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
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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
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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
Click Here To Scroll Thru My Recent Post List

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
Click Here To Scroll Thru My Recent Post List

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Friday, December 17, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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