…Every economy is planned. This traditionally has been the function of government. Relinquishing this role under the slogan of “free markets” leaves it in the hands of banks. Yet the planning privilege of credit creation and allocation turns out to be even more centralized than that of elected public officials. And to make matters worse, the financial time frame is short-term hit-and-run, ending up as asset stripping. By seeking their own gains, the banks tend to destroy the economy. The surplus ends up being consumed by interest and other financial charges, leaving no revenue for new capital investment or basic social spending.

This is why relinquishing policy control to a creditor class rarely has gone together with economic growth and rising living standards. The tendency for debts to grow faster than the population’s ability to pay has been a basic constant throughout all recorded history. Debts mount up exponentially, absorbing the surplus and reducing much of the population to the equivalent of debt peonage. To restore economic balance, antiquity’s cry for debt cancellation sought what the Bronze Age Near East achieved by royal fiat: to cancel the overgrowth of debts.

In more modern times, democracies have urged a strong state to tax rentier income and wealth, and when called for, to write down debts. This is done most readily when the state itself creates money and credit. It is done least easily when banks translate their gains into political power. When banks are permitted to be self-regulating and given veto power over government regulators, the economy is distorted to permit creditors to indulge in the speculative gambles and outright fraud that have marked the past decade. The fall of the Roman Empire demonstrates what happens when creditor demands are unchecked. Under these conditions the alternative to government planning and regulation of the financial sector becomes a road to debt peonage.

Hudson gives a democratic rationale for governments to tax rentier income or ‘economic rent’ especially that of the value of land…

Democracy involves subordinating financial dynamics to serve economic balance and growth – and taxing rentier income or keeping basic monopolies in the public domain. Untaxing or privatizing property income “frees” it to be pledged to the banks, to be capitalized into larger loans. Financed by debt leveraging, asset-price inflation increases rentier wealth while indebting the economy at large. The economy shrinks, falling into negative equity.

 

 

A critique of the European Commission’s Green Paper on ‘Stability’ Bonds, by Stuart Holland published by Yanis Varoufakis,

…This (Stuart Holland’s) paper both critiques the Green Paper and proposes Twin Track approaches for Union Bonds to stabilise the crisis and Eurobonds to finance growth. It claims that this should be acceptable to Germany and other surplus Member States on the grounds that neither such proposal needs Joint Guarantees, Fiscal Transfers or Debt Buyouts, that a conversion of a share of national debt to the Union could be on an enhanced cooperation basis, and that Eurobonds for the recovery of growth would be funded not by German or other taxpayers but by inflows to the Union through their purchase by the central banks of emerging economies and sovereign wealth funds…..

Stuart concludes his critique thus..

..The Green Paper not only displaces the vital importance of growth, and fails to refer to the Delors White Paper whose aims resonated for more than a decade at the highest political level.

It also is recommending proposals which imply not only mutual guarantees and therefore potential fiscal transfers, but also Treaty revisions and new institutions.

In so doing it neglects to cite other proposals for bonds both to stabilise the crisis and to fund growth which could be effected without the need for Treaty revisions. These include “Twin Track” alternatives with Union Bonds for Stability and Eurobonds for growth.[7] This approach:

► does not imply joint guarantees, fiscal transfers – or a general buying out of national debt – to which Germany and other key Member States are opposed;

► recognises that this could be by an enhanced cooperation procedure which would not bind all member states and with the key political advantage that Germany and other member states could keep their own bonds;

► distinguishes Union Bonds for stability which would not be traded from Eurobonds for growth which would be traded and attract inflows from the central banks of emerging economies and sovereign wealth funds.

- Without Joint Guarantees, Fiscal Transfers or Debt Buyouts  

The precedent that neither transfer of a share of national debt to the Union nor net issues of bonds need joint guarantees, fiscal transfers of debt buyouts is that of the European Investment Bank which has issued bonds without them for more than 50 years and has been so successful that it now is more than twice the size of the World Bank and the world’s largest multilateral development bank.

- By Enhanced Cooperation

The case for introducing Union Bonds for stability by enhanced cooperation by whichGermanyand other surplus member states could keep their own bonds has not been considered by the Commission Green Paper. But the precedent is strong in the introduction of the Euro itself which was a de facto case of enhanced cooperation.

The procedure for enhanced cooperation within the institutional framework of the EU requires nine member states. The voting procedure for enhanced cooperation depends only on the consent of the member states instigating it, not a qualified majority decision. ^[8]

- Union Bonds

On lines similar to the Bruegel proposal (Commission Green Paper Proposal 2) a conversion of national debt of up to 60% of GDP could be converted to Union Bonds for debt stabilisation by those member states consenting to them.

Unlike the Bruegel proposal, these need not be traded but could be held in a consolidated EU debit account. Such a debit account could not be used for credit creation any more than a credit can be drawn on a personal debit card.

Since the converted bonds would not be traded they would be protected against speculation by rating agencies. But they would not need fiscal transfers between member states. Member States whose debt is converted into Union Bonds would service their share of them.

The Bruegel Institute has proposed a new institution to hold the conversion of such a share of national debt to theUnion. But a new institution is not needed. The converted Union Bonds could be held by the European Financial Stability Faculty and, after it, by the ESM.

- Eurobonds

Eurobonds to finance recovery and growth would be traded and attract inflows to theUnionfrom the central banks of emerging economies and sovereign wealth funds. Brazil, Russia, India, China and South Africahave re-stated in September 2011 that they are interested in holding reserves in Euros in order to help stabilise the euro area.

Doing so by investing in Eurobonds rather than by national bonds both could strengthen the Eurozone and enable the BRICS to achieve their ambition of a more plural global reserve currency system.

- Not Counting on National Debt

Eurobonds would not count on national debt since they would be the bonds of theUnionrather than member states. An analogy is US Treasury Bonds which do not count on the debt of member states of the American Union such asCaliforniaorDelaware. They would not need member state guarantees anymore than do European Investment Bank bonds, while EIB bonds also do not cunt onMemberStatenational debt (see below).

- Union Bonds and the ECB or the EIF

Parallel proposals have suggested that the converted national debt should be held by the European Central Bank and net bond issues also managed by it.[9]

Alternatively eurobonds could be issued by the European Investment Fund which was set up by Delors to issue Union Bonds and now is part of the European Investment Bank Group. The EIF would gain from the EIB’s vast experience and expertise in bond issues while the ECB could back them withut any further backing from the member-states or anyone else. The case that net issues of Eurobonds (for financing growth rather than existing debt-conversion) should be by the EIF as part of the EIB Group also makes operational sense in that the EIB has decades of experience of net bond issues whereas the ECB has none.

- Growth

Growth would be enhanced since Eurobonds would co-finance EIB investment projects which are serviced by the revenues of the Member States benefiting from them, rather than fiscal transfers between Member States.

None of the major Eurozone Member States, nor Ireland, Portugal or Greece, count EIB project funding against their national debt, nor need any member state do so. The decision whether or not to do so is governmental and does not depend on a Treaty revision.

- Cohesion

Cohesion would be enhanced in that, since the Amsterdam Special Action Programme, the EIB already has a cohesion and convergence remit for investment projects in health, education, urban renewal, the environment and green technology, as well as financial support for small and medium firms and new high tech start-ups.

- Competitiveness

Competitiveness would be enhanced by a share of the net inflows into Eurobonds financing a European Venture Capital Fund for small and medium firms, or a European Mittelstandspolitik, which was one of the original aims of the European Investment Fund.^[10]

- Maastricht Compliance

With a conversion of debt of up to 60% of GDP to Union Bonds all Member States other thanGreecewould beMaastrichtcompliant on their remaining national debt.Greecewould remain a special problem, since still well in excess of the 60%Maastrichtlimit but, as such, an exceptional case meriting continued debt buy outs.

- Stability and Growth Pact

The “Twin Track” strategy of Union Bonds for debt stabilisation and Eurobonds to finance growth also would give political and public credibility to the SGP where growth has been sacrificed to stability and would further be so by the proposals in the Commission Green Paper.

- Debt Restructuring and Reducing National Debt

None of the above is to the exclusion of debt restructuring in the sense of debt write downs. Nor does it deny the case for reducing national debt. But this could be phased over the medium to longer term in line with the “Twin Track” Strategy for combining stability through Union Bonds with growth through Eurobonds.

The case for reducing national debt through for growth has been demonstrated in the US case by the adoption of such a strategy by the Clintonadministration and that in each of the four years of its second term the federal budget was in surplus.[11]

sholland@fe.uc.pt

Interesting.  Stuart Holland is an insider with long experience.  He worked with the original visionaries of the European Project as a very young economist.  It does seem extraordinary that the current mandarins do not pay more attention to his prescriptions.  

Abandoning a sinking ship? A plan for leaving the euro

27 Nov

As regulars of this blog know, I am of the view that the eurozone’s collapse will be a harbinger of a postmodern 1930s. While virulently opposed to the eurozone’s creation, in its time of crisis I have been campaigning for saving the euro. Of course, as Alain Parguez wrote aptly here, it is impossible to save someone, or something, that does not want to be saved. In this post, while not going back on my personal commitment to keep trying to save a monetary union bent on self-destruction, I shall relate to you an idea on how a peripheral member-state could try to minimise the (huge) socio-economic costs of an exit from the eurozone forced upon it by the latter’s steady disintegration.

The said plan was put together with Ireland in mind. Its authors are Warren Mosler (an investment manager and creator of the mortgage swap and the current Eurofutures swap contract) and Philip Pilkington, a journalist and writer based in Dublin, Ireland. Their starting point is a (perfectly spot on) diagnosis: “austerity programs” are “an abject failure and yet European officials continue to consider them the only game in town. So, we can only conclude at this stage that, given that European officials know that austerity programs do not work, they are pursuing them for political rather than economic reasons.”  (Link to full article)

By Marshall Auerback

Forget about the S&P downgrade, which has had ZERO impact on the global equity markets. The downgrade was supposed to mean that it would be more likely that the US government would not be able to pay its debt than previously assumed. IF the markets took this warning seriously, then they would have attached a higher risk premium to US government bonds. Of course, the opposite occurred. US bonds soared in price. In other words, investors, both here and abroad, voted with money as loudly as possible that they view the US government debt as a very safe haven in a time of financial turmoil

So if it wasn’t the S&P downgrade which caused this downward cascade in the global equity markets, then what was it? By far, the most important factor currently driving the market’s bear trends is Europe or, more specifically, the future of the euro and the European Monetary Union. Systemic risk has migrated across the Atlantic to the euro zone.

And after yesterday’s joke of a summit between German Chancellor Merkel and French President Nicolas Sarkozy, it appears yet again that Europe’s policy makers have comprehensively blown it. Their persistent reluctance to get ahead of the looming systemic ticking bomb at the heart of the euro project has reached the point where it is likely to doom the euro’s existence. Their repeated “rescue plans” (and equally fatuous statements about new committees and “euro solidarity) can no longer mask the central problem, which is that countries with very different economies are yoked to the same currency in the absence of a fiscal transfer union which would otherwise facilitate growth, not ongoing economic depression and political turmoil.

Rather than attempting to stave off a double-dip recession by easing fiscal and monetary policy, the European Central Bank (ECB) has gone careening off in the opposite direction. The euro project is consequently being turned into a Hooverian instrument of economic torture from sado-monetarists, such as Jean-Claude Trichet, who see each bailout as a way for irresponsible nations to offload their liabilities onto their fitter neighbors, rather than considering the flawed institutional structures which created the need for these stop-gap measures in the first place. Interest rates have been raised, and member states have been forced into self-defeating austerity programmes which, by destroying growth, have made underlying debt dynamics even worse. It is hard to imagine a more tragic and self-defeating type of policy mix. It is 1937 writ large.

The Case for an Irish Default

All roads to solvency lead through debt restructuring. It’s time for the Irish government to take heed.

By RICHARD PORTES

The woes of Irish banks, unlike those at peer institutions elsewhere in Europe’s suffering periphery, are not a concern merely for the banks’ own solvency. They are a national solvency problem, too—or at least they became one when the government decided to insure bank creditors in September 2008.

It is this, more serious aspect of the Irish crisis that remains unaddressed in the government’s new bailout plans. Ireland’s public debt is clearly unsustainable. The projections contained in the International Monetary Fund’s bailout program see gross debt peaking in 2013, at 120% of GDP. Repeated infusions of taxpayer funds have not done much to convince the markets that those obligations will be repaid: Sovereign spreads are today about the same as they were in November, before the IMF program, and the latest plans have led at least one ratings agency to downgrade Irish sovereign debt.

Continued fiscal belt-tightening will help, but alone it can only take the country part of the way back to health. The government has already made heroic discretionary cuts since 2008, but the further turnaround required by the IMF is more self-sacrificing still: Under the terms of the bailout agreement, the primary fiscal balance is expected to move by 2015 to a surplus of 2% of GDP from last year’s deficit of 9%.

That requirement assumes, however, that the interest rate will exceed the growth rate by only two percentage points over the next four years—highly optimistic given that Ireland’s 10-year bond rate currently stands at about 10%. If, as is only slightly more plausible, the interest rate were to outpace GDP growth by six percentage points, the required primary surplus for 2015 would be 7% of GDP: a shift of 16 percentage points. And all that merely to stabilize the debt at 120% of GDP—to say nothing of reducing it.

Where, moreover, would growth come from? With ongoing fiscal consolidation, domestic demand will remain depressed. Trade will not provide much of a boost, either: Ireland’s real effective exchange rate, a measure of its import competitiveness, has already fallen by more than 10%. “Internal devaluation” cannot go much further, and given the European Central Bank’s present monetary-policy strategy, the euro is not likely to depreciate significantly.

The right policy is to restructure the debt, negotiating haircuts that would reduce its present value. A reasonable target, one in line with current market expectations, would be to cut the present value of the debt by €40-50 billion, or some 30% of GDP. That would bring the debt ratio down to a more sustainable 80% or so.

There might be contagion effects from this—on Greece, Portugal and perhaps Spain. But this is debatable, especially since the markets are already discounting debt restructuring at least for Greece. In any case, “solidarity” goes only so far when a fundamental national interest is at stake. The “solidarity” of Ireland’s partners in the euro zone is also limited, at least when it comes to the interest rate on the Irish borrowing and Ireland’s tax regime.

The ongoing crisis in this country over the socialising of the banks’ debts and the imposition of the EU/IMF package have engendered widespread popular indignation and anger – but so far no concerted popular opposition from citizens has emerged.

However, recent examples – from the UKUncut movement to the popular protests in the Arab world – show the power of direct action and popular mobilisation.

So how might we as citizens opposed to the public bailout of private investors begin to turn our indignation into constructive action? How might we start to build a citizens’ movement for debt justice?

This will be the focus of a citizens’ think-in to be held on Thursday April 14thfrom 6.30pm – 9pm at the Cultivate centre, Dublin (see details below)

The meeting is being organised by a group of activists and concerned citizens who hope to encourage others to come together to begin to explore this core issue. The meeting will take the form of a participatory encounter – participants will be invited to explore this question collectively through structured themed break-out groups. There will be no keynote speakers!

It is hoped that from this meeting some form of activist/education network(s) – focused on non-payment of unjust debt – can emerge. The event will take place at the following location

Thursday 14th April, 6.30 pm – 9 pm

Venue:

Cultivate,

The Greenhouse,

17 St. Andrew St.

Dublin 2

Cultivate is situated just opposite the Trocadero Restaurant on the corner of St. Andrew’s Street and Suffolk Street.

The meeting is open to all

The event is being organized by Andy Storey, Donnacha Ó Briain & Nessa Ní Chasaide. For more information contact donobriain@gmail.com or 087-2825960

…Punishing Your Local Bank for Wall Street’s Misdeeds

What precipitated the credit crisis and bank bailout of 2008 was not that the existing Basel II capital requirements were too low. It was that banks found a way around the rules by purchasing unregulated “insurance contracts” known as credit default swaps (CDS). The Basel II rules based capital requirements on how risky a bank’s loan book was, and banks could make their books look less risky by buying CDS. This “insurance,” however, proved to be a fraud when AIG, the major seller of CDS, went bankrupt on September 15, 2008. The bailout of the Wall Street banks caught in this derivative scheme followed.

The smaller local banks neither triggered the crisis nor got the bailout money. Yet it is they that will be affected by the new rules, and that effect could cripple local lending. Raising the capital requirements on the smaller banks seems so counterproductive that suspicious observers might wonder if something else is going on. Professor Carroll Quigley, an insider groomed by the international bankers, wrote in Tragedy and Hope in 1966 of the pivotal role played by the BIS in the grand scheme of his mentors:

“[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations.”

The BIS has now become the apex of the system as Dr. Quigley foresaw, dictating rules that strengthen an international banking empire at the expense of smaller rivals and of economies generally. The big global bankers are one step closer to global dominance, steered by the invisible hand of their captains at the BIS. In a game that has been played by bankers for centuries, tightening credit in the ebbs of the “business cycle” creates waves of bankruptcies and foreclosures, allowing property to be snatched up at fire sale prices by financiers who not only saw the wave coming but actually precipitated it.(link to full article)

In the case of the mainly men who doomed the Irish economy, there were some ostensibly bright people, timeservers who had never taken a risk in their lives and politicians like Bertie Ahern, Mary Harney, Charlie McCreevy and Brian Cowen who had limited experience of life outside politics. Harney had worked for 9 months as a teacher and Ahern had been a bookkeeper at Dublin’s Mater Hospital.

McCreevy was a chartered accountant as was Seán FitzPatrick, who built the builders’ bank Anglo Irish; two boomtime governors of the Bank of Ireland, Laurence Crowley and Richard Burrows, were chartered accountants and at AIB, another chartered accountant, Lochlann Quinn, shared the boom years as chairman with Dermot Gleeson who the establishment considered an accomplished lawyer.

In the supporting cast, were more highly-paid accountants who were conveniently myopic when it came to risky practices at banks; incomplete documentation on big value transactions and year-end window-dressing. Providing the intellectual underpinning for both the ignorant and intelligent who had skin in the game was the chief cheerleader among economists, the Dr. Dan McLaughlin of Bank of Ireland, who on May 11, 2007, told builders “that one often hears that growth is unbalanced but a glance at the data from 2001 to 2006 shows average GDP growth of 5.3%, with all components growing in a 4.5% – 5.5% range. Others complain that too many resources are being devoted to consumption but consumer spending in Ireland amounts to 46% of GDP which is not only below the eurozone norm (55%) but has fallen steadily for the past forty years. Household savings in Ireland is also relatively high (at around 10% of household disposable income), which is similar to Germany and substantially above the UK (5%) and the US (zero). This also means that many people benefit from a rising rate environment but this view is also rarely heard.“

However, as Shakespeare said in the Merchant of Venice: “The devil can cite Scripture for his purpose.”

Well before 2007, Finfacts highlighted inconvenient data such as the stalling of the international tradable goods and services sector; dependence on foreign firms for 90% of trade exports; chump change going into to venture capital for business as the Irish became the second biggest investors in commercial property across Europe; sham benchmarking in return for laughable aspirational targets.

Then there were senior civil servants who must have known that benchmarking was not an honest arrangement  but pocketed the proceeds and those who are retired did not have any clawback in recent times from these illgotten gains.

Last week in response to the oil leak in the Gulf of Mexico, Tony Hayward, BP’s chief executive, admitted it had to find entirely new ways of handling “low-probability, high-impact” risks.

The insiders were cowards because it paid to go with the flow.

As with churchmen turning a blind eye to abuse, nobody shouted stop.

Challenging conventional wisdom often comes at a high price and for example the whistleblower is more often than not the biggest loser. Any amount of legal protection will not change this reality.

Most times, it’s a safe bet to keep the trap shut; black swans are rare and there is also plenty company sailing in the status quo boat.

In Ireland with a culture of limited accountability in governance, a small establishment of insiders given preference on public appointments and procurement, conflict of interest seldom an issue, pervasive cronyism and corruption, the risks of standing apart from the pack were greater than in some other countries.

It was of course easier to go with the flow.

Being a coward was expected to continue to pay dividends but despite the crash and terrible human toll, most of the main culprits and cheerleaders in this drama are still laughing all the way to the bank.

Resignation on an issue of principle, would anyway be a strange development in Ireland.

While politics sometimes gives some leeway to the dissenter, business and religious organisations, show zero tolerance. The brand and the leadership cannot be endangered at all costs and even people of probity turn against the whistleblower, as he or she is seen as endangering the livelihoods of everyone else. Family may also provide no comfort, viewing the trade-off of high principle for future income, as unacceptable.

The US Government Accountability Project warns anyone thinking of exposing an employer’s wrongdoing: think hard before you do because you are going to suffer. In a book called Courage Without Martyrdom, it warns that whistleblowers “pay an enormous professional and personal price for their actions – often a price they did not anticipate.”

The effects will not disappear. “Long after the public has forgotten your courageous actions, your superiors will remember what you did to them,” the book says.

In February 2009, Paul Moore, Head of Group Regulatory Risk at Britain’s biggest mortgage lender HBOS, between 2002 and 2005, who was a barrister by profession and a former Partner in KPMG’s Financial Sector Practice in London specialising in regulatory services, told the House of Commons Treasury Select Committee in a written submission, that he and his team experienced threatening behaviours by executives when carrying out its legitimate role.

“I was strongly reprimanded by the CFO for tabling at a Group Audit Committee meeting the full version of a critical report by my department making it clear that the systems and controls, risk management and compliance were inadequate in the Halifax to control its ‘over-eager’ sales culture,” Moore said.

He was fired in 2005 by HBOS and was subsequently paid a substantial sum, in return for signing a “gagging” order. Moore’s replacement as risk manager was a sales manager who had no experience in risk. The appointment was made personally by the CEO and against the wishes of the other directors.

As for life since, Moore commented to the House of Commons committee: “I am still toxic waste now for having spoken out all those years ago!”

Where else would lawyers inquiring into petty corruption, become multimillionaires in the process?

It surely begs the question as to what is corruption?

In 2004, the then Bank of Ireland chief executive Michael Soden was swiftly fired for accessing an escort site from his office computer. However, his successor could risk bringing the venerable bank to the brink of ruin

Soden broke a rule and it was easy for Laurence Crowley to apply but what risk rules did Crowley put in place and if Seán FitzPatrick was setting the market rules, surely he could have made a public issue of it?

“Rocking the boat and swimming against the tide of public opinion would have required a particularly strong sense of the independent role of a central bank in being prepared to ‘spoil the party’ and withstand possible strong adverse public reaction,” Prof. Patrick Honohan, Governor of the Central Bank said in his report which was published yesterday. (link to article)

By Peter Boone and Simon Johnson

…This is a whole new level of global moral hazard – the result of an alliance of convenience between troubled governments in the south of Europe and the north European banks (and implicitly, north American banks) who enabled their debt habit.  The Europeans promise to unveil a mechanism this week that will “prevent abuse” by borrowing countries, but it is hard to see how this would really work in Europe today.

Overall, this is our assessment:

The underlying problem in the euro zone is that Portugal, Ireland, Italy, Greece, and Spain are locked into a currency which means they are uncompetitive in trade terms while they are also running large budget deficits.  To get out of this they need large wage and price cuts to restore competitiveness, and they need to make fiscal cuts to get budget balances back at sustainable levels.

Markets decided these adjustments were going to be difficult, so spreads on those countries’ debts widened (i.e., interest rates relative to German government bonds).  As the rates go up, this causes local asset prices to fall, concerns over bank balance sheets increase, etc.  This combination was causing an incipient run on banks.  Any country with its own currency could reasonably devalue in such a situation, but this is not an option within the euro bloc.

All these problems were exacerbated by the appearance that the Germans were going to be unwilling to bail out troubled nations – and would eventually chose to bail out their own banks instead.  It is this risk which is now resolved.  The Germans have shown willingness to provide very large amounts of money (the 750bn euro support is probably just enough for Spain and Portugal if they got packages in line with that received by Greece) and they would obviously provide more if needed (e.g., for Italy).  (Here again is the ready reckoning chart for interlinkages between indebted Europeans.)

However, the solvency issue remains.  The Spanish and Portuguese have said they will now cut their budgets further, but already their forecasts were optimistic, and neither has seemed willing to admit they have severe budget problems, so we will need to watch how they implement in the near term.  Greece remains simply far too indebted.

As Willem Buiter (formerly Bank of England, now at Citigroup) remarked last week, you have the greatest incentive to default when you are running a balanced primary budget (i.e., after substantial budget cuts) and still have a large government debt outstanding.   His point is that the incentive structure of these programs means they will postpone a decision to default which would otherwise be rational now.

There is no discussion of Ireland, which has one of the highest deficits of all the EU nations.  This is a vulnerability to the European Stabilization Mechanism – more countries will flock to its embrace….

The EU Stabilisation Plan

This post was written by Karl Whelan

The size of the funds announced in the EU deal are large enough to most likely ensure that, for a while, no EU country will fail to roll over its sovereign debt. In that sense it will most likely work. But it doesn’t change the fiscal reality.

Last week’s €110 billion Greek deal wasn’t well received by the markets because it still seemed to imply a Greek default was on the way. Last night’s announcement is being well received but then it doesn’t actually come with a concrete fiscal restructuring plan for Portugal, Spain or Ireland, so the plan can be taken good news without having to question any dubious underlying assumptions about fiscal sustainability. If the time comes when this fund is tapped but the markets don’t buy the stabilisation plan announced, the situation could unravel again.

Money 1: People 0

EU financial crisis – live blog | Business | guardian.co.uk .

There’s gushing enthusiasm for the Euro bail out:

With an hour to go until trading begins on Wall Street, investors are expecting a very healthy start. The futures market indicates that theDow Jones index will jump 3.4% (to around 10,685 points) while the S&P 500 could rise over 4.2% at the open.

European markets are still on track to record strong gains today, with theFTSE 100 up 4.6% at 5359 (a rise of 236 points), the German Dax is 4.7% higher , while the French CAC is having the best performance of the major indices – up 8.3%.

So the wealthy are to get their state subsidy.

But any mention of saving the agony of the Greek epople who are going top suffer cuts likely to drive demicracy from their country?

Not a bit.

Sickening.

…Ok, if a literal armed attack on Goldman is too far-fetched, then go after the firm using the full force of the regulatory and legal systems. Close the offices and go through the files with a fine-tooth comb. Issue subpoenas to all non-clerical staff for court appearances. Make the internal emails public. Post the names of all managers and traders on Interpol. Arrest anyone who tries to board a plane, train, or boat; confiscate their passports; revoke their visas and work permits; and put a hold on their bank accounts until culpability can be assessed. Make life at least as miserable for them as it now is for Europe’s tens of millions of unemployed workers.

We know that the Obama administration will not go after the banksters that created this global financial calamity. It has been thoroughly co-opted by Wall Street’s fifth column—who hold most of the important posts in the administration. Europe has even more at stake and has shown somewhat more willingness to take action. Perhaps our only hope for retribution lies there.

Some might believe the term “banksters” is too mean. Surely Wall Street was just doing its job—providing the financial services wanted by the world. Yes, it all turned out a tad unfortunate but no one could have foreseen that so many of the financial innovations would turn into black swans. And hasn’t Wall Street learned its lesson and changed its practices? Fat chance. We know from internal emails that everyone on Wall Street saw this coming—indeed, they sold trash assets and placed bets that the trash would crater. The crisis was not a mistake—it was the foregone conclusion. The FBI warned of an epidemic of fraud back in 2004—with 80% of the fraud on the part of lenders. As Bill Black has been warning since the days of the Saving and Loan crisis, the most devastating kind of fraud is the “control fraud”, perpetrated by the financial institution’s management. Wall Street is, and was, run by control frauds. Not only were they busy defrauding the borrowers, like Greece, but they were simultaneously defrauding the owners of the firms they ran. Now add to that list the taxpayers that bailed out the firms. And Goldman is front and center when it comes to bad apples.

Lest anyone believe that Goldman’s executives were somehow unaware of bad deals done by rogue traders, William Cohan (see here) reports that top management unloaded their Goldman stocks in March 2008 when Bear crashed, and again when Lehman collapsed in September 2008. Why? Quite simple: they knew the firm was full of toxic waste that it would not be able to continue to unload on suckers—and the only protection it had came from AIG, which it knew to be a bad counterparty. Hence on March 19, Jack Levy (co-chair of M&As) sold over $5 million of Goldman’s stock and bet against 60,000 more shares; Gerald Corrigan (former head of the NY Fed who was rewarded for that tenure with a position as managing director of Goldman) sold 15,000 shares in March; Jon Winkelried (Goldman’s co-president) sold 20,000 shares. After the Lehman fiasco, Levy sold over $6 million of Goldman shares and Masanori Mochida (head of Goldman in Japan) sold $56 million worth. The bloodletting by top management only stopped when Goldman got Geithner’s NYFed to produce a bail-out for AIG, which of course turned around and funneled government money to Goldman. With the government rescue, the control frauds decided it was safe to stop betting against their firm. So much for the “savvy businessmen” that President Obama believes to be in charge of Wall Street firms like Goldman.

From 2001 through November 2009 (note the date—a full year after Lehman) Goldman created financial instruments to hide European government debt, for example through currency trades or by pushing debt into the future. But not only did Goldman and other financial firms help and encourage Greece to take on more debt, they also brokered credit default swaps on Greece’s debt—making income on bets that Greece would default. No doubt they also took positions as the financial conditions deteriorated—betting on default and driving up CDS spreads.

But it gets even worse: An article by the German newspaper, Handelsblatt, (“Die Fieberkurve der griechischen Schuldenkrise”, Feb. 20, 2010) strongly indicates that AIG, everybody’s favorite poster boy for financial deviancy, may have been the party which sold the credit default swaps on Greece (English translation – here).

Generally, speaking, these CDSs lead to credit downgrades by ratings agencies, which drive spreads higher. In other words, Wall Street, led here by Goldman and AIG, helped to create the debt, then helped to create the hysteria about possible defaults. As CDS prices rise and Greece’s credit rating collapses, the interest rate it must pay on bonds rises—fueling a death spiral because it cannot cut spending or raise taxes sufficiently to reduce its deficit.

Having been bailed out by the Obama Administration, Wall Street firms are already eyeing other victims (and for allowing these kinds of activities to continue, the US Treasury remains indirectly complicit, another good reason why one shouldn’t expect any action coming out of Washington). Since the economic collapse is causing all Euronations to run larger budget deficits and at the same time is raising CDS prices and interest rates, it is easy to pick off nation after nation. This will not stop with Greece, so it is in the interest of Euroland to stop the vampires now…(link to article)