Category: Current Affairs
Buried scary ledes
The [ECB] bank reversed itself on buying bonds amid signs that the debt crisis was spreading to the banking system.
“The situation was already starting to get worse on Thursday afternoon and throughout Friday of the week before last,” Mr. Trichet said. “A number of markets were no longer functioning correctly. It looked somewhat like the situation in mid-September 2008 after the Lehman Brothers’ bankruptcy.”
I suppose…I am glad they have not screamed that from the rooftops. The full story is here.
Update: The scary lede has been removed altogether from any NYT story.
Very good sentences
“Finance ministers in the eurozone might argue that they acted to save the euro, but in reality they acted to save national bond markets – and the euro is the fall guy,” says Steve Barrow at Standard Bank.
There is more of interest here.
Thoughts on the British election
1. It's amazing how quickly they form a new government. We could learn something from this.
2. Spending cuts will be necessary. (I am curious: what is the U.S. "progressive" take on this question. Is it admitted that spending cuts are necessary?)
3. Tax increases will be necessary. (Do U.S. commentators on the right admit this?)
4. Britain should avoid proportional representation. Classic parliamentary systems are good at making big changes in a hurry, when the major party knows which changes are needed, and that is Britain's current position. It's no accident that Thatcher and Roger Douglas — both of whom operated under extreme Westminster systems – were two of the major reformers in the late 20th century. PR gives too much power to minority parties in the ex post electoral bargain and it works best when there is extreme consensus at the social level, combined with the need to bring certain co-optable minorities into that consensus. Is that the way to think about UK politics today? I don't see it. Does any objective observer jump for joy when a "first past the post" election yields a hung Parliament and requires a coalition, as it does now? No, so why institutionalize this need with PR?
5. Do paragraphs like this make you feel better?: "William Hague, the new foreign secretary, said the coalition would be built on the personal chemistry of Mr Cameron and Mr Clegg, and said that Mr Clegg would not get a veto on government decisions. He told the BBC: “Their ability to resolve this situation bodes very well for all our ability to work together in government.”" They shouldn't.
(Whoops + yikes) x five
Kevin Drum has sharp eyes. He cites this passage:
The €440 billion pledged by euro-zone governments isn't immediately available cash in hand. Instead, a specially created off-balance-sheet entity will borrow the money, as needed, and then lend it out to the country or countries in trouble. The special entity's borrowings will be guaranteed by euro-zone countries – excluding the country asking for aid. This construction helps skirt the EU treaties' prohibition on one state's assuming the debt of another….This portion would need approval by the parliaments of contributing countries, something that could delay a rapid payout of funds.
Simple thoughts on Europe
1. The fundamental cause of the financial crisis has been people and institutions thinking they are more wealthy than they are; this spread to Europe as well and now we are seeing the comeuppance.
2. Although accounting conventions differ, and numbers should not be shifted out of context, many major European banks are highly leveraged. The mechanics of the so-called "shadow banking system" — namely the ability of short-term creditors to flee on a moment's notice – remain in place.
3. The major European powers would not have come up with a nearly $1 trillion bailout, also involving de facto loss of ECB independence, unless they were scared ****less.
4. They are trying to do a version of TARP-in-advance-of-the-panic and in my view that panic would have come today.
5. Here is one view, consistent with my own: "My quick thoughts on markets are as follows: great for risk assets, terrible news for bonds, great news for southern European bonds, bad news for the flight to quality UST trade, and ultimately terrible news for the EUR. Maybe the EUR tries to rally on this, but it the end this bailout has done nothing positive for the EUR. The market will inevitably look at the ECB as being forced by the EU to monetize the debts of EU rogue nations…"
6. Basically the ECB is monetizing bad government debt claims.
7. The Fed has reactivated its dollar swap lines to Europe.
8. "Greece’s 10-year borrowing costs plunged by almost half – an astonishing 5.9 percentage points – to 6.5 percent." And Deutsche Bank is up ten percent.
9. This doesn't solve any of the basic fiscal problems, so ultimately it raises the stakes and creates a chance of even greater financial failure. Simon Johnson comments.
10. Question: does this sentence sounds scary or non-scary?: "”We shall defend the euro whatever it takes,” Mr. Rehn said."
11. Felix Salmon writes: "They’re not all partners together anymore: now they’re bifurcating into the rich lenders, on the one hand, and the formerly-profligate debtors, on the other. The mind-boggling sums involved are only going to increase resentments both of the south in the north and of the north in the south."
12. How much time has the EU bought itself?
Addendum: Paul Krugman comments. And Arnold Kling comments. Ezra Klein comments. Matt Yglesias comments.
Facts about Europe
The country in Europe with the biggest untaxed, or “shadow,” economy as a proportion of GDP is Greece. Next is (gulp) Italy. Then Portugal and Spain. On the chart below, in fact, the bars look unsettlingly like dominoes.
There is more information and a good chart here. There is this too:
Massive tax evasion helps produce large public-sector deficits. Let’s make some simple back-of-the-envelope calculations: if the shadow economy is adding 25 percent to GDP, with income going untaxed, and if the average tax rate on such income is a conservative 20 percent, recovering such tax revenues would imply an additional 5 percent of GDP in tax revenues, which would bring down the Italian 2009 deficit to zero. As deficits cumulate into debt, prolonged tax evasion could explain – by itself – the whole of the Italian public debt, now projected at 118.4 percent of GDP.
Not From the Onion: Hair, Oil, Transvestites
Discarded hair from salons is being used to sop up oil in the Gulf of Mexico. San Francisco transvestites have been key to the effort.
As it turns out, hair adheres to oil pretty efficiently, which is why your hair gets greasy. Now salons are donating their discarded locks to help with the Gulf Coast cleanup. A group in San Francisco has been producing hair booms for nearly a decade now. Matter of Trust makes nylon stockings stuffed with human hair and trimmed animal fur….
While the group does have lots of hair, Gautier notes, there is one shortage. "I knew that hair wouldn't be a problem, but nobody wears nylons anymore," she says. Well, some people still do. Gautier says the great thing about being based in San Francisco is the city's transvestite community, which has readily donated nylons.
Politics in Colombia
When you hear the name Antanas Mockus, do you imagine him as the character in some strange fantasy novel? Well, he is running for President of Colombia and so far he is in the lead:
Responsible is not always the first word that comes to people’s minds here about Mr. Mockus. He became well known in 1993 after dropping his trousers and mooning an auditorium of unruly students, forcing him to resign as rector of the National University.
“Innovative behavior can be useful when you run out of words,” Mr. Mockus said of the uproar that followed, explaining that he viewed the episode within the concept of French philosopher Pierre Bourdieu’s “symbolic violence.”
He leveraged the publicity from that episode to run for mayor of Bogotá, a city then on the verge of chaos. In two terms, Mr. Mockus merged lofty political theory with projects to improve quality of life here and got attention by dressing up, with a hint of self-mockery, in a superhero costume as “Supercitizen.”
Beyond that, he used mimes to mock scofflaw pedestrians, held disarmament days for people to turn in guns and even asked people to pay more in voluntary taxes. To nearly everyone’s surprise, some 63,000 people did.
Here is his self-description:
“I’m battling for the integration of ideas from the left and right,” he said, explaining that he was in favor of higher tax collection and a strong government role in society, while also advocating the closing of inefficient state enterprises, cutting the public payroll and supporting private industry.
Sentences to ponder
"The way it plunged so fast and then came roaring right back makes you think either a tons of stops got hit or somebody's automated trading program kicked in," said Colin Cieszynski, market analyst at CMC Markets Canada.
I thank a loyal MR reader for the pointer.
Debt facts
Greece resolved its last sovereign default only in the mid-1960s and Portugal had an International Monetary Fund programme as recently as 1984. (Spain’s modern history is much better, despite holding the record – more than 12 – for most independent sovereign default episodes.)
The article, by Ken Rogoff, lays out a version of what I call Austro-Euro business cycle theory. It is an especially good short piece.
Sentences to ponder
Italy owes France $511 billion, or nearly 20 percent of French gross domestic product.
There is a good visual here and hat tip goes to Bob Cottrell at The Browser.
Spain fact of the day
The regional governments already account for 57 percent of Spain’s public spending, double the level of two decades ago, according to Carlos Sebastián, economics professor at Complutense University in Madrid.
There is more discussion here. As in Greece (or for that matter the EU!), the fiscal difficulties are revealing political difficulties which have been papered over by excess and unsustainable levels of subsidy. That's why this is more than just a straightforward financial crisis.
China estimate of the day
As much as 60 percent of the country’s gross domestic product relies on construction, he said. Rogoff said in February a debt-fueled bubble in China may trigger a regional recession within a decade.
The entire article deals with China pessimism more generally.
Greece fact of the day
Already, the government’s proposals for deep spending cuts have stoked strong resentments in a country where one out of three people is employed in the civil service that, until now, has guaranteed jobs for life.
Here is more.
What should be the penalties for oil spills?
The US Supreme Court has struck down a $2.5 billion punitive damages award against oil giant Exxon for its role in the 1989 Exxon Valdez oil spill in Alaska.
The high court said the award should be reduced to the amount of compensatory damages in the case – $507.5 million.
That was from June 2008. Here is a more general history. Googling "exxon valdez punishment managers" does not yield obvious answers (what other problem does that remind you of?). The CEO, Lawrence Rawl, stayed with the company four more years until the mandatory retirement age of 65. Do you know more?
Here is one report on the BP CEO.