More EU/IMF Confusion

The Times gets credit for scooping the new plans for Germany and France to help Greece after all. I guess all those big bad threats to leave Greece to the mercy of the IMF weren’t really serious.

In one sense, it really doesn’t matter whether Germany or the IMF ends up on the hook for Greece’s bailout (which is supposed to cost 22 billion Euros, or something like $38 billion). The point is that Greece is not going to be the last country who needs this kind of assistance. As I mentioned previously, Britain, France, Portugal, Ireland, Belgium, Italy, and Spain all have debt crises looming on the horizon. Whoever cleans up after Greece will likely end up mopping up all of Europe. So it’s natural that neither Germany or the IMF want to set the precedent alone.

Again, I cannot stress Wall Street’s complicity in this affair. They were the ones selling Greece absurd amounts of debt on one hand and then buying credit default swaps against that debt on the other. That’s bandit behavior, and they shouldn’t be allowed to walk away from this colossal imbroglio they created without any repercussions. I think it’s clear that Wall Street deserves to pay for some of this mess, if not all of it.

But herein lies the paradox! If Wall Street pays up to bail out Greece, it’s really the US doing it, since all five of the major bank-holding companies are still on TARP life support. So it’s really a no-win situation, unless you happen to be a major bank-holding company on government life support. Then you win.

Germany Flip-Flops on Greek Bailout

Well, I certainly didn’t expect this. It looks as though Germany is going to rely on the IMF to bail Greece out should the dreaded moment arrive (hint: it will). This does not bode well for the European Union, and indeed, until now, many thought the only way to preserve the integrity of the Euro would be to treat this Greek crisis as an in-house affair. Resorting to IMF loans would do very little to assure investors that the EU is good for its members’ debt, as this basically signals to the rest of the world that Germany (virtually the only healthy economy left in the EU) is either unwilling or unable to shoulder the entire partnership’s burden.

Remember: France, Britain, Spain, Italy, Portugal, Ireland, and Belgium are all facing debt crises of their own, many just as deep, though not as visible, as that of Greece. Germany’s indication that it will not help Greece is effectively a pre-emptive warning to the rest of these countries that when their own respective economies collapse, not to come banging on Germany’s door. Bloomberg reports today that Greece’s Prime Minister has set a deadline for Germany to bail it out, before it goes to the IMF for help. Germany has already indicated that it’s going to let the IMF solve Greece’s problem, effectively rendering that threat moot.

This is big news for several reasons. With Germany, the last healthy EU economy, refusing to bail Greece out, we may be seeing the end of the European Union as a cohesive economic entity. The Euro has been taking a beating ever since fears of a Greek default arose (it’s down more than 10% since this crisis began), and it’s sure to drop further on today’s news. It is unlikely that Greece will default or be forced out of the economic partnership, but if the IMF gets its fingers into Greece, it will only be a matter of time before the rest of the EU comes to the IMF, arms outstretched. Greece will not be the last European country to undergo a debt crisis, as I hope I have shown.

If Greece accepts IMF help, it will be forced into far worse “austerity measures” than anything Germany would have imposed. “Austerity” is generally a euphemism for cutting off social services and indiscriminately firing middle class workers while the rich make off like bandits. Already these measures have caused massive riots and general strikes in Greece, and these are sure to continue if the IMF gets its way.

As always, one can draw a straight line between economic collapse and Wall Street. Many sources have already reported on how Wall Street helped Greece hide its debt for years, and, in fact, encouraged them to take on more debt via “securitized” trades.

But that isn’t all. Wall Street’s “innovative financial instruments” – its Collateralized Debt Obligations and other over-the-counter derivatives – proliferated throughout the European economy, and are at the heart of the myriad debt crises. They made billions selling Europe these worthless junk bonds, and now they’re slowly walking away, whistling, as though they had nothing to do with it. Greece should be demanding massive reparations for the unprecedented fraud of which they, and the rest of the EU, were the victims.

It’s difficult to see where this will end. The IMF bails out Greece instead of Germany – but then what? Portugal, Italy, Spain… then France? What if Britain needs a bailout? Does the IMF have such resources? Are they just going to print the money? Does anyone know what they’re doing?

Britain Helped Lehman Bros. Hide Billions

The Independent has a good rundown of some recently released documents pertaining to the Lehman Bros. debacle in September ’08:

The failed investment bank [Lehman Bros.] approached a London law firm over plans to use a controversial accounting trick – known internally as “Repo 105” – to temporarily conceal the liabilities.

…

The bank used the Repo 105 tactic in the run-up to the end of its three-month financial reporting periods to help cushion the blow of huge losses in the first half of 2008 and suggest its financial health was far more robust than it was.

Linklaters – which drafted a document which stated that the technique was legal under UK law – was only approached after Lehman was unable to find an American law firm to say that the Repo 105 transactions could be carried out in the US.

…

The bank had become so addicted to using the technique that when executive Bart McDade, who went on to become Lehman’s chief operating officer, was asked if he was aware of the device the report cited he wrote in an April 2008 e-mail: “I am very aware … it is another drug we r [sic] on.”

I don’t know how many of these scandals have to emerge before we realize that financial institutions (and, likely, corporations in general) are not scrupulous organizations, and they are willing to dispense with any ethical norm a) so long a they’re allowed to, and b) so long as it’s profitable.

It’s astounding that we haven’t done a single thing to prevent our banks’ future malfeasance. Their size hasn’t been restricted (indeed, they’ve grown since the crisis), OTC derivatives are still legal, most of the same executives are in place – its a ticking time bomb.

Europe’s New Debt Solution – Its Own Credit Agency

Spiegel reports that the EU is unhappy with the standard American credit rating agency, Moody’s, and seeks to create its own. Moody’s is notorious for over-rating US debt, and under-rating nearly everyone else’s, so the frustration is understandable. During the Crisis, Moody’s engaged in outright fraud by pricing worthless derivatives as “Triple-A” paper, along with a raft of other deceptions.

A particular danger now is that Moody’s will downgrade Greece’s debt rating, prohibiting them from borrowing from the EU central bank. If this happens, the Euro is pretty much toast. Their solution is to just create their own rating agency, which seems like a good idea. Relying on Moody’s to gauge the health of an investment is like asking a homeless guy how much he thinks your diamond ring is worth.

But its worth taking a look at the motivations behind Europe’s push for its own rating agency. According to Spiegel, the EU’s major beef with Moody’s is not its widespread fraud and malfeasance during the crisis, but merely the possiblility that it might “downgrade” Greece, along with the “veto power” it exerts over European banks – and indeed, whole countries:

Under existing rules, the ECB can only accept euro-zone sovereign bonds as collateral when lending money if at least one of the three main rating agencies gives the country issuing the securities an A- rating or better. Moody’s is now the only main rating agency that still gives Greece an A2 rating; Standard & Poor’s and Fitch have already lowered their grades to the BBB level.

Although an exception to the rule is in place as a result of the financial crisis — the current minimum rating is just BBB- — that rule will expire at the end of 2010. If Moody’s were to downgrade Greece, as it threatened to do last week, the country would be cut off from ECB loans as of Jan. 1, 2011, triggering a liquidity crisis for the country. This means that Moody’s effectively has a veto over Greece’s access to Europe’s key financing facility.

So what they want is not a stable, accountable rating agency – just one that will consistently give their countries AAA ratings. In effect, they want a “European Moody’s” – a ratings agency that will ignore all tangible market signs and spit out the ratings the big bosses command, just as Moody’s did in America.

I fail to see how this will be an improvement.

Secretary of War Calls European De-Militarization “Threat to Peace”

Is he serious?

“The demilitarization of Europe — where large swaths of the general public and political class are averse to military force and the risks that go with it — has gone from a blessing in the 20th century to an impediment to achieving real security and lasting peace in the 21st,” he told NATO officers and officials in a speech at the National Defense University, the Defense Department-financed graduate school for military officers and diplomats.

So the reduction of arms and a general aversion to war is a threat to “security”. War, in other words, is peace – but not only that: in the twisted mind of Secretary Gates, peace is somehow war.

Cold Economist on Greece

The Economist takes a coldly “rational” stance with its editorial exhorting Germany to “Let the Greeks Ruin Themselves“:

A bail-out, Mrs Merkel fears, would break the bargain Germany struck in accepting the euro: that the single currency’s members would never jeopardise its stability nor ask Germans to pay for anyone else’s mismanagement. That said, the currency union was hardly an act of martyrdom by Germany. In the past decade its firms have modernised and their workers have accepted miserly pay rises, boosting their competitiveness. In a euro-less Europe, its trading partners could have erased some of that advantage by devaluing their currencies. Instead, many of Europe’s weaker economies failed to reform and Germany accumulated gratifyingly large current-account surpluses. Nor has the crisis been entirely bad news. The euro has weakened by about 10% against the dollar since the beginning of 2010. Under the circumstances, that was not a harbinger of inflation but a welcome tonic for European exports—especially German ones.

I agree: it shouldn’t be Germany’s responsibility to bail out the “profligate” Greeks from their manufactured crisis. But, again, I want to stress that American banks were a driving factor (some might say a decisive factor) in allowing Greece’s budget to get so out of hand.

We need a systemic way of dealing with these European Union crises, because I guarantee you Greece won’t be the last. Spain, Portugal, Italy, Ireland, and even France are all in danger of being declared insolvent next. The only way we can get this straight is a meaningful audit of our major US banks, along with court-mandated payments to these European countries that suffered from their malfeasance. It’s absolutely criminal that they should get to profit from taking down whole countries.

As far as The Economist’s editorial is concerned, sure – let Greece collapse. Just so long as you know that decision will likely doom the previously mentioned countries at risk. We don’t want a Lehman Bros scenario where Greece is denied emergency funds, but once Spain starts to collapse they immediately get a bailout. That wouldn’t be fair. Letting Greece “ruin itself” means letting a raft of European countries ruin themselves. And they’re not even ruining themselves so much as they were ruined by the American banks.

Trillions to Burn?

(c/o Kevin Drum)

The Project for Defense Alternatives has just put up its 2011 guide to Pentagon spending, entitled Trillions to Burn – complete with nine handy charts which excruciatingly detail the United States’ military dominance of the world. We will be hearing a lot in the coming months about the US budget deficit – how this or that proposal will be “unfeasible” because of its budgetary implications, or how we must reduce social spending (via education, social security, medicare, etc.) in order to show “fiscal responsibility”. Just know that all of those statements are hogwash and bullshit (or hogshit, if you like).

In reality, the single biggest contributor to the United States budget deficit is so-called “defense spending”. We spend upwards of $5000 per second in Iraq (source) and spend a similar amount per unit time in Afghanistan. This spending does nothing for anybody. It does not make us “more safe”, it does not help these impoverished people “achieve democracy”, and it certainly hasn’t made oil any cheaper. The only thing – and I do mean the only thing – it does is transfer the nation’s wealth from the taxpayer to a select group of war profiteers.

That’s it. That’s all our “defense spending” does. The next time you hear some “Republican” or “Democrat” spout off about how we need to spend this money in order to “defeat our enemies”, check to see who their campaign contributors are (via OpenSecrets), and ask yourself if these people would still be our “enemies” if we weren’t spending the equivalent of South Korea’s GDP every year attempting to bomb them out of their homes. Remember the Fort Hood shooter, who specifically stated that his motivation was outrage over US massacres of Iraqi and Afghan civilians? Or the so-called “shoe bomber” who similarly claimed he was compelled to attack the US because of its ongoing support for Israeli atrocities in Gaza?  (Aid to Israel = “Defense spending”, in the eyes of our budget office). Osama bin Laden himself, assuming he was responsible for 9/11, repeatedly cited the US occupation of Saudi Arabia and its continued ‘aid’ to Israel as his primary beefs with the United States.

It is clear that the gargantuan sums of money we allocate for ‘defense’ have precisely the opposite of their intended effect. That we should spend our time squabbling over whether or not health care reform should “add to the deficit” demonstrates just how far removed from reality our discourse has become. Anyone who claims to worry about the deficit yet still thinks we need to prosecute our foreign adventures is either an idiot or in the pay of our ‘defense contractors’. Either way, we should all benefit from their swift and timely death.

Greek Debt

Greece is in a lot of trouble, and as a member of the “eurozone”, its troubles have now become Europe’s. In a sense, we’re getting a grim preview of the sort of future we might have in America with the case of Greece. Like us, Greece spent heavily over the past decade and accumulated a lot of “sovereign debt”. Unlike us, however, Greece is not a military bully – and thus cannot simply print money and force the rest of the world to accept it. Further complicating the issue is Greece’s membership in the European Union. No Euro-using country has ever declared bankruptcy, and analysts are busy falling over themselves to predict what a Greek government default would imply. Some of the most grim predictions entail the break-up of the EU, while the more moderate voices still predict havoc within the eurozone.

If Greece defaults, it seems likely there would be some sort of run on the European banking system, and almost certainly the Greek banking system. But more significantly, this crisis highlights the impossibility of leaving the Eurozone, once you become a full-fledged member. For many countries (notably, the PIIGS – Portugal, Italy, Ireland, Greece and Spain – the slowly growing Eurozone countries) this leads to a catch-22.

One one hand, adopting the Euro means a country can’t combat deflation via the traditional methods. Usually this would be done by revaulating its currency, but since no individual country has control over the Euro (well, maybe Germany does) – this ceases to be an option.

On the other hand, an announcement to leave the Euro (As Tyler notes) would trigger an immediate run on that country’s banks. Nobody wants their bank account in Euros to suddenly transform into a bank account in a less prestigious currency (lira, drachmas, etc.) Once a country gets into the EU, it pretty much has no choice but to stay.

So leaving the Eurozone would doom Greece – and staying in might doom the rest of the EU. What are they doing about it? Well, the Times splashed on its front page today that after weeks of nail-biting vacillation, the EU has finally pledged a “bailout” to Greece. (Under that article, in tiny letters, the headline: “Greek Civil Servants Strike Over Austerity Measures – giving us a taste, I guess, of what that bailout will cost.) But the point is that no one knows how this bailout will actually work.

At the root of Greece’s problems, and the EU’s, lies the vast difference in economic output between members. Though Greece and Germany use the same currency, their economies are vastly different. This naturally leads to over-valuation of the Greek economy, and, I suppose, under-valuation of the German economy.

It looks like Britain made a smart move after all, not adopting the Euro.

Tax ’em!

The Financial Times has a list of 14 reasons why US bankers should be taxed for their outsize bonuses. Both Britain and France have begun to do this.

1. People on Main Street are furious about Wall Street bonuses.

2. This anger is justified because the bonuses are based in large part on windfall profits. These profits derive from taxpayer-backed interventions that stabilised the financial system, paving the way for a  recovery in financial markets and collapse of risk spreads.

3. All banks benefited from this bailout – not just the ones that took or still have Tarp funds. Even the strong gained hugely from Fed liquidity and government actions to ensure none of their weaker counterparties failed (including but by no means limited to the AIG case).

4. In an ideal world, these interventions would have been structured up front in a way that ensured the value created did not leak out to banks and bankers. But they were not.

German Justice

Here we have yet more proof that the Europeans, whom we once deigned to lecture on the “virtues of democracy”, have long since surpassed us in that.

From Der Spiegel:

Labor Minister Franz Josef Jung resigned from Angela Merkel’s cabinet on Friday. In a brief statement Jung said he was taking “political responsibility” for having misinformed the German public due to, he claims, a lack of knowledge regarding civilian casualties stemming from a Sept. 4 airstrike Afghanistan.

You see, in Germany, when politicians are caught blatantly lying to their constituencies, they do the right thing and step down. The amazing aspect of this is that, by American standards, Josef Jung’s transgression was exceedingly minor – he merely lied about the effects of one airstrike in Afghanistan. Following the strike, Jung claimed that there were no “civilian casualties”, but later it came to light that there were tens or hundreds, many of them children. For that he resigned.

Now can you even imagine something like that happening in America? We have grown so desensitized to the constant stream of mendacity from our leaders that it is difficult to grow angry over any one lie. Warrantless  wiretapping, “We Do Not Torture”, Weapons of Mass Destruction, “existential threats”, secret detentions, the Saddam-Al Qaeda link, and the list goes on and on and on. Yet not only do our leaders routinely inform us that no investigations into these lies will be forthcoming, no popular outrage seems to exist over them.

And Jung isn’t the only one to have been let go:

The debacle has made things difficult for Germany’s new Defense Minister Karl-Theodor zu Guttenberg. He is reported to have “exploded” when he first learned of the report — when he was contacted by Bild on Wednesday for a comment. He immediately called in the General Inspector Schneidhan to see if he was aware of the report. Once it was clear that he had known about it, there was little choice but for him to resign. Peter Wichert, the deputy defense minister, was also fired.

We in America are a long way off from that kind of democracy.

The Spanish Conscience

Via Scott Horton and The Huffington Post: Spain demands to know how high the torture directive went.

The people of Spain, as you may remember, also threw their conservative government out of office shortly after that poor minister agreed to the Iraq War. They since provided a valuable European criticism of American policy all throughout the era of general acceptance. Now they have a serious mind to prosecute the authors of the famous “Torture Memos” which provided the legal groundwork for our abuses from Guantanamo to Bagram.

The Obama Administration has steadfastly refused to engage in “political” prosecutions, morality be damned – and no other country seems to want to bring the matter up, so little will likely come of this. But it is heartening to see such defiance of America (and on such a sensitive issue) amid the general obeisance one views from the rest of Europe.