Meanwhile In Spain...

Once upon a time, treasury auctions were boring affairs.  The Spanish treasury, for instance, would announce they needed to borrow a billion euros and the banks would place bids for their own account and either hold the bonds to maturity or resell them to their clients.  The clearing price and interest rate at the auction were buried on page 23 of some obscure publication.

Naturally, that has all changed with the advent of the credit crisis.  Now, everyone watches the auctions in order to gauge whether or not the market is willing to finance the Spanish treasury and at what rate.  Also, being of the utmost interest, the clearing rate and size of each auction are now prominently displayed in all financial journals.

The question at this point is, who has the risk appetite to buy Spanish (or Italian) bonds and why? Do they have a different view of the Spanish economy that allows them to accept a 5% annual return at a time when some think Spain may be in default in a few years? 

The answer seems to be neither.  What seems to be happening instead (click here for a link in Spanish) 
is that the Spanish banks have discovered a new way to make free money.  They basically get loans from the ECB at 1% which they use to buy Spanish debt yielding 5%, thus, earning the difference.

So the next time you read that Spain (or Italy, or Portugal) raised money at an auction and that the demand was better than expected, or that the ECB is not buying government bonds, remember that money is fungible.  The ECB is designed to lend to the banks who need it.  Whether the banks decide to reduce or add exposure in the process is their problem and no Spanish regulator will ever chastise a bank for buying Spanish debt, no matter the scenario.


Charles Ponzi would be proud.

Only in Spain

Is like a joke but a bad one. The last to join the charade was Artur Mas, President of La Generalitat (Catalonia Autonomous Government). From "El País": "The Catalan government has slashed staffing levels at hospitals and reduced services, an on Monday proposed that healthcare workers accepted a 50-percent cut in their Christmas bonus. The budgets for education and social services have also been shaved. The measures announced on Tuesday include a two-month freeze in transfers to private-public care centers for the retired and other groups with special needs". Imagine this, if payments for the elderly and special needs groups are openly delayed, what we can expect is happening to other not-so-socially-sensitive bills? Four months delay? Six month delay? Is has been said that Spain´s budget deficit targets have been met only for the practice of kicking the can down the road which, translated into Spanish, means delaying most of payments due to the private sector at least by two months. In other words, how easy is to comply with your targets when your annual payments schedule only have 10 months... See what happens next year when those unpaid bills from 2011 have to be incorporated in 2012 budget... By the way, Catalonia has much to risk if it doesn´t meet the deficit target and so its credit ratings are further downgraded: on November will have to roll-over 3.15 billion euros in "Patriotic Bonds" @ 4.75%...

A Moment Of Sanity: Germany Rejects Geithner's Advice

This past weekend sec. Geithner, one more time, propose a leveraged solution for a leverage problem.  This time, he tried to convince the Germans to allow the bailout fund, which they guarantee, to borrow in the markets (with German credit) to buy even more Italian and Spanish bonds.  The German response? See below:  

"I don't understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense,"

It seems Geithner not only continues to see the world exclusively through the banker's eyes ("save US or else") but has yet to see a financial engineering solution he doesn't like.

Extra Extra!!! High Derivative Concentration

There is an excellent news by the folks at zerohedge.com, showing that contrary to popular opinion, the derivative exposure of US banks has actually increased since the prior economic crisis of 2008.  Now the top 5 banks (JPM, CITI, BAC, GS and HSBC) account for 96% of the total outstanding derivative exposure!

So after a massive financial and economic crisis, what do banks do?   as expected, they get bigger and riskier...

Here is a much more detailed link of the OCC's (Office of the Currency Comptroller) latest quarterly report on bank trading and derivatives activities.

Tim Geithner Wants The Whole World To Go Japanese

Do you remember the original TARP? It was supposed to be a fund to buy toxic assets from US banks. As it often happens in politics, by the time it was implemented it did anything but and was used to recapitalize the banks in favorable terms using government money to buy equity without forcing anybody to take losses on their past loans. It was a gentlemen agreement of sorts, which allowed the banks to come back strong even if it did nothing for the broader economy. Adding insult to injury, many large banks purchased even more of the same toxic assets they were supposed to sell. Since they never clean up their balance sheets they never looked to expand it by making new loans.

Tim Geithner, our esteemed secretary of the Treasury, was a major supporter of the idea that helping the banks helps the economy. Except that helping the banks, as most things in economics, may mean different things to different audiences. For instance, a pre-packaged bankruptcy may help the bank clean up its balance sheet without impacting the debt, thus, avoiding a Lehman-like crisis. It does, however, wipe out the equity and prefer equity, which is what the executives running said banks own. You can already guess who prefers which solution. Geithner, if you do not know already, consults the top executives of the same banks he bailed out on a permanent basis.

Now, apparently, it is Geithner's time to help European bank(er)s (Earlier on Thursday, U.S. Treasury Secretary Timothy Geithner voiced optimism that Europe would devote more of its own resources to backstop euro area governments and banks under stress). Again, the story is as simple or as complicated as you want to make it. The European banks own some toxic assets. Whether they are real estate loans in Spain, Italian government debt in Italy, or Greek bonds and loans in France, it doesn't matter. The fact is that all of these banks are currently reporting these assets at values far above fair prices (yes, Virginia, bankers do that on a regular basis and get away with it). As it is usually the case, they do not want to take the losses unless they have to which means they won't take the losses unless they are forced by a regulator or go bankrupt, whichever comes first. 

Given past performance, you can be sure that Mr. Geithner is NOT advocating that the banks are forced to clean up their balance sheets. So any plan of his, will involve some form of free money (government guarantees, mispriced equity warrants, etc) that allows the banks to avoid writing down the losses. As you can see, with American and Japanese banks (yes that is exactly what they did in the 90s), this preserves the (zombie) bank while condemning the rest of the economy to a Japanese like "recovery." 

Capitalism needs failure as much as it needs success. The Japanese have been trying to absorb the mistakes they socialized in the early 90s and they are still trying. Apparently, we are on our way to doing the same.

CEO of worlds largest copper mining company says copper prices may have hit bottom...

WHAT ELSE COULD HE HAVE SAID??? REALLY???

here is the link

makes me think of what Robert McNamara once said:


"Never answer the question that is asked of you, answer the question that you wished had been asked of you"

Why Lowering Interest Rates Doesn't Work This Time

This past September 8th we celebrated the 30th anniversary of the highest interest rates in the US.  Before you dismiss the previous statement as the inconsequential drivel of a market geek with too much time on his hands, consider the graph below for the yield on the generic US Treasury bond of 10-year maturity.

The economic importance of long term interest rates going from almost 16% to 1.8% cannot be overemphasized.  If that interest rate belongs to what the world regards as the Reserve/Reference Currency the impact is even bigger.   In a sense, every project around the world is ultimately, through the foreign exchange market, measured against that interest rate; which is why the Federal Reserve has been able to attain the god-like status that has enjoyed until today? last week? 2008?

These people have had, until recently, the ability to entice others to borrow, consume, invest, speculate, plan, etc. by manipulating interest rates.  Any time there has been a problem (1987 crash, 1992 recession, 1994 Mexican crisis, 1997 Asian crisis, 1998 Russian/LTCM crisis, 2000, dotcom crisis, etc) the Federal Reserve has been called to the rescue with the expectation that they could fix things, if they wanted, and why would they ever choose not to fix things.

More recently the Fed announced another policy designed to lower interest rates even more.  Rates are indeed lower this time.  However, we think this policy will have the same effect on the economy as their recent predecessors.  Why? Because, at close to zero, the price for credit is NOT the problem.  Anybody in the US with good credit and collateral can borrow very cheaply.  The problem is that most of these people are not interested in borrowing anymore.  In turn, companies, as we hear every day, are flush with cash which is another way of saying they cannot find good investments. 

So Bernanke may launch Q3 and indeed Q20, each with its own unintended future consequences, without encouraging new consumption or investment.  Sadly, some said that "to a man with a hammer as his only tool everything looks like a nail."

Give Me More, More, More...

We think that the following interview with Barton Biggs is worth watching.  Mr. Biggs, (click for a brief wiki-biograpy) is a smart, well-educated individual who had a tremendous ride during the bull market.  As such, whether he realizes it or not, he now epitomizes the Wall Street-Central Banks establishment who created this crisis by piling on debt and government intervention to rescue the economy from the previous crisis.  Furthermore, he clearly believes in what he says as he is willing to bet his own money on the positive outcome. 

If you listen until the end, he says he "...doesn't believe in creative destruction... [note: the term was originally coined by Marx with somewhat of a different connotation.  The sense implied by Mr. Biggs is the one explained on the link]"  Pity, because this process he wants to deny is critical to capitalism and will assert itself whether one believes in it or not. 

Our conclusion, is that bankers and large money managers have too much vested in protecting their existing assets in order to make unbiased recommendations for the general welfare.

The German view

Interesting take on a very German view on the European crisis and what should be done.

My take is that there are very competent and even well intentioned individuals at the helm, who are continually being shut down by the bureaucratic and collective decision making process of the ECB Council.  There are two options: separation or greater (fiscal this time) integration - both of which  are too complicated to contemplate now.  Eventually and at a much greater financial cost...they will. 

The Germans are on board and will sink together with this ship or will jump to a smaller boat and sink with it too...

The Last Act

Time flies when you are dealing with a debt crisis.  Only last year we were being assured that there was no way the Greeks would not be rescued by their fellow eurozone partners.  In any case, it wasn't such a big deal since the Greek economy was only about 3% of Europe's GDP.  Never mind that the same was said about US sub prime. 

Now, after several aid packages, with their corresponding austerity programs, have resulted in 5% contraction in Greek GDP, it seems the Greeks have wised up to the fact that the German and French politicians are more interested in covering up the sins of their bankers than in helping their Greek brothers.

No matter what the politicians say, these crises are all the same.  People just hate deflationary adjustments and eventually they reject the austerity measures, which are for the benefit of the existing debt holders, in favor of other alternatives.  Since the policy makers do not seem to have a plan B, some are beginning to prefer a default.  How ironic if the Greek themselves were to reject the next aid package.

After you listen to the story below.  We suggest you click on our "Back To The Future..." link, if you haven't already.  Plus ça change...

Speculation Grow: Greece Will Default On Its Debts (audio)

Greece Borrows at 4.56% !!!! What Crisis?

--European stocks advance post Greek auction, coupon payment
--Traders look to Greece talks, Fed news
--Italian downgrade broadly shrugged off

By Toby Anderson & Ishaq Siddiqi 
   Of DOW JONES NEWSWIRES 
 

LONDON (Dow Jones)--European stock markets advanced Tuesday, with investors buoyed by some reasonably positive noise coming from Greece, assuaging some of their concerns about European debt contagion.

....

Similarly, the Greek Public Debt Management Agency managed to raise EUR1.625 billion in a sale of three month treasury bills, with a yield of 4.56%, only slightly above the 4.5% offered to investors in an equivalent sale in August.  

(click here for the complete article in the WSJ, some of it requires a subscription)

Wait a minute! I thought Greece was about to default.  How come they can still borrow at 4.56%? The truth, of course, is that 1 year Greek bonds are offered for sale (no buyers around) at a rate of 130%.  If you think the disparity is insane, you are correct.  So why the difference? The so-called auction today placed all 1.625 billion euros in friendly hands.  Usually banks who depend on the ECB or the Greek Central Bank for financing.  In other words, the bonds are purchased by the banks with ECB or Greek Central Bank money (yes they can do that).

How do we know? because no sane investor would lend Greece money at 4.56% for even 3 months when they can get a much better return in the market.  Like buying 1 year paper with a chance of more than doubling their money.

Naturally, the ECB, the banks, and the Greek treasury have an interest in pretending that Greece can still borrow at 4.56%.  The question is why does The Dow Jones Company go along with the charade? Perhaps is because neither the reporter nor the editor has ever traded a distressed bond.

So, the next time you hear optimism based on market prices for Greek, Irish, Portuguese, Italian, or Spanish debt, remember that prices are manipulated and that the press doesn't even understand the mechanisms.

Yankee Go Home!

As we wrote yesterday sec. Geithner went to Europe to offer his expertise as a Financial Engineer.  Apparently he told the European finance ministers that, as he learned at the Fed, you can actually drown the debt by pouring enough liquidity.

"He conveyed dramatically that we need to commit money to avoid bringing the system into difficulty," Austria's Finance Minister Maria Fekter told reporters after the meeting.
"I found it peculiar that even though the Americans have significantly worse fundamental data than the euro zone, that they tell us what we should do and when we make a suggestion ... that they say no straight away."

At least Geithner didn't tell the Swiss they should supervise their banks.

Meanwhile In Spain...

One of the most important aspects of a Business degree is the ability to synthesize complex systems into one PowerPoint slide.  For a couple of years now, the financial and political pundits have been telling us that Spain doesn't really have a debt problem thanks to their low debt/GDP ratio. 

Spain, however, is a complex country with autonomous regions (Comunidades Autonomas).  The interaction between these and the central government, too complex to describe here, must not be underestimated.  The CCAA (Spanish abreviation) have their own budgets and their own deficits.  They also have their own bonds complete with Moody's and S&P ratings. 

Although the Kingdom of Spain doesn't explicitly guarantee the debt of the CCAA, one can expect that, in practice, they will when the time comes.  No matter what the prospectus says.

The combined debt of the CCAA is currently at 12.4% of GDP (link in Spanish here) which is 20% higher than a year ago. 

I do not know about you, but I have not seen this in any Wall Street Research about Spain.  Perhaps they can find Spanish speakers in NY to read and translate the local papers.

Something to think about...

There is a thoughtful article on the telegraph - central bankers do not take this course of action unless something is up...

In regards to the recent announcement that central banks of US, UK, Europe, Japan and Switzerland, made a joint effort to provide unlimited USD funding for European banks in need of short-term liquidity.

He is correctly suggesting that central bankers should (and are expected to) react, and when they make, what seems to be, preemptive action, it usually isun't...

CAVEAT EMPTOR

More American Financial Engineering

Tim Geithner, having already bailed out the American banks with public money is now trying to convince the Europeans to do the same (Geithner to float idea of leveraging euro rescue).  Why write off the losses and move forward when you can get taxpayer guarantees and ensure a Japanese solution for everyone?  By the way, remember the toxic assets that the TARP was going to buy from the American banks in order to clean up their balance sheets? They are still there.  Banks don't sell anything at a discount unless they have to.

The problem, in our opinion, is that these alchemists are under the illusion that every problem has a financial engineering solution.  Which is why we are wary of days when the markets seem to validate (how ever briefly) their approach.  Does anyone really think the European problem is about not having dollars?

China Shows Her Cards (and they are high)

Europe needs money? The Chinese are happy to oblige.  However, if the Italians thought they were going to out-negotiate their Chinese counterparts they must have been surprised.

First, Chinese investment in Italy will be in equity for strategic companies.  NOT for Italian government debt.  This means, a greater influence of China (still under a one-party system) in Italy, and no short term solution to the billions Italy needs over the next 12 months.

Second, China will continue to collaborate with Europe in exchange for greater access to European markets, an interesting pact-with-the-devil of sorts as the European firms will have to compete harder against their Chinese counterparts.  One thing is sure, employment will not go up.

Will the Brazilians ask for their pound of flesh as well? How opening Europe's agricultural markets? (Quel horreur!)

Are the poor actually going to bail out the rich?

Markets are up and financial pundits NEED a reason.  Somehow, these hyper-informed bunch, have yet to read the obituary of the Efficient Market Hypothesis.  Thus, we are currently being bombarded with stories about China and her fellow BRICS "rescuing Italy." 

As president Clinton showed us the day he declared he "didn't have sex with that woman" later explained by his narrow definition of "sex", the devil is in the semantic details.

Therefore,
"we are currently studying how to support..." means we may do nothing at all
 "we are considering buying Italian bonds..." means we may buy an insignificant amount in order to say we did
"we are committed to do everything we can..." means anything we don't do is automatically redefined as "we couldn't do more."

Of course the real point of these statements is to see if they "inspire confidence in the markets" which is political/wall street parlance for fooling the private sector into buying Greek and Italian bonds again at the same rate they would buy Germany's.  Barring this ideal case, at least provide legal cover for pension funds, banks, and others custodians of other people's money who can point out to their (by then former) customers in bankruptcy court that nobody could have seen it coming, after all, the president/chancellor him/herself said they wouldn't let them fail.

This is bluff poker, any resemblance to capitalism is just a mirage.

Don't Worry, Someone Will Pay My Bills

Talk about promising to pay with someone else's money.  Undeterred by the fact that chancellor Merkel, and the German Supreme Court continue to reject shared liabilities (aka eurobonds), European Commission President Jose Barroso, whose country is already on life support from the eurozone, has decided it is time for eurobonds.

How does a eurobond work, you asked? The 17 countries would be liable for payment of interest and principal.  So, Portugal (Mr. Barroso's country, currently unable to borrow in the public markets) would be able to borrow money in the public market using the eurozone's (i.e. Germany's) credit. 

Does this make the Germans nervous? It should.  If it goes through it will probably drag Germany's credit with Italy's as the German treasury would be co-responsible for the debt issued by their spendthrift neighbors.

In another example of paying with someone else's money, the press insists of the story about China using reserves to "save" Italy.  Never mind that

the Chinese premier said economies “must put their own houses in order” and not rely on bailouts from China. 

Or that China has already bought Portuguese, Greek, and Spanish bonds to no avail (they bought small amounts).  The financial press likes  this story and they are sticking by it.  Why let the facts  get in the way of  good literature.

How can you lose?

Don't you think that it is amazing that after everything that we have gone through over the last 5 years people are still able to delude themselves that it is possible to earn money without risk? 

"Agran, the Los Angeles investor, said he generally sees publicly traded real estate as a good investment no matter what the economy does or where inflation goes."

You'd think that statements like: "what else could I do with my money" would carry little weight in an intellectual debate about risk reward.   In any case, there is no such thing as a "good investment no matter what".  People overpay even for their own education.

How do REITs make money? by using leverage to enhance their returns.  Lots of leverage.

You know what other real estate-based investment used leverage to enhance returns? CDOs (aka "those toxic securities the banks own" TARP debate circa 2008).

I know! Let's tell them the Chinese are buying

S&P was down most of the day on fears of a Greek default (the same Greece we have been told several times is too small to make a difference).   But wait! about 10 minutes to close it makes a maddening dash into positive territory.  What happened? Did P&G revise earnings upwards? Did GM sell more cars? Did Pfizer announce a drug to cure hair-loss?

...and the answer is...U.S. Stocks Gain on Reports of Italy China Talks

Could this be true? Could this crisis just require a wink from the rich Chinese? Of course, the "reports" say nothing about who said what or, more importantly, how much would China invest in Italian bonds.  In fact, they could buy them in the market without telling anyone and get much better prices.

In case you have been absent this year, this trick has been used before:

China buys Greek Bonds
China buys Portuguese Bonds
China buys Spanish Bonds

Coming soon: China buys French and German bank bonds.  China buys Belgian bonds. 

Quantities not disclosed.

A Classic (not only Greek) Tragedy

In previous episodes, Greece was promised short term money in order to buy time until they can implement fiscal reforms.  In other words, the same people who lent lots of money to the Greeks before, now realizing their mistake, want to Greeks to play nice and raises taxes while cutting costs during a severe recession.

So we have, in one corner: the creditors  The French and German banks represented by, mostly, the French and German governments who are, somewhat, represented by the allegedly global (and bank neutral) IMF.

In the other corner, the Greek electorate.  Their choices are (a) sacrifice a lot and hope the country begins to grow at some point, or (b) tell the creditors to go to hell, default, devalue and hope the country begins to grow at some point.

As we know, the Greeks keep coming up with new plans every day.  As of this weekend, they seem to have found a new untapped resource in the form of a real estate tax which the unions! are threatening to block. 

Although we would have never predicted the unions to block a property tax, the outcome is right in line with our expectations.  The bottom line is that this is a classic tug-of-war between bondholders and voters.  Unless there are invading armies involved, the latter always win.  No matter who is at fault, people HATE austerity.

Yet another classic contribution from Mr. Greenspan

“There were unintended consequences to almost every action I was involved in” as Fed chairman, said Mr. Greenspan, who himself cut interest rates to help stave off a bond-market crisis in 1998, and later was accused of helping inflate the stock bubble of the late 1990s. “If we anticipated the unintended consequences that were going to happen we might have changed the policy"

Also added that it was impossible to forecast all the consequences of government action.
-WSJ August 29th, 2011

Imagine that! There is no way to "anticipate" the future, I guess that's why it is called - "the future".  But to first downplay and later justify your actions, just reeks of moral hazard, hindsight bias, and a lack of accountability...

There will be "unintended consequences" in EVERY decision we make, but one should not use this fact as further reasoning to embrace a failed macroeconomic theory.

Shouldn't he be considered senile already?

CAVEAT EMPTOR

German High Court Implies No Eurobond

At least on this front Frau Merkel was vindicated

“The ruling also seems to further entrench the German government position that Eurobonds are a no-go, by warning that Germany should not assume other countries’ liabilities. However, the wording used by the Court also seems to suggest that joint debt in the eurozone could be constitutionally allowed if it involved a stronger German say over other member states’ fiscal policies. This could set Europe up for a major clash of national democracies in future, should Eurobonds be deemed necessary to hold the Single Currency together in the long term.”

As we read this, a Eurobond would not be impossible to setup but it would require a lot more than a handshake between Merkel and Sarcozy.

Spain's Finance Minister Salgado Says No Recession

I wonder if this comment will end up in our "Iraqi Minister of Information" gallery? Nothing like the predictions of the Finance Minister of a financially challenged country.  How would she know?

Remember the much celebrated Greek Debt Exchange?

Apparently is less popular in the implementation phase (Greece Bondholder Exchange Not Working).  

This plan was supposed to emulate the Uruguayan debt exchange of 2002.  Unfortunately, nobody bothered to study either this plan or the Uruguayan exchange.  Uruguay, a VERY small country, had a LIQUIDITY problem because their debt was concentrated on short maturities at a time when their neighbor, Argentina (a much bigger economy) had a SOLVENCY problem. 

The Greek exchange is more akin to the last efforts by (Argentine minister) Cavallo right before the default (for more information check our "Back To The Future" link on the main page.  By the way, at that time Argentina had deficit of well under 3% (they were attempting to take it to zero) and a debt to GDP of 55% (Greece's last know calculation was over 120%).

One thing is clear, everything we have been told by the IMF and the European policymakers up to this point has be wrong, misleading or both.

Merkel Gets Emotional Over Paper Money

You know you are in trouble when politicians use emotional terms to explain technical issues.  Brainy-German chancellors are no exception.  According to Angela Merkel "If the Euro Fails, Europe Fails". 

The question is: how does one go about defining "failure" for the Euro? It is obvious that the Southern countries are not competitive.  Should they exit the Euro or endure decades of deflation? Does Frau Merkel seriously think the Greeks can lower their wages until they become competitive in Euros? How much will they owe at that point?

Given the amount of resources that are being spent on propping up Greece for the sake of German and French banks some may argue that the Euro is already a colossal failure.

Who knows, maybe 800 years of sovereign crises and economic logic don't matter.  Maybe this time is really different.

Obama Launches His Reelection Campaign Tomorrow

His so-called "Jobs Proposal" faces an uncertain future in Congress.  Even if approved, it is too small to make a difference in the short-term.  How about the long-term, you asked? Same as "hope now," "cash for clunkers," and all the other initiatives. 

So why everyone talking about this? Pundits (and bloggers) need something to do.

German High Court Rules That Parliament May Bailout Whomever They Want

After recent sell-offs even a long expected ruling (Germans don't like surprises) is a good excuse for a rally of sorts.

If you haven't been following the issue, a group of German private citizens had decided to challenge the constitutionality of bailing out foreign governments with German taxpayer money.  The court, as expected, said that the Bundestag can lend money (on paper it is a loan) as they see fit.

Theory: The Euro Can Be Saved By A Fiscal Union

What do these articles have in common?

They gloss over the fact that East German workers could be trained to fill the vacancies in West Germany in the same way that Eastern American workers could be encouraged to emigrate to West America (aka California). 

What are the chances that young and well educated Greeks or Spaniards will move to Germany or the Netherlands? They are far more likely to come to the US.

Bureaucrats often forget they are dealing with people.

More Trouble Ahead For European Credit Markets

This past week, we found out the Finns, worried about their money, had cut a parallel deal with Greece. "Prime Minister Jyrki Katainen “can’t back down on the collateral demand as his government would likely collapse,” said Timo Tyrvaeinen, Chief Economist at Aktia Oyj in Helsinki."

Now it is Slovakia's turn to throw a monkey wrench in the sophisticated machinery of the German-French designed EFSF (the stabilization fund hoped to lend money to Greece, Portugal, Ireland and every European bank while not costing anybody anything) (Slovakia's EFSF Vote Not Before December , Reuters)

If you are lost in the saga, which now rivals a Wall Street prospectus in complexity, here is a brief summary:

The EFSF was created as a huge fund of which only a fraction would be used to help small countries, such as Greece in their temporary plight for liquidity.  The facility would be guaranteed by all the euro-zone countries (the selfish English declined to help since the euro is not their currency). 

The crazy markets, instead of recognizing the error of their ways, decided to cast doubt on Ireland and Portugal, so the fund had to bail them out as well. 

After Ireland and Portugal were included in the deal, the EFSF needed more money in order to lend only a fraction.  Since many euro-zone governments didn't' want to commit more (a few of them do not believe it is a good idea to lend money to a country with a runaway deficit), the EFSF had to go all in.  Also, Greece needed a second (or a third?) bailout package.  Except some or all of this needs to be approved by every government in the euro-zone (believe it or not, it is not just Germany running things).  This still has to be done albeit at a European pace (they are only coming back from vacation tomorrow).

While the elite was enjoying their mandatory no-work August, the crazy markets, who do not take time off for some reason, decided to attack Spain and Italy.  At that time Monsieur Trichet, who was either left on guard at the ECB or can make decisions from his vacation spot, decided to buy Italian and Spanish bonds in the secondary market (i.e. from intermediaries who buy from the governments.  The ECB buying directly from the governments would be illegal.) on a temporary basis until the EFSF can be approved, funded, and ready to do its part. 

What happens next?

The ECB may redefine temporary and continue to buy Italian and Spanish bonds (It is already the most leveraged bank in the world by far)
Germany may decide to throw away the pretense of a European bailout and recognize they do not really need Slovakia or Finland (do they need France?)
Finland may be bribed to drop their collateral requirement (who really follows Finnish politics anyway?)
Or this may be the week when the crazy markets take over again

The bottom line is that nobody believes this will work unless the Germans agree to pay Greek debts unconditionally and that, as we know, opens yet a different can of worms.

Bernanke doesn't know what to do...but the plunges ahead anyway

Straight from the "frequently wrong but never in doubt" school of thinking, our esteemed chairman continues on his endeavor to make us just like Japan by avoiding repeating the mistakes of the Japanese.

As the prepares to deploy his latest weapon "Operation Twist", some are already pointing out that it will not help the unemployed (Bernanke’s Next Easing May Not Aid Jobless Americans ). 

So, why is he doing this? Because he wants you to buy stocks, that's why! The fact is that, for all their technical econometric babble about interest rates, the Fed manages monetary policy by targeting not M1, M2, or any monetary aggregate as one would think by reading their explanations.  Instead, since Alan Greenspan tasted success in 1987, the Fed has been targeting the stock market.

As fate may have it.  The creators of the model Bernanke is following  have also done the same, to no avail.

Here is how the Japanese did it, we are right on track:

1) Ignore a real estate bubble.  No matter the size, everyone is happy.
2) After the bubble burst, save the banks at any cost.  Pretend is the only way.  The bankers are happy.
3) In order to let the banks recover, drive rates to zero on account that it will spur economic growth (a few bankers and financial agents are happy)
4) Give up all pretense of a capitalist system and authorize the central bank to buy anything.  Forget Bonds, Bank of Japan Buys Stocks

In case you think people who own stocks in Japan are happy with (4) above, I suggest you take a look at the following chart:

Suprise?

Bottom line: The IMF has "discovered" that the Greeks will not meet the 2011 deficit targets.  As the article says:  "Greece blames a deeper-than-expected recession..."

You have to wonder where this people studied macroeconomics.  Greece had a (known) deficit of 15% in 2009 which they aggressively cut to 10.5% in 2010  by implementing a tough austerity program during a deep recession.  Apparently, however, nobody in the Greek government or the troika considered the possibility that the economy would slow down, thus, pushing the targets further away.  In addition, many of the so-called reforms, like selling government property for 50 billion euro seem right out of imaginary-land.

Although nobody knows the future, the most likely scenario is that the IMF team returns in 10 days and grants Greece a "waiver."

If you haven't read our back to the future link I suggest you do now.  It will save you time.

Yes Mr, Krugman, it has worked...

On Iceland exiting IMF program,


"Iceland is no longer under an IMF program... And it has done with very heterodox policies - debt repudiation, capital controls, and currency depreciation. It was as close as you can get to the polar opposite of the gold standard. And it has worked."

http://krugman.blogs.nytimes.com/2011/09/01/iceland-exits/


Well Mr. Krugman, America seems to be following the same path thanks to the advocates of unlimited stimulus (you among them). Currency depreciation? Done. Debt repudiation and capital controls are next? Now we know you believe that this can work, still I hope you are not right and those are not the next steps to follow... Regarding your choice of Iceland as an example of what to do, please note that Iceland is a tiny country (population 320.000, GDP 12 billion $). They broke the rules and they got away with it. Try to do the same in Spain or Italy, just try it.  Things are rarely that simple.

Deflation or Inflation: That's the question

Hoisington: Quarterly Review and Outlook

Black Hole Continues to Implode

Irish Deficit Widens On Bank Recapitalization (Bloomberg)

Remember Ireland? A model country with low debt and high productivity that decided they had to save their banks.  The bank creditors received 100% of the money they gambled by lending to the banks who gambled on Ireland's property boom.  Private gains vs. socialized losses.

Let's Help Our Greek Brothers

So, why are Merkel and Sarcozy working so hard to help the Greeks? After all, the Greeks lied to everyone, they can never pay that debt back, and they (gasp) do not even seem to appreciate the help.

It is to keep the euro-dream alive, correct?

Apparently the same French and German bankers who stuffed their employers' balance sheets with Greek bonds (with the help of very cheap money from the ECB) are now making amends in the midst of a religious pan-European awakening

European Banks Are Hard-Selling Greek Bailout Plan (NYTimes)

Yes! they are hard-selling the deal because it is the best for the people of Greece...

The Truth About European Banks (FT and others)

As in any farce eventually the comedians have to show their true colors. IMF and eurozone clash over estimates The IMF, believing they are supposed to tell the truth, have discovered that the European banks lie about the true value of their holdings.  Why not? Their own regulators don't seem to care that they hold their Greek bonds marked at 80% of face value when they trade at close to 50%.

Furthermore, as we can see from (Spanish finance minister) Elena Salgado, the politicians give the regulators, the auditors, and other overseers good legal cover against future discontent ("Look, the government said it was ok to price Spanish mortgages at par even though we KNEW the chances of recovering 100% were close to zero).

In essence, everything is fair in love, war, and finances.  So much for the illusion of a well regulated banking system.