Monthly Archives: October 2011

GERMAN COALITION SOURCES: MERKEL SAYS LEVERAGING EFSF VIA ECB IS RULED OUT

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The news out of Europe has turned from mixed for the last week or so to troubling.

On the one hand they seem to realize that the answer is the ECB writing the check, and on the other they seem to be saying they don’t want to do that. And on the one hand they say Greece won’t default, and on the other is a serious discussion of the ramifications of default. And as the haircut talk on private holders of Greek debt has gone from 21% to 50% and maybe more, the ECB says they will keep their Greek bonds which will presumably mature at par, but at the same time additional ECB capital calls are under consideration due to what they call increased risk of loss.

The idea that the EFSF alone writing checks to support Portugal, Spain, and Italy would weaken the credit worthiness of the core has also been discussed, which is why talk of ECB support had materialized.

Meanwhile, even as the austerity continues to bite, perhaps to the point where the austerity is now causing deficits to be larger, additional austerity measures continue to be demanded and imposed.

And where the banks stand with regard to solvency is anyone’s guess as well.

In other words, it’s all moving further away from any sense of resolution, with uncertainty about as high now as it’s ever been, as is the potential for a catastrophic financial event.

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ECB Capital

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I’ve been reading up some on ECB capital.

Seems a minimum capital level for the ECB is not specified.

However, the ECB distributes profits ultimately to the national govts.

And that ECB losses are ultimately the responsibility of the national govts.

That’s why, faced with potential losses, the ECB has required the national central banks to advance additional capital to the ECB.

However, in the event of losses, the ECB is not required to call for capital from its members, but as a matter of policy the ECB has called for capital from its members when it deemed the risk of losses had risen.

So while the ECB, like the Fed, can, operationally, allow its capital to go negative without operational consequence. The ECB, unlike the Fed, looks to keep it’s capital positive by requiring contributions from its members.

This therefore means, for example, that should the ECB realize losses on its Greek bonds, it will demand additional capital from the national central banks/national govs. which will further erode their solvency.

The reason for this seems to be the notion that ECB losses left as negative capital would otherwise be inflationary.

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G20 Looks to IMF to Show How it Could Help in Debt Crisis

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What the IMF could do is contribute capital to the ECB as needed, and then let the ECB write the checks.

G20 Looks to IMF to Show How it Could Help in Debt Crisis

By AP

October 15 (CNBC) — The finance chiefs of the world’s leading economies opened the door Saturday for the International Monetary Fund to play a bigger role in fighting the eurozone’s escalating debt troubles.

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Posted in ECB

MMT proposals for the 99%

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1. A full FICA suspension to end that highly regressive, punishing tax and restore sales, output, and jobs.
2. $150 billion in federal revenue sharing for the state goverments on a per capita basis to sustain essential services.
3. An $8/hr federally funded transition job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment.
4. See my universal health care proposals on this website (Health Care Proposal).
5. See my proposals for narrow banking, the Fed, the Treasury and the FDIC on this website (Banking Proposal).
6. See my proposal’s to take away the financial sector’s ‘food supply’ by banning pension funds from buying equities, banning the Tsy from issuing anything longer than 3 month bills, and many others.
7. Universal Social Security at age 62 at a minimum level of support that makes us proud to be Americans.
8. Fill the Medicare ‘donut hole’ and other inequities.
9. Enact my housing proposals on this website (Housing proposal).
10. Don’t vote for anyone who wants to balance the federal budget!!!!

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Radio interview today

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Warren will be on a radio talk show at 1:30pm EST today for an hour which can be heard here:

http://wstxam.com/

Call in numbers:

340 773 9951
340 773 0490

Click here for replay. (Wait 45 seconds for regular download)

Comment from reader:

If you hit ‘regular download” on the replay link Warren provided, it goes directly into your iTunes as “WSTXAM970Redfield&Mosler”. At least on my MacBook- and it showed up as a music file not a podcast.

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Retail Sales and euro dynamics

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Agreed.

Fundamentally, the 8%+ US federal budget deficit continues to support sufficient aggregate demand for modest GDP growth. Market participants don’t seem to understand this and were discounting a far higher probability of a recession than otherwise.

The strong euro/weak dollar strong stock dynamic continues, with the ECB continuing it’s strong euro policy of forced austerity in exchange for funding. However, this policy also slows growth in the euro zone, which tends to push deficits higher through softer tax revenues and higher transfer payments. At some point this means the ECB has to reconsider a policy designed to bring deficits down that is instead causing them to rise. The problem is they have no such alternative policy, and instead are looking for tight fiscal policy to drive exports. The problem with that is that without a policy of buying $US (the old German model), instead of exports rising, the euro rises to the point where trade stays relatively balanced, as has been the case since the inception of the euro.

Meanwhile, they seem to have responded adequately to the solvency issue with the ECB writing the check as needed. But with a slowing economy the checks the ECB must write get geometrically larger, which, while not an operational constraint, are a daunting political challenge that can quickly throw it all into even more disarray.


Karim writes:

  • Better than expected at 1.1% headline and 0.6% control group, and net +0.5% revisions to July and August control group.
  • Motor vehicles and parts clearly lifted in mid to late Q3 from end of supply chain disruptions
  • And lower gas prices also helping
  • These forces are looking to bring Q3 and Q4 growth near 2.5%, lower than the 3% plus that the Fed was looking for in Q2, but stronger than the post-debt ceiling debacle private sector consensus.
  • Also strong enough to delay need for ‘additional measures’ from Fed, though they will continue to be discussed in light of risks from Europe (via trade impact as well as financial conditions impact (fx, equities, bank lending,etc).

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Bill Mitchell on Thomas Sargent and the Nobel Prize

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Rewarding those who are culpable

By Bill Mitchell

October 14 — I didn’t comment earlier this week on the recent decision to award the (not)Nobel Prize in Economics to Thomas Sargent. My thoughts were otherwise occupied but it is worth recording that Sargent has been at the centre of the mainstream macroeconomics literature which has been used to justify the claims that government fiscal interventions are ultimately futile and only generate accelerating inflation. His ideas helped my profession to claim authority in its campaign to pressure governments in deregulation, privatisation, inflation targetting and abandoning full employment as a primary policy target. The upshot has been three decades of policy development which really laid the foundations of the current crisis. If Sargent and his cohort had not been so influential the world economy might not have been in the mess that it finds itself in. And … millions might still have their life savings and be gainfully employed. The so-called Nobel Prize in Economics continues to reward those who are culpable.

I covered the event last year – Nobel prize – hardly noble – and noted that the award had nothing to do with Alfred Nobel’s will which wanted prestige to be bestowed on “shall have conferred the greatest benefit on mankind”. Instead, the economic prize was established in 1968 by the ultra-conservative Swedish central bank and the prize is awarded by the Royal Swedish Academy of Sciences.

There is a good critique of Sargent’s selection by John Cassidy in his New Yorker article (October 12, 2011) – A Nobel for Freshwater Economics. He said:

This week’s announcement of the Nobel Prize in Economics got me thinking about the state of the subject, and my thoughts weren’t very positive. Three years after the great financial crisis of 2008 discredited the ruling orthodoxy in macroeconomics and finance, the Royal Swedish Academy of Sciences has chosen to honor one of the leading creators of that orthodoxy: Tom Sargent, of New York University. And judging from the reactions to the Nobel announcement, most academic economists heartily approved of it.

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ECB and Euro zone on Greek debt haircuts

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So how do you reconcile these two releases?

How about, they want the market to price in large haircuts so the ECB can buy the bonds that much cheaper?

Just guessing!

ECB Says Private-Sector Involvement in Rescues is Stability Risk

By Jeff Black

October 13 (Bloomberg) — The ECB said the involvement of the private sector in euro-area bailouts through enforced investor losses is a risk to financial stability and would have “direct negative effects” on the banking sector. While private-sector involvement “is certain to place significant stress on the solvency of banks and other private financial institutions in the country concerned, it will also have an impact on the balance sheets of banks in other euro-area countries,” the bank said in its monthly bulletin today. “The ECB has strongly advised against all concepts that are not purely voluntary or that have elements of compulsion, and has called for the avoidance of any credit events and selective default or default.”

Europe eyes bigger Greek losses for banks

By Jan Strupczewski

October 12 (Reuters) — Euro zone countries will ask banks to accept losses of up to 50 percent on their holdings of Greek debt. Ahead of a make-or-break summit of European leaders on October 23 at which a comprehensive new Franco-German crisis plan is expected to be discussed, four euro zone officials told Reuters that a “haircut” of between 30 and 50 percent for Greece’s private creditors was under consideration. That is far more than the 21 percent loss they had asked banks, pension funds and other financial institutions to accept in July as part of a second rescue package for Athens.

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Cain Beats Romney as GOP Frontrunner for Primary

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Shows how quick Republicans are to ‘step up’ from Romney. Shows there’s a lot more than racism working against President Obama.

And shows translating Tea Party rhetoric into logically consistent policy proposals is highly problematic at best.

With Cain leading, his 999 proposal is suddenly getting more serious media attention, and getting ripped to shreds.

Leaves the Republicans, and the nation, without any headline proposals to debate, Romney holding on as the default candidate, and President Obama holding on to a narrow lead.

Cain Beats Romney as GOP Frontrunner for Primary

By John Harwood

October 12 (CNBC) — Business executive Herman Cain has jumped to the top of the volatile Republican presidential race in a campaign season dominated by economic anxiety.

Among Republican primary voters, Cain leads former Massachusetts Gov. Mitt Romney 27 percent to 23 percent, according to the latest NBC News/Wall Street Journal poll.

Texas Gov. Rick Perry, who led the August NBC/WSJ survey with 38 percent supported, plummeted to third place with 16 percent. He was followed by Rep. Ron Paul with 11 percent, former House Speaker Newt Gingrich with 8 percent, Rep. Michele Bachmann with 5 percent, former Utah Gov. Jon Huntsman with 3 percent and former Sen. Rick Santorum with 1 percent.

Cain’s rapid rise, from 5 percent in the previous poll, underscores the volatility of the 2012 GOP nomination contest. Like the rank-and-file’s earlier flirtations with Donald Trump, Michele Bachmann and Perry, this one, too, may not last.

Bill McInturff, the Republican pollster who conducts the Journal/NBC survey with his Democratic counterpart Peter Hart, cautioned that this latest “speculative bubble” reflects the Republican base sifting a presidential field without a dominant front-runner. Romney holds a lead in fund-raising and in New Hampshire’s first-in-the-nation primary, but has so far been unable to capture the heart of his party.

“He’s the remainder-man candidate for the Republicans,” Hart said. “Acceptable, but not their first choice.”

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