Central Perk

sâmbătă, 18 decembrie 2010

Mish's Global Economic Trend Analysis

Cincinnati Threatens to Outsource Entire Police Department
Canadian Borrowing Gone Mad: A Look at BMO's Misguided Balance Sheet Theory and the Keep on Dancin' Market Share Theory of Toronto-Dominion
Spanish "Ghost Towns", Shadow Inventory, Cooked Books; Spain's 2011 Real Estate Funding Crisis

Cincinnati Threatens to Outsource Entire Police Department

Posted: 18 Dec 2010 08:55 PM PST

Cincinnati, like every union-plagued city in the country is having huge budget problems over untenable union wages and pension benefits. Big problems call for big actions. I am pleased to report that several thinking members on the Cincinnati City Council proposed to outsource the entire police department to the local sheriff's association. Unfortunately, the mayor nixed the idea.

The Cincinnati Enquirer reports City-county police merger proposed

Three Cincinnati City Council members floated a proposal Wednesday to shift city police patrols to the Hamilton County Sheriff's Office as a way to help plug a $60 million deficit in the city budget and avoid 275 police and firefighters layoffs.

But just as quickly as council members Roxanne Qualls, Wendell Young and Jeff Berding pitched the plan – which Hamilton County Sheriff Simon Leis supports – it seemingly died.

Council currently does not have enough votes to override a threatened veto by Mayor Mark Mallory, who in a letter to Leis said he sees the proposal as "a brazen and shameless attempt at union-busting" that he will never support.

Council members Cecil Thomas, Charlie Winburn and Leslie Ghiz are definite no votes.

Ghiz, who practices labor law, said the plan sounds to her like union-busting since council members just this week asked the police and fire unions for $20 million in concessions.

Cincinnati City Councilman Chris Bortz, who joined Leis, Qualls, Young and Berding at the Enquirer to talk about the idea, said merging services is worth exploring, but he wasn't willing to commit.

The proposed plan calls for the city to lay off its 790 patrol officers. The city would then pay the sheriff's department for patrols, who would hire many of the city officers to do those patrols. The rest of the police department would remain under the chief's supervision.

By doing the switch through layoffs and re-hiring, Qualls said the process does not violate the union contract.

Brazen and Shameless

What's brazen and shameless is the arrogance of the police union and Mayor Mark Mallory's willingness to hold citizens of Cincinnati hostage to untenable union demands. Clearly Mallory is beholden to the unions, not to the taxpayers of Cincinnati whom he is supposed to represent.

Here is the Proposal from Simon Leis Jr. Sheriff Hamilton County, Ohio. Check yourself to see if appears to be a "brazen, shameless" proposal.

Mallory has his priorities wrong and is unfit for office. The same can be said for Cecil Thomas, Charlie Winburn and Leslie Ghiz.

Your priority, should you live in Cincinnati, should be to get rid of Mayor Mark Mallory, and all of his pro-union cronies. They have destroyed your city and will continue to do so.

I commend Roxanne Qualls, Wendell Young and Jeff Berding for having the courage to make a proposal of outstanding merit.

What You Can Do

Please contact Mark Mallory, Leslie Ghiz, Cecil Thomas, and Charlie Winburn and let them know how disgusted you are that they would not even consider the merits of the proposal.

You can reach Mark Mallory at 513.352.3250.
Please email mayor.mallory@cincinnati-oh.gov to comment on police department outsourcing.

You can reach Leslie Ghiz at 513-352-3344
Please email leslie.ghiz@cincinnati-oh.gov to comment on police department outsourcing.

You can reach Cecil Thomas at 513-352-3499
Please email cecil.thomas@cincinnati-oh.gov to comment on police department outsourcing.

You can reach Charlie Winburn at 513-352-5354
Please email charlie.winburn@cincinnati-oh.gov to comment on police department outsourcing.

Please let the mayor know you are tired of seeing your taxes raised to support public unions who get far more benefits and wages than taxpayers can afford and that it is high time for mayors and council members to be beholden to taxpayers, not unions.

Thanks to "Machiavellian" at the Virtuous Republic for his email that led to this post.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Canadian Borrowing Gone Mad: A Look at BMO's Misguided Balance Sheet Theory and the Keep on Dancin' Market Share Theory of Toronto-Dominion

Posted: 18 Dec 2010 09:55 AM PST

Theory has it that Canadian banks are in far better shape than their US counterparts. If so, it's primarily because the Canadian Central Bank (Bank of Canada) has assumed nearly all the default risk on Canada's massive property bubble.

Is that supposed to make everyone stand up and salute the Loonie?

One key point that has recently come into the spotlight is Canadian citizens are not in better shape than their US counterparts. All those going "rah rah" over the Loonie, might be advised to consider some of the following articles.

Canadians warned to rein in borrowing on cheap money before it's too late

Bank of Canada governor Mark Carney issued a staunch warning to Canadians about the perils of cheap borrowing Monday, just as fresh data suggested household debt-to-income ratios have jumped to record highs.

"Household debt levels are at unprecedented levels relative to income — the level of vulnerability of households remains high," Carney told a news conference after a speech in Toronto.

Statistics Canada said Monday the ratio of debt to disposable income rose to 148.1 per cent in Canada in the third quarter — a close to five point jump — slightly ahead of the U.S. ratio of 147.2 per cent.

TD Bank chief economist Craig Alexander said it was natural that the government would explore ways to constrain borrowing, but said he also does not believe the situation has reached a crisis.

Apparently TD Bank chief economist Craig Alexander thinks it's best to wait until there is a crisis to do anything about it.

No doubt Alexander is a big believer in the Greenspan methodology of dealing with bubbles after they burst even though we have already seen the disastrous results of such complaisance.

Here's another good one from up North: Consumers warned: 'brutal reckoning' ahead

Bank of Canada governor Mark Carney issued another stern warning Monday on Canadians' appetite to take on record levels of household debt, which some analysts took as a signal he is set to raise interest rates as soon as the economy improves.

"Cheap money is not a long-term growth strategy," Carney said. "Low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: the greater the complacency, the more brutal the reckoning."

In Ottawa, Finance Minister Jim Flaherty said his government could tighten mortgage eligibility rules for a third time, if required, to keep credit growth in check.

Based on conversations he's had with banking executives, "there is no reason for extreme concern right now," Flaherty said. "But there is a reason for concern. So if it is necessary, we will toughen up the mortgage rules some more."

What's with this "no reason for extreme concern right now" nonsense? The Canadian property bubble is of epic proportion.

Flaherty too, appears to be a proponent of the Greenspan theory that bubbles can only be recognized in hindsight.

Blue Ribbon Complacency Awards

The blue ribbon for complacency goes to the Bank of Montreal for Debt picture not so bleak

Statistics Canada released data Monday showing that Canadian household debt has risen to 148 per cent of disposable income. The eye-popping figure is all the more alarming considering it's the first time since the 1990s that Canada's ratio has been higher than that of the U.S.

Alarm bells rang everywhere from the Bank of Canada to the Finance Department on Monday, and Canadians were urged to tighten their belts and prepare for a time of austerity.

But a closer look at the numbers indicates the picture might not be so bleak.

"The continued laser-like focus on debt overshadows the other half of the balance sheet," BMO chief economist Doug Porter said Monday.

Namely, Canadians are borrowing. But they're also saving, and they're worth more than they used to be.

Balance Sheet Theory Madness

Porter's statements are exactly the same kind of silliness we heard in the US regarding the central belief "massive debt is OK because it's supported by rising asset prices".

It was bad enough that anyone believed such nonsense a few years ago before the US property bubble blew sky high. That such beliefs still have proponents at the highest level of Canadian banks now seems rather amazing.

It just goes to show just how firm the belief "It's different here" is in Canada.

When housing prices crash, and especially if the stock market goes with it, what's left of Porter's "Balance Sheet Theory" will look something like a moldy slice of 3-year-old Swiss cheese.

Banks Won' Lead The Way

Toronto-Dominion Bank chief executive officer Ed Clark says Banks won't lead way on fixing debt problem.

If policy makers want Canadians to stop borrowing too much, it's up to Ottawa, not financial institutions, to force a change in behaviour, says one of Bay Street's longest-serving senior bankers.

Toronto-Dominion Bank chief executive officer Ed Clark acknowledged Canadians' alarming debt levels, but said the issue is a matter of public policy and would be best resolved by a tighter government rules on residential mortgages.

In an interview with The Globe and Mail, Mr. Clark said that no bank wants to be the first to impose stricter requirements on borrowers out of fear that it will suffer a major loss of customers to rivals. Personal banking "is a highly competitive industry," Mr. Clark said. "If we said 'Look, we're going to be heroes and save Canada from itself, and we'll impose a whole new [mortgage] regime on everyone else,' the other four [large] banks would say 'Let's carve them up.' "

Mr. Clark said it is impossible to expect any bank to crack the whip on borrowers because "market share loss is perceived as a strategic loss, not just a numerical or dollar loss."

Dance Until The Music Stops

Clark sounds like he's a big believer in the Chuck Price Music Theory best described in retrospect as "Keep dancing until you dance out the door".

Flashback July 10, 2007: Quotes of the Day / Top Call

Chuck Prince - Citigroup CEO

No End Soon to Buyout Boom: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing".

Mish reply.

If ever there was market arrogance, the statements by Chuck Prince says it all.
In an interview with the newspaper, Prince said the boom will eventually end, but will continue for now because markets have plenty of liquidity, despite turmoil in the U.S. subprime mortgage market. He denied Citigroup was pulling back, the newspaper said. "When the music stops, in terms of liquidity, things will be complicated," he said. "But as long as the music is playing, you've got to get up and dance. We're still dancing.

Prince added: "The depth of the pools of liquidity is so much larger than it used to be that a disruptive event now needs to be much more disruptive than it used to be. At some point, the disruptive event will be so significant that, instead of liquidity filling in, the liquidity will go the other way. I don't think we're at that point.

My comment at the time was "I leave it to you to decide whether or not this is the 'last dance'".

Flashback November 02, 2007: Music Stops for Chuck Prince

The party is over and the music has stopped for Chuck Prince. His last dance is a two-step out the door. Citi's Prince Plans to Resign.

Moral-Hazard Position of Bank of Canada

Toronto-Dominion's CEO does not give a damn about fundamentals, about acting on their clients' interests, or for that matter acting on shareholder interests. Clark's only concern is in not losing market share to the other Canadian banks until the whole mess blows sky high.

Canada's banks clearly don't care what happens as long as they can pass the trash to the Bank of Canada, the Canadian equivalent of Fannie Mae.

Clark's statements, as well as statements made by the chief economists of BMO and Toronto-Dominion, put a spotlight on the decidedly stupid moral-hazard mess the Bank of Canada has gotten itself into by backstopping mortgages of Canadian borrowers.

But hey, look on the bright side. The music is still playing. In memory of Chuck Prince, Keep on Dancin'

Addendum:

I said Bank of Canada in a couple of places where I should have said CMHC.

Here are a couple of corrections from Canadian readers.

"RP" Writes ....

Quick corrections here Mish. Mortgages in Canada are guaranteed by the CMHC, which is a crown corporation equivalent to Fannie Mae. Anything less than 20% down requires this insurance, so that's the source of the Canadian banks' "health". The loose lending standards were set by the current "Conservative" government, a few months after they came in office. We had 0 down, 40 year mortgages insured by the government for a couple of years. Now it's officially 5% down and 35 years, but every bank will lend you the downpayment. The government also insures mortgages for rental properties.

Similarly, "MS" writes ....

Hey Mish,

One inaccuracy that should be corrected. It's the CMHC (Canada Mortgage and Housing Corporation) that serves as the equivalent to Fannie and Freddie, not the BoC. The CMHC insures mortgages for below market rates, and the major banks pass along their loans to them.

The Conservative government ordered the CMHC (a crown corporation) to insure some $300 Billion in additional mortgages during the crisis - nearly double their previous holdings. It is this that has buoyed the Canadian R/E market since then. Banks don't worry about credit worthiness, because the CMHC will take it anyway in order to meet their quota.

"Moi" Writes ....

Mish you are one of the few Americans that seem to "Get It". So many of the other US financial writers talk glowingly about how sound Canada is financially and how the Canadian banks did not take part in the risky lending practices that the US banks have taken part in. This is complete and utter BS!! The Canadian banks are doing the same sort of zero down or variable rate mortgages it's just they have none of the risk to worry about. 600 Billion dollars worth of that mortgage risk is held by the government of Canada thanks to the Canada Mortgage and Housing Corporation (CMHC). There are cash back mortgages every where in this country. In other words come up with your measly 5% down payment and the bank will give you 5% back. So here in Canada we proudly brag about how we do not have zero down mortgages, we just call them by a different name. Also, if you do not have 5% to put down no problem. All of the banks will loan you money to by an RRSP (IRA), you can than cash that RRSP to be paid back later and use that as your 5% down payment. Voila, zero down mortgages.

The Canadian Association of Accredited Mortgage Professionals came out last month with their "Good News" annual report last month. Just like the Real Estate Industry, all news is good news. Take a look at the numbers. At these absolutely rock bottom interest rates:

100,000 mortgage holders would be in trouble with any rate move.
350,000 mortgage holders would be in trouble if rates only go up less than 1 percent.
250,000 mortgage holders would be in trouble if rates went up between 1 and 1.5 percent.

So, if interest rates which are at Century lows went up a measly 1.5 percent, 700,000 mortgage holders in Canada would be in trouble. What if they went up 2 or 3%? It would be mortgage Armageddon in Canada. This is how precarious our housing market. The following link gives you just one tiny example of why Canadian housing is a house of cards that could topple at the slightest touch.
http://whispersfromtheedgeoftherainforest.blogspot.com/2010/05/pardon.html

http://www.theglobeandmail.com/report-on-business/canadian-mortgage-debt-tops-1-trillion-for-first-time/article1789172/

5% or more cash back mortgage:

http://www.tdcanadatrust.com/mortgages/5_cashback.jsp
http://www.rbcroyalbank.com/products/mortgages/cash-back-mortgage.html

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Spanish "Ghost Towns", Shadow Inventory, Cooked Books; Spain's 2011 Real Estate Funding Crisis

Posted: 18 Dec 2010 12:39 AM PST

In Spain, huge projects are completely empty and bad debts mounts as the Spanish banks play extend-and-pretend with developers. That game is about to end.

Developer loans are coming due. Yet, there is no way for developers to make interest payments let alone pay any principal. When developers collapse in 2011, banks will be stuck with a vast amount of undeveloped land at overvalued prices as well as ghost towns so far outside of major towns that no one will live in them.

A flood of inventory awaits a death of buyers. Moreover, a huge amount of shadow-inventory is waiting on deck, hoping for better prices so the owners can bail. Unfortunately there is no one to bail to. Spain's official unemployment rate is 20%, and it's quite likely the real unemployment rate is higher.

On top of that, Spain has to deal with various austerity measures. There is no way for it to grow out of its problems.

Many are starting to realize Spain is massively understating the problems its banks, and Spanish banks books are cooked. That has been my position all along. The New York Times offers evidence in Newly Built Ghost Towns Haunt Banks in Spain

It is a measure of Spain's giddy construction excesses that 250 row houses carpet a hill near this tiny rural village about an hour by car outside of Madrid.

Most of these units have never sold, and though they were finished just three years ago, they are already falling into disrepair, the concrete chipping off the sides of the buildings. Vandals have stolen piping, radiators, doors — anything they could get their hands on.

The Bank of Spain says the banks have about $240 billion in "problematic exposure" out of $580 billion invested in real estate and construction, a situation, they say, the banks are capable of handling.

The boom and bust of Spain's property sector is astonishing. Over a decade, land prices rose about 500 percent and developers built hundreds of thousands of units — about 800,000 in 2007 alone. Developments sprang up on the outskirts of cities ready to welcome many of the four million immigrants who had settled in Spain, many employed in construction.

"Most of the adjustment in housing prices has already taken place," José Manuel Campa, Spain's deputy finance minister, said recently, though he allowed that there was a lack of good information on real estate sales.

Still, skeptics abound. One is Jesús Encinar, the founder of Spain's most popular property Web site, Idealista.com. He says that the Spanish authorities are striving to engineer a soft landing of the housing market that would give more time to offload surplus housing at reasonable prices.

But he believes prices still have a long way to fall, by 30 or 40 percent, maybe more. "Some people who said there was no housing bubble are now saying we are at the bottom," Mr. Encinar said. "But I say we have several years to go."

Fernando Acuña, co-founder of Pisosembargados.com, a Web site that sells housing on behalf of the banks, said as many as 100,000 repossessed units were now for sale in Spain, a number that "could double or triple."

The biggest challenge for the banks is that they are likely to end up owners of vast amounts of undeveloped land. José Luis Suárez, an expert on real estate at the IESE business school, said 65 percent of bank lending to developers is tied up in land, enough to build 758,000 more housing units. "That gives you an idea of how long it could take for the market to digest all this," he said.

There is much more in the two-page article. Inquiring minds will want to take a closer look.

Revenue Drain to Hit Spain

Bloomberg reports Spain Banks Face 2011 Revenue Drain on Funding Costs.

Spain's banks, burdened this year by rising defaults and flagging credit demand, will face further pressure in 2011 as funding costs eat away at the returns on their stock of home loans.

The squeeze may be worst for lenders with the greatest proportion of mortgages because they have less scope to pass on the financing costs to customers, said Claire Kane, an analyst at MF Global in London. Ibercaja, a Zaragoza-based savings bank, has 53 percent of its loans in mortgages, while Bankinter SA, based in Madrid, has 46 percent, Bank of Spain data show.

"The amount of mortgages a bank has gives an indication of who is going to face the most pressure on revenues," said Daragh Quinn, an analyst at Nomura International in Madrid. "The more retail mortgages you have, the more difficult it will be to re-price your loan book."

Cooked Books and Bad Loans

The Bank of Spain said "Bad loans as a proportion of total loans in Spain climbed to 5.67 percent in October, the highest level since January 1996, from 5.50 percent in September and 4.99 percent a year ago."

Does anyone believe that? I don't, but even if it is true, it will not stay that way long. Expect to see that rate rise as soon as developers default and banks get saddled with ghost towns.

Here's another paragraph from the article that strikes me as unbelievable.

"The quality of Spain's mortgages has proved resilient, even with unemployment higher than 20 percent. Moody's expects a loss ratio of 2.8 percent for home loans, compared with 12.9 percent for loans to developers and 50 percent for real estate assets."

Anyone agree with Moody's regarding that 2.8% loss ratio on home loans in the face of statements by Jesús Encinar, from the preceding article. Encinar, the founder of Spain's most popular property Web site, thinks home prices drop another 30% over the next few years.

PIGS Exposure Table

Inquiring minds may wish to take another peek at PIGS Exposure Table, Explaining the Panic by Numbers

click on chart for sharper image

Exposure to Spain

Germany - $216.6 billion
France - $201.3 billion
Great Britain - $136.5 billion
US - $172.8 billion

A Question of Philosophy

Here's an interesting quote from the above Bloomberg article by Arturo de Frias, an analyst at Evolution Securities Ltd. in London: "Mortgages can be a problem in a given year such as 2011 because of the prevailing liquidity or funding conditions. Over a longer period, they remain a very profitable business."

That sounds much like the philosophy espoused by Countrywide Financial and hundreds of U.S. subprime lenders that all suddenly died in 2007-2008. Ironically it's the reverse of an often repeated Keynesian phrase "In the long run, we're all dead."

In this case it's "In the short run we're dead, but never mind that. In the long run we'll do just fine". It sums up the PIGS situation quite nicely, but it's certainly no way to run a business or a country.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Your Weekly Address: National Security Over Politics on START

Your Daily Snapshot for
Saturday, Dec. 18, 2010

Your Weekly Address: National Security Over Politics on START

President Obama urges the Senate to heed the calls from Presidents George H.W. Bush and Bill Clinton, every living Republican Secretary of State, our NATO allies, and the leadership of the military: ratify the New START Treaty with Russia.

Watch the video.

Weekly Wrap-Up

A quick look at the week of December 13, 2010:

Quote: “We are here with some good news for the American people this holiday season,” said President Obama before signing the Middle-Class Tax Cuts Bill -- legislation that will prevent tax hikes on middle class families, keep the economy growing, and maintain lifelines for millions of those who are unemployed through no fault of their own. Watch the video.

Digg the White House: The White House is now on digg.com. Take a peek and start following us right now.

Holidays in Photos: Go behind-the-scenes as the White House celebrates the holidays in this photostream.

Healthy Kids: The President signs the Healthy, Hunger-Free Kids Act at a local DC school. The new law improves the nutritional value of school meals and increases the number of children eligible to receive them. Watch the President’s and the First Lady’s remarks.

The Night Before Christmas: The President reads to children at a local elementary school and the First Lady to patients, parents and staff at Children’s National Medical Center. Watch the video of the President here and the video of the First Lady here.

Elmo at the White House: Elmo joins Assistant White House Chef Sam Kass in the White House Kitchen to talk about healthy and tasty school meals -- and Elmo does the melon dance. Watch the video.

Lie of the Year: Politifact calls the claim that Health Reform is a "Government Takeover of Health Care" the lie of the year.

West Wing Week: “All these pens”

Across the Country: See how the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act will impact middle class families in every state.

"Significant Progress”: President Obama discusses the Afghanistan-Pakistan Annual Review released this week. Read the statement.

“We need it badly”: General James Cartwright, the Vice Chairman of the Joint Chiefs of Staff, takes questions on the START Treaty.

Cool Roofs: Changing the color of your roof from dark to light can lower your energy bill 10-15%. Find out more in this video.

DREAM: Top Administration Officials discuss the importance of the DREAM Act, read them all: Cabinet Secretary Chris Lu’s here, Education Secretary Arne Duncan’s here, Labor Secretary Hilda Solis's here, Commerce Secretary Gary Locke's here, Homeland Security Secretary Janet Napolitano's here, Dr. Clifford L. Stanley, Under Secretary of Defense for Personnel and Readiness, here, Secretary of Agriculture Tom Vilsack here, Attorney General Eric Holder's post here.

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Seth's Blog : What are you working on?

[You're getting this note because you subscribed to Seth Godin's blog.]

What are you working on?

If someone asks you that, are you excited to tell them the answer?

I hope so. If not, you're wasting away.

No matter what your job is, no matter where you work, there's a way to create a project (on your own, on weekends if necessary), where the excitement is palpable, where something that might make a difference is right around the corner.

Hurry, go do that.

• Email to a friend •

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vineri, 17 decembrie 2010

Mish's Global Economic Trend Analysis

"Black Swan" author Nassim Taleb on the Debt Crisis, on Davos, on Regulation
Interesting WikiLeaks Regarding Mervyn King and Bank of England at Height of Crisis; Global Banking System Insolvent Then, Still Insolvent Now
Retiree Health Care to Cost San Francisco $4.4 Billion, City Sets Aside $9.7 Million to Cover Costs
Unspoken Benefits of Trash Collecting
Support Rises for "European Nanny State"; Is Germany unfit for the Euro or is the Euro Unfit for the PIIGS?

"Black Swan" author Nassim Taleb on the Debt Crisis, on Davos, on Regulation

Posted: 17 Dec 2010 09:25 PM PST

Here is a video of "Black Swan" author Nassim Taleb on Bloomberg Television's "Surveillance Midday" with Tom Keene. Taleb said that he's worried about the crisis in the U.S. more than in Europe and that executive compensation on Wall Street is not fully addressed by regulators, causing a "moral hazard."

On the crises in Europe and the U.S.:

"I'm not worried about Europe. I'm worried about here more. Europe is a patient who has been diagnosed with cancer and starting chemotherapy. That is the worst moment. Over here we have had a much larger tumor and we have not been diagnosed. When you are pumping more and more painkillers [qe2s], you stay in the same place and there are harmful side effects. Here, we are not yet at a consciousness. The problem we had was not a recession. It was simply a problem of too much debt."

On Davos:

"The opposite of success is not failure. It is name dropping. People go to Davos for name dropping. The second problem is that have a framework. When I went there they thought here was a problem of recession. They cannot understand it was a problem of debt. I said to myself, these are not the people who will get us out of here. It is a waste of time. You're chasing successful people who want to be seen with other successful people. That's a game. So it's not productive, it was very depressing for me to go there to realize that these people have no clue. I do so much better staying at home with my fireplace and I have my notebook and I have my library."

On why the U.S. gets regulation so wrong:

"The problem is that regulation is like medicine. If I give you the wrong medicine, I will make you sick. If I give you the right medicine, I will improve your health. With Basel we had the wrong regulation and even today it did not tackle the central points that got us here. The captain does not go down with the ship. If you take collectively the executives of banks and S&P 500 and you'll realize over the past 10 years the stock market is down and these people are rich. They are collectively rich. So, you have a moral hazard, an asymmetry. They have the bonuses and we take losses as a society. That is not fully addressed by regulators."

On what we should be paying attention to that we aren't:

"My idea has been throughout to show that there is opacity and set the limits of what we do not know. The limits are fuzzy, but we definitely can construct decision making policies that don't expose us to this unknown. You avoid having a large corporation because it's much more fragile to the unknown. Some technological things make you vulnerable to the unknown. My idea is to identify what you need to be robust against and implement the policy general to society. Low debt because debt facializes you to uncertainty. It makes you rely on forecasting a lot more if you don't have debt."

The above transcript courtesy of Bloomberg's Amanda Cowie.
Thanks Amanda.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Interesting WikiLeaks Regarding Mervyn King and Bank of England at Height of Crisis; Global Banking System Insolvent Then, Still Insolvent Now

Posted: 17 Dec 2010 04:59 PM PST

The global financial crisis is over (so most seem to think), but some of the WikiLeaks cables at the height of the crisis regarding the Bank of England are quite interesting.

For example the Guardian reports US embassy cables: Mervyn King says in March 2008 bailout fund needed

Monday, 17 March 2008, 18:27
C O N F I D E N T I A L LONDON 000797
SUBJECT: BANKING CRISIS NOW ONE OF SOLVENCY NOT LIQUIDITY

King said there are two imperatives. First to find ways for banks to avoid the stigma of selling unwanted paper at distressed prices or going to a central bank for assistance. Second to ensure there's a coordinated effort to possibly recapitalize the global banking system. For the first imperative, King suggested developing a pooling and auction process to unblock the large volume of financial investments for which there is currently no market. For the second imperative, King suggested that the U.S., UK, Switzerland, and perhaps Japan might form a temporary new group to jointly develop an effort to bring together sources of capital to recapitalize all major banks. END SUMMARY

4. (C/NF) The G-7 is almost dysfunctional on an economic level, said King. Key economies are not included, especially those that have large and growing pools of capital. King said that a new international group was needed to address the issue. It could be a temporary group, and he suggested that perhaps the central banks and finance ministers of the U.S., the UK, and Switzerland could coordinate discussions with other countries that have large pools of capital, including sovereign wealth funds, about recycling dollars to recapitalize banks. King said Japan might not be included because it has little to offer. King noted, though that including the Japanese might force their hand in finally marking to market impaired assets. Kimmitt said that he was cautious about starting new groups in the international financial community because of the inevitable debate around whom to include.

6. (U) Participants: USG: Ambassador Robert Tuttle; Deputy Secretary Kimmitt; Eric Meyer, Office Director for Europe;

The Daily Bail has more information and links regarding the cables in WikiLeaks Cable: "Systemic Insolvency Is Now The Problem, Global Bank Bailout Needed".

Nothing Has Changed

The thing is, what was true then is true today. The system is still insolvent in spite of massive amounts of private debt dumped on the backs of taxpayers and now made public.

Not a single structural problem has been fixed in the US, UK, Europe, Japan, China, Australia, Canada or for that matter anywhere.

It is hard to say where the biggest problem is, but the spotlight at the moment is on Europe. Before that it was on the US, and before that it was on Dubai and Greece. Next month the spotlight may be on Japan or a massively overheating China. Don't forget the property bubbles in Australia or Canada.

Global Banking System Insolvent Then, Still Insolvent Now

US banks are still insolvent. But are Chinese banks any better? Certainly European banks aren't. Japan is a certainly disaster waiting to happen.

One of these days the spotlight is going to simultaneously be on the Eurozone, the US, China, the UK, and Japan. I do not know when that happens, but I do know the result will not be pretty when it does.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Retiree Health Care to Cost San Francisco $4.4 Billion, City Sets Aside $9.7 Million to Cover Costs

Posted: 17 Dec 2010 12:02 PM PST

Unfunded health care liabilities are mounting in nearly every city in the nation. In some of the larger cities, the difference between funding and liabilities is staggering. For example, take San Francisco where Retiree Care to Cost City $4.4 Billion

After months of delays, the San Francisco controller's office announced Thursday that it expected the city to pay $4.4 billion to provide municipal retirees and their dependents with lifetime health benefits. The city has set aside $9.7 million to cover the costs.

In an interview, Benjamin Rosenfield, the city's controller, said that the situation would be worse if the city had not enacted changes that went into effect last year. New city employees must pay 2 percent of their salary into a health care trust fund. Requirements to receive lifetime coverage were also tightened.

But Mr. Rosenfield said tens of thousands of employees are still entitled to lifetime coverage, and they pay nothing into the fund.

To put the $4.4 billion liability in perspective, San Francisco has borrowed $2.6 billion through general obligation bonds in its entire history.

All city employees hired before 2009 were promised lifetime health care after five years of work. The coverage includes all dependents, and it does not matter how long before retirement the employee stopped working for the city.

In November 2009, the United States Government Accountability Office studied retiree health care liabilities of the 39 largest local governments. San Francisco's then-$4 billion tab ranked No. 6 on the list, behind larger cities like New York and Los Angeles.

Preposterous Deals Explained

Why citizens of San Francisco keep electing officials who agree to these preposterous deals is at first glance incomprehensible. Yet, the situation is easily explained.

The union is in bed with city politicians, and via campaigns of fear mongering, coercion, and massive union-funded ad campaigns, unthinking voters keep returning corrupt politicians to city hall.

Outrageous City Response to Crisis

Just look at that outrageous city response to the crisis. Going forward, new city employees must pay 2 percent of their salary into a health care trust fund. That is a smashing kick in the teeth of city taxpayers by those running the city into the ground.

The city would have massive applications for jobs even if the employees had to pick up at 100%.

Judging from the health-care deficiency alone, not even counting unfunded pension liabilities, it is safe to assume San Francisco is bankrupt.

Look at Rosenfield's statement: If the city is unable to set aside large sums to address the growing liability, Mr. Rosenfield said, one viable solution would be that "over time and through collective bargaining" current city employees contribute more.

With that statement, it is easy to see Rosenfield is totally incompetent, and unfit for public office. For starters what's with the "IF the city is unable" nonsense? There is no "IF" about this: The city clearly does not have $4.4 billion, nor does it have any viable means of getting $4.4 billion.

Moreover, and worse yet, collective bargaining is itself one of the problems. The problem and the solution cannot be the same. Thus, anyone who thinks collective bargaining with public unions "over time" is a viable solution is either in bed with union leaders or a complete fool. I suspect both.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Unspoken Benefits of Trash Collecting

Posted: 17 Dec 2010 10:39 AM PST

In response to Trash is Cash (and the economic madness that proves it) I received an email from "FTC" a former trash collector who explains the "unspoken benefits" of being a trash collector.

Hello Mish,

I spent several summers working as a trash collector in Bronxville, NY. Trash collection was non-union and so they could hire high-school kids during the time regular workers would take their vacations. It was the best job, in some ways, that I ever had.

Speaking from experience I could almost guarantee one of two things.

1. The mystery thieves are none other than the garbage workers themselves who front-run the route personally early on special pick-up day to grab any choice goodies before they return in their official capacity. To my mind there is nothing wrong with this as the items get recycled/reused rather than going to the landfill.

2. Someone in the main office is tipping off a ring of friends who are doing this, and the garbage workers are ticked off because they are finding themselves preempted when they show up early and the goodies are gone. I am neutral on this practice but it does take away one of the long-established unspoken benefits of the job. Moreover, it would explain the workers raising heck over this.

Hope this sheds a little insight.

Thank you for all you do every day - I read your blog as an ever-unfolding real-time economics course.

Sign me "Former Trash Collector"

This is just a quick anecdote from a reader while I am working on other things.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Support Rises for "European Nanny State"; Is Germany unfit for the Euro or is the Euro Unfit for the PIIGS?

Posted: 17 Dec 2010 12:31 AM PST

In Europe, a big finger-pointing escapade is is full swing. Those looking for scapegoats for what ails the Eurozone have found a convenient target in German Chancellor Angela Merkel for refusing to cooperate in resolving the European sovereign debt crisis. Merkel is accused of anything and everything including being "extraordinarily lazy" as well as for "taking Germany to the brink".

Those charges were made in the EuroIntelligence article Germany is rising up against Merkel's euroscepticism

Merkel has taken Germany to the brink – but it looks that Germany does not like what it sees. Frank-Walter Steinmeier, the leader of the opposition in the Bundestag, put his fingers on the issue. If Merkel continues to favour crisis-solution via the ECB, then the ECB ends up as a bad bank.

The Left Party's spokeswoman said Merkel's position did not reflect the national interest but those of the banks (a position with which we would agree. Merkel is extraordinarily lazy in the definition of what constitutes the national interest.) Quentin Peel of the Financial Times noted: "The one thing that united almost every speaker was a determination to be the most pro-European. No one sought to blame Ms Merkel for not being German enough."

Not knowing the complete details of the Steinmeier/Steinbrück plan, I proposed in EU Agrees to Agree in 2013, Bickers Like Mad Now; Smoldering Greece, Smoldering Politics "it could conceivably work".

However, I also stated "It would involve agreement on haircuts, debt guarantees, E-bonds, fiscal policies, and debt rescues. Good luck with that."

The point being theory is one thing and practice is another. After reading the EuroIntelligence article I have strong doubts about the theory itself.

Haircuts Mandatory

The one thing I am absolutely certain of is the need for haircuts on sovereign debt. However, ECB policymaker Christian Noyer (also the Governor of the Bank of France) stated "As far as I'm concerned, I exclude that there will be haircuts in the future."

ECB president Jean-Claude Trichet warned Angela Merkel not to "unsettle bondholders".

Piling on, Ireland's finance minister, Brian Lenihan stated "Those who think we can unilaterally renege on senior bondholders against the wishes of the E.C.B. are living in fantasy land."

My comment on the above was "Once Ireland's finance minister is thrown out on his ass, we will see just who is in fantasy land regarding haircuts on bonds."

Angela Merkel's Big Mistake

Merkel's big mistake was caving in to Trichet, Noyer, and others who insisted on "no haircuts".

For that, she is now the subject of "The Big Point" with everyone jumping on her back and pointing fingers. Consider this statement from the EuroIntellihgence article:

The Left Party's spokeswoman said Merkel's position did not reflect the national interest but those of the banks (a position with which we would agree. Merkel is extraordinarily lazy in the definition of what constitutes the national interest.)

European Nanny State

My initial reaction was "It would seem that Merkel stood up FOR Germany and against the banks when she insisted on haircuts."

Just to be safe, I emailed my friend "HB" who lives in Germany, asking for his thoughts. His reply was "I completely agree with your interpretation."

He went on to comment about a reference in the EuroIntelligence article citing Der Spiegel's online editorial "Union of the Unreconciled" calling for the coordination of all aspects of economic policy, includes taxes, wages, and pensions.

My friend "HB" commented

This is what the fools that rule the Eurocracy want - a huge centralized nanny state in which taxes are 'harmonized' and citizens can no longer choose between low and high tax nations.

It is the absolutely worst thing that could possibly happen. It would be better for the euro-area to break up.

Bazooka-Bang Ploy

EuroIntelligence cited 'European sovereign debt kerfuffle' in which Willem Buiter calls for a "Big Bang" Approach.

According to Buiter, the following [needs to happen]:

1. Get out their 'big bazooka': Expand the EFSF to €1,700bn to cover potential demands from Ireland, Greece, Portugal, Spain, Italy and Belgium.

This is the amount he estimates is enough to deter speculators and to tide countries over until the ESM commences in 2013. Which is, by the way, when Buiter thinks the sovereign defaults will probably start to occur. Gulp.

2. Initiate a coordinated process of bank restructuring in the distressed periphery.

Buiter reckons that bank recapitalisation still has a way to go, and that Europe needs to stop kidding itself that senior bondholders can go much longer without a 'short back and sides'.

But the process of bank restructuring can't continue piecemeal as this will lead to the 'mother of all contagions' as bondholders dodge countries where they think haircuts are imminent.

I certainly agree with point number 2. However, point number 1 is simply wrong. How many times does it take to prove the "bazooka theory" does not work. Besides, if you are going to impose haircuts, why would you need to expand the EFSF to €1,700bn in the first place?

The proper way to deal with this mess is for bondholders to pay the full burden. Should that prove to be insufficient to recapitalize banks, then and only then should taxpayers be involved in bailouts.

Bondholders took the risks, they should pay.

Germany's Lose-Lose Situation

Mohamed El-Erian, PIMCO's CEO, writes Germany in a Lose-Lose Situation

Pity Germany. It goes to Thursday's two-day European summit in Brussels in a visible lose-lose situation, and with no easy way out of a complex dilemma that pits good politics against bad economics. Its hard-fought economic gains, earned over many years through restructuring and fiscal discipline, are threatened by the crisis in peripheral eurozone economies that adopted a different policy approach. To add to the irony, these challenged countries (and indeed the zone as a whole) now look to Germany to fund one rescue package after another.

Rather than simply doubling up on a faltering liquidity approach, the time has come for Germany to lead a more holistic solution focused on addressing the periphery's debt overhang and competitiveness problems.

Those were the opening and closing paragraphs of an interesting article. The opening paragraph was faultless. In the final paragraph, El-Erian was correct to slam the Bazooka concept of "doubling up on a faltering liquidity approach".

Unfortunately his idea "The time has come for Germany to lead a more holistic solution focused on addressing the periphery's debt overhang and competitiveness problems" is long on flag-waving and short on details.

In the video below El-Erian offers a more detailed look at the problems although sill without solutions. It is well worth a play.

Periphery is Slowly Contaminating the Core

El-Erian discusses how contamination migrates up and how time will make things worse because the EU did not get ahead of the crisis. In addition, he slams the idea that there can be two sets of rules for debt before and after 2013. I have made similar comments several times as well.

Here are a few of the more interesting statements El-Erian made

"What's happening in Europe is unambiguously deflationary. Whatever projections you had for growth in Europe, you are going to be revising them down."
"Don't get sucked into peripheral exposure simply because money is being thrown at the problem. Money will not solve this issue. It's a balance sheet issue."
"Be Cautious of the Euro, even German bonds because the periphery is slowly contaminating the core."
"The Eurozone is so heterogeneous that the bad contaminates the good."
"Germany, France, Netherlands, Austria are homogeneous countries that would stay in the Eurozone. Nonetheless, a monetary union has to be accompanied by a more fiscal union."

El-Erian does not think the Euro goes away but the 16 member Eurozone group may shrink.

Germany Unfit for the Euro?

In distinct contract to El-Erian's reasoned comments, please consider Germany is unfit for the euro by Joerg Bibow.

Sooner or later Europe may have to conclude that Germany is unfit for the euro. Let the Germans have their mark back if they are so keen. Let the new euro-mark rise to US dollars 2 or 2.50, so that the joys of stability are real. Euroland may then regroup around France. With Germany once again proving immature to provide constructive rather than destructive leadership, Europe's fate is in France's hands.

One thing's certain, France would not be willing to bail out the PIGS by itself. Moreover, if Germany and France left, how long would Ireland stay enslaved to the EU? Six months?

Then you have to ask, how long would Greece, Portugal, Spain and Italy stay together singing Kumbaya?

Is Germany unfit for the Euro or is the Euro unfit for the PIIGS? Isn't that the real question?

Such discussions are the consequences of a currency union with a one size fits all interest rate policy combined with widely varying fiscal policies, pension structures, union benefits, and other problems.

Arguably, the Euro experiment was never meant to work in the first place, at least for such a complicated heterogeneous mix.

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