Tag Archives: Housing Bubble

Deregulation isn’t the solution, it’s the problem

Representative Mark Amodei (R-NV2) was pleased to vote for the so-called “Choice Act,” which rolls back some of the reforms enacted in the wake of the Wall Street casino debacle and subsequent recession as the Great Wall Street Derivative Monster collapsed like an air dancer in a Nevada wind.   The theory behind this ridiculousness is that regulations restrict commerce, and a restriction of commerce diminishes wealth, therefore diminished wealth impacts investment, ergo diminished investment equates to a limit on economic growth.  Not. So. Fast.

Yes, regulations restrict “commerce,” but only some kinds of “commerce,” generally the fraudulent variety.  I am free to issue shares of stock in my corporation — however, I am not free to issue shares of stock in the Reese River Steamboat Company.  Some sharp soul offered shares of this highly dubious company during one of the mining booms, and assuredly some investors were cheated by this obviously fraudulent sale.  We have regulations to prevent this.  We have laws and related regulations to prevent insider trading, to prevent “blue sky” stocks, and to reduce the possibility investors are cheated by financial products which promise high returns with little or no risk.  Sometimes the adage, “If it looks too good to be true, it probably is,” isn’t quite enough to prevent mismanagement of other people’s money.

Recently, Wells Fargo was found guilty of violating regulations and laws relating to the creation of phony accounts, the fine totaled a massive $185 million and some 5,300 individuals were fired. [NYT] The situation was all the more egregious because the bank was ripping off its own customers.  $100 million of that fine was the highest penalty the CFPB ever levied against a financial institution.  This is precisely the agency the so-called “Choice Act” wants to ham-string.

The “Choice Act” would eliminate the regulation regime which was intended to prevent the collapse of banking institutions.  Just for the record, let’s look at the list of US institutions that either disappeared or were acquired during the Great Recession: New Century, American Home Mortgage, Netbank, Bear Stearns, Countrywide Financial, Merrill Lynch, American International Group, Washington Mutual, Lehman Brothers, Wachovia, Sovereign Bank, National City Bank, CommerceBancorp, Downey Savings and Loan, IndyMac Federal Bank, HSBC Finance Corporation, Colonial Bank, Guaranty Bank, First Federal Bank of California, Ambac, MFGlobal, PMI Group, and FGIC.

If we extrapolate the “let the market sort it out” argument to its conclusion — it’s acceptable to allow banking institutions to over-extend themselves to such an extent that they will ultimately collapse; that’s just the market “at work.”  Fine, if the impact of such deregulation solely impinges on the banking institutions themselves, but that’s not what happens in the real world.  In the real world such supposedly safe havens (money market accounts) were in peril:

“A little over a year ago the collapse of Lehman Brothers sparked heavy redemptions from the dozen or so money market funds that held Lehman debt securities. The hit was particularly hard at The Reserve Fund, a money market fund that had a $785 million position in Lehman commercial paper. Soon The Reserve saw a run on its Primary Fund, spreading to other Reserve funds. Reserve tried to furiously sell its portfolio securities to satisfy redemptions, but this only depressed their values.

Despite its best efforts, The Reserve Primary Fund couldn’t find enough buyers and on Sept. 16 the unthinkable happened. The Primary Fund “broke the buck,” meaning that the net asset value of the fund, $1, fell to $0.97 a share. It was only the second time a money market fund, which are commonly thought of as guaranteed, broke the buck in 30 years.”

Meanwhile in Nevada, unemployment soared to 14+%, the state endured being listed among the states with the highest levels of foreclosures, and it took until 2016 for the state to recover almost all the wealth and jobs lost in the aftermath of the deregulated Wall Street casino debacle. [LVRJ]

Deregulation may sound fine when discussed in theoretical, ethereal, terms, it obviously didn’t work in the real world in which Bear Stearns, Lehman Brothers, WaMu, and IndyMac collapsed, and where the Reserve Primary Fund “broke the buck.”

The questions someone should ask of Representative Amodei, and other “deregulators,” are:

(1) Do you favor a return to the regulatory environment in which investment banks were allowed to over-extend and engage in risk taking far beyond their capacity to remain solvent?

(2) Do you favor a regulatory environment in which those being regulated are allowed permission to “self regulate,” without oversight from governmental agencies and institutions?

The second question is particularly important because it addresses the question of trust in commercial relationships.

The most basic of all commercial relationships is the simple act of buying and selling.  I have something to sell, and there is a potential customer for my goods or services.  This is another point at which deregulation can easily become part of the problem.  If I am selling food, there are self-evident reasons for regulating the conditions under which that food is prepared and served to the general public.  Deregulation invites disasters of the public health variety.  We trust that the food offered for sale by restaurants and groceries is safe for consumption.

If I am selling financial products does the buyer (consumer) have the expectation that my product is what it purports to be?  That it is backed by sufficient funds for ‘redemption?’ That it conforms to the standards of acceptable practices?  And, if it doesn’t, are there avenues of redress such that the consumer can be compensated?  In short, can the customer be assured that he or she can trust the product?

If I am selling a manufactured product, can the consumer trust that the item was produced in a safe way, that the product will perform as advertised, that the product will not create a hazard in my home or office?  There are voices on the fringe of Free Market thought calling  for the abolition or at least the restriction of the Consumer Product Safety Commivoicssion, who would love to see the return of Caveat Emptor, but most reasonable people agree that regulations pertaining to product safety are conducive to commerce, NOT restrictive.  A vehicle which meets or exceeds safety standards is more likely to be my choice than a vehicle which does not.  A vehicle which meets or exceeds fuel consumption standards is more like to be my choice than one which does not.  In short, regulatory standards benefit the best products (and their producers) while those who do not meet the standards have a more difficult time at the point of sale.  Now, the question becomes — do we want a regulatory environment which benefits the marginal, the inadequate, or perhaps even the corrupt producers?

Unfortunately, the deregulatory voices are answering this question in the affirmative.

Is this really the answer Representative Amodei and his cohorts want to give to constituents in the Second District? In the US?  To our customers around the world?

 

 

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Filed under Amodei, banking, Economy, financial regulation, Foreclosures, Nevada economy, Nevada politics, Politics

Anti-Choice: The Rebirth of Deregulation

I don’t think anyone in the state of Nevada doesn’t know what happened the last time Wall Street was left unfettered.  The Bubble splattered all over the state.   The offcast included 167,000 empty houses. [USAToday]  Nevada’s unemployment rate soared to 12.8% by December, 2009.  By October 2010 the state’s unemployment rate was 14.4%.  And now the House of Representatives is on track to vote on H.R. 10, the “Choice Act” to dismantle the financial regulatory reforms enacted in the wake of the Housing Debacle and deregulated banking disaster.

Two procedural votes are on record to move this bill forward — House vote 290, and House vote 291 — and Representative Mark Amodei voted in favor of bringing this bill to a vote by the full House.   Watch this space for an update on the vote for passage.

Update:  On House vote #299, Representative Mark Amodei (R-NV2) voted along with 232 other Republicans to essentially gut the financial reform regulations enacted in the wake of the Housing Bubble debacle. (HR 10)

Representatives Kihuen, Rosen, and Titus voted against this deregulation bill.

Comment: Be aware of Republican representatives to frame this vote as one against Bank Bailouts and “Too Big to Fail.”   In a polite world we’d call this something euphemistic like “south bound product of a north bound bull.”  The Dodd Frank Act requires banks to have a plan for unwinding failing banks, and bankers have screamed to the heavens about provisions to allow outside oversight of banking management.  More simply, if you approve of the antics of Wells Fargo — then you’ll love the “Choice Act,” a bill which gives banks the “choice” to skewer its customers and investors.

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Filed under Amodei, Economy, financial regulation, Nevada economy, Nevada politics, Politics

At Play In The Fields Of The Frontier Markets

banker 3Repeat: One man’s debt is another man’s asset.  Repeat: The higher the yield the higher the risk.  The higher the risk the more likely something will go haywire.  And, why repeat these boring bits? Because,  if one is sitting in Nevada (or Florida, or Arizona) and still looking at an economy which is sluggish for the average family and volatile for the 0.1% investor — The Players Are At It Again.

Some time in the future — one can only hope it isn’t soon — the term  “Frontier Market” is going to come back to haunt someone, and we might wish to pray that not only is the backwash not immediate, but also that it doesn’t repeat the last financial debacle.

Tucked into Reuters’ reporting of market news was this article which may prove altogether too prescient:

“With the world’s biggest central banks driving yields on safe assets to near zero, some investors are tossing caution to the wind and rushing to buy illiquid and previously overlooked bonds sold by countries with no capital markets track record.”  [Reuters]

If this sounds too familiar, it should — it should have reminded someone of Argentina (1992-2002) the Asian financial calamity (1997) and the mess in Russia (1998) which brought down Long Term Capital Management.  We ought to take a second look at what happened in the LTCM mess:

“Long-Term Capital was advised by finance quants, or quantitative analysts, who made a number of unsound, esoteric bets, including investments in interest rate derivatives. When Russia’s inability to pay its debts roiled global markets, the fund, saddled with high-leverage and off-balance-sheet obligations, was near collapse.

Because Long-Term Capital owed large sums to banks and other financial institutions, the Federal Reserve Bank of New York organized a consortium of companies to buy it out and cover the debts. Alan Greenspan, then the Fed chairman, eased monetary policy to restart capital markets, which were starting to freeze up. Long-Term Capital’s shareholders were wiped out, but none of the creditors took losses.”  [NYT]

Quick summary:  A large hedge fund, guided by quantitative analysis (but not exactly a boatload of common sense), took positions in debt issued by Russia.  Because the hedge fund owed large amounts to “other financial institutions” (read: banks and other funds) when the Russian economy collapsed the Big Hedge Fund blew up, and the creditors (those other banks and investment firms) were about to get not only a hair cut, but possibly get their heads shaved.  Not surprisingly the financial markets began to “freeze up” (Does this sound familiar?)  Enter the first big government bail out of the Era of the Financialists.

This wouldn’t be the first or last time the bankers blew it.  Consider Mexico in 1994, those investors bought Mexican debt in pesos and were repaid in dollars — but the Mexican government didn’t have sufficient reserves to keep up the fixed rate repayment.  At this juncture a sentient creature might have wanted to ask: Why am I buying debt without checking to see if the nation in question has ample reserves to repay it?  Not enough investors (and their institutions) ask the question, and the result was messy.  The U.S. ended up buying pesos on the open market, and then added loan guarantees  to the tune of some $50 billion.

So, now let’s add “investors” interested in buying Paraguayan, Bolivian, and Honduran debt in 2013.  Just for good measure we can toss in some Vietnamese and Romanian debt as well.  These nations are issuing debt (bonds) and “investors” are buying it up.

Paraguay offered bonds at 4.65% interest (yield) on January 17, 2013.   Reuters reported: “Paraguay, one of South America’s poorest and most unstable nations is expected to see a strong economic rebound this year and the government is keen to tap increased investor interest in smaller emerging market issuers.”

U.S. Treasury bonds are currently going for 1.95% for ten years.  [Treasury] thus for the Greed Is Good Crowd that 4.65% might be very appealing?  However, that “poorest and most unstable nation” thing might give a few individuals pause.

Honduras was rated B+ by S&P when it issued its international bonds at 7.5%, mature in 2024.  They are involved in a $205 million lawsuit concerning a state owned logging company which caused Barclay’s to pull out of the deal. [Bloomberg] But Gee! doesn’t that interest rate look enticing? There’s just a bit of a problem — Honduras has “gang problems,” $6 billion in foreign debt, and an internal debt that’s tripled since 2010.  [AJTV] What could possibly go wrong?

Guatemala entered the lists: “Guatemala, rated two steps higher than Honduras at BB, sold $700 million of 2028 bonds to yield 5 percent on Feb. 6, according to data compiled by Bloomberg. The yield on the bonds has fallen to 4.95 percent since they were issued.” [Bloomberg] The fact that 54% of the nation’s citizens are living in poverty ought to be some kind of clue about its economy, and the fact that  the highest income earners are responsible for 42+% of the nation’s consumption might also be a sticky point. [CIA]  The State Department offers this caution: “Guatemala continues to face major challenges to successful development, including poverty, malnutrition, and vulnerability to economic fluctuations and natural disasters. The Guatemalan government also faces the challenges of corruption and the presence of transnational organized crime.”

Just imagine for a moment if Burnham Down & Crash LLC,  bought up some Paraguayan, Honduran, and Guatemalan bonds, which they mixed with some U.S. bonds (1.95%), some bonds from Great Britain (1.95%), and some German bonds (1.37%).   A bit of careful slicing, dicing, and repackaging could be used to manufacture “Unlimited Horizons” — a bond offering for “investors” (read: Other Bankers).  Incorporate a touch more Magic Hands and the bonds from “Unlimited Horizons” could be repackaged with bonds from “Blue Skies” yet another mixture of national paper, and an admixture of really good investments piled in with some really questionable ones.  Is this sounding familiar yet? Clue: Think Housing Bubble.

How many of the bonds from the shaky sources have to default before the investors are looking at the financial equivalent of Sweeney Todd’s barber shop?  How many investment houses are going to be involved in the purchase of these bonds and their derivatives before the Major Bankers “have to step in” and announce austerity measures so that the small debtor nations can repay the investors?  Clue: Look at Greece? Cyprus?

How many of us on this planet would be just as happy if the bankers had not decided to play in those debt markets in the first place?

It isn’t as though the bankers didn’t learn anything from Argentina, Mexico, the Asian markets, and Long Term Capital Management — from Lehman Brothers, or from the Mortgage Meltdown — it really doesn’t look like they’ve learned anything.

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Filed under Economy, financial regulation

Senator Heller’s Pipe Dream: Fun With Deregulation

Nevada got hammered in the Housing Bubble.   Here’s what the Bubble looked like:

As the Housing Bubble collapsed so did Nevada employment. The graph looks like this:

Nevada lead the nation in home foreclosures for months on end, and it was only in January, 2012 that we were relieved to say “We’re Number Three.” [RGJ]    Why look backward?  Because in this instance the past is prologue. Lessons learned the hard way during the Savings and Loan Crisis of 1986 to 1995 were lost on bankers, builders, pundits, and politicians.

Risky Business

Does this sound familiar?  Deregulation of the Savings and Loans during the 1980’s gave the S&Ls many banking capabilities but without the regulations associated with banking.  Immediately after the deregulation of the Thrifts those that had state charters moved to federal charters because the latter were less restrictive. The states of California and Texas reduced their S&L oversight to match the federal deregulation.  The system rewarded risk. The greater the risk the greater the profits.  That is, the system was profitable until all the risky investments in real estate development started bottoming out.   The dominoes started to topple in 1985 when the Home State Savings Bank of Cincinnati, OH collapsed in March.    From 1986 to 1995 the number of Savings & Loan banks dropped from 3,234 to 1,645; and, the taxpayers were out about $124 billion dollars. [Link]

Deregulation and subsequent “innovation” in the last thirty years have given us the Savings and Loan Crisis (1986-1995), the Dot.Com Bubble from April 1997 to June 2003, [BI] the Enron Debacle and bankruptcy in December 2001, and the Mortgage Meltdown/Credit Crisis of 2008.

One would think we’d have learned something along the way, but here we have Senator Dean Heller (R-NV) touting his platform for economic growth:

“The key to turning our economy around is to remove impediments that have caused economic stagnation and the inability of businesses to create new jobs. Not continue with business as usual.”

“Dean believes that private capital, not the federal government, should be the primary source of mortgage financing for the housing market. Dean supports financial regulatory reforms that stop taxpayer-funded bailouts and address the growing liabilities of Fannie Mae and Freddie Mac.”

And, what might those impediments be? Might they be the Sarbanes-Oxley Act requiring accounting reforms and greater transparency in the wake of the Enron Debacle?  Might they be the provisions of the Dodd Frank Act, the most recent attempt to restrain some of the excesses of Wall Street during the Housing Bubble?  It’s well known Senator Heller joins his ultra-right wing cohort Senator Jim DeMint (R-SC) in proposing the repeal of the Dodd Frank Act.

Dean supports financial regulatory reforms that stop taxpayer-funded bailouts and address the growing liabilities of Fannie Mae and Freddie Mac.”  What would those “reforms” be?  If you want to stop taxpayer funded bailouts of the banking sector, simply leave the Dodd Frank Act in place since it provides for an Orderly Liquidation Authority to wind down the next Lehman Brothers mess.   No one’s all that pleased with the mortgage twins BUT if they are put out of business, WHO picks up the action in the secondary mortgage market?  JPMorganChase? Barclays Capital?

The growing liabilities of Fannie Mae?  That might have been true in 2009 but it’s outdated information now. There’s home-made chart for that:

Data from Fannie Mae, Funding Summary and Debt Outstanding, PDF.

How about Freddie Mac? Again, Senator Heller’s talking points are behind the curve.  Here’s the portion of the presentation made by Freddie Mac to its investors in June 2012 (pdf) —

A bit of Fannie and Freddie bashing is always welcome in some financial sector circles, and usually gets some applause from stump speech audiences who don’t know any better, but trying to sell the idea that we can get out from under the risky business of deregulation, and increase economic growth by dismantling the regulatory frameworks enacted to at least prevent the financial sector from repeating its recent atrocious mistakes is a pipe dream of the first water.

Senator Heller is using the  message from the Frank Luntz GOP talking point memo on financial regulation, complete with the framing: “Public outrage about the bailout of banks and Wall Street is a simmering time bomb set to go off on Election Day,” Luntz wrote. “Frankly, the single best way to kill any legislation is to link it to the Big Bank Bailout.” (emphasis added)

Unfortunately, the facts and actual provisions don’t match the linkage.  New regulations seek to PREVENT the necessity of any more major bailouts by establishing the Orderly Liquidation Authority, but if Senator Heller can string “financial reform” + “bailout” into a single sentence, and then repeat the mis-characterization often enough,  then maybe someone who doesn’t know any better will believe him.

In short: If you liked the Savings and Loan Crisis, enjoyed the Dot.com Bubble bursting, cheered for Team Enron, and loved the Housing Bubble and Mortgage Meltdown…  Senator Heller is your kind of candidate!

Relevant Previous Posts: “Nibbling Away at Sarbanes Oxley,” DB March 26, 2012. “Deregulation Debacle,” DB June 27, 2012. “A good reason not to repeal Dodd Frank OLA,” DB October 22, 2011. “Full Tilt Boogie: GOP attempts to gut Dodd Frank,” DB November 7, 2012.

See also: “Investor Presentation, Freddie Mac” June 2012. (pdf)  Sam Stein, “Frank Luntz Pens memo to kill Financial Reform,” Huffington Post, April 3, 2010.

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Filed under banking, financial regulation, Heller, Nevada economy, Nevada politics, nevada unemployment

Romney’s Job Creation Response: Yawn

The Romney campaign responded to reports that during Governor Romney’s tenure as the chief executive of Massachusetts he wasn’t particularly successful at creating jobs because the unemployment rate in the Bay State was 4.5% at the end of his term.   YAWN.   There are some reasons to indulge in a simultaneous inhalation of air and stretching of the ear drums followed by an immediate exhalation of breath.

#1.   2007 was also the year that Nevada had a 4.7% unemployment rate, California had a 5.7% unemployment rate, Arizona had a 3.7% rate, while Florida had a 4.0% rate — can we say “Housing Bubble?” [BLS] The national average that year was 4.6%, and that doesn’t make the 4.5% look all that impressive.

#2.  Massachusetts’ unemployment rate in 2003 was 5.8%, compared to a national unemployment average of 6.0%.  [BLS] It doesn’t look as though Mr. Romney can argue he was “starting out in a hole.”

#3.  As of 2004, the national unemployment rate was 5.5%, while the Massachusetts rate was 5.2%.  [BLS] In 2005 the national rate was 5.1% and the MA rate was 4.8%. [BLS] The national rate of unemployment in 2006 was 4.6%, while the Massachusetts rate was 4.8%. [BLS] It may not do to get too excited about the reduction of unemployment levels in a state when the outcome amounts to a +0.2% overall gain in four years.

#4. The job creation Romney promised in Massachusetts never really materialized.  “By the time Romney left the State House, Massachusetts had generated 24,400 net new jobs, according to an analysis by Moody’s Economy.com, an independent research group. The state had only an 0.8 percent increase in employment, giving it the fourth-weakest rate of job growth among all states over that time.”  [Boston Globe]

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Filed under 2012 election, employment, Nevada economy, Politics, Romney, unemployment

Round Up

Wondering about the level of taxation in Nevada?  The Small Business & Entrepreneurship Council says “We’re Number Three!” (Nationally) for being all sweet and cuddly for businesses disinclined to pay taxes. [NNB] But, we are going to collect sales taxes from Amazon.com for Nevada customers. [NNB] And, all this while Governor Sandoval tells us we don’t need any more taxes since the last batch has been extended. [NNB] So, we don’t have enough taxation to make business owners and corporations howl — and we don’t need any more business taxes — but we’ll happily collect more sales taxes (which obviously have a greater impact on those with lower incomes) on online purchases from the Big A…  The Lesson: It’s Only A Tax Increase If A Special Interest Has To Pay It?

***

Washoe County, Nevada is still getting some backwash from the Housing Bubble Debacle.  Short-sales are up, wherein mortgage lenders agree to sell a piece of real estate for less than what is owed.  “In Reno, short sales have been accounting for about a third of all sales in the past couple of years, according to the Greater Reno-Tahoe Real Estate Report. Short sales accounted for 116 units sold in March — 31 percent of all home sales in the area. Foreclosures posted 123 unit sales during the same period, which was 34 percent of inventory sold.”  [RGJ]   Meanwhile, back with those Wonderful People Who Brought On The Housing Bubble With Their Insatiable Appetite For MORE Mortgages —

“In case their (derivatives traders/bankers)  lobbying falls short, the industry — largely dealer banks and commodities firms — has been pushing legislation that would pre-empt the rulemaking process and tie the agencies’ hands. So far, no fewer than 10 such derivatives bills have been introduced in the House; two have passed and several more have cleared committee.

Not satisfied with that, influential lawmakers have been not so subtly warning regulators to go easy on derivatives. This is incredibly intimidating: Congress controls the agencies’ budgets, and the increase in workload mandated by Dodd-Frank leaves them woefully short on funds.

And should a derivatives rule unpalatable to the dealers somehow survive this Beltway obstacle course, the agencies face an explicit threat of a lawsuit. This has had a chilling effect. As Bart Chilton, a CFTC commissioner, told me, regulators fear there is “litigation lurking around every corner and down every hallway.”  [Lowenstein, Bloomberg]

Thus we have bankers, who having been bailed out once, have now decided that there is NO reason for any sentient human being to advocate regulation of their shadow system and their “private placement” activities — which got us into this Mess in the first place.  The only good news is that we may have found the bottom of this market. [Bloomberg]

***

The bottom of the housing market may be upon us, but the litigation lingers on.   A judge has denied AIG’s motion in the Bank of America settlement. [Reuters] A federal judge denied Bank of New York Mellon’s motion to dismiss a lawsuit by investors over the bank’s role as a trustee more mortgage backed securities  in the mess made by Countrywide.  [Reuters]

***

Maybe the Republicans do have a “health care” plan?

Health care would be “addressed” by disabling the implementation of ObamaCare, which Mitt Romney has repeatedly said he’d do on his first day in office. Even if you believe Romney and other Republicans actually have their own agenda of “health reform,” it’s mostly just a matter of replacing today’s health care deduction for employers with a tax credit for individuals, and then passing one bill allowing interstate insurance sales; the “market” (i.e., the rush of insurers to states with little or no regulation) will take care of the rest, and besides, it’s not the federal government’s job to make sure everyone has health insurance, right? [WashMon]

Yes, and with the rush to those states with little or no restraint on health insurance corporations we can reasonably expect that those corporations will not provide insurance to individuals with pre-existing conditions, not include vaccinations under basic policies, not include wellness screening for prostate, breast, or other cancers, and not include tax breaks for small businesses which provide health care plans for their employees.  It’s the Bush System on Steriods.

***

Some cheese with that whine?  Presumptive nominee Mitt Romney’s saying Life’s Unfair!

“This America is fundamentally fair,” he said. “We will stop the unfairness of urban children being denied access to the good schools of their choice; we will stop the unfairness of politicians giving taxpayer money to their friends’ businesses; we will stop the unfairness of requiring union workers to contribute to politicians not of their choosing; we will stop the unfairness of government workers getting better pay and benefits than the taxpayers they serve; and we will stop the unfairness of one generation passing larger and larger debts on to the next.”  [TPM]

Translation:  We will provide vouchers for parents to subsidize private schooling for their children.  We will stop assisting manufacturing companies with research and development.  We will attack trade unions.  We will further slash pay for government employees.  We will give tax breaks to the 1% and impose austerity on the remaining 99%.  There’s a good piece about privatizing education here.   H/T to Nevada State Employee Focus, there’s another excellent article on the attacks on public employees here.

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Speaking from friends in interesting places: The Soap Opera that’s become the Nevada Republican Party continues apace, and to read the gruesome details click over to The Nevada Progressive.

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More dispatches from the War On Women in the Sin City Siren.   Meanwhile anti-abortion activists are urging a “personhood bill” for the state of Oklahoma, the New Hampshire Senate has 6 abortion bills on its agenda, and a move to defund Planned Parenthood in Ohio is on temporary hold, but could reappear at any time.   More restrictive bills are in process in Tennessee, Louisiana, and Iowa.

***

Political items worth the click and read:  “The Koch Brothers Exposed,” Rolling Stone.   “Mitt Romney’s Attack Dog,” (Larry McCarthy negative ad guru), New Yorker 2/2012. “Don’t Let Business Lobbyists Kill The Post Office,” Rolling Stone.   “Campaign Tips from Cicero,” Foreign Affairs.

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Filed under Economy, financial regulation, Health Care, Heath Insurance, housing, Politics, Sandoval, Taxation, Union busting, unions, Women's Issues, Womens' Rights

Beware of Politicians Speaking of Greeks: Updated

If the current situation playing out in Athens were a melodrama it would be difficult to pick out the protagonists from the antagonists.  The Greeks, after all, gave us these theatrical terms and now we are watching the drama of a Parliament giving in to the austerity measures demanded by the international bankers, Athens on fire, and a host of serious questions unanswered.  [Bloomberg]  Here is a sample:

(1) If we don’t pay down our national debt are we going the way of the Greeks? Quick answer: NO.  Longer answer:  For starters, Greece has the 41st largest economy in the world, if we measure by GDP.  That would put it in the $325 billion range. [CIA] By contrast, the U.S. Department of Commerce estimates that the GDP of California was $1.89 trillion in 2009. [EconPost] Structurally, Greece depends on its public sector (40%?) and tourism, which accounts for about 15% of its total.  Again, the contrast between the two economies, one not even enough to put it into a Top Ten List of U.S. state economies, with the total U.S. output of $12.982 billion (December 2011 GDP) and there is obviously no comparison. [BEA]

A second point should be made for all those who are attempting to compare economic apples with ideological oranges.  Headlines like “US debt now bigger than (fill in the blank with some year’s GDP)” aren’t really helpful.  The point isn’t the size of the debt, it’s the ability to pay it off.  The BBC provides this handy graph:

Now, let’s look at another chart from the BBC report:

If the ratio were the sole determinant, what to make of the fact that the probability of repayment is less for Spain than for the United Kingdom which actually has a higher debt ratio?  The answer lies in the strength and diversity of the underlying economy allowing it to eventually pay off its obligations.

The “budget deficit” part of the graph doesn’t explain the probabilities in graph One either.  Again, Spain has almost the same deficit ratio as the U.K but is above it in terms of probability of payment.  Once more, it’s not the ratios that determine the direction, but the likelihood that the underlying economies of Germany, the U.K, and the U.S. can sustain obligations much more capably than the less dynamic and diversified economies of Italy, Greece, Portugal, and Ireland.

(2) Will austerity measures solve the Greek problem?   Short answer: Maybe.  And, then again maybe not.  Longer answer:  We need to look at the individual austerity measures, and then ask how productive these initiatives might be.  The package calls for (a) a 22% cut in the minimum wage; (b) 150,000 public sector jobs cut by 2015; (c) pension cuts by $370 million this year; and (d) the enaction of laws making it easier to lay off workers, and (e) spending cuts for health care services and defense. [TDJ]

The first question we might want to ask is if the Greek minimum wage was artificially inflated?  What we find is that the comparison of the Greek minimum wage to other European countries is difficult because several like Germany, Sweden, Finland, the Czech Republic, and Italy don’t have statutorily mandated minimum wages.  What the EuroStats information does tell us is that as of 2009, the Greek minimum wage level was comparable to that in Spain and Portugal, but higher than that in what used to be the Eastern European bloc. [EuroStat pdf]

If the Greek minimum wage isn’t already substantially higher than other members of the Eurozone, then what might the impact be of cutting it by 22%-22%?  Here we come to the part where the rubber meets the road and realities diverge from economic ideologies.

For all the glitzy graphs and equally glittering generalities on offer, there is one problem economists cannot solve with their models — there is no way to establish the one, the crucial, and the absolutely necessary, component in scientific research — the control.  It isn’t like we can divide nations into a control group with no austerity programs and no wage cuts, and establish a test group with comparable austerity programs, and then statistically compare the two groups.  Without a control group there is no scientifically definitive way to control for causality, or even to find rational correlations.  And, if we can’t even measure correlations, then we’re left at our starting point — taking economic proposals as articles of faith. [See also: GuardianUK]

One side will propose that creating a more “business friendly environment” with lower wages, lower or no pensions, and more latitude for corporate management will cause economic growth, which will in turn drive increased capacity to meet indebtedness.  The other will argue that depressing consumer spending by decreasing wages will simply serve to drive the economy downward, prolonging the hard times.  [FalseEconomy] At least one major  piece of “meta-research” appears to lend credence to the latter, [IPPR pdf] but without any control we’re still arguing possibilities not statistical probabilities.

(3) Will the Greek problem spread to the U.S?  Short answer: Not necessarily. Longer answer: It depends on the problems in the financial sector.  To test the waters, we might first observe who’s freaking out about the Greek situation?   The answer may be that the more exposure to Greek debt, the greater the possible  Freak Out factor.

1. Spanish government debt exposure to Greece is about $502 million, with a total lending exposure of approximately $1.5 billion.  2. The Swiss government’s exposure is about $529 million, with a total lending exposure of $3 billion. 3. The Belgian government has $1.9 billion, with a total lending exposure of $10.5 billion.  4. The U.S. government has an exposure of $1.94 billion, with a total lending exposure (including private sector) of $8.7 billion.  5. The Italian government exposure is $2.4 billion, with a total exposure of $4.5 billion.  6. The British government has an exposure of $3.96 billion with a total lending exposure of $14.7 billion. 7. The French government is exposed to some $13.4 billion, with a total lending exposure of $56.94 billion.  8. German government exposure totals $14.1 billion, while its total lending exposure equals $23.8 billion.  [BusInsider] * See charts added below.

A quick and dirty analysis would say that the German government has the most exposure to the Greek indebtedness mess, while French bankers are up to their armpits in it.  Banks in the U.S. are much lower in this dubious ranking.  Of the eight countries with significant chunks of Greek debt, the U.S. is among the bottom four.   We might infer from this that the anguish expressed in the United States will be more a function of how major banks perceive the impact of a Greek default on their bottom lines than how much effect a potential default will actually have on the U.S. economy as a whole.

One effect we might well bet on is that should the Greek’s program fail there will be great gnashing of teeth and rending of cloth on Wall Street.   It’s probably safe to predict that the Stock Market would report a drop in stock prices in the event of a Greek failure, as The Herd sees an equally predictable decline in the financial sector’s estimated short term revenues.  The problem in the United States may be to engage in deep breathing while The Herd thunders and panics over its “exposure” and possible consequent decline in bonuses and executive compensation?

Just as the banks securitized every U.S. mortgage on which they could lay hands during the Housing Bubble and then sliced diced and traded the portions in unregulated derivatives to their detriment, they decided to lend some $8.7 billion to the Greeks — which may or may not be paid back.  Bluntly speaking this is more an example of “reduced lending standards” to be endured than a reason for U.S. citizens to pony up any coin of the realm to further bail out institutions which decry regulation while demonstrating exactly why they need it.

Update: The following charts illustrate the numbers provided in the text —

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