its ranks if they object to the granddouble-cross.

*Olafur Arnarson is an author and columnist atPressan.is. Michael Hudson is Prof. of Economics at UMKC. Gunnar Tomasson is aretired IMF advisor.

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MMP Blog #24: What if Foreigners Hold Government Bonds?

Posted on November 13, 2011 by | 1 comment

By L. Randall Wray

Previously, we have shown that government deficits lead to an equivalent amount of nongovernment savings. The nongovernment savings created will be held in claims on government. Normally, the nongovernment sector prefers to hold some of that savings in government IOUs that promise interest, rather than in nonearning IOUs like cash. Further, we have shown that budget deficits create an equivalent amount of reserves. And banks prefer to hold higher-earning assets than reserves that pay almost nothing (until recently, they paid zero in the USA). Hence, both savers as well as banks would rather have government bonds. We, thus, find that in normal times government will offer interest earning bonds in an amount almost equal to its deficits (the difference is made up by bank accumulation of reserves and private sector accumulation of currency).

However, when government deficit spends, some of the claims on government will end up in the hands of foreigners. Does this matter? Yes, according to many. At one extreme we have many commentators worrying that the US government might run deficits, but will find that the Chinese desire to “lend to” the US government is insufficient to absorb bond issues. Others argue that while Japan can run up government debt to GDP ratios equal to 200% of GDP this is only because more than 90% of all that debt is held domestically. The US, it is said, cannot run up debts that great because so much of its “borrowing” is from foreigners—who might “go on strike.” Others worry about ability of the US government (for example) to pay interest to foreigners. And what if foreigners demand more interest? And what about effects on exchange rates? This week, we begin to look at such issues.

Foreign holdings of government debt. Government deficit spending creates equivalent nongovernment savings (dollar for dollar). However, some of the savings created will accumulate in the hands of foreigners, since they can also accumulate the government’s domestic currency-denominated debt.

In addition to actually holding the currency including both cash and reserves (indeed, it is possible that foreigners hold most US dollar-denominated paper currency), they can also hold government bonds. These usually just take the form of an electronic entry on the books of the central bank of the issuing government.Interest is paid on these “bonds” in the same manner, whether they are held by foreigners or by domestic residents—simply through a “keystroke” electronic entry that adds to the nominal value of the “bond” (itself an electronic entry). The foreign holder portfolio preferences will determine whether they hold bonds or reserves—with higher interest on the bonds. As discussed in previous weeks, shifting from reserves to bonds is done electronically, and is much like a transfer from a “checking account” (reserves) to a “savings account” (bonds).

There is a common belief that it makes a great deal of difference whether these electronic entries on the books of the central bank are owned by domestic residents versus foreigners. The reasoning is that domestic residents are far less likely to desire to shift to assets denominated in other currencies.

Let us presume that for some reason, foreign holders of a government’s debt decide to shift to debt denominated in some other currency. In that case, they either let the bond mature (refusing to roll over into another instrument) or they sell it. The fear is that this could have interest rate and exchange rate effects—as debt matures government might have to issue new debt at a higher interest rate,and selling pressure could cause the exchange rate to depreciate. Let us look at these two possibilities separately.
                a) Interest rate pressure. Let us presume that sizable amounts of a government’s bonds are held externally, by foreigners. Assume foreigners decide they would rather hold reserves than bonds—perhaps because they are not happy with the low interest rate paid on bonds. Can they pressure the government to raise the interest rate it pays on bonds?

A shift of portfolio preferences by foreigners against this government’s bonds reduces foreign purchases. It would appear that only higher interest rates promised by the government could restore foreign demand.

However,recall from previous discussions that bonds are sold to offer an interest-earning alternative to reserves that pay little or no interest. Foreigners and domestic residents buy government bonds when they are more attractive than reserves. Refusing to “roll over” maturing bonds simply means that banks taken globally will have more reserves (credits at the issuing government’s central bank) and less bonds. Selling bonds that have not yet matured simply shifts reserves about—from the buyer to the seller.

Neither of these activities will force the hand of the issuing government—there is no pressure on it to offer higher interest rates to try to find buyers of its bonds.

From the perspective of government, it is perfectly sensible to let banks hold more reserves while issuing fewer bonds. Or it could offer higher interest rates to sell more bonds (even though there is no need to do so); but this just means that keystrokes are used to credit more interest to the bond holders.

Government can always “afford” larger keystrokes, but markets cannot force the government’s hand because it can simply stop selling bonds and, thereby, let markets accumulate reserves instead.

                b) Exchange rate pressure. The more important issue concerns the case where foreigners decide they do not want to hold either reserves or bonds denominated in some currency.

When foreign holders decide to sell off the government’s bonds, they must find willing buyers. Assume they wish to switch currencies, so they must find holders of other currency-denominated reserve credits willing to exchange these for the bonds offered for sale. It is possible that the potential buyers will purchase bonds only at a lower exchange rate (measured as the value of the currency of the government bonds that are offered for sale relative to the currency desired by the sellers).

For this reason, it is true that foreign sales of a government’s debt can affect the exchange rate. However, so long as a government is willing to let its exchange rate “float” it need not react to prevent a depreciation.

We conclude that shifting portfolio preferences of foreign holders can indeed lead to a currency depreciation. But so long as the currency is floating, the government does not have to take further action if this happens.

Current accounts and foreign accumulation of claims. Just how do foreigners get hold of reserves and bonds denominated in a government’s domestic currency?

As we have shown in previous weeks, our macroeconomic sectoral balance ensures that if the domestic private sector balance is zero, then a government budget deficit equals a current account deficit. That current account deficit will lead to foreign net accumulation of financial assets in the form of the government’s debt. This is why, for example, the US government is running deficits and issuing government debt that is accumulated in China and elsewhere.

Of course,in the case of the US, for many years (during the Clinton and Bush, jr. presidencies) the domestic private sector was also running budget deficits—so foreigners also accumulated net claims on American households and firms. The US current account deficit guarantees—by accounting identity—that dollar claims will be accumulated by foreigners.

After the crisis, the US domestic sector balanced its budget and actually started to run a surplus. However, the current account deficit remained. The US government budget deficit grew—by identity it was equal to the current account deficit plus the private sector surplus. Given that the US government became the only net source of new dollar-denominated financial assets (the US private sector was running a surplus), foreigners must—by accounting identity—have accumulated US government debt.

Some fear—as discussed earlier—that suddenly the Chinese might decide to stop accumulating US government debt. But it must be recognized that we cannot simply change one piece of the accounting identity, and we cannot ignore the stock-flow consistency that follows from it.

For the rest of the world to stop accumulating dollar-denominated assets, it must also stop running current account surpluses against the US. Hence, the other side of a Chinese decision to stop accumulating dollars must be a decision to stop net exporting to the US. It could happen—but the chances are remote.

Further,trying to run a current account surplus against the US while avoiding the accumulation of dollar-denominated assets would require that the Chinese off-load the dollars they earn by exporting to the US—trading them for other currencies. That, of course, requires that they find buyers willing to take the dollars.

This could—as feared by many commentators—lead to a depreciation of the value of the dollar. That, in turn would expose the Chinese to a possible devaluation of the value of their US dollar holdings—reserves plus Treasuries that total over $2trillion.

Depreciation of the dollar  would also increase the dollar cost of their exports, imperilling their ability to continue to export to the US. For these reasons, a sudden run by China out of the dollar is quite unlikely. A slow transition into other currencies is a possibility—and more likely if China can find alternative markets for its exports.

Next week, we will look to the frequent claim that the US is “special”—while it might be able to run persistent government deficits and trade deficits, other countries cannot.

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A Financial Coup d’etat in the Making?

Posted on November 10, 2011 by | Comments Off on A Financial Coup d’etat in the Making?

By Marshall Auerback

It is said that the EuropeanUnion is a remarkably inefficient organization in terms of organizing economicrescue packages, but when it comes to subverting democracy, they are asruthless and efficient as a well-oiled crime syndicate.
Considerthe following:  in the space of less than2 weeks, the eurocrats have managed to eliminate two troublesome electedleaders, whose actions dared to interfere with their broader objectives offinalizing the “European Project” – a project which, to put it bluntly, islooking more and more like a financial coup d’etat.

First,Greece, which has in a sense provided the template:  Prime Minister George Papandreou, had theaudacity toseek the consent of his own people to decisions that would shape their livesvia referendum.  Well, judging from thepetulant reactions of German Chancellor Angela Merkel and French PresidentNicolas Sarkozy, this clearly wouldn’t do. Blatantly interfering with the internal affairs of a fellow democracy(and an ostensible ally), both lobbied (andthreatened) the Greek government, the end result being that Mr. Papandreou wasduly shoved aside after backtracking.
And look who’s the new PM in Greece: LucasPapademos, a former ECB official, (naturally, with the requisite Goldman Sachspedigree), in order to implement the latest set of “structural reforms”, whichwill almost certainly have the effect of deflating the Greek economy evenfurther into the ground.  Of course, theprivatizations will go ahead and Greece’s rapacious tax evading oligarchs willscoop them up at distressed values (presumably with the cash they’ve alreadystashed offshore in the London property market, or Swiss banks), therebyconsolidating their control of an increasingly dysfunctional Greek economy.  The vast majority of Greeks will sufferhorribly.  They have no say, in a sensebeing left with the choice of shooting themselves or a firing squad.  Still, it’s not a total loss:  no doubt Goldman Sachs will reap substantial feesas it helps to auction off these very same state assets.
Across, the Adriatic, itappears as if the “Merkozy” tandem has also played its cards successfully forRound 2, this time successfully eliminating its troublesome nemesis, Italy PM SilvioBerlusconi.  Say what you will about MrBerlusconi, but in this instance he was right to object to a crude political ploy being foisted on him by theECB, the French and Germans to accept an irrational and economicallycounterproductive program fiscal austerity program in exchange for “support”from the likes of the IMF.   Ask any Argentinean what IMF “support”entails.
AllBerlusconi had to do was cast his eyes toward Athens to see the likely effectof a renewed assault on the Italian welfare state. But the markets’ euphoric reactionto his resignation was surreal: akin to turkeys voting for Thanksgiving.
InRome, this Franco-German powerplay is being overseen by a canny ex-Communist,President Giorgio Napolitano, who is in the process of engineering  life-longeurocrat, Mario Monti, as the next PM in Italy.  Look at Monti’sbackground: Impeccable credentials:  a virtual “lifer” within the European Union’stechnocratic governing structures, mingled with some private sector“experience” as a director of entities such as Coca Cola and, of course, an “internationaladvisor” to Goldman Sachs.
What is taking place isnothing less than a financial coup d’etat by the Eurozone’s rentier class.  And it is one of history’s sad ironies that,at least in the case of Italy, this is all being engineered by an ex-Communist,who likely would have been chased out of the Italian Government (a la JuanBerlinguer)  by a Cold War-driven CIA hadthis taken place but 30 years earlier.
How have we come to this passwithin the EU?  It is hard to point toone person.  We have seen this vastproject moved along by a handful of unelected bureaucrats for several decadesor more.  Jacques Delors was a truly seminal figure, but he did not actalone.  The whole of the Europeanproject has been increasingly driven by these unelected  tenured eurocrats, who  have rotated in and out of various positions withinthe EU’s governing structures and spent a few years’ getting the requisiteprivate sector training at a place like GS or JP Morgan. 
You could make the case thatthis started when then French President Francois Mitterrand came to power inthe early 1980s, and tried to implement a genuinely fresh progressive economicdirection for France. He was promptly undermined until he learned to “playball” with the powers behind the throne.  Since then, the game planhas largely remained the same:  EuropeanCommissioners set up multiple diktats, rules, regulations, minus, of course, anyreal kind of democratic recourse when they encounter popular resistance. You start small and build up gradually and create fait accomplis everywhere. 
Whenthere is democratic backlash via a referendum, the setback is onlytemporary.  Countries, such as Ireland,which dare to vote the “wrong” way in a national referendum, do not have theresults respected.   EU officialdom hasgenerally responded, not by reflecting on a popular expression of democraticwill, but ignoring the results until the silly peasants realize the egregiouserrors of their ways and re-vote the right way. 
Ifit takes two, or even three, referenda, so be it. Politically, theinterpretation of any aspect of the Treaties relating to European governancehave always been largely left in the hands of unelected bureaucrats, operatingout of institutions which are devoid of any kind of democraticlegitimacy.  This, in turn, has led to an increasing sense of politicalalienation and a corresponding move toward extremist parties hostile to anykind of political and monetary union in other parts of Europe.  Underpolitically charged circumstances, these extremist parties might become themainstream.

The one figure who emerges as a tragic figure here isGeorge Papandreaou.  However ineffectually, Papandreou had been deeply committedto making the October deal work.  But asHarvard economist (and Greek government advisor) Richard Parker has noted,Papandreou faced a firestorm on multiple fronts: competitors in his own partywho wanted his job; parliamentarians in his party who threatened to bolt overnew austerity measures; the wholesale intransigence of Samaras and NewDemocracy; to say nothing of economy that was deflating into the ground beforeany real help had arrived.  Calling for a referendum became his onlyinstrument to put out multiple fires at once—by forcing Greek politicians andtheir powerful backers to back down and by forcing European leaders back to thetable immediately to finalize a workable rescue plan in final form.

Of course, he was bound tofail, given the powerful opposition behind him. The Greek PM was being punished on the one hand by his”allies” in the EU, who have imposed collective punishment on theGreek people because of decades of embedded corruption in the system, in spiteof the fact that this Prime Minister had come clean. Making Greece a properfunctioning democracy was Papandreou’s raison d’etre for in getting into Greekpolitics. 
And, on the otherside, the parasite Greek oligarchs themselves, who saw his actions asfrontal attack on their control of the Greek economy, fought to destroy himpolitically and in effect moving Greece one step closer to a failed state.
And now Greece has provided aconvenient model.  You’ve now manufactured a crisis (that EASILY could have been solved by the ECB years ago – Greece is around 2.5% ofEurope’s GDP), which is now spreading, but providing ample opportunity to getrid of troublesome politicians who don’t do what they are told (effectivelyembrace this “stability culture” that the Germans bleat on about, butwhich in reality is nothing more than consolidation of the rentiers’ control ofthe various governments). 
Similarly in Italy, theEuropean Central Bank has been buying Italian bonds, but in very half-heartedfashion and certainly not enough to stem the relentless rise in rates.  The ECB’s new chief, Mario Draghi (also anex-Goldman man), kicked off his term with a blunt warning that Europe’s centralbank would not act as a “lender of last resort” (hiding behind dubious legaltechnicalities) and thereby put his fellow countryman in a position where hisresignation was the only course of action to salvage the country from animmediate financial crisis.

Berlusconi was also an easy target, given his colorfuland dubious private history.  And hislikely replacement, Mario Monti, is a perfect bagman for the financialoligarchs of Europe. He is, indeed, part of what one can rightly refer toas a “financial mafia” that has wrecked the world economy since 2008. Thesehatchet men of this murky and opaque financial world are now being appointed toimplement austerity on poor working households to save the financial sectorfrom a debt deflation — an artificial crisis created because of thearchitecture of the Euro system, which as we know these same financial“markets” so much celebrated when the euro was launched in 1999. Sadly, a largenumber of Italians still see the euro as their saviour from a corrupt past,which many associate with the Italian lire and high interest rates, even if thecorrupt Berlusconi has been himself intimately linked to the same Euro elite.
And Draghi himself has a dubious past: as wenoted in a recent post,historically, Italyactively exploited ambiguity in accounting rules for swap transactions in orderto mislead EU institutions, other EU national governments, and its own publicas to the true size of its budget deficit. 
Itseems indeed fitting that Draghi is now the man forced to deal with theconsequences of this national accounting fraud. But it’s hardly just for the people of Europe, all of whom will continueto get crushed under the boot of yet more fiscal austerity, by an increasinglydetached and democratically unaccountable elite.  No wonder the streets of Madrid, Athens, Romeand elsewhere are beginning to burn.

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Blog #23: Sovereign Debt Limits: Response to Comments

Posted on November 10, 2011 by | 2 comments

Thanks for comments and apologies for being late. I justreturned from Rio. And lest you think I was just tanning on the beach, I wasactually indoors at a conference—underground, no less.

Rather than repeating the questions, let me justsummarize six key issues raised.

  1. Weneed to tie ourselves to the masthead of budget limits to keep politicians fromspending too much. For better or worse we have a budgeting process throughwhich Congress decides how much to allocate to programs, then submits the planto the President. Once approved, this authorizes spending. That is the“democratic” process through which our elected representatives decide whichprograms are worthy of funding—and at what levels. Much of the spending is“open-ended” in the sense that it is contingent (unemployment benefits paidwill depend on economic performance, for example). I do not see how adding aconstraint beyond this is either necessary or consistent with democraticcontrol and accountability. Certainly I do not support many or even most of theprograms Congress and the President decide to fund. I can vote to throw thebums out. If I’m rich enough, I can try to buy them off with campaigncontributions. By its very nature a debt limit is arbitrary and inconsistentwith the budgeting process. In the past, it never mattered—the budget trumpedthe limit and Congress routinely raised the limit. Now the politics of aminority is trying to subvert the budgeting process. In truth, the biggerdanger is the new super-duper hand-picked for ignorance deficit committee thatis authorized to ignore Congress’s will as expressed in the budget and to slashand burn programs in a thoroughly undemocratic manner.

  2. Publicgoods provision is always less efficient than private goods provision; andproduction of public goods crowds-out private goods and hence must reduceoverall efficiency. This is faith-based economics of the worst sort. It hasabsolutely no evidence to support it and defies any logic. Outside of communistor socialist societies, I truthfully cannot see any legitimate use for the hazyterm “efficiency” in economics. Unlike communist societies, capitalistsocieties never operate near to full capacity (with World Wars the onlypossible exception) and hence it is never a simple matter of taking resourcesaway from private use to support public use. And in any case, one cannotimagine any private production without first having in place publicprovisioning.

  3. Abloated government is a drag on growth and causes inflation. Could be true.However, everywhere I look in the West (that is to say, among developednations) the problem is government that is far too small to succeed in thetasks at hand. Too much privatization, too many idle resources, inadequateprovision of essential public services.

  4. Whohas the authority to issue “warrants” or “platinum coins”? As discussed above,Congress and the President first work out a budget. That authorizes Treasuryspending. We can come up with all sorts of procedures to allow Treasury toaccomplish that task. A relatively primitive but effective one would be for itto simply print up Treasury notes and spend. Or it can directly keystrokeentries into the deposit accounts of recipients—but that requires that Treasurycan also keystroke reserves onto bank balance sheets. Since we divide the tasksbetween Treasury and Fed, having banks “bank at the Fed”, it must be the Fedthat keystrokes the reserves. There is no fundamental reason for this—bankscould have accounts at the Treasury used for clearing and then the Treasurywould keystroke the reserves. But we don’t do it that way. So we could have theFed act as the Treasury’s bank, accepting a Treasury IOU and keystroking bankreserves. But we don’t do that either—we say that although the Fed is theTreasury’s bank, it is prohibited from directly accepting a Treasury IOU. Andhence we created complex procedures that involve private banks, the Fed and theTreasury to accomplish the same thing.

    Now I went through all that simply as an introductionto the warrant and platinum coins proposals. Treasury has the authority toissue platinum coins in any denomination, so could for example make largepayments for military weapons by stamping large denomination platinum coins. Itwould thereby skip the Fed and private banks. And since coins (and reserves andFederal Reserve notes) don’t count as government debt for purposes of the debtlimit this also allows the Treasury to avoid increasing debt as it spendsplatinum coins. Similarly we could create some new IOU we call a warrant thatis made acceptable (for example) in tax payment. It would be a Treasury IOU butwould not be counted among the bills and bonds that total to the governmentdebt. Like currency it would be “redeemed” in tax payment, hence demanded bythose with taxes due. So it is just another finesse to get around arbitrarylimits or procedures put on Treasury spending.

  5. TotalFed commitments (so far) to bailout Wall Street: $29 trillion. That figureresults from a close study by two UMKC PhD students who will soon be releasingtheir study.

  6. Whatabout Italy (etc)? Do they face market imposed debt limits (rather than simplytying their shoes together voluntarily)? Yes. Go to my GLF blog today.They are now more like US states, users not issuers of the currency.

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Bill Black’s Address To #OccupyLA

Posted on November 10, 2011 by | Comments Off on Bill Black’s Address To #OccupyLA

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The Road to Serfdom

Posted on November 9, 2011 by | 2 comments

(With apologies to Friedrich Hayek)

By Marshall Auerback
The markets are again infree-fall and, once again, a lazy Mediterranean profligate is to blame.  This time, it’s an Italian, rather than aGreek.  No, not Silvio Berlusconi, buthis fellow countryman, Mario Draghi, the new head of the increasingly spinelessEuropean Central Bank.
At least the Alice inWonderland quality of the markets has finally dissipated.  It was extraordinary to observe the euphoricreaction to the formation of the European Financial Stability Forum a few weeksago, along with the “voluntary” 50% haircut on Greek debt (which has turned outto be as ‘voluntary’ as a bank teller opening up a vault and surrendering moneyto someone sticking a gun in his/her face). To anybody with a modicum of understanding of modern money, it wasobvious that the CDO like scam created via the EFSF would never end well andthat the absence of a substantive role for the European Central Bank wouldprove to be its undoing. 

As far as the haircuts went,the façade of voluntarism had to be maintained in order to avoid triggering aseries of credit default swaps written on Greek debt, which again highlightsthe feckless quality of our global regulators being hoisted on their own petard,given their reluctance to eliminate these Frankenstein-like financialinnovations in the aftermath of the 2008 disaster. 
What is required is a “backto the future” approach to banking:  Inthe old days, a banker “hedged” his credit risk by doing (shock!) CREDITANALYSIS.  If the customer was deemed tobe a poor credit risk, no loan was made. 
It goes back to a point wehave made many times:  creditworthinessprecedes credit.  You need policiesdesigned to promote job growth, higher incomes and a corresponding ability toservice debt before you can expect a borrower take on a loan or a banker toextend one.  And, as Minsky used to pointout, in the old days, banking was a fundamentally optimistic activity, becausethe success of the lender was tied up with the success of the borrower; inother words, we didn’t have the spectacle of vampire-like squids bettingagainst the success of their clients via instruments such as credit defaultswaps.
Credit default swapsthemselves are to “hedging” credit exposure what nuclear weapons are to“hedging” national defence requirements. In theory, they both sound like reasonable deterrents to mitigatedisaster, but use them and everything blows up. At least one decent by-product of the eurocrats’ incompetent handling ofthis national solvency disaster has been the likely discrediting of CDSs as ahedging instrument in the future.  Notethat 5 year CDSs on Italian debt have not blown out to new highs today in spiteof bond yields rising over 7%, because the markets are slowly but surely comingto the recognition that they are ineffective hedging instruments – althoughthey have been very useful in terms of lining the pockets of the likes of JPMorgan and Goldman Sachs. 
Say what you willabout Silvio Berlusconi (and there’s LOTS one can say about the man as anyreader of the NY Post can attest).  But hewas right to oppose to a crude political ploy being foisted on him by the ECB,the French and Germans to accept an irrational and economically counterproductiveprogram fiscal austerity program in exchange for “support” from the likes ofthe IMF.   All Berlusconi had to do wascast his eyes to the other side of the Adriatic to see the likely effect ofthat. The markets’ reaction to his resignation was surreal: akin to turkeysvoting for Thanksgiving.   The overriding imperative in Euroland(indeed, in the entire global economy) should be to stimulate economic growth to ensure that there are enoughjobs for all who want them.
Private spending is very flatand so they need to replace it with public spending or GDP will declinefurther. The eurocrats seem incapable of understanding that even if the budgetdeficit rises in the short-run, it will always come down again as GDP growsbecause more people pay taxes and less people warrant government welfaresupport.
As for Italy itself, this isa sordid case of the Europe’s mandarins subverting yet another democracy,through crude economic blackmail. Already one government has been destroyed this way: In the words ofFintan O’Toole of the Irish Times:

Firstly, it was madeexplicit that the most reckless, irresponsible and ultimately impermissiblething a government could do was to seek the consent of its own people todecisions that would shape their lives. And, indeed, even if it had gone ahead,the Greek referendum would have been largely meaningless. As one Greek MP putit, the question would have been: do you want to take your own life or to bekilled? Secondly, there was open and shameless intervention by European leaders(Angela Merkel and Nicolas Sarkozy) in the internal affairs of another state.Sarkozy hailed the “courageous and responsible” stance of the main Greekopposition party – in effect a call for the replacement of the elected Greekgovernment.
The third part of thismoment of clarity was what happened in Ireland: the payment of a billiondollars to unsecured Anglo Irish Bank bondholders. Apart from its obviousobscenity, the most striking aspect of this was that, for the first time, wehad a government performing an action it openly declared to be wrong. MichaelNoonan wasn’t handing over these vast sums of cash from a bankrupt nation tovulture capitalist gamblers because he thought it was a good idea. He was doingit because there was a gun to his head. The threat came from the EuropeanCentral Bank and it was as crude as it was brutal: give the spivs yourtaxpayers’ money or we’ll bring down your banking system.
Of course, this is nothing new for the EU, asany Irishman or Portuguese citizen can attest. Vote the “wrong” way in a national referendum and the result is ignoredby the eurocrats until the silly peasants realize the egregious errors of theirways and re-vote the right way.  If ittakes two, or even three, referenda, so be it. Politically, the interpretation of any aspect of the Treaties relatingto European governance have always been largely left in the hands of unelectedbureaucrats, operating out of institutions which are devoid of any kind ofdemocratic legitimacy.  This, in turn,has led to an increasing sense of political alienation and a corresponding movetoward extremist parties hostile to any kind of political and monetary union inother parts of Europe.  Under politicallycharged circumstances, these extremist parties might become the mainstream.
As for Italy itself, the country runs a primary fiscalsurplus. As George Soros has noted: “Italy is indebted, but it isn’tinsolvent.” Its fiscal deficit to GDP ratio is 60% of the OECD average.  It is less than the euro area average.  Its ratio of non-financial private debt toGDP is very low relative to other OECD economies.  
It is not at all like Greece.  It has avibrant tradeable goods sector.  It sells things the rest of the worldwants. You introduce austerity at this juncture, and you will cause even slowereconomic growth, higher public debt, thereby creating the very type of Greekstyle national insolvency crisis that Europe is ostensibly seeking toavoid.  And then it will move to France,and ultimately to Germany itself.  Nopassenger is safe when the Titanic hits the iceberg.
The entire eurozone is already in severe recession (depression, in fact, is not too strong aword), yet the ECB, the Germans, the French and virtually every single policymaker in the core continue to advocate the economic equivalent of mediaevalblood-letting via ongoing fiscal austerity. And, surprise, surprise, the public deficits continue to grow.
Here’s anotherinteresting thing:  in the 1990s, a number of countries, including Italy,engaged deliberately in transactions which had no economic justification,other than to mask their public debt levels in order to secure entry into theeuro (see an excellent paper on this by Professor Gustavo Piga, “Derivativesand Public Debt Management”, which documents this practice).  Italyactively exploited ambiguity in accounting rules for swap transactions in orderto mislead EU institutions, other EU national governments, and its own publicas to the true size of its budget deficit. 
And Eurostatsigned off on these transactions.  And who worked at the Italian Treasuryat that time?  That’s right:   “SuperMario” Draghi, who was director general of the Italian Treasury from 1991-2001 whenall this was going on, and then joined Goldman Sachs (2002-2005), when theprivatisations came up.  Interesting that he is now the guy who has todeal with the ultimate fall-out.  Karmic justice.
Virtuallyeverybody has lied about their figures (Spain is a notable offender today), solistening to Europe’s high priests of monetary chastity is akin to listening tosomeone coming out of a brothel proclaiming his continued virginity.
Is there a solution?  Ofcourse there is. But the eurozone’s chiefpolicy makers continue to avoid utilizing the one institution – the EuropeanCentral Bank – which has the capacity to create unlimited euros, and thereforeprovides the only credible backstop to markets which continue to query thesolvency of individual nation states within the euro zone.  They are, as Professor Paul de Grauwesuggests, like generals who refuse to go into combat fully armed (“European Summits in Ivory Towers”): 
“Thegenerals… announce that they actually hate the whole thing and that they willlimit the shooting as much as possible. Some of the generals are so upset bythe prospect of going to war that they resign from the army. The remaininggenerals then tell the enemy that the shooting will only be temporary, and thatthe army will go home as soon as possible. What is the likely outcome of thiswar? You guessed it. Utter defeat by the enemy.
TheECB has been behaving like the generals. When it announced its programme ofgovernment bond buying it made it known to the financial markets (the enemy)that it thoroughly dislikes it and that it will discontinue it as soon aspossible. Some members of the Governing Council of the ECB resigned in disgustat the prospect of having to buy bad bonds. Like the army, the ECB hasoverwhelming (in fact unlimited) firepower but it made it clear that it is notprepared to use the full strength of its money-creating capacity. What is thelikely outcome of such a programme? You guessed it. Defeat by the financialmarkets.”
The ECB should, as De Grauwesuggests, be using the ecoomic equivalent of the Powell Doctrine: when a nationis engaging in war, every resource and tool should be used to achieve decisiveforce against the enemy, minimizing casualties and ending the conflict quicklyby forcing the weaker force to capitulate.
The ECB is themonopoly supplier of currency.  They can set the price on the rates,(obviously not the supply) so if they set a level (say, Italy at 5%) why shouldthere be a default?  Capitulating to the markets, or entering the battlehalf-heartedly not only ensures more economic collateral damage, buteffectively emboldens the speculators by granting them a free put option onevery nation in the euro zone.  They’llline them up, one by one, starting with Greece and ending with Germany.
The ECB continuesto hide behind legalisms to justify its inaction, ironic, considering theextent to which national accounting fraud has long been tolerated in the eurozone since its inception.  The notionthat it cannot act as lender of last resort is disingenuous:  The ECB does have the legal mandate under its”financial stability” mandate which was provided under the Treaty ofMaastricht. 
True it is fairto say that the whole Treaty of Maastricht is full of ambiguity.  Theinstitutional policy framework within which the euro has been introduced andoperates (Article 11 of Protocol on the Statute of the European System ofCentral Banks (ESCB) and of the European Central Bank) has severalkey elements.
One notable feature of the operation of the ESCB is the apparent absence of the lender of last resort facility, which is an issue raised by the WSJ today, and which Draghi uses to justify his inaction.  But it’s not as clear-cut as suggested: The Protocols under which the ECB is established enables, but does not require, the ECB to act as a lender of last resort.
Proof that theECB exploits these ambiguities when it suits them is evident in its bond buyingprogram.  The ECB articles say it cannotbuy government bonds in the primary market. And this rule was once used as anexcuse not to backstop national government bonds at all.  But this changed in early 2010, when it beganto buy them in the secondary market. 
The ECB also hasa mandate to maintain financial stability.  It is buying government bondsin the secondary market under the financial stability mandate.  And itcould continue to do so, or so one might argue that it could.  True thereis now great disagreement about this within the ECB.  It has been turnedover to the legal department, which itself is in disagreement, which ultimatelysuggests that this is a political judgement, and politics is what is drivingItaly (and soon France) toward the brink.
In fact, giventhe 50% “voluntary” haircut imposed on holders of Greek debt, arguably the ECBis the only entity that can buy these national government bonds today.  As Warren Mosler has noted,it is hard to see how anyone with fiduciary responsibility can  buyItalian debt or any other member nation debt  after EU officials announcedthe plan for  50% haircuts on Greek bonds held by the private sector: 
Yes,all governments have the authority, one way or another, to confiscate aninvestors funds. But they don’t, and work to establish credibility that theywon’t.
Butnow that the EU has actually announced they are going to do it, as a fiduciaryyou’d have to be a darn fool to support investing any client funds in anymember nation debt.
Thelast buyer standing is and was always to be the ECB, which will now be buyingmost all new member nation debt as there is no alternative that includessurvival of the union.
Andwhen this happens there will be a massive relief response, as the solvencyissue will be behind them, with the euro firming as well.
Of course, wewill still have to deal with the reality of a major recession in Europe so longas the faith based cult of Austerians continues to dominate policy making.  Sadly, that’s unlikely to change until peopleare shot on the streets of Madrid or Rome. But at the very least, let’s get this silly national solvency problemaddressed once and for all in the only credible way possible.  Mario Draghi, you have the chance to redeemyourself and your country.  Don’t wastethe opportunity. 

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