Tag Archives: banks

Trouble in Triple-A World

Trouble in Triple-A World – By Joshua E. Keating | Foreign Policy.

Standard & Poor’s decision last Friday to downgrade U.S. debt from AAA to AA+ status was as much about politics as economics. According to the ratings agency, “the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.”

As others have noticed, not all of the remaining 15 countries with AAA ratings exactly have their fiscal houses in order. But as long as S&P is getting into the political risk assessment game, he’s a look at the political state of play in some of the world’s most creditworthy countries.

FRANCE

Predictable is probably not the first word one would use to describe the politics of a country that has gone through five different governments since its founding. Today, even the smallest economic reforms — such as, raising the retirement age from 60 to 62, is enough to bring the country to a grinding halt as labor unions shut down the country’s businesses and transportation networks and protesters take to the streets. Maybe that’s the definition of predictability?

The country’s president has been investigated for receiving illegal campaign donations, his predecessor is on trial for payoffs to political allies, and its most prominent opposition leader is facing multiple rape charges. Meanwhile, France’s third-largest political party, which has performed disturbingly well in both national and regional elections, is the far-right National Front which wants to ban all immigration and has pledged to pull France out of the eurozone if it ever comes to power.

BRITAIN

Britain’s decision to stay out of the eurozone, which has given it the flexibility to print more pounds if need be, is looking pretty wise these days. On the other hand, with a growth rate under one percent over the last 12 months and riots raging the capital city, Britons can’t exactly feel too secure. The country’s debt-to-GDP ratio is 80 percent, six points higher than that of the United States.

For now, Prime Minister David Cameron has been able to push harsh austerity measures meant to restore fiscal confidence through Parliament, but he’s dependent on an often uneasy partnership with the Liberal Democratic Party, which could drop its tenuous support, collapsing Cameron’s government.  The prospect of a hung Parliament so rattled currency markets last year that the pound briefly fell against that poster child of skyrocketing inflation, the Zimbabwean dollar.

Exchequer Chancellor George Osborne says he views the global debt crisis as an “opportunity” to push through economic reforms, but unless his government can deliver growth fast, the window of opportunity may be a short one.

CANADA

Want a definition of government dysfunction? How about a prime minister who, when faced with a myriad of tricky issues — an unpopular war, economic turmoil, Olympic fever — chooses to shut down the government for two months. That’s exactly what Canadian Prime Minister Stephen Harper did in early 2010, employing a time-honored Canadian political tactic known as a “prorogue” to shut down parliamentary debate. It was the third time the prime minister had employed the prorogue in as many years. One can hardly blame Harper for wanting to avoid parliamentary debate. Because of repeated votes of no-confidence, Canada has had four national elections in the last seven years.

Canada has weathered the financial crisis better than most developing world economies, though the effect of U.S. and European economic woes may force the country to revise down its growth forecasts.

GERMANY

Once touted as “Frau Germania” and the recipient of glowing comparisons to Margaret Thatcher and even Otto Von Bismarck, German Chancellor Angela Merkel, has definitely lost her mojo lately. And there’s never been a worse time for it: With Germany’s key role in the European economy, she’s arguable the continent’s most important person. But Merkel isn’t quite the strong and unbending leader as these times call for anymore: she’s changed her position from radical free trader to defender of the welfare state, from defender of the environment to champion of industry, and from nuclear cheerleader to anti-nuke activist.

Voters aren’t buying it. Her popularity is at its lowest point since 2006 and her party was trounced in recent local elections.  Most worryingly, the leader of Europe’s lender of last resort hasn’t been able to sell voters on the need to bail out Europe’s struggling economies.

LUXEMBOURG

Pop quiz: What country has the world’s largest national debt per capita? Greece? Ireland? Pakistan? Nope. It’s tiny AAA-rated Luxembourg, which boasts a debt of nearly $1.9 trillion, or about $3.44 million per capita. Granted, the country also has the second highest GDP per capita, so they can probably cover their debts right now. But given the country’s reliance on the European banking sector and investment funds — not the most stable field at the moment — who’s to say how long the duchy’s good times will last?

Italy Hits the Iceberg

Italy Hits the Iceberg – By Maurizio Molinari | Foreign Policy.

Perhaps it was already too late for Italy to avoid the financial downgrade that credit-rating agency Moody’s threatened at the beginning of this summer. It’s not as if people didn’t see it coming. Italy’s economy has been battered by rising debt and worsening credit spreads. A default or bailout is every European central banker’s nightmare scenario — it’s the economy “too big to save.” Indeed, as Finance Minister Giulio Tremonti ominously warned in July, “If we don’t act now, then we will be like the Titanic, and even the first-class passengers suffered.” Not to push the analogy, but Italy may have just hit the iceberg. It’s not necessarily sinking, though. The government in Rome can still try to exploit the pressure generated by the current financial crisis to jolt the economy out of its semi-stagnation, launching a bold and comprehensive program of structural reforms to increase productivity and growth, while driving down debt. But does anyone believe that embattled Prime Minister Silvio Berlusconi still has the will — or enough political juice — to do it?

Moody’s Oct. 4 decision to downgrade Italy’s sovereign debt to A2 follows a similar decision by Standard & Poor’s on Sept. 19 that knocked the country down to a single A rating; but Moody’s slash of three notches was in some ways more shocking. Both agencies also give Italy a negative outlook, which means that future downgrades are likely. Italy’s high and mighty have reason to worry.

The downgrades are based on three concerns. First is the sharp deterioration of the international economic outlook, particularly in Europe. This is obviously something over which Italy has no control, but which it’s more impacted by than other advanced countries because of its endemic low growth rates. Italy does not have the fiscal space or the flexibility to change monetary or foreign exchange policies to boost growth. Second, and compounding the problem, sluggish growth risks undermining the otherwise good fiscal results achieved by Italy in the past few years, particularly the primary budget surplus. Third is the political component: Growing frictions within the ruling coalition and its slim parliamentary majority have undermined the government’s ability to enact necessary but unpopular measures to front-load fiscal consolidation and break the numerous logjams that hamper growth. And political uncertainty is not going to disappear anytime soon; even if Berlusconi steps down, it is unclear who will be his successor or whether new elections will lead to a more effective government coalition.

Even if Berlusconi and Tremonti did see the Moody’s iceberg coming, it is unlikely that they could have turned the ship of the Italian economy in time to avoid it. This, however, doesn’t mean that they’re above fault. Italy should have taken immediate action to strengthen its economy and to try to distance itself from the contagion of the debt crisis in Greece and the other European peripheral countries. Specifically, Rome should have embraced the stern recommendations issued in early August by European Central Bank (ECB) President Jean-Claude Trichet and his incoming Italian successor, Mario Draghi, who requested that Italy act with urgency on several fronts, including liberalizing public services and professions, making the labor market more flexible, increasing the retirement age in line with international standards, and streamlining the public administration. These measures, as the ECB urged, should be part of a “comprehensive, bold, and credible strategy of reforms.” Rome gravely nodded and promised to get to work, but the result was more of the same: lots of talking and only marginal improvement.

After some procrastination, the Italian government did push through Parliament a set of measures aimed at having a balanced budget by 2013, a plan that would allow the debt-to-GDP ratio to start to decline from its very high level. But the plan’s effectiveness and credibility have been questioned: Most measures don’t actually cut government spending but rather increase tax revenue, including a much-vaunted program to strengthen tax collection. (We’ll see what comes of that.) In any case, many of the structural reforms and growth-enhancing measures suggested by the ECB are missing.

The predicament that the Italian government now faces is like trying to fix the flaws in the Titanic’s construction as it’s hitting the iceberg: Sound the alarm, save the women and children, plug the holes — and while you’re at it, build more lifeboats, double-plate the hull, and make sure that those rivets aren’t subpar.

Markets are asking Italy to resolve long-standing problems that will take years to redress, even assuming its full commitment to the task. This commitment, however, is severely lacking now and in the foreseeable future. Berlusconi is under fire for nonstop sordid revelations about his private life; the current coalition government lacks any clear candidate to replace him; and the opposition is too fragmented and weak to offer a credible alternative. Even civil society seems unable to offer credible leaders. The only exception to this lack of leadership is the president, Giorgio Napolitano, whose moral authority has grown considerably in recent months but whose powers are strictly limited by the Italian Constitution. Napolitano, however, has never said that he’s eager to assume the premiership.

Under these circumstances, it is unclear who will be able to take those bold, comprehensive actions recommended by the ECB; Tremonti is preparing plans, but the political will to push them forward is lacking. This is due largely to Berlusconi — whose weakened stature makes it nearly impossible for him to take command of a fractious government. Meanwhile, Italy remains exposed to the spillover effects of the debt crisis, though its budgetary situation appears much stronger than those of most European countries. But the Moody’s downgrade doesn’t help. It’s now going to be more difficult — and it cost Italy a lot more — to enter credit markets and reassure bondholders.

To make matters worse, like with the Titanic’s sinking, the Carpathia is too far away to come to Italy’s aid. European leaders have been unable to decide on an effective strategy to cope with the debt crisis and contain its effects. The European Financial Stability Facility (ESFS) that is designed to assist countries dealing with the economic crisis is not yet operational, pending the ratification of the last of the 17 eurozone countries, Slovakia. Even assuming the ESFS does come online in the near future, most serious analysts doubt whether it has adequate resources; only $300 billion would be available to it, and most estimates hold that it will take more than $1 trillion to calm the restive markets.

Still, there’s a glimmer of hope on the horizon. There is no doubt that Italy — as well as a number of other eurozone countries — is navigating through very dangerous seas. But it’s not yet a foregone conclusion that it will go down like the Titanic. That said, if Italy’s politicians think that anyone but themselves will come and save them, then they might want to start taking swimming lessons now.

ForeclosureGate Could Force Bank Nationalization

t r u t h o u t | ForeclosureGate Could Force Bank Nationalization.

by: Ellen Brown, t r u t h o u t | News Analysis

photo
(Photo: Joey Parsons / Flickr)

For two years, politicians have danced around the nationalization issue, but ForeclosureGate may be the last straw. The megabanks are too big to fail, but they aren’t too big to reorganize as federal institutions serving the public interest.

In January 2009, only a week into Obama’s presidency, David Sanger reported in The New York Times that nationalizing the banks was being discussed. Privately, the Obama economic team was conceding that more taxpayer money was going to be needed to shore up the banks. When asked whether nationalization was a good idea, House Speaker Nancy Pelosi replied:

“Well, whatever you want to call it…. If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.

“I’m not talking about total ownership,” she quickly cautioned – stopping herself by posing a question: “Would we have ever thought we would see the day when we’d be using that terminology? ‘Nationalization of the banks?'”

Noted Matthew Rothschild in a March 2009 editorial:

[T]hat’s the problem today. The word “nationalization” shuts off the debate. Never mind that Britain, facing the same crisis we are, just nationalized the Bank of Scotland. Never mind that Ronald Reagan himself considered such an option during a global banking crisis in the early 1980s.

Although nationalization sounds like socialism, it is actually what is supposed to happen under our capitalist system when a major bank goes bankrupt. The bank is put into receivership under the FDIC, which takes it over.

What fits the socialist label more, in fact, is the TARP bank bailout, sometimes called “welfare for the rich.” The banks’ losses and risks have been socialized, but the profits have not. The bankers have been feasting on our dime without sharing the spread.

And that was before ForeclosureGate – the uncovering of massive fraud in the foreclosure process. Investors are now suing to put defective loans back on bank balance sheets. If they win, the banks will be hopelessly under water.

“The unraveling of the ‘foreclosure-gate‘ could mean banking crisis 2.0,” warned economist Dian Chu on October 21, 2010.

Banking Crisis 2.0 Means TARP II

The significance of ForeclosureGate is being downplayed in the media, but independent analysts warn that it could be the tsunami that takes the big players down.

John Lekas, senior portfolio manager of the Leader Short Term Bond Fund, said on “The Street” on November 2, 2010, that the banks will prevail in the lawsuits brought by investors. The paperwork issues, he said, are just “technical mumbo jumbo”; there is no way to unwind years of complex paperwork and securitizations.

But Yves Smith, writing in The New York Times on October 30, says it’s not that easy:

“The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable.

“Asking for Congress’s help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings. Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee?”

Chris Whalen of Institutional Risk Analytics told Fox Business News on October 1 that the government needs to restructure the largest banks. “Restructuring” in this context means bankruptcy receivership. “You can’t prevent it,” said Whalen. “We’ve wasted two years, and haven’t restructured the top banks, but for Citi. Bank of America will need to be restructured; this isn’t about the documentation problem, this is because [of the high] cost of servicing the property.”

Profs. William Black and Randall Wray are calling for receivership for another reason – the industry has engaged in flagrant, widespread fraud. “There was fraud at every step in the home finance food chain,” they wrote in The Huffington Post on October 25:

“[T]he appraisers were paid to overvalue real estate; mortgage brokers were paid to induce borrowers to accept loan terms they could not possibly afford; loan applications overstated the borrowers’ incomes; speculators lied when they claimed that six different homes were their principal dwelling; mortgage securitizers made false reps and warranties about the quality of the packaged loans; credit ratings agencies were overpaid to overrate the securities sold on to investors; and investment banks stuffed collateralized debt obligations with toxic securities that were handpicked by hedge fund managers to ensure they would self destruct.”

Players all down the line were able to game the system, suggesting there is something radically wrong not just with the players, but with the system itself. Would it be sufficient just to throw the culprits in jail? And which culprits? One reason there have been so few arrests to date is that “everyone was doing it.” Virtually the whole securitized mortgage industry might have to be put behind bars.

The Need for Permanent Reform

The Kanjorski amendment to the Banking Reform Bill passed in July allows federal regulators to preemptively break up large financial institutions that pose a threat to US financial or economic stability. In the financial crises of the 1930s and 1980s, the banks were purged of their toxic miscreations and delivered back to private owners, who proceeded to engage in the same sorts of chicanery all over again. It could be time to take the next logical step and nationalize not just the losses, but the banks themselves, and not just temporarily, but permanently.

The logic of that sort of reform was addressed by Willem Buiter, chief economist of Citigroup and formerly a member of the Bank of England’s Monetary Policy Committee, in The Financial Times following the bailout of AIG in September 2008. He wrote:

If financial behemoths like AIG are too large and/or too interconnected to fail but not too smart to get themselves into situations where they need to be bailed out, then what is the case for letting private firms engage in such kinds of activities in the first place?

Is the reality of the modern, transactions-oriented model of financial capitalism indeed that large private firms make enormous private profits when the going is good and get bailed out and taken into temporary public ownership when the going gets bad, with the tax payer taking the risk and the losses?

If so, then why not keep these activities in permanent public ownership? There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist safely without a deposit guarantee and/or lender of last resort facilities, that are ultimately underwritten by the taxpayer.

Even where private deposit insurance exists, this is only sufficient to handle bank runs on a subset of the banks in the system. Private banks collectively cannot self-insure against a generalised run on the banks. Once the state underwrites the deposits or makes alternative funding available as lender of last resort, deposit-based banking is a license to print money. [Emphasis added.]

All money today except coins originates as a debt to a bank, and debts are just legal agreements to pay in the future. Legal agreements are properly overseen by the judiciary, a branch of government. Perhaps it is time to make banking a fourth branch of government.

That probably won’t happen any time soon, but in the meantime we can try a few experiments in public banking, beginning with the Bank of America, predicted to be the first of the behemoths to be put into receivership.

Leo Panitch, Canada Research Chair in comparative political economy at York University, wrote in The Globe and Mail in December 2009 that “there has long been a strong case for turning the banks into a public utility, given that they can’t exist in complex modern society without states guaranteeing their deposits and central banks constantly acting as lenders of last resort.”

Nationalization Is Looking Better

David Sanger wrote in The New York Times in January 2009:

Mr. Obama’s advisers say they are acutely aware that if the government is perceived as running the banks, the administration would come under enormous political pressure to halt foreclosures or lend money to ailing projects in cities or states with powerful constituencies, which could imperil the effort to steer the banks away from the cliff. “The nightmare scenarios are endless,” one of the administration’s senior officials said.

Today, that scenario is looking less like a nightmare and more like relief. Calls have been made for a national moratorium on foreclosures. If the banks were nationalized, the government could move to restructure the mortgages, perhaps at subsidized rates.

Lending money to ailing projects in cities and states is also sounding rather promising. Despite massive bailouts by the taxpayers and the Fed, the banks are still not lending to local governments, local businesses or consumers. Matthew Rothschild, writing in March 2009, quoted Robert Pollin, professor of economics at the University of Massachusetts at Amherst:

“Relative to a year ago, lending in the US economy is down an astonishing 90 percent. The government needs to take over the banks now, and force them to start lending.”

When the private sector fails, the public sector needs to step in. Under public ownership, wrote Nobel Prize winner Joseph Stiglitz in January 2009, “the incentives of the banks can be aligned better with those of the country. And it is in the national interest that prudent lending be restarted.”

For a model, Congress can look to the nation’s only state-owned bank, the Bank of North Dakota (BND). The 91-year-old BND has served its community well. As of March 2010, North Dakota was the only state boasting a budget surplus; it had the lowest default rate in the country; it had the lowest unemployment rate in the country; and it had received a 2009 dividend from the BND of $58.1 million, quite a large sum for a sparsely populated state.

For our newly-elected Congress, the only alternative may be to start budgeting for TARP II.

Bankster – Corporate – Politicians I

http://www.huffingtonpost.com/dylan-ratigan/banksters-revealed-again_b_652808.html

(see also http://www.huffingtonpost.com/leo-hindery-jr/obama-versus-big-business_b_652411.html  below)

Doc Holliday said, “My hypocrisy knows no bounds” in the movie Tombstone. The same apparently is true for our current crop of Bankster Politicians, many of whom today voted against extending unemployment benefits even after they voted in 2008 for a bank bailout.

Yes, these Corporate Communists not only voted for billion dollar bailouts for companies that were about to fail due to their own terrible decisions, but then subsequently have done nothing to prevent the ongoing and future theft. By destroying this very tenet of capitalism — that the losers actually lose so that new ideas, people, companies can become winners — they have now crippled our economy and kept millions out of work.

Now when faced with giving a pittance of support to many of the same people tossed from employment by their cronyism, they have all of a sudden found ideology. Of course, considering that many of these Bankster Politicians are going to lose their jobs for this, they will try to make excuses like the following:

Unemployment needs to be paid for out of current spending!
And for some reason the bank bailouts did not? But even letting bygones be bygones, I have a suggestion — let’s use clawbacks to pay for unemployment, considering this financial crisis (a) was caused by these people and (b) is why there are no jobs.

But unemployment pays people not to work!
Well, bailing out these banks is even worse — it’s the government literally paying people ungodly sums to destroy our country. Like I’ve said before, there’s a reason why banking is an unpaid job in Monopoly — it is basically a utility rendered unprofitable by modern technology. These bailed-out banks are dangerous casinos gambling with the well-being of America, and America is losing.

Mind you, I don’t even agree with the current unemployment program in this country. I believe people should have to volunteer for a non-profit for 10-20 hours a week to qualify for unemployment. However, our vote-loving politicians like to keep their jobs by giving future generation’s money away for nothing in return.

TARP was to keep people working!
Really? Well then it’s done a terrible job of keeping people working, because unemployment is actually getting worse. The only place it’s actually saved “us” is in the imaginary crony-ist utopia of those who benefited. Their jobs plan is a lucky few of you cleaning the pools built with their $145 billion in 2010 bonuses.

TARP was just a loan and has been paid back, with interest!
I suggest you all familiarize yourselves with THE BIG TARP LIE… and make sure the politicians and media that continue to spout it become familiar as well.

Continue reading Bankster – Corporate – Politicians I