Economics

The official start of the European transfer union

There are basically three scenarios for the future of the European Monetary Union as I argue in my book The Tragedy of the Euro.

First, the Stability and Growth Pact (SGP) is reformed and enforced with automatic sanctions for countries not complying with its conditions. This requires harsh austerity measures, privatizations, labor market reforms and reduction of living standards in the periphery. The case of Greece shows that this option may just not be viable considering political structures and socialist voters resisting a reduction of the state’s size. Indeed, for 2011 the Greek deficit is expected to be at 9.5% of GDP, far above of the 3% limit established by the SGP and the 7.4% target established by the European Commission.

The second scenario is a break-up of the monetary union. The periphery has no interest in exiting the Eurozone. Periphery governments are benefitting from guarantees by the core and from monetary redistribution. An exit would imply a substantial reduction of living standards in the periphery. But why are core countries not leaving the Euro? While a euro exit would be in the interest of the common population, the political elite and their financiers from the banking sector want to continue the Euro project. As we have seen in the summit on the second Greek bailout, German Chancellor Merkel not only defied the “no-bailout clause” of the Maastricht Treaty but also a resolution of the German parliament against purchasing commonly-guaranteed bonds from February 2011. This leads us to the third scenario, which we are approaching fast: a transfer union and a European superstate. The EU summit of Thursday, 21st of July 2011 marks a big step in this direction.

The Greek government will get an additional €109 bn. bailout loan until 2014. Maturities for Greek bonds from the first bailout were raised from 7.5 to 15 years (originally it was 3 years). Interest rates were reduced from 4.2 % (originally at 5.2 %) to 3.5 %. Likewise, interest rates on loans to Portugal and Ireland were reduced.

The day brought also another bailout of banks. Banks, insurance companies and other private investors can swap their old Greek government bonds against new ones with a longer maturity. Joseph Ackermann, CEO of Deutsche Bank, estimates write-downs for banks around 21%. Politicians sell the  so-called “participation of private investors” in the bailout as a great success. However, it is just another bailout for the banking system, limiting losses to 21% and putting taxpayers’ money on the hook. Old bonds are swapped into new bonds that are guaranteed by the EFSF and such by European taxpayers. Without the second bailout the Greek government would have had to default. Banks would have had to take much higher losses in a restructuring. Estimates of losses range between 50-70%. After the swap, banks are effectively protected. The financial industry, the governments’ main financier, can be very happy about this covert bailout.

The most important consequence of 21st of July was the official establishment of a transfer union by granting more powers to the EFSF (the European bailout fund). In the Eurozone, there have always been transfers through monetary redistribution: The ECB accepts bonds from the periphery as collateral thereby monetizing deficits indirectly. Last year, the ECB even started to buy government bonds from the periphery outright, spreading the burden of the bailout to all users of the currency. Yet, from now on, direct purchases by the ECB may become unnecessary. The burden of the bailouts will be more concentrated. Not all currency users will pay in form of a dilution of the Euro but rather taxpayers in countries that effectively guarantee the EFSF.

The EFSF now can give credit lines to countries that are expected to have financing problems. In addition, the EFSF may purchase government bonds on the secondary market. The role of the ECB is thereby partially taken over by the EFSF.

The possibility of financing through the EFSF reduces the pressure for countries to eliminate deficits and reduce government debts. Why introduce harsh austerity measures, reform labor markets and privatize the public sector if there are loans available from the EFSF at ridiculously low interest rates? If you want to win elections, you should not reform but spend. Only through deficit spending one can maintain the artificially high living standards in the periphery. Indeed, debts are still on the rise. Deficits are huge and far from being eliminated. Most probably, Greece, Ireland, Portugal and soon Spain, Italy and even Belgium will borrow exclusively from the EFSF. To be effective, the size of the EFSF will have to be extended. The main guarantor will be Germany. Considering peripheral funding needs, a report from Bernstein calculates:

As the guarantees of the periphery including Italy are worthless, the guarantee Germany would have to provide rises to €790bn or 32% of GDP.

If France is downgraded, the German share increases to €1.385 trillion — 56% of GDP.

The transfer union implies a transfer of power to the European Commission. We get ever closer to a European superstate. Incentives to reduce deficits will be reduced both in the periphery and in the core. Germans will start to resist cuts in public spending. Why save if the savings flow to the periphery? Instead of reducing German pensions to guarantee Greek pensions, German voters will push for more public spending. To pay for welfare states and transfers, more taxes (maybe a European tax) and money production will become necessary. The centralization of power allows for harmonization of regulations and taxes. Once tax competition ends, there will be a tendency towards ever higher taxes. With the transfers, the power of Brussels will continue to rise. There seems to be only one bold, albeit costly way, to stop the process towards a EUSSR: withdrawal from the transfer union. With an exit from the Euro, Germany could bring down the whole Euro project and save Europe.

Cobden Centre Radio

Cobden Centre Radio: Europe’s Deep Freeze of Debt

In this latest Cobden Centre Radio programme, I interview Professor David Howden, a member of our Advisory Board, about his new book, Deep Freeze: Iceland’s Economic Collapse, co-authored with Professor Philipp Bagus.

Amongst other subjects, we fly south from Iceland down to Ireland, then compare how these two North Atlantic islands are coping with their respective economic crises, before Howden considers Portugal, Greece, and Spain, and how the fate of these nations may be tied to the immediate fate of the Euro, by weighing up the latest evidence from an Austrian perspective:

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Economics

Birth and Death of the Celtic Tiger

In 2008 Eurostat reported that Ireland was the second richest country in the EU.

Less than three years later, Max Keiser presents us with a very different picture, of an Ireland few could have imagined.

There is blame aplenty and no shortage of wonderful writers in this country to expound their various theses on who or what was to blame, but not many focus on the central bank and its money.

When savings collapse and the total debt per taxpayer climbs to nearly 500,000 euros, one doesn’t need to wade through 900-odd pages of Ludwig von Mises’ Human Action to suspect interest rates might have been to blame.  Higher interest rates would have discouraged this level of borrowing, and increased savings — real savings.

One also realises that an average wage of around 35,000 euros (and falling) will never repay a total debt (still climbing) of 500,000 euros per taxpayer. Everyone knows this, but to face it would require the politicians to make themselves most unpopular in Brussels, and prompt some very uncomfortable conversations with bankers and property developers, with whom they had a very cosy relationship. Much easier to shift the obligation to service the debt onto the taxpayer and even raid his pension.

It seems childish to break it down to this level but the creditor’s relationship was to the bank or property developer. At what point did the contract stipulate that in the event the creditor could not be paid, the taxpayer would step in and shoulder the burden?

As a foreigner in Ireland, I have been moved by the stoicism of the people, but the degree to which it is being called upon is unjust. The shifting of debt obligations onto the taxpayer is simply not acceptable and one wonders how long it will be before the people decide to follow the more boisterous attitude of other small nations who are starting to make a stand (Finland, Iceland and Norway).

Let us hope it will be peaceful.

Economics

The Beauty of Being Iceland

Under the EU’s Markets in Financial Instruments Directive, the EU allowed the external countries of Iceland, Liechtenstein, and Norway to enter the ‘levelled’ EU financial markets, which Iceland took advantage of, to within an inch of its financial life.

When the Icelandic banks collapsed, the EU tried to make the Icelandic government impose ‘austerity’ upon the Icelandic people to ensure that EU banks were kept whole on their Icelandic investments.

Being outside the EU and being one of the most freedom-loving peoples in the world, with a proud history of North Atlantic island independence and a record of cocking a snook at the powers of the world — including defeating the Royal Navy in 1976 — the Icelandic people refused to bow their collective knees to their feeble quisling government and their government’s would-be overlords at the EU; they defaulted instead on their banking system’s enormous debts, much to the anger of the technocrats in Belgium.

Since then, Iceland has recovered from a low recessionary point, with this growth accelerating.

Meanwhile, back within the hallowed holy borders of the EU, the overlords of the Holy Roman Empire of Brussels have insisted that the Irish people suck up austerity and stop complaining, because this will:

  • Help prevent a terminal crisis for the glorious Euro project
  • Help prevent German and French banks collapsing
  • Help their satrap quislings in Dublin and their divine overlords in Brussels keep living the high life

You’ll notice that there’s little in the above package for the actual Irish people themselves.

However, because they allowed themselves to get ruled over by some of the stupidest politicians and most Machiavellian bankers in global history (and let’s not even talk about corruption and greed), this means in the explicit EU view, that the Irish people deserve to take their imposed punishment of austerity.

But is this divinely-directed EU edict written in French on tablets of Lapis Lazuli and then copied out in triplicate in Danish, German, and Greek?  Or is it in any way modifiable?

Unfortunately for the EU, the Irish people also have a proud history of North Atlantic island independence, not unlike that of Iceland, which is also a lot closer to Ireland than it is to Belgium. This relative success of the Icelandic default, compared to the upcoming agony of austerity for the tax serfs of Ireland, is something that is also quite clearly visible from the north-western shores of County Donegal.

So in this latest King World News interview, Jim Rickards asks the question: What if the Irish people refuse to suck it up? What if they do what Iceland did and tell the EU and its tottering banks to take a hike? What happens next?

Personally, as Daniel Hannan reported, I think this is an unlikely outcome, because most people in Ireland still perhaps accept their political system — for its legion faults — and all of the politicians in Ireland still want to suck up to the EU, for whatever reason. But what if the Irish do default and overcome the selfish personal interests of their politicians?

We certainly do live in interesting times and that is perhaps an interesting question.

If you would like to listen to the interview, which also discusses the honest financial assessments of Mervyn King, plus the situation in the metals markets, then click through either of the links below.

The interview proper starts @ 30 seconds:

Economics

Are German Dilemmas Causing European Problems?

The European monetary union is being held together tenuously. After putting €110bn. on the line to save Greece earlier this year, the tab increased by €85bn. as Ireland reluctantly accepted a recent bailout package. While the €750bn. shield brokered by the IMF and EU member states seemed adequate not even one year ago, the outlook grows gloomier by the day. Instead of questioning whether the fund is large enough or has the authority to act quickly enough in an emergency, we should reassess what the original purpose behind it was.

Germany fronted almost €120bn. for the fund, over €1,500 for every German man, woman and child. While it is perhaps not surprising that the EU’s largest economy and population pledged the most support, Germany faces a much starker rationale. The survival of the EU relies on the survival of its periphery. A strong German-centric EU will need help from its core to realize this future. Survival of the periphery, however, may not be in any one individual country’s best interests. So goes the common argument for the maintenance of Europe’s political and monetary unions.

In a recent commentary Mohamed El-Erian points out that the continued support of the periphery is straining Germany’s balance sheet. German government bunds have seen their rates surge over the past weeks, despite the country’s continued dedication to austerity. It shares the same fate as its periphery, without any of the “benefits” of a German funded bailout.

Luckily for the Germans, they largely control a key tool to Europe’s future – the European Central Bank. By continuing to purchase periphery (PIIGS) debt, El-Erian reckons that the ECB can alleviate Germany of this increasingly burdensome role. What he misses are the implicit costs that will result, as well as the promotion of dangerous consequences already in place.

The choice Germany faces is not between straining itself fiscally or inflating its problems away via the ECB. Germany may opt to exit the Eurozone, thus avoiding the bureaucratic costs of its less prudent neighbors. Indeed, after Berlin passed an €80bn. austerity package earlier this year, other Eurozone countries continued their prolific spending programs. The EU’s Treaty of Maastricht “strictly” prohibits member state deficits greater than 3 percent of GDP except for exceptional and temporary circumstances. The Irish deficit could reach 14 percent of GDP this year. Greece is close behind at 13 percent. Although the circumstances affecting these countries do seem exceptional, they are increasingly reckoned as anything but temporary.

Troubled counties such as Ireland would do well to exit the Eurozone to allow their currencies to devalue in an attempt o regain a competitive advantage. Germans will also find their own exit positive.

Continuing to fund bailout packages for less prudent neighbors is not a sustainable nor equitable situation for the Germans to be in. Turning to the ECB to inflate the problems of these periphery countries may be a short-term fix, but at what cost? Germans would be “punished” for not directly bailing out their neighbors with an inflated currency.

While every German man, woman and child has already had to fund the European Financial Stability Facility to the tune of €1,500, an inflated euro would decrease the value of every hard earned euro not already pledged. El-Erian correctly concludes that “The situation this time suggests good economics should play a greater role. Rather than simply doubling up on a faltering liquidity approach, the time has come for Germany to lead a more holistic solution focused on addressing the periphery’s debt overhang and competitiveness problems.”

An exit from the Eurozone and abandonment of the euro would do much to allow individual member states the necessary currency readjustment to regain their competitiveness. Euro membership could be a beautiful thing if it meant that member countries followed the rules – reduce or eliminate deficits and not promote inflationary solutions. Germans, indeed, should quit funding unsustainable situations with bandage solutions, and instead focus on the root problem. The German dilemma between fiscal bailouts and inflation need not necessary cause European-wide problems. A third option exists. Exiting the common currency would do much to remove the root of these problems, both for Germany and the periphery.

Economics

Hayek-doubters re Denationalisation of Money: Eat Your Heart Out!

A great article from Harvard Business Review:

Once upon a time, there was a country where bankers disappeared. The bankers, fed up with regulation, dissatisfaction, and downright hostility, decided to unleash the planet-destroying superweapon in their arsenal: they went on strike, not once, but three times.

This is no fairy tale, so we don’t have to imagine what happened next. And what did come next was something really, really interesting — and just a little bit awesome. Instead of Ragnarok ripping prosperity to shreds, the economy continued to grow. Though the money supply did contract sharply, neither trade, commerce, nor industry came to a grinding halt.

How? People created their own currencies, to substitute for the collapsing money supply. They kept using checks to pay one another, but then, people’s checks began trading within communities. Here’s how Antoin Murphy, one of the few scholars to have studied these strikes, which took place in the 1970s, describes it: “a highly personalized credit system without any definite time horizon for the eventual clearance of debits and credits substituted for the existing institutionalized banking system.”

The country in question was Ireland — today, in deep crisis because of profligate banks.

I recommend the whole article.

Economics

Learning the Wrong Lessons from Ireland

As the bailout of Ireland begins in earnest, many in the media are asking “What went wrong?”, and coming to some dubious answers. The circumstances are well known. Ireland saw a long boom before the financial crisis. That boom was accompanied by a large rise in house prices and a boom in building construction. After the financial crisis and ensuing world-wide recession, many Irish banks were bailed out by the government or nationalised. The Irish government practised austerity policies, increasing taxes and reducing expenditure. But, as the cost of the bailouts increased, so did the budget deficit.

Many commentators are now claiming that Ireland’s membership of the Euro was the underlying problem (for example, Peter Oborne. In this argument many sound economic ideas have been mixed with careless ones.

One argument is that if Ireland had not been part of the Eurozone it would have been able to devalue it’s currency. It’s true, that if Ireland still had the Punt then this would be possible but not as significant as many people believe. In today’s world with floating fiat currencies controlled by central banks there is no clear concept of “devaluation” any more. The economic prospects of the region encompassed by each currency and the policies of the central banks are taken into account by the exchange rate market, and the exchange rate fluctuates minute by minute. This means there are two different arguments. The first, which focuses on the private sector, is that when a country enters recession the value of it’s currency falls allowing a growth in exports. This is a dubious argument, but whatever its merits it could not have seriously improved the financial situation of the Irish banks or the Irish government. The second argument is that in a crisis the state’s central bank may create money and use it to pay debts and finance bailouts.

A modern state can easily create new money without having additional assets. If Ireland had kept the Punt, it’s own fiat currency, then the government could have bailed out the banks using newly created money. But, that would simply be a hidden tax. Inflation would ensue then holders of money and money-substitutes would see the real value of those assets fall. Holders of assets denominated in money such as loans and bonds would see those fall in value in real terms too. The tax would be paid by the people through this loss of purchasing power. Any permanent increase in the stock of money must lead to inflation, though there may be a time lag until it becomes noticeable. A temporary increase could only be achieved by withdrawing money from circulation afterwards, and that could only be done with taxation. That governments can create money to get themselves out of sticky situations is beneficial to governments, but not to the people they’re supposed to serve.

Critics of the Euro also claim that the Eurozone currency area could not have worked. According to this view the ECB must run monetary policy to suit the core Eurozone countries. But interest rates that are a good fit for Germany and France will cause problems in other Eurozone countries. There is some truth in this. In the years before the crisis, the ECB ran low interest rates to stimulate the northern European economies, particularly Germany and France which were struggling with rigid labour markets. A side-effect of that policy was the building booms in Southern Europe and Ireland which weren’t sustainable. Though there is some truth in this view, it’s still confused. The idea that labour market problems can be successfully compensated for by reducing interest rates is from Keynesian economics. The idea that central banks reducing interest rates to excessively low levels causes unsustainable booms is from Austrian economics. These views can’t be mixed because they come from conflicting theoretical starting points. It isn’t possible that Keynesian economists are right in France and Germany but Austrian economists are right in Ireland and Portugal. In my view the ECB’s low interest rates may have been an attempt to stimulate the Northern European economies, but that policy wouldn’t have worked under any circumstances. The ECB’s policy came at a cost to Ireland and the Southern European countries when the property bubbles burst, but that cost doesn’t reflect any benefit to the Northern European countries.

It’s true that a Central Bank faces greater problems if the currency area that it regulates spans many countries with different conditions. But, as we have seen, Central Banks can’t avoid recessions and crises even if they only regulate the currency of a single sovereign nation.

Many countries have found themselves facing the consequences of the bad decisions made by Central Banks. Ireland isn’t unique in that respect. What makes Ireland unique is the extraordinary lengths that the government have taken to support banks and property developers. In September of 2008 the Irish government guaranteed for two years all bank accounts with Irish banks and almost all loans to those banks. This September, when that guarantee was due to expire, it was extended for another three months. The government decided that rather than risk paying out on that guarantee they would bail out banks as and when they needed it. They nationalised the worst-affected bank – Anglo Irish Bank in 2008. So far, through several bailouts Anglo-Irish Bank has cost the Irish government €22.9 and the other banks have cost ~€10.1, though the extent of losses hasn’t been fully recognized and will probably be much greater. It is these debts that have caused Ireland’s budget deficit to rise much more than those of other countries.

There have been many rumours about corruption in the Fianna Fail and in Anglo-Irish bank. The actions of the former board of Anglo-Irish bank are under investigation by financial regulators and the police, the former CEO has been declared bankrupt. There are close links between the ruling Fianna Fail party and many property developers, that was the subject of jokes long before the crisis. The previous Taoiseach Bertie Ahern was investigated for receiving bribes from property developers. I think there’s probably some truth in these allegations of corruption. But the politicians that form the government had many ways they could abuse their power for personal gain. A politician has many ways he can make a little on the side without bankrupting his country.

It’s ideas rather than corruption that have created such a great crisis for Ireland. The government thought that the resources the state could lay claim to were inexhaustible. They believed that if the state guaranteed bank accounts that this guarantee alone would satisfy the markets. The Finance Minister Brian Lenihan once called the guarantee the “cheapest bailout in the world so far”. The government forgot that the power of the state isn’t magical. A government can transfer the liabilities of banks onto the taxpayers, but they can’t abolish them. Back in 2008, the government were worried that the failure of a bank would harm Ireland’s reputation, but in the long run their cure was worse than the illness.

As Phillip Booth wrote, the first step the Irish government, the IMF and the EU should take is to end the guarantees.

Economics

Time to sort out mechanisms to wind up banks

Europe is trapped in a cycle where debt is being passed round and round in circles – the banks are bust so the Irish government bails them out; the Irish government’s debt is owned by other banks and if the government defaults, they go bust; the EU as a whole then tries to rescue both in opaque arrangements which are only sustainable because Ireland is so small; now Britain is getting involved.

Responding to debt crises in this way is entirely unsustainable, we potentially have crises in Italy and Spain around the corner and nobody can shoulder their indebtedness.

The EU has been sitting around doing very little for the last two years (except for dreaming up new regulations for the banks, hedge funds and private equity). What it and the nation states involved should have been doing is ensuring that banks can be wound up in an orderly fashion so that all providers of capital and credit potentially lose money except for depositors who were insured at the beginning of the crisis. The EU governments are simply underwriting mistakes made by private businesses and then blaming it all on “casino capitalists”.

The Irish government’s debt position would not, in fact, be that bad if it were not for the bank guarantees. Ireland is not another Greece (or Italy) – its underlying position is sound. The key issue has not changed since the beginning of the crisis – it is the need to recognise failed financial institutions for what they are and not load the cost of their bad loans onto taxpayers in general. At the beginning of the crisis, the bail-outs were understandable; we have now had two years to sort out proper legal mechanisms for winding up banks.

Economics

Regulating while Europe burns

Britain and the Eurozone hover on the Brink of Banking and Monetary Collapse. Our response? More Regulation.

The European Central Bank’s head, Jean Claude Trichet, appears to have realised what a mistake he made in single-handedly engineering the bailout of Greece only six months ago.

As I pointed out at the time this was simply a massive transfer of wealth from taxpayers to banks, funds and other investors in Greek Government bonds.  Those smart and wealthy investors are now banking these profits very rapidly as we can observe by noting the rises in credit default swap prices.

Yesterday M. Trichet announced plans to raise Euro interest rates and decrease long term support for the banking system.  It will be interesting to see if and by how much rates are raised since the Spanish banking system will probably collapse if Euro rates rise by even 1 per cent.

Why will this happen?  It was a poorly reported consequence of the bailout two years ago that a significant consequence of forcing rates to zero is to inflate asset prices.  Both effects are forced and hence, to use the popular term of the decade, unsustainable.  The crash that we are about to experience will be far greater than that which would have occurred if the ordinary rules of capitalism had been allowed to operate in 2008.   Sanity could have been restored to the banking system had governments stayed out of the mess.   Liquidations would have led to changed business models and the appreciation by consumers of banking products that governments cannot protect them from losing money.

And what has the UK Government’s response been during this joyous week, which has already been widely reported as a good time to bury bad news?

In addition to pledging that we will donate several billion to the Irish cause, it has been announced that those who make their living by selling us mortgage products must take a course in mortgage loans.

This is yet another example of what Kevin Dowd has labelled “sham regulation”.  The presence of an accreditation mark on an IFA’s business card is intended to imply that the consumer should trust his mortgage advice and sign up for the loan he recommends.

Let me recommend that sellers and buyers of these products take a very short education by reading and understanding the rest of this article.  If enough of you lobby the FSA, these few words might even be adopted as the new FSA official mortgage education qualification.

When considering mortgage loan offers there are only two relevant criteria:

a)    The length of the fixed interest period;

b)    The all-in cost of the loan.

I would mention a third, but much less important point: break costs.  Borrowers’ circumstances may deteriorate and the consumer should be aware of the costs of defaulting or switching lenders during the fixed period.  Simply ask and compare.

Let us consider point a).  Why do I focus on fixed rate loans, when historically in the UK and today in many countries like Spain floating rate loans were / are much more common?  The answer is simple.  The financial risk of a home purchase is usually considered to comprise only the risk of up or down variance in the house’s value after purchase.  This assessment only applies to houses bought for cash.  If a loan is required the consumer should quickly decide whether he wishes i) to take this amount of risk or ii) twice this risk.

Buying a house and borrowing on a floating rate basis amounts to taking roughly twice the house price risk because if rates rise not only do house prices usually fall but of course your payments rise as well.  Therefore borrowers who wish to expose themselves to one times the risk of the house price variance should borrow on a fixed rate basis.

Point b) the all-in cost, can be calculated by entering all payments into either an Excel spreadsheet or even some calculators.  All fees at inception and redemption should be included.  Then press the “Net Present Value” button and compare the offers.  (For the less financially savvy reader, NPV is simply a way of expressing a stream of payments over time as a cost today.  For example, if the interest rate is 5% you would be indifferent as to a choice between paying £100 away today or £105 in one year’s time).

That is the end of the mortgage loan training course.  Set out above is a universal guide.  No other criteria matter – least of all the identity of the lender, unless you take a floating rate loan and expose yourself to being gamed by the bank.  Many lenders brazenly jack up the rates they apply to loyal customers and offer “discounts” to new borrowers.  These banks rely on lethargic consumers not to refinance quickly.  This risk is almost impossible to assess in advance and is another reason to fix your rate for as long as possible.

It would be wonderful if the FSA’s official course were to comprise no more than the above few paragraphs, but sadly I fear the actual course will be replete with mumbo jumbo and simply constitute yet another barrier to entry into the financial services business.  Mortgage industry hucksters will thus receive state support for their present modus operandi, namely the maintenance of the pretence that, like a Savile Row suit, you are a very special customer and need an expert, like me, to tailor a loan to your specific requirements.

Economics

Dear Uncle Sam: the Director’s Cut

Dear Uncle Sam,

My mother told me to send thank-you notes promptly. I’ve been remiss, but you know, with my firm’s revenues up 30% and its net income up nearly threefold since the Crisis struck, I thought I’d better be careful in case anyone considered my praise was a little less than disinterested.

Just over two years ago, in September 2008, the country faced an economic meltdown. Fannie Mae and Freddie Mac, the corrupted, corporatist rent-seekers you had long encouraged to disrupt the proper allocation of scarce means in the mortgage system in the lust for venal political advantage, had been forced into ‘conservatorship’ (i.e., they were permanently battened on the teat of the long-suffering tax-payer). Several of the largest commercial banks were teetering as a result of their leaders’ blind pursuit of short-term gain in the regime of extreme moral hazard instituted by you and your central bank. One of Wall Street’s giant investment banks had gone officially bankrupt, and the remaining three were poised to follow (at least until you allowed them to practice the legal fraud of what I then called ‘mark-to-myth’ in assessing their net worth) – but, of course, the full impact of flouting the eternal capitalist imperative of loss-avoidance and profit-seeking could not be allowed to be borne by them, now could it? Fortunately, the fact that AIG, the world’s most notorious mispricer of credit risk, was at death’s door offered you a way to make those same investment banks nearly whole through the back door. I believe the gamblers-in-charge who needed such unheard of levels of assistance are largely still in place and still making out like bandits at the expense of everyone else. Way to go!

Many of our largest industrial companies, foolishly over-reliant on hot-money, short-term financing via a commercial paper market that had disappeared up the tail-pipe of the mythical ‘global saving glut’ were weeks away from exhausting their cash resources. Indeed, all – well, many – oh, alright: some of the most badly run – of corporate America’s dominoes were lined up, ready to topple at lightning speed. My own company might have been the last to fall – since I am not only a recognised investment genius, but very thick with a number of your more influential servants – but that hypothetical distinction provided little solace with even my stock price back at 1998 levels, before reckoning for inflation or the weaker dollar.

Nor was it just business that was in peril: 300 million Americans were in the domino line as well and it is, of course, not just a constitutional right, but a precept of natural law, that you must act as that vast, tutelary deity of whom de Tocqueville spoke when you were still little more than a lad and so spare the improvident, the indolent, and the plain unfortunate the consequences of their actions, even if it costs the thrifty, the industrious, and the innocent very dear in the process. Just days before, the jobs, income, 401(k)’s and money-market funds of these citizens had seemed secure. Then, virtually overnight, everything began to turn into pumpkins and mice – but, then again, if you take my strictures (q.v., below) about ‘bubbles’ into account, maybe they were nothing more than Bibbedy-bobbedy-boo all along (except where they held shares in MY company, of course). There was no hiding place. Thanks to your misplaced efforts in trying to keep a lid on the volcano for at least the previous decade (some would say ever since the early 1930s), instead of allowing it to depressurize in its own good time, a destructive economic force unlike any seen for generations had been unleashed.

Only one counterforce was available, and that was you, Uncle Sam. Yes, you are often clumsy, even inept (allow me a little euphemism here: I’m trying to be nice). But when businesses and people worldwide race to get liquid, you are the only party armed with the printing press and primed with an utter disregard for the long term consequences of using it and so can take the other side of the transaction. And when our citizens are losing trust by the hour in institutions they once revered – institutions which you fostered, pretended to regulate, and from which you continue to take hefty political contributions – only you can prop up a house of cards of your own construction.

When the crisis struck, I knew you would not waste the opportunity to expand the role you could play – Crisis and Leviathan, and all that. But you’ve never been known for speed, and in a meltdown minutes matter. I worried whether the barrage of shattering surprises would disorient you. Absent any guiding principles, drunk on the unbridled power of executive privilege, and utterly contemptuous of due process, you would rush (‘like a fire-engine going the wrong way down a one way street’) to improvise ill-thought out – and often conflicting – solutions on the run, violate legal boundaries and avoid constitutional inconveniences, like Congressional hearings and studies. You would also need to get turf-conscious departments to work together in mounting your counterattack. Ah, well, better luck, next time! The challenge was huge, and many people thought you were not up to it – who says you should always discount the consensus?

Well, Uncle Sam, you delivered. Oh boy did you deliver! People will second-guess your specific decisions; you can always count on that, just as you can count on the resulting uncertainty about exactly what stunt you’re gonna pull next to paralyze entrepreneurial decision-making and so prolong the slump far beyond its natural span. But just as there is a fog of war, there is a fog of panic and under its veil you certainly did a number of things which would not stand up to scrutiny in the unlikely event you ever honoured a FOIA appeal to reveal exactly who did what to (or for) whom and why. Overall, your actions were remarkably effective in taking the failure of a few egregiously over-leveraged, private-sector companies and magnifying it into a global collapse, passing the losses of the billionaire financier class onto the individual saver and the small businessman, wherever they might be found.

I don’t know precisely how you orchestrated these – certainly, the noise that came out was much more Berg than Bach. But I did have a pretty good seat as events unfolded (don’t I always?), and I would like to commend a few of your troops. In the darkest of days, Ben Bernanke, Hank Paulson, Tim Geithner and Sheila Bair finally grasped – after much prior public denial – the gravity of a situation in whose development at least the first three had been actively instrumental. As for dear ol’ Dubya, I give him great credit for leading, even as Congress postured and squabbled, for if there’s one thing that sells tickets in this Theatre of the Absurd, it’s Leadership (capitalized, naturally, just like Führerprinzip), even if too few care to check quite where they are being led until it’s far too late to do anything about it.

You have been criticized, Uncle Sam, for some of the earlier decisions that got us in this mess — most prominently for not battling the rot building up in the housing market (though to limit ourselves to this narrow field is to deny much of the discredit due you). But then, few of your critics saw matters clearly either (even though several of them now tediously hog the headlines by pretending that they did) since, they, too, are all Neo-Keynesian, macroeconomic-aggregate astrologers with no real grasp of economic theory. In truth, almost all of the country became possessed by the idea that home prices could never fall significantly – a mania which never could have taken hold if we had abolished the Fed and put in place an honest monetary system, of course. (Since you ask, my S&P put shorts and my bearish USD position are again doing quite nicely, thanks).

That was a mass delusion, reinforced by rapidly rising prices that discredited the few skeptics who warned of trouble. Delusions, whether about tulips or Internet stocks, produce bubbles. And when bubbles pop, they can generate waves of trouble that hit shores far from their origin. This bubble was a doozy and its pop was felt around the world. Thank the Lord, you’ve been trying might and main ever since to reinflate a new one on the wreckage of the old (see my comments about pumpkins and mice, above).

So, again, Uncle Sam, thanks to you and your aides. Often you are wasteful, and sometimes you are bullying. On occasion, you are downright maddening (this is meiosis, not euphemism, in case you were wondering). But in this extraordinary emergency, you came through — and the world would look far different now if you had not. What a shame we’ll be picking up the multi-trillion tab for that utterly ill-advised intervention for many a long year to come (I use the term ‘we’ loosely, of course, since I’m reaping what I did not sow as per usual).

Your grateful nephew, W

PS: Do I get my nice, shiny new medal now, please?

PPS: Please excuse the shocking punctuation, left largely unamended by the editorial staff at the nation’s premier newspaper.


Whatever encomia are being passed back and fro between the global Platonic elite, matters are a little more messy beyond the fragrant groves of the Academy.

Enough ink has been spent elsewhere on Ireland’s plight for us to avoid comment other than to point this up as a salutary warning of the perils of affording the political class too much freedom of action. In brief, under the previous easy money regime, the banks and their developer cronies were allowed to run riot because the entrained false prosperity bought votes for their buddies in the Dail. The banks were bailed out because that’s what comic-heroic ‘statesmen’ like ‘Flash’ Gordon Brown were doing to save the (Masters of the) Universe and so that’s what every Tammany Hall boss everywhere aspired to do. The banks were next fully adopted into the state to avoid losses spreading to their unthinking lenders among the Continental banks and insurers and now the problem threatens not just the livelihood of the culprits, but that of their neighbours, too, while the belated focus on hard arithmetic, rather than heady wishfulness, has threatened to unpick the shoddy fabric cloaking the naked emperors all across the European Community.

Meanwhile, China, that most-capitalist of nations, that paladin of effective government, that lodestar of future development, that world-leader-in-waiting (in the opinion of one or two prominent commentators, at least) has just fallen back on the most cack-handed, unjust, illiberal, counter-productive means of addressing its raging domestic price problem imaginable – an assault on ‘speculators’ and ‘hoarders’, coupled with the imposition of price controls and the provision of subsidies to the ‘less well-off’. The heirs of Chiang-Kai-shek might demur, since their forebears’ own, brutal attempt to suppress a paper money inflation in the 1940s was a material factor in the Generalissimo’s loss of popular support and, hence, his eventual defeat by forces loyal to Mao.

So, strangely enough, the vast monetary expansion (60% since the LEH-AIG debacle) has not only further distorted the capital structure of the country (not least – but also not only, we suspect – in real estate), but has led to a rapid escalation in the price of all manner of basic foodstuffs such as garlic and ginger (which have well nigh doubled in price) as leaders in a group of 18 such staples – including cabbage, potatoes, and cucumber – which have risen 62% in a year.

Of such matters are revolutions made, hence, Beijing’s panicky response.

What this distinctly second-best solution also shows is just how far into the quicksand the Central Planners fear their anti-bust policies have led them when they still eschew any significant use of the interest rate weapon. Trapped between the Scylla of having far too much domestic credit (and hence banking capital) at risk in the property bubble and the Charybdis of an over-developed, low-ROC horde of price-takers in the export sector at the mercy of any upward lurch in the exchange rate, our Oriental Argonauts seem to have decided to scuttle the ship midway between the two.

This time last year, we mused that the biggest single risk to the recovery and hence to commodity prices would be the roaring dragon of Chinese inflation. With its long-time diversion into the price of bricks and mortar (the one tangible form of the disease invariably viewed as a boon by most of those subject to its progression), that warning has seemed, at times, a touch premature, but the much pricier chickens may at last be coming home to roost.