Thursday, June 02, 2011

There IS a way to get both Greece and the USA out of bankruptcy

Though no-one says it would be popular

Martin Hutchinson

In the endless negotiations about Greece’s approach to bankruptcy, EU leaders suggested last week that a “fund of experts” might take over $200 billion or more worth of Greek state assets, with a view to speeding their privatization and repaying much of Greece’s staggering debt load. The idea has some merit, as it reverses the recent erosion in creditors’ positions in national defaults. It would also be applicable in much larger cases, notably including that of the United States.

Whereas national bankruptcy laws have for centuries provided creditors with solid rights against individuals and corporations (though the U.S. 1978 Bankruptcy Act damagingly weakened those rights) enforcement in bankruptcy against sovereign states has always been more problematical, because of the military power those states possess. Mediaeval monarchs in both Britain and France took aggressive action against creditors who pressed their claims too vigorously. In the seventeenth century, Charles II’s 1672 Great Stop of the Exchequer bankrupted several leading London goldsmiths, although notably on that occasion the state paid much of the claims in full, albeit with lengthy delays.

In the nineteenth and early twentieth centuries however, with Britain both a leading naval power and the center of the world’s money market, creditor attitudes were admirably robust. When Venezuela defaulted in 1902, it believed that the Monroe Doctrine would bring U.S. protection to bear against any aggressive action by its creditors, primarily British and German banks. However President Theodore Roosevelt proclaimed “if any South American country misbehaves toward any European country, let the European country spank it.” After Kaiser Wilhelm II visited Sandringham, Anglo-German agreement was reached and a naval flotilla from both nations sailed for the Venezuelan coast, blockading the country for four months and bombarding coastal forts adjacent to Caracas and Maracaibo.

The postwar Keynes-White architecture of international finance, with the IMF and World Bank involved in most defaults, sapped the robustness of creditor attitudes. By the 1970s, creditors were in denial with Citibank chairman Walter Wriston notoriously proclaiming that “countries don’t go bust.” Needless to say this was nonsense, and the 1980s Latin American defaults came close to sinking Citibank itself, even though the lending banks under Citi’s Bill Rhodes were able to retain overall control of the debt restructuring. More recently, as IMF participation in defaulting countries has become larger and the IMF’s own attitudes less reliable, creditors have found themselves pushed way down the totem pole by massive loans from the IMF and other agencies, all of which are deemed to take precedence in bankruptcy.

The IMF’s $40 billion loan facility to Greece is an extreme example of this tendency; by it the position of European banks who lent to Greece has been irrevocably weakened. In today’s world, defaults are negotiated by the international agencies, and private commercial banks’ positions are far worse than in even a U.S. private bankruptcy. Only the GM and Chrysler bankruptcies, where the newly inaugurated Obama administration fiddled the legalities to favor the automobile unions over private lenders, were equivalent to state defaults and restructurings in their playing field tilt.

You can see the effect of this in the Greek negotiations. The Greek government, admittedly newly elected but with a strong connection (the prime minister being his son) to the most dishonest and spendthrift of all Greece’s postwar prime ministers, was allowed to promise modest reforms in return for huge dollops of money, and was then permitted to water down these reforms still further in the face of violent protests by the bloated beneficiaries of the country’s public sector excess. Consequently a year later Greece’s finances remain unreformed, and “austerity fatigue” has set in, with the country making only minimal gestures towards further reform.

The real problem is that massive EU subsidies allowed Greece’s living standards to soar far beyond the productivity of its ill-educated and idle citizens, so that only by imposing truly draconian cuts of 30-40 percent in living standards, as well as increasing the Greek retirement age close to 70 from what currently appears to be an average of little more than 50, can the books be balanced. Whereas in 1900 creditor action would probably have knocked a few more chips off the Parthenon, today the Greek debtors are allowed to continue their extravagant lifestyle to the detriment of the remaining value of the creditors’ holdings.

The one possibility for repaying some of Greece’s debts is a sale of state assets. In the original bailout deal, Greece had promised to sell $70 billion of these by 2015, but in the intervening year no progress has been made, as sale would upset too many vested interests. The EU proposal would now transfer to a “fund of experts” control of these state assets, which may be (but probably aren’t) worth as much as $300 billion, a substantial fraction of Greece’s debt obligations. By forcing Greece to accept a creditor committee as manager of these assets, the EU could in principle produce a genuine restructuring, selling perhaps $150-200 billion of the assets over the next 3-4 years, thereby eliminating close to half Greece’s debt obligations.

In reality of course, any committee appointed by the EU would be likely to contain the same kind of socialist bureaucrats as got Greece into trouble in the first place, and so its control would provide very little additional security for creditors. However in principle, if the international bureaucracies would back genuine creditor control of Greek state assets, the country’s debt problems could be resolved and the legal position of creditor interests strengthened to a level at which rational lenders would provide funding.

The other obvious candidate for creditor intervention if current conditions continue is the United States. There are two possible scenarios for this. One is a political scenario in which the current Congressional impasse continues through the date in August when the debt ceiling is reached, causing a technical default on U.S. debt and (more dangerously) a massive loss of confidence in the Treasury bond markets. The other is an economic scenario in which the deficit remains unaddressed, real interest rates start to rise and the bond markets eventually panic, preventing the Treasury from funding the ongoing deficit.

The conventional approach following such an occurrence would be a massive roundup of international banks and aid institutions to provide the U.S. with bailout funds. However the amount of funds required would be very large and the major creditor nations, China and Japan, may be unwilling to fund the profligacies of the U.S. political system any further. Presumably in the second scenario if they had been willing to provide further funding, they would have already done so through the ordinary Treasury bond market. In the first scenario their refusal to provide funding might be caused simply by cool Asian exasperation with U.S. woolly-mindedness and ineptitude.

In either scenario, the only approach would then be a sale of U.S. assets. Unlike in Greece there are few U.S. nationalized industries, although there are certain assets such as the air traffic control system that might be valuable. Other public assets, such as airports and subway systems, are generally owned by states and municipalities rather than by the national government directly, so would not readily be available for sale. Still others, like Amtrak and the Post Office, would fetch very little money because of their chronic loss-making status – Britain managed to sell its nationalized industry “dogs” in the 1980s, but they had first been given a period of firm management to bring them back to profitability. This has not been done, or even seriously attempted, in the United States so a sale in the short-term would be impossible. Naturally, if creditor management were imposed for a period of several years, even the Post Office (which should be managed by Chinese cost-cutters) and Amtrak (maybe run by German management, ruthlessly upgrading the efficiency of the system while closing unprofitable lines in key Congressional districts) could be forced into profitability.

However the greatest “quick hit” realization from creditor management would come in financial assets. According to their latest financial statements, there are $3.1 trillion in mortgage assets on Fannie Mae’s balance sheet and $2.1 trillion on Freddie Mac’s (these totals are sharply up over the past year, as both institutions have been buying mortgage debt to support the market.) Of course, the government guarantee on this $5.2 trillion of long-term paper would be worth very little. However, each asset represents a housing loan, and even today the great majority of these housing loans are perfectly solid credits. With firm management from retired senior executives of British building societies, the good quality paper could readily be sold back into the private market at only a modest discount, since “prime” mortgages are as they always have been an attractive banking asset. By realizing say $4 trillion from these sales (while retaining outstanding the long-term Fannie Mae and Freddie Mac debt, which would remain backed by the government guarantee) the liquidity position of the U.S. government would be revolutionized.

Provided appropriate budget cuts were then made under the watchful eye of Singaporean fiscal managers, the United States would emerge from the process humbled but solvent. Even more important, it would have learned the advantages of a private un-securitized housing market from the British building society managers, how to run a railroad from the Germans, the uses of cheap sweated labor from the Chinese and sound fiscal management from the Singaporeans.



Get Ready for more money printing

Failed ideas are all that the American Left has got

The New York Times has launched its trial balloon for the Federal Reserve to begin yet another round of so-called “quantitative easing” to, it thinks, help the economy. In its May 30 editorial, “The Numbers Are Grim,” the Times calls for the Fed to, among other things, “be prepared to continue measures to bolster the economy as needed, even if that means looser policy for longer than it originally planned.”

It may not be long before the wonks over at the Fed come to the same conclusion, under pressure from the Obama Administration and its allies at the Times. So far, the central bank has said it is not considering such a move, but that could change if the bad economic data continues to come in, with growth at a dismal 1.8 percent in the first quarter.

The Times also calls for unemployment welfare to be extended yet again, for an easing of rules for refinancing, “bolstered foreclosure relief and more fiscal aid to states,” job “retraining,” and even tax increases to, it says, “help cover needed spending.” You know, all of the stuff government has already been doing without any success to facilitate this so-called “recovery”.

Times columnist Paul Krugman too jumps into the fray for his part. He wants “W.P.A.-type programs putting the unemployed to work doing useful things like repairing roads… a serious program of mortgage modification, reducing the debts of troubled homeowners… [and] [w]e could try to get inflation back up to the 4 percent rate”.

Basically, the Left wants more of the same — more “stimulus”—which has already failed. We know that because of the 4.2 percent decline in home values in the first quarter as measured by the S&P/Case Shiller home price index.

We are now officially in a double dip downturn in housing. Home values are now at their lowest point in the current recession — lower than even April 2009. The Obama Administration promised that if trillions of dollars in fiscal and monetary “stimulus” were injected into the economy, that it would turn the housing market around.

Specifically, when Barack Obama signed the $826 billion “stimulus” into law he promised to “stem the spread of foreclosures and falling home values for all Americans”. So much for that.

Zillow reported last month that 28.4 percent of homeowners are underwater, a number that is likely to keep rising the more overall home values continue to plunge. The problem of negative equity has likely been compounded, ironically, by the $22 billion homebuyers tax incentive program.

3.3 million people utilized the program, which temporarily juiced the market, and have now seen prices depreciate again just as the government was saying the recovery was at hand. Whoops.

Coupled with rising foreclosures and persistently high unemployment at 9 percent, including a youth unemployment rate (i.e. those under 25) over 17.2 percent, Keynesians like Krugman, the Times editorial board and those at the Obama Administration can only come to one conclusion: Not enough money was spent, borrowed, and printed by the government. They can’t believe their lying eyes.

That is because their ideology does not allow for another possibility: That the financial crisis caused by government “stimulus,” too low interest rates by the Fed, and loose underwriting policies by Fannie Mae, Freddie Mac, and the Federal Housing Administration, not to mention the Community Reinvestment Act regulations that weakened lending policies, lowered down payments, and otherwise pushed risky loans on individuals who could not afford them.

Government created the bubble. And when it popped, the resultant correction was unavoidable.

Obama has simply prolonged the recession he swore to pull us out of, as shown by Case-Shiller’s data. After the “stimulus” programs ended, the temporary spike in home values did too. Under the theory, the “recovery” should have been self-sustaining. Instead, values went down anyway.

We should have just let prices hit the bottom in the first place. Instead of bailing out banks, it would have been better to let investors that bet poorly on housing to fail. If government had just gotten out of the way, we would already be in recovery. That is the path Iceland has followed, and compared to Ireland, which did bail out its banks, is speeding more rapidly into recovery, and without the burdensome, excessive public debt accrued.

The American people have wasted over $2 trillion on a lie. Obama has been given everything he wanted — everything he said would turn the economy around. The “stimulus”’ has failed. He has failed.

Now is the time for a new direction for America, and that will only come with new leadership on the economy, before we go bankrupt trying to “stimulate” it. It is also time for Fed head Ben Bernanke not to heed the calls to throw another trillion dollars from a helicopter. But based upon the past three years of experience, there is little reason to doubt that under pressure he won’t cave.




TSA pays out token sum to Texas woman whose breasts were exposed during patdown: "An airline passenger who sued the TSA after her breasts were exposed during a patdown has received a settlement of just $2,350. Lynsie Murley, 24, sued the TSA for negligence and intentional infliction of emotional distress after she was humiliated at Texas's Corpus Christi airport in May of 2008. Miss Murley, of Amarillo in Texas, claimed an agent pulled her blouse completely down, exposing her breasts to everyone in the area, after she was 'singled out for extended search procedures'. The agents 'joked and laughed' for an 'extended period of time', she said."

FL: Scott signs “drug tests for welfare” bill: "Florida Gov. Rick Scott signed into law Tuesday a bill that requires Floridians to be tested for drugs if they want cash benefits from the state. People must pay for drug testing of samples of their urine, blood or hair before they receive state benefits. If people pass the drug test, taxpayers will reimburse them for $10 to $25 that such tests usually cost. They are not reimbursed if they fail the test and they are banned for six months from receiving benefits from Temporary Assistance for Needy Families. A second failed test results in a three-year ban."

Commerce Nominee is a crony capitalist: "John Bryson, President Obama's nominee to head the Commerce Department, is well-qualified, knowledgeable and practiced in the ways of business. If anything, he might be too practiced. The Senate's confirmation scrutiny of Bryson sometime this summer could be lively, judging from his CV and the California policies and politics that gave him his start. To some Republicans, Bryson's outspoken pronouncements about curbing climate change, his enthusiasm for tough California regulations that actually gave his company competitive advantages, and his support for left-leaning nonprofit organizations -- plus his generous contributions to Democratic candidates -- are all unsettling."


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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)


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