Demand for Dollars from Fed's Discount Window Swells in Europe by 12,735% After Fed Cut Rates on Dollar Swap Lines

On November 30, Central Banks Cut Rates on Dollar Swap Lines which made borrowing at the Fed's discount window cheaper for foreign banks than US banks.

As a result, Dollar-Loan Demand Swells In Europe and Japan

The European Central Bank said demand for three-month dollar loans surged after it cut the cost of the financing almost in half in a coordinated action last week with five other central banks including the Federal Reserve.

The European Central Bank, based in Frankfurt, will lend $50.7 billion to 34 euro area banks on Thursday for 84 days at a fixed rate of 0.59 percent. That compares with the $395 million lent in the last three-month offering on Nov. 9 at a rate of 1.09 percent. The E.C.B. also lent five banks $1.6 billion in its regular weekly dollar operation, up from $352 million last week. The E.C.B. does not disclose the identity of the banks that borrow.

Six central banks including the Fed, the European Central Bank and the Bank of Japan cut the cost of emergency dollar loans by 50 basis points on Nov. 30 in an effort to ease a credit shortage worsened by Europe’s sovereign debt crisis. A basis point is equal to 0.01 percent. On Tuesday, demand for seven-day dollar loans from the Bank of Japan surged to $25 million from $1 million.

“The reduction in the rate seems to have been enough to reduce the stigma in using the facility,” said Vincent Chaigneau, rate strategist at Société Générale in Paris.

Discount Window Borrowing Swells by 12,735%

$395 million to $50.7 billion is quite a move. Percentage-wise it is approximately 12,735%. In Japan, demand for loans increased from $1 million to $25 million, a mere 2,400%. The actual demand in Japan is trivial. In Europe, it's not.

Who is desperate for the cash? The ECB will not say. Does the Fed even know or care?

Further information on the discount window, including interest rates, is available from the Federal Reserve System's discount window web site.

Discount Window



US banks going to the Fed's discount window pay .75% for primary credit. European banks going to the Fed's discount window paid a fixed rate of .59%.

That said, US banks are generally not using the discount window given adequate liquidity.

Mike "Mish" Shedlock
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Europe's Ass Backwards Plan to Stimulate Lending

Please consider the ass backwards Measures to Stimulate Bank Lending in the EMU.

The European Central Bank may announce a range of measures tomorrow to stimulate bank lending, said three euro-area officials with knowledge of policy makers’ deliberations.

Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private. Two said an interest rate cut is likely, with only the size of the reduction to be determined for the monthly decision tomorrow.

The ECB is focusing on getting banks lending again rather than increasing its government bond purchases to fight Europe’s debt crisis. The central bank’s insistence that governments take measures to restore investor confidence appears to have paid dividends, with Italian and Spanish yields plunging after Germany and France agreed to move the 17-nation euro area toward a fiscal union, a stance they reiterated today.

Confidence? What Confidence?

There is no confidence. Investors stepped in to buy Italian and Spanish debt hoping to unload to the ECB when it steps up bond purchases in the secondary market. Confidence is nothing more than investors front-running ECB president Mario Draghi's hint that the ECB is about to purchase more sovereign debt.

Ass Backwards Plan

Banks cannot or will not lend in Europe for the same reason they don't in the US.

1. Banks are undercapitalized
2. Few credit worthy businesses want to borrow

Cutting rates will not fix either of those problems. Worse yet, and with thanks to French President Nicolas Sarkozy, taxpayers and businesses will bear 100% of the responsibility to recapitalize banks.

Europe is in recession. Yet the fools at the EMU and EU want to increase the VAT, increase property taxes, increase fees, etc, to ensure that French and German banks do not shoulder any responsibility for making idiotic loans.

This may (or may not) increase confidence that banks will not go under, but it sure will not inspire consumers to spend or businesses to borrow.

Moreover, lowering interest rates further will put additional stress on those living on fixed income.

Correct Approach

1. Force banks, not taxpayers, to take losses for stupid lending decisions
   
2. Force banks to raise capital so they are not capital restrained in lending
3. Reduce public sector spending
4. Reduce taxes on businesses
5. Reduce taxes on private citizens

In every instance, except perhaps number three in some countries, the ECB, EU, EMU, and various national leaders have taken the exact wrong approach.

This is a balance sheet recession, not the garden variety in which the standard solution of central bank rate cutting might appear help. Few seems to have figured this out yet.

Worse yet, most of the few who have figured this out are hell-bent on trying various QE strategies proven to be complete failures by Japan and the US.

Mike "Mish" Shedlock
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Chart of the Day: Food Stamp Recession Curve

The latest Food Stamp data (now called SNAP) is out. Here is a chart by reader Tim Wallace showing program usage.

I added highlights in yellow to mark recessions based on NBER Business Cycle Expansions. The NBER is the official arbiter of recession start and end dates.

Food Stamp Participation 1969 to Present

click on chart for sharper image

Tim writes ...

The latest food stamp (SNAP) data is available for September 2011. The reporting lags by two months. We have now surged past 46 million, up to 46,268,257 to be exact.

Note that food stamp usage sloped down throughout the Reagan presidency until it started back up in 1989, ahead of the recession that doomed Bush I, then continued for several more years.

The pattern is similar for the recession of 2001. Food stamp usage picked up in 2001 prior to the recession, then continued for four years after the recession ended.

The current recession ended in mid-2009 but usage spirals higher and higher.

You can see that this "recession" is far more devastating than any in the past as the curve is more like a right angle than a curve.

We have added about 20 million in the latest rise and if the trend continues (as it has so far and as it did in the past two recessions), usage will hit 51 million or so in 2013.

Tim

In the last three recessions, a significant change in upward slope in food stamp participation served as a leading indicator of the  upcoming recession. Only the second 80's recession failed to meet that pattern.

Based on demographics as well as weak hiring trends, it is reasonable to assume this steep upward slop will continue.

Mike "Mish" Shedlock
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Merkozy Dog-and-Pony Show is Nothing but Fleas; Immense Arrogance, Loose Cannons, No Credibility

Within a couple of days German Chancellor Angela Merkel and French President Nicolas Sarkozy will present their "Grand Plan" to save Europe to a formal hearing on EU debt.

Their plan is on the death-bed already, but it does not officially die until formal votes in May as noted in Eurozone Treaty Changes to be Finalized in March, Then a Vote in May, Then Country-Specific Referendums, Then?

Merkozy Dog-and-Pony Show is Nothing but Fleas

As with grand plans for the EFSF, still not finalized, the Merkozy plan has morphed into nothing but budget rules that the EMU will not be able to enforce because Sarkozy would not cede fiscal control to the EU. Merkel will not accept Eurobonds, because she can't, by German supreme court ruling.

By any reasonable standard, the Merkozy dog-and-pony show is in reality neither dog nor pony but rather all fleas.

Loose Cannons and No Credibility

Steen Jakobsen, chief economist for Saxo Bank asks Where have your standards gone, Europe?

This week is being touted as the make-or-break week for the Euro and its Euro-zone - we did not get a Grand Plan in Cannes as Sarkozy had promised us, so now it seems we will get a Desperate plan instead.

The EU will always create 'something' which they believe they can sell as progress, but the problem is one of moral and political standards, or rather the lack thereof. Yes, you can buy time by printing money, you can try to fast-track changes to EU treaties, but you simply cannot run away from the dilution of standards from these desperate actions.

This weekend it dawned on me (and yes I am a bit slow) that the real issue here is not whether Europe gets a deal by late Tuesday night, rather it’s about how the EU can maintain any shred of credibility on its long-term ability to move the agenda beyond “saving Europe” to the longer term challenge of creating the next upswing in employment, growth and optimism.

This is not a question of the need for a crisis, though I do believe it’s the only way we get true progress, it is more about an alarming decline in standards of behaviour by those in power. Simply put, they have become loose cannons. The IMF can lend thousands of per cent of its SDR quotas, the FED can print trillions of dollars if they deem it necessary and soon it appears EU political shenanigans will see the ECB printing money in exchange for politicians in Europe doing what they should have done in 1999.

At its core, perhaps this is what the “occupy” movement is all about: it’s a protest against the violation of standards of behaviour by the ruling class, not just against the decisions they have made. And if that is the case, then I agree! We need debt brakes to stop the fiscal bloodshed, and we certainly need standards for how far central banks and politicians can devalue our hard earned, after tax salary by printing money.

This week, the EU’s Merkel/Sarkozy will try to force the move toward fiscal union using article 126 in the EU treaty, which basically gives the decision making forum of the EU Council the power to move and strengthen fiscal oversight.

The problem here is that it will be seen, ultimately as what it is: a total dilution of the originally intended standards of EU behaviour and indirectly it also puts us on the road to of transitioning from Euro-17 to perhaps the Euro-10.

I still have the feeling we are about to add a third new low point in the history of the EU history. The first was breaking the original stability-and-growth pact, the second was the ECB’s intervention in the peripheral sovereign debt markets in May of last year. Now we have the third and perhaps final straw: no limits, and no accountability to voters, the investors and the future.

So the risk is that the EU wins the battle this week, only to lose the war down the road.

Please let me be wrong.

Steen

Immense Arrogance

Reader Andrea emails ...

Hi Mish,

My comment (and I think I am not alone in Europe): This is a Franco-German agreement drawn and agreed between France and Germany without any involvement or contribution of any kind at any level of the other 25 countries.

Why the hell should the other 25 countries (parliaments or people) approve that?

Irritation, even rage against the Franco-German tandem deciding for everybody is mounting quite fast in other European countries.

The odds to get this plan approved are basically 0.

Best regards,

AC

Mike "Mish" Shedlock
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12 of 26 Economists in Financial Times Survey See Probability of Eurozone Breakup at 20 to 30 Percent; What are the True Odds?

Financial Times Deutschland says the key to whether or not the Eurozone holds together depends on Bundesbank president Jens Weidmann.

Will he or won't he go along with ECB president Mario Draghi's hint that the ECB is about to purchase more sovereign debt.

Via Google Translate, please consider Everyone looks at Weidmann

Twelve of 26 economists see the probability of a breakup of the euro zone at 20 to 30 percent. From the perspective of ten economists, the risk is ten percent. Anna Grimaldi, the Italian bank Intesa Sanpaolo sees a 40 percent chance and John Greenwood of Invesco investment company rates the probability at 70 percent.

At the other extreme are Anders Matzen at Swedish Nordea Bank, which estimates the probability of survival of monetary union to 95 percent, and Ulrich Kater from Deka Bank who sets the value at 99 percent.

Most economists indicated that they were convinced that the position of Weidmann will be crucial in deciding whether the ECB more than at present to save the euro is taking. "The attitude of the Bundesbank to the program for the purchase of government bonds is more important than their normal attitude to monetary policy, since the program moved to the edge of the contractual mandate," said Torge Middendorf from WestLB.

Not So Simple

Certainly a huge feud between Weidmann and Draghi will not help. However, that is not the only issue. The German supreme court can step in at anytime and demand a voter referendum.

The UK can and probably will single-handily torpedo the treaty changes proposed by Merkel and Sarkozy.

According to the Washington Post, British Prime Minister David Cameron said he did not intend to “pass any powers from Britain to Brussels.” He noted that if the treaty changes suggested by Sarkozy and Merkel require such a transfer, he would have to call a national referendum to approve them.

Will UK voters pass that referendum? I see a zero percent chance of that. Then what?

Please see Eurozone Treaty Changes to be Finalized in March, Then a Vote in May, Then Country-Specific Referendums, Then? for further discussion.

Ireland, Germany, or Finland may also torpedo the agreement.

Moreover, voters in Spain, Portugal, or Greece may eventually (and correctly) say to hell with all this austerity just to pay back French and German banks.

To repeat what I have said several times:

Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

What are the True Odds?

A few months ago, economists would have pegged the probability close to zero percent. The shift of 14 economists to 20% or greater probability is a significant shift in the right direction.

It's important to remember that economists are a perpetually optimistic lot. Ironically, a breakup is likely before economists agree it will happen.

Taking everything into consideration, the probability the Eurozone stays intact is arguably 15 percent at best.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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ECB Ready to Push Boundaries on Interest Rates and Bond Purchases; One Size Fits Italy

Get ready for record low interest rates in Europe as ECB ready to push boundaries of crisis role

A Reuters survey of 73 analysts showed a 60-percent chance the ECB will cut rates by 25 basis points to a record low of 1.0 percent -- a floor it previously reached during the financial crisis in 2009. It cut rates by a similar amount in November.

New ECB President Mario Draghi reinforced expectations for a rate cut last week when he said the bank had a responsibility to ensure inflation did not undershoot its target of just below 2 percent, not just to stop it exceeding it.

Markets have taken it to heart. Three-month Euribor futures -- one of the main gauges of market expectations -- point to rates being be cut this month and then even further.

The case for a cut is supported by the euro zone economy teetering on the brink of recession. With the ECB increasingly concerned about falling consumer prices, further cuts may be in the offing even if the ECB has never cut rates below 1 percent before -- not even after the collapse of Lehman.

Draghi made his comments a day after the world's major central banks took emergency joint action to provide cheaper dollar funding for starved European banks.

This was the latest in a slew of actions aimed at propping up European banks, which are struggling with the fallout from the debt crisis, such as higher capital requirements and rising tension in the interbank money market.

Banks are increasingly turning to the ECB and the recent jump in overnight deposits at the ECB has highlighted the freeze in interbank lending markets.

Sources have told Reuters that the ECB is looking at extending the term of loans it offers banks to 2 or even 3 years to try to prevent the euro zone crisis precipitating a credit crunch that chokes the bloc's economy.

One Size Fits Italy

Under ECB president Jean-Claude Trichet, ECB actions were best described as "One Size Fits Germany and France". Under Draghi, ECB policy has morphed into "One Size Fits Italy".

Central banks say and do what they want when they want. Eurozone inflation remains at 3 percent, for 3 consecutive months. So where did this concern for falling prices come from?

It certainly did not come from Eurozone price data. Rather it came from the desire of Draghi to help Italian bonds. That also explains Draghi's comments to the European Parliament last week, that the ECB could take stronger action to fight the crisis if European leaders agree on tighter budget controls.

Tighter budget controls will not be realistic of course, but the illusion will give Draghi the cover he wants to buy more Italian bonds.

The can-kicking exercise continues. So does the ticking of the clock before the market once and for all decides it has enough of proposals that do nothing.

Mike "Mish" Shedlock
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Eurozone Treaty Changes to be Finalized in March, Then a Vote in May, Then Country-Specific Referendums, Then?

On December 8 Merkel and Sarkozy will have reached a 6-point agreement requiring ratification of a new treaty.

However, details will not be finalized until March. At that time, if all goes to plan (and it won't), a vote by all 27 EU nations will take place. If that fails (and hopefully the UK torpedoes it), various aspects of the treaty might still be ratified by (and apply only to) the 17-member Eurozone nations.

However, fiscal rules will still require individual referendums in Ireland and in my opinion Germany. Got that?

Eurointelligence writes That „comprehensive agreement“ in full

Angela Merkel and Nicolas Sarkozy essentially agreed on the German position. These should be embedded in a New Treaty, and they have asked Herman van Rompuy to put those proposals formally on the agenda for the Dec 8 and 9. Here is a summary of the six most important decisions taken. As so often, the newspapers cover only a short subset.

1. Automatic sanctions. In case of non-compliance with the deficit rule, countries are subject to automatic sanctions, which will require a majority of 85% to overturn.
2. Golden Rule: All EU member states, but in particular the eurozone, should subject themselves to uniform debt limits. The ECJ will adjudicate in case of a dispute, and should have the right to declare national budgets illegal.
3. Private Sector Participation will follow the rules of the IMF. The PSI agreement on Greece remains valid, but is a unique case that should not be repeated;
4. Germany and France want the ESM to start end-2012.
5. The heads of state and government meet once a month as the eurozone’s economic government.
6. There shall be no eurobonds.

These proposals indeed require substantial treaty change, but we are surprised that this could be concluded so quickly, given the necessary procedures, and their own implantation record. A change in the EU treaties would require a convention, unless the European Parliament were to decide to wave its rights in this respect.

Given that these proposals entail a transfer of sovereignty, national referendums in Ireland and possibly other countries may be required. While there are possibilities for the eurozone to adopt its own set of policies, points 1 and 2 (which are the main element of the fiscal agreement) require a full treaty change, to be ratified by all 27 members (even if the provisions are only implemented in respect of the eurozone).

We suspect therefore that Sarkozy agreed to these measure in the full knowledge that this will never be implemented. If you subtract the treaty change proposals, one is left with a shallow agenda.

Also, newspapers reported that Merkel gave up PSI. That is not true. The position is now that the IMF rules will be applied, which are not all that different. CACs will also remain in the ESM treaty.

Shallow Agenda or No Agenda at All?

Ambrose Evans-Pritchard weighs in with Zilch again from Merkozy

No fiscal union, no Eurobonds, no ECB as lender of last resort – yet. Just the usual blather and a revamped Stability Pact (Fiskalunion).

Yawn.

Merkel seems to have backed off on demands that budget breaches will be justiciable before the European Court, so the Treaty chatter is mostly Quatsch, bêtises, and eyewash.

This Merkel climb-down makes it less likely that she will give in on real rescue measures, so why the market exuberance in Italy? Beats me.

Private investors will not have to face further haircuts after Greece (if you believe anything they say on this subject) but that was already the case. Nothing further to add at this stage.

Will 27 Nations Sign on the Dotted Line?

Those treaty changes may sound good on paper, but what is the likelihood these treaty changes pass? The Washington Post chimes in with Sarkozy, Merkel call for new E.U. treaty to address debt crisis

Under growing pressure from nervous financial markets, the leaders of France and Germany reached a difficult compromise agreement Monday to seek mandatory limits on budget deficits among debt-laden European governments.

If adopted by other nations in the union, the deal would mean drastic cuts in European budgets. It would also spell the end of three decades of overspending that helped finance a cozy social protection system envied by much of the world.

Although France and Germany represent the core of the European Union, it is far from certain that the rest of the group’s 27 nations will go along at a crucial European summit scheduled for Thursday in Brussels. The deal could face significant opposition from those reluctant to surrender national sovereignty over fiscal policy.

“This package of measures is a proof of our absolute determination to guarantee a stable euro,” Merkel said at a joint news conference with Sarkozy in Paris.

The Franco-German accord is to be outlined in a letter to E.U. leaders Wednesday and voted on at the special summit conference the next day, making this a make-or-break week for the ideal of European unity. Sarkozy said the hope is that all 27 E.U. nations will adhere to the plan. But he said it could also move forward with consensus from only the 17 countries that have adopted the euro as their common currency.

The swift schedule for the treaty change is unheard of in the history of the European Union, which is notorious for slow-moving bureaucracy and endless bickering among governments at all-night conferences at the union’s Brussels headquarters.

The deficit limits — a “golden rule” of 3 percent of gross domestic product — would be enforced by elected leaders of the European Community acting with a supermajority of 85 percent, according to explanations provided by Sarkozy and Merkel at the news conference. The E.U. leaders would rule on any government cited as overspending by the European Court of Justice, they added.

In a suggestion of the debate still to come, British Prime Minister David Cameron said he did not intend to “pass any powers from Britain to Brussels.” He noted that if the treaty changes suggested by Sarkozy and Merkel require such a transfer, he would have to call a national referendum to approve them.

Would the UK voters agree to this in a referendum? Ireland? Germany? Austria? Netherlands?

I think the answer is no. So what is left in this much ballyhooed great compromise between Merkel and Sarkozy?

Here is the compromise in case you missed it.

• Merkel gets the "no eurobond" position she wants
• Sarkozy gets the "no bondholder haircuts except Greece" position he wants.

This proposal solves absolutely nothing. For some reason the market seems to love "nothing" these days. Don't expect that to last.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Donald Trump's Self-Serving Circus Sideshow; Gingrich Fawns Over Trump; Mish Proposes an Alternative Debate

Donald Trump has invited all the Republican presidential candidates to a debate. Ron Paul and Jon Huntsman promptly and properly turned down the offer.

In contrast, Newt Gingrich, hoping for a Trump endorsement, made a pilgrimage to Donald.

One must understand upfront this is not a gracious offer by Donald Trump to conduct a a fair debate. This is a self-serving promotion by Don Trump, for Don Trump, to put none other than Don Trump into the spotlight as kingmaker.

In Response to Trump's Offer Ron Paul's campaign chairman said “The selection of a reality television personality to host a presidential debate that voters nationwide will be watching is beneath the office of the Presidency and flies in the face of that office’s history and dignity.

Mr. Trump’s participation as moderator will distract from questions and answers concerning important issues such as the national economy, crushing federal government debt, the role of the federal government, foreign policy, and the like. To be sure, Mr. Trump’s participation will contribute to an unwanted circus-like atmosphere".

Ron Paul Jabs Trump

The Huffington Post reports Ron Paul Jabs Donald Trump: 'I Didn't Know He Had The Ability To Anoint People'

"I don't understand the marching to his office. I didn't know he had the ability to lay on hands and anoint people," said Paul on CNN's "State of the Union."

The row between the two began when Paul announced he'd be boycotting the Dec. 27 GOP presidential debate because Trump was chosen to moderate it.

Paul's position in the race seems to be on the rise. A Des Moines Register poll found Paul pulling ahead of Mitt Romney in Iowa, securing the second place spot behind Newt Gingrich.

Matt Dowd, former campaign strategist for President George W. Bush, recently said he would not be at all surprised if Paul wins the Iowa caucuses.

Gingrich Fawns Over Trump

There is only one candidate that has sucked up to Trump's self-serving offer. That person is Newt Gingrich.

Please consider Republicans Critical of Trump Debate

Republican strategists on Monday bemoaned the prospect of a presidential debate hosted by Donald Trump even as Newt Gingrich, surging in recent polls, made a pilgrimage to see Mr. Trump, a billionaire real estate mogul and reality TV star.

Mr. Gingrich arrived Monday at Trump Tower in New York to a crush of media, the latest Republican presidential candidate to court Mr. Trump. Mitt Romney, the former governor of Massachusetts, and other candidates have also made the trip.

“Donald Trump is a great showman,” Mr. Gingrich told reporters after his closed-door meeting.

Mr. Gingrich has accepted an invitation by Mr. Trump to participate in a debate days before the Iowa caucuses on Jan. 3. But leading Republican strategists and campaign officials on Monday condemned a Trump-moderated debate as a spectacle that would do more harm to the party than good.

Mr. Trump grabbed headlines this year by seizing on the “birther” issue, questioning where President Obama was born, and he continues to dangle the idea of an independent bid for the White House next year.

Karl Rove, the former political adviser to President George W. Bush, railed against the idea of a debate hosted by Mr. Trump. In an appearance on Fox News on Monday, Mr. Rove called on Reince Priebus, the chairman of the Republican National Committee, to put a stop to the debate.

“What the heck are the Republican candidates doing showing up at a debate with a guy who says ‘I may run for president next year as an independent,’” Mr. Rove said. “I think the Republican National chairman ought to step in and say we strongly discourage every candidate from appearing.”

Mish Proposes an Alternative Debate

There is no need to stop the Trump circus. Let Gingrich go. If Romney wants to go too, let him. The two can debate to their heart's content with a Circus-Clown Pseudo-Republican "Great Showman" as the moderator.

Meanwhile, let's have another debate without distractions like Don Trump. More importantly, let's have a real debate without distractions like Newt Gingrich and any other Republican fools willing to fawn all over Don Trump as if Trump's "power to anoint" was worth a plug nickel.

Hello News Organizations...

Is there any news organization willing to sponsor an alternate debate, a real debate, preferably one that gives equal response time to candidates Ron Paul and Jon Huntsman?

After all, Paul and Huntsman are the only candidates with enough common sense to see what the proposal by Trump is really all about, and promptly decline the offer.

Also note that both Paul and Huntsman, unlike the other candidates have put forth serious economic proposals. Moreover, neither is likely to start another major war.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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S&P Places 15 Eurozone Countries, Including Germany and France, on Credit Watch Negative

In a move sure to antagonize EU officials the S&P put 15 Eurozone countries on "Credit Watch Negative".

The ratings agency placed the ratings of 15 euro zone countries, including top-rated nations Germany and France, on credit watch negative -- a move that signals a possible downgrade in no later than three months.

S&P said, however, it expects to conclude its review "as soon as possible" following this week's summit of EU leaders on Friday.

The action was "prompted by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole," the ratings agency said in a statement.

There are 17 Eurozone nations and Greece is already rated CC (near-default). Given that Cyprus was downgraded recently, this is an effective downgrade of every country in the Eurozone.

Expect France to bitch loudly tomorrow.

Mike "Mish" Shedlock
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Decade-Long European Recession Coming Up; Reflections on the Un-Level Playing Field

If French president Nicolas Sarkozy gets his wish to "Level the Playing Field" on sovereign bonds, a decade-long European recession is on its way.

French President Nicolas Sarkozy made it clear in a speech in Toulon last week that he wanted the private sector to be given a more-level playing field when it came to the threat of having to bear losses on their investments.

He said Greece, where there have been drawn-out negotiations between the government and the private sector over how much of a hit banks and insurance companies should take under a debt restructuring, should be a unique case.

"It must be clear that what has been done for Greece, in a very particular context, will not happen again, that no other state in the euro zone will be put into default," he said.

"It must be absolutely clear that in future no saver will lose a cent on the reimbursement of a loan to a euro zone country."

Reflections on the Un-Level Playing Field

What could possibly be more un-level than guaranteeing banks and bondholders will never take losses? When there are more losses, and there will be, the only way to guarantee banks do not take them, is to have someone else take them, namely taxpayers.

While pondering that, take look at the action in Portuguese bonds.

Portugal 10-Year Government Bonds



Portugal 2-Year Government Bonds



Do either of those charts suggest there will be no more losses? If there are, who will pay them?

If Sarkozy gets his wish, taxpayers, not bondholders will pay the price.The same holds true for Ireland, Spain, Belgium, and Italy.

The only true way to level the playing field is to make banks and bondholders who take foolish risks to pay the price for their foolish actions.

Monti's "Save Italy" Package Sure to Cause "Super Recession"

Yesterday I wrote Monti's "Save Italy" Package Sure to Cause "Super Recession"

Super Mario has a five-point plan to "Save Italy".

1. Raise more than 10 billion euros from a new property tax
2. Impose a new tax on luxury items like yachts
3. Raise value added tax
4. Crack down on tax evasion
5. Increase the pension age

The above package was dubbed the "Save Italy" package by Prime Minister Mario Monti. Supposedly it will boost growth.

While I agree pension reform is much needed, there is not a single thing in the package to boost growth. Italy is in recession. Raising taxes in a recession is the last thing you want to do, yet four of Monti's five ideas raise taxes.

This proposal may temporarily placate the bond market, but Italy is headed for one "super recession" if Mario's mix of idiotic tax hikes passes. Instead, Italy needs to cut wasteful government spending and lower taxes.

For there to be no more losses, we will need still more austerity measures in France, Spain, Portugal, Italy, Greece, and Germany.

Spanish unemployment is 22.6%, a 15-year high. Greek unemployment is a record 18.4%. What will more austerity measures do and what will cramming losses on taxpayers do to those rates?

The EU needs to reflect on the consequences of Sarkozy's ludicrous proposal to "un-level" the risks on piss poor lending decisions.

Two Consequences In Order

1. Europe will slide into a multi-year recession
2. Voters in Greece, Spain, Portugal (likely all) will have had enough

Then .... Eventually, Will Come a Time When ....

Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

Mike "Mish" Shedlock
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Daily Show on "Free Money"

Jon Stewart on the Daily Show went after the Bernanke Fed last week following the disclosure by Bloomberg of $7.7 trillion lent to US banks on which they made billions of dollars in profit, at no risk.



Link is video does not play: Secret TARP program explained

For more facts on which banks were involved and to what extent, please see Banks Make $13 Billion on $7.7 Trillion in Secret Fed Loans; SEC Stands by Does Nothing.

The most puzzling aspect about the Bloomberg revelation is why there is not more public ire against Congress, the Fed, and banks over this.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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After Two Horrendous Articles, Ambrose Evans-Pritchard Back on Track: "Germany is the Ultimate Victim of EMU"

I took Ambrose Evans-Pritchard to task twice recently, primarily for making monetary proposals claiming central banks could print their way out of this economic mess but also for unwarranted attacks on Germany.

My friend Pater Tenebrarum has done the same. Here are a few articles.

Mish: Has Ambrose Evans-Pritchard Lost His Mind?

Mish: We Must Crush Ambrose Evans-Pritchard, Nouriel Roubini, Martin Wolf, the Army of Krugmanites into Submission; Reflections on "Dangerous and Insane"

Pater: Central Banks and Monetary Cranks

Pater: The ECB and ‘Balance Sheet Recessions’

Here are a few snips from Pater's Balance Sheet Recession link above.

If government debt is at some point monetized on a grand scale, there will eventually also come a point when the demand for money is overwhelmed by the increase in its supply. The supporters of money printing, such as e.g. Ambrose Evans-Pritchard, who has just penned another screed calling for ECB intervention, seem oblivious to this fact. Even if they are not au fait with economic theory, they should at least not pretend that Weimar never happened. After all, what is the central bank supposed to do when the effects of its intervention wear off, as they invariably do? Why, print more of course – until the bitter end, one presumes.

In addition, these ex-post rationalizations (which basically assert that 'now that we're in crisis we have to do what normally would be an error') always avoid discussing why we have arrived at the point of crisis in the first place. It was after all the credit expansion of the fractionally reserved and central bank-backstopped banking system that has been the root cause of the boom and bust. It is not enough to just say that the euro has 'design flaws' (even though that is quite correct). Its major design flaw is that plaguing all modern fiat monies.

The question in the end comes always down to whether one wants to take the losses as soon as possible and begin again with a clean slate, or whether one wants to delay the day of reckoning by doing again – and usually on a bigger scale – what has led to the crisis in the first place. The choice is always between short term pain in exchange for long term gain or the avoidance of short term pain in exchange for long term misery.

Why everyone seems to favor taking the path to long term misery remains a mystery to us. As we keep saying, the focus, especially in Europe, should be on how to revive the currently taxed-and-regulated-to-death entrepreneurial spirit. In the end, only a resumption of genuine wealth creation can solve the economic problems of the region. This requires that the market economy be freed to do what it does best. Printing more money is not going to help this process.

I have also commented many times previously on how Koo has learned nothing in 20 years. The lesson of Japan is not what Koo suggests (more firepower), but rather forcing banks to take writedowns.

The amazing thing about the Japanese situation is that Greenspan and Bernanke both made statements that Japan should write down bad debts, but when the US faced the same situation, Bernanke not only did the opposite, but now says that letting Lehman collapse was his biggest mistake.

Excuse me! Letting Lehman collapse was the only thing Bernanke did correct. I might also point out the world did not end. Anyway back to Pritchard.

Ambrose Evans-Pritchard Back on Track

Please consider Germany is the ultimate victim of EMU by Ambrose Evans-Pritchard.

Ambrose: Enough is enough. Please stop defaming Germany out there in the blogosphere.

Mish: Since Ambrose cannot not mean me, perhaps he means himself. Regardless, I certainly agree.

Ambrose: The German people entered monetary union for honourable motives, believing they were acting as good Europeans. It is excruciating for them to see those Athens banners in Syntagma Square showing Chancellor Angela Merkel wearing the Swastika, or read that sign “Arbeit Macht Frei”.

They gave up the D-Mark reluctantly under French and Italian pressure, as the price for acquiescence in Reunification.

They entered EMU at an overvalued rate after the Reunification bubble, leaving them in semi-slump for half a decade. They slowly clawed back competitiveness the hard way, by squeezing wages and driving up productivity.

It is entirely understandable that they now think Club Med can and should do the same. (They are profoundly wrong, of course, because Germany was able to lower relative wages during a) a global boom, b) against other EMU states that were inflating c) and with benchmark borrowing cost that stayed low even during the dog days. None of these factors apply to Italy or Spain now. But this is hard to explain this to the man or woman on the Berlin tram.)

Mish: I am in general agreement.

Previously I wrote "Pritchard clearly has it in for Germany. Why I do not know."

The above article shows otherwise. However, many people emailed in agreement. Will the above article change perceptions? Perhaps not. Pritchard has been a big German basher recently.

Pritchard: She [Merkel] is entirely right in one sense to continue ruling out Eurobonds as “unthinkable” under current structures, and a violation of German constitution, but that is not really an answer to the historical challenge that she faces in late 2011.

Germany cannot unwind the clock. It did take the fateful step of joining monetary union, and from that awful error follows a string of strategic imperatives.

As the wise professors warned at the time, EMU would lead ineluctably to full fiscal union because an orphan currency would not endure without an EU Treasury and government to back it up, but it would a fiscal union accountable to nobody, because no European democracy exists, or can exist.

It would lead to debt pooling and shared budgets.

It would lead – fatally – to loss of the Bundestag’s sovereign powers to tax and spend. The core functions of parliament would slip away to EU mandarins.

It would lead to the emasculation of Germany’s exemplary post-War democracy.

It would lead in essence to the abolition of Germany as a nation state, even if the window flowers remained in place.

All else was illusion and wishful thinking.

Mish: Precisely. And as I have asked before, Who made the rules? Whose fault is it that Germany was pressured to join the Euro? Did the 17 countries know the rules when they joined? Whose fault is it that 17 countries joined? 

To partially answer the first question Jean-Claude Trichet was one of the architects. Perhaps we should blame France.

Here are a couple of interesting European Monetary Union References to further assist in placing blame:

Otmar Issuing, Chief Economist of the German Bundesbank Council, 1991: "There is no example in history of a lasting monetary union that was not linked to one State."

John Major, British Conservative politician, Prime Minister 1991-1997, widely viewed as a failure and famous mainly for calling Eurosceptics bastards and shagging Edwina Currie. November 1996: "A single currency is about the politics of Europe. It is about a Federal Europe by the back door."

Perhaps we should place some blame on John Major and the UK.

How about this quote?

Romano Prodi, EU Commission President [an Italian Statesman]. Interview in the Financial Times, April 1999: "[My] real goal [is to draw on] the consequences of the single currency and create a political Europe."

Yes, indeed. The REAL GOAL was a political Europe that the German people did not want!

What else did Prodi say?

Romano Prodi, EU Commission President, speech to European Parliament, 13th October 1999: "We must now face the difficult task of moving forward towards a single economy, a single political entity... For the first time since the fall of the Roman Empire we have the opportunity to unite Europe."

Romano Prodi, EU Commission President. Financial Times, 4 December 2001: "I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created."

Here is one from Wim Duisenburg, President of the European Central Bank. Date uncertain. Note the choice of words "was always meant to be", which communicates a false inevitability: "The process of monetary union goes hand in hand, must go hand in hand, with political integration and ultimately political union. EMU is, and always was meant to be, a stepping stone on the way to a united Europe."

The idea the Euro is a German hatched plot to control Europe is patently false. Most German citizens (though unfortunately not all German politicians were extremely leery of a fiscal union and loss of sovereignty which is precisely why they insisted on a set of exact controls in the Maastricht Treaty to prevent the formation of a fiscal transfer union.

Pritchard: That is what monetary union always meant and means now, though the trick being played on Europe’s citizens was fudged by dishonest treaties, themselves dishonestly ratified.

It is why so many of us on this side of the Ärmelkanal have fought tooth and nail for twenty years to stop Britain being subsumed into this plaything of unaccountable elites, this Project so profoundly threatening to our self-government and constitutional order.

Mish: "dishonest treaties, themselves dishonestly ratified"

Hello Ambrose - you are 100% correct. So why the hell did you throw that all away with two recent articles? How about taking them back, right here, right now?

Ambrose: But this is where Germany now is. It must either immolate itself and dismantle the Bismarckian state for the cause of EMU, or prepare to finance an orderly withdrawal from monetary union (with the Finns, Dutch, and Austrians) so that the South can breathe again and hope to recover.

That is the choice. All else is can-kicking, denial, obfuscation, muddle, and self-delusion. As is now becoming obvious, the failure to resolve the matter one way or the other is becoming a danger to the global financial system. It threatens to uncork a global depression. Germany must at last decide.

It is a horrible choice. My sympathies go to the German people who were never given a vote on this ensnarement and infeudation of their peaceful country, and who were egregiously deceived by their own leaders, and who cannot now begin to understand why they suddenly are target of such furious and venomous global criticism.

The Germans too are victims of this ruinous project, the greatest victims of all. Their elites have led them into a diplomatic and economic Stalingrad.

Mish: Exactly!

All else, including Pritchard's horrendous idea You are all wrong, printing money can halt Europe's crisis is an exercise in can-kicking!

Ambrose, we both know Germany is going to pay a price. Indeed every country in Europe is going to pay a price, even the UK.

The idea is to make that price as small as possible. To do that we need an orderly (as orderly as possible) breakup of the EMU. The UK can help.

UK Should Exit the EU

The UK can start the ball rolling in the proper direction by exiting the EU. Why should UK citizens pay through the nose for inane trade regulations especially on agricultural goods?

The UK needs to send a statement that it has had enough. If France wants protectionist agricultural policies then France, not the UK should suffer the consequences.

Those who do not know what I am talking about can find a nice example in UK facing £20m garlic tax bill

The UK Government has received a European Commission ultimatum to hand over £20 million within two months or face legal action. The wrangle is over the fact that import tariffs on frozen garlic from outside the EU are lower than the rates for fresh garlic. And, according to the Commission, UK authorities carelessly levied the lower rate applicable to frozen garlic on imports of the fresh product from China, in breach of EU customs rules.

A Commission statement explained: "Between 2005 and 2006, the UK customs authorities allowed imports of fresh garlic from the People's Republic of China under wrong authorising documents. They have erroneously stated that the goods imported were frozen garlic for which significantly lower import duties apply.

Why put up with this? What on God's green earth does the UK get for these endless regulations other than higher prices and direct subsidies to French farmers?

John Law Mississippi Bubble

I also need to point out one major historical item that Pritchard seems to have forgotten about when he proposed his can-kicking printing solution. I invite everyone to read about John Law and the Mississippi Bubble: 1718-1720.

In 1716 Law convinced the French government to let him open a bank, the Bank Generale, that could issue paper money, or bank notes. The paper notes would be supported by the bank's assets of gold and silver and would circulate as a medium of exchange. Paper money was a new concept for the French; money to them was silver and gold. Law believed that paper notes would increase the money in circulation, which, in turn, would increase commerce. These conditions would help revitalize and rehabilitate the finances of the French government.

Please read the article to see how printing paper money to revitalize the French economy ended.

Germany Needs to Exit EMU

The best solution for the EMU is for Germany to leave. If France wants the Euro it can have it. Let France have the ECB and let France print if it wants to. Perhaps the result will be better than last time.


Regardless, It will be far less disruptive for Germany to leave than for Greece, then Portugal, then Spain to leave.

Either way, German banks take a hit. So do French banks and any banks in general holding debts in Euros. However, the Deutschmark would be a credible currency right off the bat.

That makes it less disruptive for Germany to leave rather than Greece, Portugal, and Spain to leave. Those countries have no credible currencies to go back to.

Please see Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied) for further discussion of why things are better if Germany leaves rather than a piecemeal breakup.

Reflections on Credibility

We need to discuss Eurozone breakup ideas, not mindless printing schemes that will do nothing but kick the can down the road, bailing out the banks, and leaving the taxpayers saddled with the debt or the inflation (or both).

Pritchard lost a lot of credibility in those two recent articles I blasted. His latest article, referenced above helps, but a complete retraction of his can-kicking monetary printing proposal would help even more.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Monti's "Save Italy" Package Sure to Cause "Super Recession"

Super Mario has a five-point plan to "Save Italy".

1. Raise more than 10 billion euros from a new property tax
2. Impose a new tax on luxury items like yachts
3. Raise value added tax
4. Crack down on tax evasion
5. Increase the pension age

The above package was dubbed the "Save Italy" package by Prime Minister Mario Monti. Supposedly it will boost growth.

While I agree pension reform is much needed, there is not a single thing in the package to boost growth. Italy is in recession. Raising taxes in a recession is the last thing you want to do, yet four of Monti's five ideas raise taxes.

This proposal may temporarily placate the bond market, but Italy is headed for one "super recession" if Mario's mix of idiotic tax hikes passes. Instead, Italy needs to cut wasteful government spending and lower taxes.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Detroit Poised for Hostile Takeover by State of Michigan; What Needs to Be Done to Fix Detroit

Detroit Mayor Dave Bing is upset about a possible takeover by the state. Bing says "We know what needs to be done, and we stand ready to do it."

I have a simple suggestion for Bing don't "stand ready to do it, just do it". Indeed he has had years to "just do it" yet hasn't done it.

Please consider Detroit in a hostile takeover bid?

The idea is extreme, even in a city accustomed to fighting for survival: Should the state of Michigan step in to run Detroit?

The governor has taken steps in that direction, proposing an unprecedented move that could give an appointed manager virtually unchecked power to gut union contracts, cut employee health insurance and slash services. But city leaders bristle at the notion. Said the mayor: "This is our city. Detroit needs to be run by Detroiters."

If it happens, Detroit would be the largest American city ever taken over by a state. Michigan has seized control of smaller struggling cities, but until now Detroit was always off-limits.

That changed this week, when Republican Gov. Rick Snyder's administration said it would begin a review of Detroit's precarious finances. If the governor concludes that the city's economic situation constitutes an emergency, he could dispatch a manager who could push the mayor and city council to the sidelines.

Democratic Mayor Dave Bing says Detroit doesn't need the help. He insists the city is reducing a $150 million budget deficit and easing cash-flow problems on its own.

"We know what needs to be done, and we stand ready to do it," an indignant Bing said.

"It terms of a city, I think Detroit stands alone," said Michael LaFaive, director of fiscal policy at Michigan's Mackinac Center for Public Policy, a nonpartisan group that espouses free markets.

An emergency financial manager would have the power to privatize utility departments, as well as the bus system and other agencies. A manager also could sell off city-owned parking lots and even Belle Isle, Detroit's popular island park, LaFaive said.

In a 2001 report, LaFaive wrote about Detroit's burgeoning fiscal problems and recommended privatization, contracting out services and ways to generate revenue.

"I think they knew what the recommendations were, but their hands were tied a bit by recalcitrant employee unions," LaFaive said. "Those kinds of bold reforms would be difficult to get over with the city council or voters, in general."

Last month, Bing declared the city government "broken" and said the public's checkbook would be short by $45 million next year unless Detroit starts saving money fast. In an attempt to ward off an emergency manager, he proposed laying off 1,000 employees — 9 percent of the workforce — and negotiating 10 percent pay cuts with unions.

Bing Hasn't Done It Because He Can't

Union rules and contracts prevent Bing from doing what needs to be done. Moreover, I doubt he would do it even if he could.

Last month Bing declared city government "broken".

Sheeesh. Detroit has been broken and bankrupt for years, decades probably, but certainly for the entire time Bing has been mayor.

I have written about Detroit on many occasions.

June 12, 2009: Median Home Prices In Detroit Fall To $6,000

Although I am a deflationist, I must admit surprise that the median home price in Detroit has fallen to a stunningly low $6,000.

July 11, 2009: Detroit Public School System Ponders Bankruptcy

Freep is reporting the Detroit Public School System May Wind Up In Bankruptcy.

July 24, 2009: Detroit Heads For Bankruptcy; 50 Cities Must "Shrink to Survive"

For Detroit, as with GM, bankruptcy has always been a question of when, not if. Detroit's time is nearly up even as Mayor Dave Bing says I’m fighting to keep city from going broke.

April 6, 2010: Detroit Bankruptcy Looms with Deficit of $446 Million in Budget of $1.6 Billion

Detroit has hit the end of the line. It's budget deficit is between $446 million and $466 million (28% to 29%) of $1.6 billion with few ways other than drastic cuts in wages and benefits to address the problem. If unions will not give in (and they won't), Detroit Faces Bankruptcy.

December 13, 2010: Detroit Mayor Plans to Halt Garbage Pickup, Police Patrols in 20% of City

Detroit has been bankrupt for years. It simply refuses to admit it. Detroit's schools are bankrupt as well. A mere 25% of students graduate from high school.

Yet, in spite of hints and threats from mayors and budget commissions, and in spite of common sense talk of bankruptcy, Detroit has not pulled the bankruptcy trigger.

In a futile attempt to stave off the inevitable one last time, Mayor Bing's latest plan is to cutoff city services including road repairs, police patrols, street lights, and garbage collection in 20% of Detroit.

Bing to Cede 20% of Detroit to Gangs and Homeless

City officials suggest this will not shrink the size of the city. Perhaps it won't shrink Detroit on Google Maps. However, Bing's plan would effectively surrender 20% of the city to gangs and the homeless.

Would you want to live in one of the gang war-zones that his plan would create? Would you want to live in a bordering neighborhood or in a bordering city?

Regardless of your answer, Bing's plan cannot and will not work and I believe Detroit will, sometime in 2011, file for bankruptcy.

Repurpose or Abandon?

Of course the Mayor's office did not say they would abandon sections of the city to gangs. But how the hell can repurposing as described above possibly mean anything else?

What's next? Barbed wire? Oh wait a minute, Detroit already has tried that. Razor-wire too. Here's a picture of Detroit's clearly abandoned repurposed Michigan Central Train Depot.



Image courtesy of the Journal and the AP.

November 16, 2011: Detroit May Run Out of Cash Next Month, Unable to Meet Payroll, Situation Worse than Reported

Michigan Live reports Detroit could run out of cash in December, plan must include layoffs

Enough Already!

Will someone, anyone please put Detroit out of its misery. Bing cannot do it. Only a complete overhaul stands a chance.

What Needs to Be Done

• Privatize  all city services
• Outsource the entire police department to the local sheriff's association
• Void all union contracts
• Renegotiate union pensions
• Establish charter schools
• Merit raises for teachers
• Fire Bing and his entire staff

It will take a hostile takeover and very tough positioning by Republican Governor Rick Snyder. He has the votes. Does he have the political courage?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Banks Make $13 Billion on $7.7 Trillion in Secret Fed Loans; SEC Stands by Does Nothing

On November 27, Bloomberg reported Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

$7.77 Trillion

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

Citigroup, Bank of America, RBS, Wells Fargo Top Recipients

The Bloomberg article has a nice interactive graphic that details how much each bank profited.

Citigroup made $1.8 Billion, Bank of America made $1.5 billion, Royal Bank of Scotland made $1.2 Billion, and Wells Fargo made $878 million. Those are the top four.

SEC Stands by Does Nothing

Yesterday, Gretchen Morgenson at the New York Times commented on the Bloomberg report in Secrets of the Bailout, Now Told

A  FRESH account emerged last week about the magnitude of financial aid that the Federal Reserve bestowed on big banks during the 2008-09 credit crisis. The report came from Bloomberg News, which had to mount a lengthy legal fight to wrest documents from the Fed that detailed its rescue efforts.

It is dispiriting, of course, that we are still learning about the billions provided to various financial firms during the crisis. Another sad element to this mess is that getting the truth requires the legal firepower of an organization as rich as Bloomberg.

During the first three months of 2009, for example, when Citigroup’s Fed borrowing apparently peaked, Vikram Pandit, its chief executive, hailed the company’s performance. Calling that first quarter the best over all since 2007, Mr. Pandit said the results showed “the strength of Citi’s franchise.”

Citi’s earnings release didn’t detail its large Fed borrowings; neither did its filing for the first quarter of 2009 with the Securities and Exchange Commission. Other banks kept silent on these activities or mentioned them in passing with few specifics.

These disclosure lapses are disturbing to Lynn E. Turner, a former chief accountant at the S.E.C. Since 1989, he said, commission rules have required public companies to disclose details about material federal assistance they receive. The rules grew out of the savings and loan crisis, during which hundreds of banks failed and others received government help.

Given these rules, Mr. Turner said: “I would have expected some discussion in the management discussion and analysis of how this has had a positive impact on these banks’ operating results. The borrowings had to have an impact on their liquidity and earnings, but I don’t ever recall anybody saying ‘we borrowed a bunch of money from the Fed at zero percent interest.’ ”

“These banks and the Fed have never believed in transparency,” Mr. Turner said. “I actually think their thought process is sorely flawed. If the banks knew this stuff was going to be made public they’d behave differently. Instead of runs on the bank you’d have bankers doing things intelligently to avoid getting into trouble.”

What an idea!

Yes indeed. What an idea. Unfortunately there are two sets of rules, one set for big financial players and another set for everyone else.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Commerzbank Desperately Needs Money; Der Spiegel Reports "Germany Considers Nationalization of Commerzbank"; First of Many Nationalizations

Via Google Translate [with some minor tweaks by me where obvious], Spiegel Online reports Federal Government is considering nationalization of Commerzbank

After the end of 2008, the institute plunged into the vortex of the financial crisis and needed financial assistance. The federal government holds 25 percent plus one share. Germany wanted Commerzbank CEO Martin Blessing to be independent again as quickly as possible . But now SPIEGEL reports information the contrary, that the federal government does not rule out the nationalization of Commerzbank.

If Commerzbank, the second largest German bank does not manage to get hold of enough capital by next summer, Germany will resume the Berlin bank rescue fund Soffin and take on additional shares according to government sources.

Commerzbank Desperately Needs Money

In a separate article Spiegel Online reports Commerzbank considers selling daughter bank € Hypo

Commerzbank desperately needs money in order to guard against the debt crisis in Europe. Now the bank is considering, according to a newspaper report, to sell his daughter € Hypo - to the state. In the deal, the bank would have suffered a considerable loss.

Frankfurt - The tougher capital requirements of European Banking Supervisors, Commerzbank EBA could move to a sale: The bank is considering a report from the "Financial Times Germany" According to cede their property financier Hypo € at a loss to the state. The money would house the gap to nine percent core capital, reduce the EBA demands from next year. In addition, Commerzbank would prevent the EU Commission to initiate a re-aid procedures.

The bank missing about three to five billion euros in order to meet the requirements of the EBA, as was recently announced. The real estate financier, who is otherwise deficient, does not belong anyway more to the core business of Commerzbank Chart show . In addition, a sale would reduce the balance of the institute. By the end of 2014, it must repel the daughter anyway, to meet EU requirements for assistance during the financial crisis.

First of Many Nationalizations

Should Commerzbank be nationalized, it will likely be the first of many major nationalizations.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Earnings Outlook Deteriorates Rapidly; Reduced Forecasts Greatest in 10 Years; Don't Worry Companies Will Still "Beat the Street"

In a game of "beat the street" companies and analysts are busy downgrading corporate earnings. By the time earnings are reported, companies will "beat the street" on those carefully downgraded estimates.

Please consider Earnings outlook may be deteriorating rapidly

Earnings season is just over a month away, but the early signals are not comforting.

Companies cutting forecasts outpace those raising estimates by the greatest ratio in 10 years, and some sectors, such as materials, have seen a dramatic fall in expectations for the soon-to-be ended fourth quarter, according to Thomson Reuters data.

It is a stark reminder that even as U.S. economic data has improved in recent weeks, the euro zone debt crisis and concerns about slowing growth in China still cast a long shadow.

Estimates for fourth-quarter S&P earnings growth have tumbled over the past two months as global macroeconomic headwinds prompted analysts to slash forecasts.

According to Thomson Reuters, 88 S&P companies have issued negative earnings preannouncements for the fourth quarter, compared with 25 positive announcements, creating a ratio of 3.5, the largest since the second quarter of 2001.

Don't Worry Companies Will Still "Beat the Street"

On August 17, 2011 I wrote Earnings Collapse Coming Up; Don't Worry Companies Will Still "Beat the Street"; Value Traps and Road to Ruin

Of all the inept reasons to be bullish about equities, "beat the street" hype is near the top of the list. The fact is, in aggregate, ever since Reg-FD (full disclosure) companies always beat the street.

In Surprising Optimism in Face of Weekly Global Equity Carnage; Foolish Comments of the Day; "Beat the Street" Bullsweet I noted nearly every quarter, even in 2008 and 2009 the majority of firms beat estimates. Here is the way the process works:

• Corporations give analysts "tips" regarding profit expectations.
• Those profit expectations are purposely low.
• Wall Street analysts lower estimates, if necessary, as the quarter progresses such that corporations can "beat the street".
• If corporations are going to miss and need an extra penny, they change tax assumption or make other "one time" adjustments as necessary.
• Corporations beat the street by a penny with "pro-forma" (after adjustment) reporting.

Percentage of Companies that "Beat the Street"



click on chart for sharper image

The last time companies failed to "beat the street" was third quarter of 1998. At the earnings trough in third quarter of 2008, 58% of companies in the S&P 500 still managed to "beat the street".

The above chart from Understandings Earnings Estimates by James Bianco on the Big Picture Blog.

Christmas sales may be up, but what about profits? It is taking bigger and bigger discounts to excite customers.

Car sales are up, but it is important to note that shipments to dealers are counted as "sales". Dealer inventories are at record highs. It will take discounts to move them.

Employers are generally running pretty lean as hiring sure did not pick up. Reduced sales and reduced margins will also cut into profits unless employers shed more workers.

Higher energy prices will take a toll unless companies can pass along the costs. Here's a hint: most can't. There is little pricing power anywhere. But hey, don't worry. Companies will beat the street. They have every quarter since 1998.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Cain Throws in the Towel; Gingrich's Serial Hypocrisy is Embarrassment to Republican Party; Ludicrous GOP Get-Tough Talk; Time for Romney and Gingrich to Step Aside as Well

Herman Cain has "Suspends Presidential Campaign" which is a polite way of saying "I Quit".

Republican Herman Cain suspended his campaign Saturday, saying that allegations of sexual harassment in the workplace and an extramarital affair have “sidetracked and distracted” a run for the White House.

The accusations of personal misconduct, which he repeatedly denied, “had a tremendous painful price on my family,” he said.

But while he added that he has “made mistakes,” Cain insisted he’s “at peace” with his God, himself and his wife, who was on stage at the event.

Newt Gingrich, who has recently emerged as the current leader in some polls, lauded Cain for “for having the courage to run and for having the courage to have big ideas,” Newsday reports.

The former Speaker of the House added that he “appreciates why under the current circumstances, he decided to go back to being a private citizen.”

Newt Gingrich: Serial Hypocrisy

Given the steady beat of Gingrichs's hypocrisy, Newt should throw in the towel as well. Please play the following short video.



Gingrich Willing to Lobby for Anything for a Price

The New York Times reports Gingrich Gave Push to Clients, Not Just Ideas

Newt Gingrich is adamant that he is not a lobbyist, but rather a visionary who traffics in ideas, not influence. But in the eight years since he started his health care consultancy, he has made millions of dollars while helping companies promote their services and gain access to state and federal officials.

Ludicrous GOP Get-Tough Talk

Peggy Noonan at the Wall Street Journal writes discusses the A Kettle of Hawks

We have a projected deficit over the next 10 years of $44 trillion. A group of Democrats and Republicans on Capitol Hill were charged with coming up with $1.2 trillion in cuts. Just 1.2 out of 44. Not that hard. And they couldn't do it.

To the Republicans, who met in debate Tuesday night in Washington. A note on the presentation of the debate itself. The videos each cable outfit now makes to introduce each debate have taken on a weird, hyperventilating tone. Tuesday's theme-setter included bombs dropping, jets roaring, presidents sweating, machine guns, screaming dictators, explosions and street demonstrators. Then, in urgent and dramatic tones: "The Republican National Security Debate begins—now." Guys, get a grip. Republican National Committee, start asking to OK the videos beforehand. This is a major-party nomination for the presidency, not a trailer for "Homeland."

Here are just a few phrases and sentences that were lobbed about for two hours. "Protect ourselves from those who, if they could, would not just kill us individually but would take out entire cities," "expanded drone campaign," "they can't be trusted," "strong special forces presence," "hot pursuit," "slapped new sanctions," "no-fly zone over Syria," "nuclear weapon in one American city," "break the Iranian regime," "sabotaging the oil refinery," "crippling sanctions," "centrifuges spinning," "covert actions within Syria to get regime change," there is an "imminent threat" in Latin America, "we have been attacked," "doctrine of appeasement."

At one point Wolf Blitzer asked Newt Gingrich: "Would you, if you were president of the United States, bomb Iran's nuclear facilities to prevent it from becoming a nuclear power?"

Messrs. Blitzer and Gingrich, longtime Washington insiders, live in a cultural cosmos in which things like this are chattered about with no more sense of import than if they were talking about the Redskins. In fact it's exactly what they talk about after they talk about the Redskins game. But should we be discussing those things so blithely and explicitly in such a public way? You have to wonder what the world thinks when it hears such talk—and the world is watching.

It would have been nice to hear one of the candidates say, "You know, Wolf, I'm not sure it's a good idea to talk the way we're talking at a time like this, with the world so hot and our problems so big. Discretion isn't cowardice, so let me give you the general and overarching philosophy with which I'd approach these challenges, and you can infer from it what you like. I prefer peaceable solutions when they are possible. I think war is always a tragedy, sometimes necessary, sometimes even inevitable, but always tragic, and so I don't speak lightly or blithely of taking up arms . . ."

By the end, some of what was said sounded so dramatic that Ron Paul seemed like the normal one. He very much doesn't want new wars or new military actions. This is not an unreasonable desire! Jon Huntsman was normal too. They both seemed to think our biggest foreign-policy challenge is the American economy, which pays for our arms and diplomacy but has grown weak. It has to be made stronger, because without it we can afford nothing.

The tone of the debate seemed to me another example of the perils of Republo-world, where politicians, consultants and policy professionals egg each other on in hopes of reaching the farthest points of the base.

On Foreign Policy, Ron Paul Is More Mainstream Than His Opponents

The Atlantic reports On Foreign Policy, Ron Paul Is More Mainstream Than His Opponents

In Peggy Noonan's latest column, discussed here by my colleague James Fallows, the Wall Street Journal columnist responds to the most recent GOP foreign policy debate by remarking on its bellicosity. "By the end, some of what was said sounded so dramatic that Ron Paul seemed like the normal one," she wrote. "He very much doesn't want new wars or new military actions. This is not an unreasonable desire!"

It's good to see an establishment columnist coming around to Paul's foreign-policy thinking, even if it's hedged in the condescending frame of they're so crazy they make even Ron Paul sound reasonable. Perhaps she'll go even farther in a future column if presented with evidence that Paul doesn't just "seem" like a normal candidate on foreign affairs, he is a normal candidate.

Remember when Paul belonged to the minority in Congress that opposed the Iraq War? Now, 62 percent of Americans say fighting the Iraq war was a mistake. You know the Republicans who criticized President Obama for presiding over the end of America's military presence in Iraq? Well, like Paul (and unlike Obama) 78 percent of Americans support full withdrawal. And in Afghanistan, another country that Paul wants to leave, two thirds of Americans want to see troop levels reduced. "Just one in three Americans believe fighting there is the right thing for the U.S. to do," CBS News found, "while 57 percent think the U.S. should not be involved in Afghanistan."

Like Ron Paul, Americans are also overwhelmingly against bombing Iran's nuclear infrastructure. And although I'll bet he wants to cut the Pentagon budget more than the average American does, a majority of the public prefers defense cuts to other kinds, and as Rasmussen found earlier this year, "Nearly one-half of Americans now think the United States can make major cuts in defense spending without putting the country in danger. They believe even more strongly that there's no risk in cutting way back on what America spends to defend other countries."

Comparing Paul's positions to those of either the American people or foreign-affairs experts in the State Department and academia, it is clear that his views are closer to normal than most of his Republican opponents' (that is to say, closer to normal than everyone but Jon Huntsman). On the biggest, most consequential foreign policy issues, he is averse to war, as are his countrymen. It is only when they are compared to the views of the Washington establishment, where the Washington Post op-ed page, the Weekly Standard, and the American Enterprise Institute are regarded as mainstream institutions, that Paul's foreign-policy views seem like the abnormal ones.

Romney is another war mongering fool and his trade policy positions will be as disastrous as the Smoot-Hawley tariffs were in the Great Depression.

I commend Cain throwing in the towel. Newt Gingrich needs to do the same because he is a hypocrite. Mitt Romney also need to do the same given that President Obama and Mitt Romney are Nearly One and the Same!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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German Finance Minister Hatches "National Redemption Fund" Scheme to Kick the Debt-Can Another 20 Years

Finance Minister Wolfgang Schaeuble hatched a plan to siphon off a huge chunk of sovereign debt for every country in the EU and pretend to do something about it, not now of course, but over the next 20 years.

Allegedly the siphoned off debt would  be paid back via a "National Redemption Fund".

Of course the only way to pay that debt back is by raising taxes or cutting spending for 20 years which means it has a snowball's chance in hell of actually working.

Reuters discusses the 20-year can kicking idea in German finance minister details debt fund plan before EU summit

Wolfgang Schaeuble outlined his plans under which states would effectively siphon off a chunk of their debt to a special national fund and pay it off over about 20 years while committing to reforms to keep debt levels on target.

Schaeuble believes his proposal, which has won qualified support from Chancellor Angela Merkel, would boost confidence as states would be sending a signal they were serious about limiting debt levels to 60 percent of gross domestic product.

"We need a redemption fund in every single country of the euro zone," Schaeuble told the Passauer Neue Presse.

"Each of these countries should put into a special fund that part of its debt which exceed 60 percent of its GDP, and should pay that off with tax revenues. Over a period of 20 years, the debt should be reduced to 60 percent," he said.

In Germany's case, the fund - covering federal, state and municipal debts - would amount to about 500 billion euros ($672 billion) as German debt is around 80 percent of its gross domestic product, said Schaeuble.

Merkel's spokesman welcomed Schaeuble's proposal as "interesting," saying it could help rebuild investor confidence.

Just One Catch

Schaeuble's plan has already hit opposition from Austria. Finance Minister Maria Fekter said on Friday any proposals that resulted in gathering billions of euros from taxpayers would encounter problems in national parliaments.

Duh? Ya think?

Bear in mind the idea is progressively harder for countries already under extreme difficulty with various austerity measures imposed to pay back French and German banks.

This is another one of those dead-on-arrival ideas that might even be agreed upon, but will never succeed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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