A Most Dangerous Precedent.

Whatever one’s position, in favor or opposition to the president’s health care law, the SCOTUS decision was what can only be described as the worst of both worlds.  The left will no doubt gloat that this decision is some sort of a victory for “fairness.”   The Right will no doubt be energized and even more determined to achieve victory at the polls in November in order to repeal the law in its entirety. 

Be that as it may for either side.  The truth is we all lost something by this decision; just a bit more of our liberty.  By the way the court framed it decision, they have in fact empowered government to tax non-behavior.  This is not taxing you on your income, not taxing you for a purchase you’ve made.  This is not even punishing you for having committed a criminal act.  This taxation for not doing something that the government has decided is in your “best interest,” taxation for not participating. 

Dangerous indeed.  Were does it stop?  Are we now no longer even be allowed to tell government that our choice to act or more importantly to not act is none of its business?  The court has opened the door to even more intrusion into or private lives.  They have in fact said there are to be no limits just so long as such intrusion is couched in terms of our “best interest” and enforced in the form of a tax.

No one in their right mind thinks that government will suddenly say “we’ve gone far enough.”  There will always be politicians, from both sides of the aisle, who will seek to corral more and more power and control for government simply because they profit from it or some power group wants a law passed in its “best interest.”  The need for which will be reinforced with campaign contributions.

What next?  We have too much obesity so we all must participate in some government approved exercise program and if we don’t government will tax you because you didn’t do the prescribed number of push-ups?  Or maybe they will tell us that we should eat a certain amount of what the government defines as “healthy” foods.  You don’t really have to, but if you don’t, they’re going to monitor your grocery store receipt and tax you for not participating in what they have deemed is our “best interest.”  

Perhaps my concern is overblown because there is no money to pay for Obamacare or any other pernicious program that may grow out of it.  But have no doubt politicians will continue to expand the excesses of government until it collapses of its own weight.  Maybe then we will get something approaching a clean slate and can start again to build anew a system based on individual liberty and personal responsibility rather than the sloth of demanding that government force everyone else to provide for us all those things we have become to lazy to do for ourselves.  One where we tell central government to stick to its proper rolls of national defense and foreign relations and little else.

The Patients Are In Charge of the Asylum.

The announcement coming out of the G20 meeting in Mexico That the EU countries are now going to pony up another €600 billion ($750 billion) to further bail out Spain and Italy clearly shows that the inmates are in charge of the asylum.  Just a month ago we were told that Spain did not need a bail out but now they are to be given €100 billion to re-capitalize their banks. 

So just where is this €600 billion going to come from?  According to the press release the largest part is to come from the ESM (European Stability Mechanism), problem is that the German Bundestag has not yet authorized Germany’s participation in the ESM.  The primary reason it has not done so is that the German voting public has repeatedly (in local elections) demonstrated that they have had enough of bailing out the profligate PIIGS.

If the structure of the so-called agreement is anything like the €100 billion bailout of Spain it will obligate the already bankrupt to loan to  the bankrupt at rate below that which they will in turn have to borrow the funds. 

Lets be honest here the only winners here (and that only short term, very short term) will be the banks facilitating the loans.  So what is the financial reality behind this latest of stopgap measures?  Quite simply it’s the CDS derivatives (Credit Default Swaps) that would come due if the Spanish and Italian banks went belly up (never mind Greece, Ireland and Portugal).  Safe to say there isn’t enough money in the world to cover the loss.  What is known is that large U.S. banks have underwritten these policies and would be bankrupted quite literally overnight if they were called to pay up.

Never mind the danger presented by Greece leaving the Euro zone, once the German voters and taxpayers are presented with this €600 billion bill they may well say enough is enough and leave the Euro themselves.  What the Germans behave like nationalists?   Yeah right, like that has never happened before.

Rest assured the politicians and bankers are scared to death of the Frankenstein’s monster that they have created.  Rest assured as well that none of them will have the courage to address the issue in public. The FED and the ECB are going to have to put the printing presses into over drive whether they want to or not.  They were of course were hoping to put any such action off until after the U.S. elections, but reality is moving too fast for them to keep playing the propaganda game for that long.

Hope for the best but prepare for the worst, things are going to get ugly long before November 6^th. 

Europe’s New Fascism: As the Bureaucrats March Blindfolded Into the Minefield of Unintended Consequences, is Germany Playing a Game of Third Time’s the Charm?

In the wake of the failed elections in Greece the spotlight of economic instability moved to the other end of the Mediterranean and Spain.  After weeks of mergers, consolidations and outright nationalization the pronouncements coming out of Madrid were that there would be no need for any outside support or bailouts for the collapsing Spanish banks. 

Nobody really believed the propaganda, Spanish bond yields and CDS rates soared and its stock market fell like a stone.  Faced with these realities the official story began to change. As the negotiations dragged out the numbers grew exponentially.  First it was the banks might need €10 billion. That soon became €18 billion and then €40 billion and then €80 billion and now it stands at €100 billion ($125 billion).  Never mind that the actual liabilities arising out of both a collapsed housing market and a complete failure of the government’s massive investment in a so-called green energy sector is more likely closer to €400 billion. 

The negotiations between the Spanish government and the European Commission revolved around several factors.  Firstly, were the loans to be made directly to the banks and Spain and it taxpayers only liable for that percentage of the banks that had been nationalized or would they be made entirely to the State and then disbursed to the banks putting the Spanish taxpayers on the hook for the entire amount in any subsequent failure?  In the end what was agreed to was to loan through as quasi-governmental bank stabilization commission so that who exactly is on the hook for this €100 billion remains nebulous at best.  Secondly and more controversially, was Spain’s refusal to agree to any budgetary controls; i.e. austerity.  On this point Spain appears to have won a pyric victory at best.  Even before the agreement was announced rumblings and complaints were heard from Ireland about wanting to renegotiate their bailout deal to do away with the onerous austerity provisions.  In other words “We want the same deal Spain got.”

So how was Spain able to make a deal absent the austerity demands imposed upon Greece, Ireland and Portugal?  Quite simply, blackmail.  Behind closed doors the Spanish no doubt told the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) representatives, “we are just to damn big to fail and if we don’t get the deal we want it will crash not only Europe and the Euro but the entire global ponzi scheme.”  Even a cursory examination of the deal revels its patent insanity.  For example, look at the requirement that Italy loan Spain €20 billion at a 3% interest rate.  The problem for Italy is that Italy doesn’t have €20 billion to lend, so they have to go onto the open market and borrow that €20 billion at a 7% interest rate.  They might as well be draining blood from one arm and pouring a good percentage on the floor before transfusing it into the other arm.

 The EC, ECB and IMF folded and Spain got the deal.  The Spanish deal will very likely move the coming Greek and Irish elections firmly into the camp of the “no austerity” parties.  Just what Europe needs, political chaos piled on top of economic chaos.

Running in parallel to these negotiations has been a constant propaganda operation coming out of the EC, the ECB and IMF calling for so-called “Eurobonds.”  Any such bonds would be issued against the assets of the European Economic Union member states as a whole.  The drumbeat continues in spite of Germany’s stated steadfast opposition.  

In spite of there being a growing discontent among the German population for being used as Europe’s cash cow, as reflected in recent local elections, Chancellor Merkel’s government is playing power games behind the scenes.  While stating opposition out of one side of her mouth out the other side comes possible consideration if any future loans are backed by the sovereign gold holdings of the central banks of the troubled nations coupled with calls for those nations to surrender control of their budgets to the un-elected EC and the ECB.  

So much for democracy, so much for National self-determination.  In other words accept austerity imposed and controlled by Germany.  Germany failed in two wars to impose control over Europe, so now are they seeking to economically colonize the PIIGS and possibly even France through the EC and the banks?

Sadly I don’t see any happy endings for the Euro or Europe or the US given the current trajectory.  But hey maybe they can stir up another war somewhere to take everybody’s attention away from this looming disaster.  Syria anyone?

Derivatives for Dummies And Why The Politicians Refuse To Discuss Them.

Introduction and background.

While attempting to engage in political and/or economic debate I frequently ask what the other person knows of financial derivatives and how they play into the economic picture.  More frequently than not I am met not with an honest admission of an absence of knowledge, but a hyper-sensitive denial that they are in any way relevant to the discussion.  Some so engaged are so sensitive on the issue that they quickly sink to the personal pejorative as a means of distracting from the issue.  I have found those on both the left and the right, to varying degrees, are guilty of this tactic.

The question of course is a rhetorical one.  I have found that putting it forth demonstrates not just their lack of understanding of what derivatives are, how they function and effect markets, but also how this absence of knowledge obviates their political posturing, not to mention any personal attacks they make.

This then leads to a follow up question; How can anyone propose a viable political direction or solution to a problem when they don’t have the first inkling of the realities that created the problem in the first place?  This then leads to several alternative reactions; 1) flatly refusing to further engage, 2) renewed vituperation's, or, 3) the favorite fall back position ,that they were just expressing an opinion, and that of course all opinions are equally valid or worthy of consideration.  It’s at this point I tell them that I have an opinion on that as well; what utter drivel. 

Anyone with any intelligence or intellectual honesty would no more ask grocery store clerk to explain a cancer diagnosis than they would ask a political partisan, particularly a liberal one to explain the implications of derivatives.

The aforementioned repeated experience inspired this piece.


Contrary to what few stories one might find among the orthodoxy of economic talking heads, derivatives aren’t really all that complex.

They can be best explained by constructing an analogy or two that even the partisans among us should be able to understand.

Derivatives are quite simply a form of insurance policy.  Nothing wrong with insurance right?  Well no, unless of course the value of those policies outweigh the assets of the underwriters on a scale of several hundreds to one.

Imagine if you will the U.S. were to experience a disastrous hurricane season.  A dozens cities along the Gulf coast and the eastern seaboard are destroyed.  Think Katrina on steroids.  Most of those homes and businesses are insured of course and the owners will file the requisite claims for financial restitution.  Except that if the sum total of all the claims exceeds the cash reserves and liquid assets of the underwriters, they go bankrupt.  Not only do the claims not get paid and the policyholders are destroyed, but all of the stockholders and bondholders in the insurance companies are also wiped out.  This includes not just individuals, but because of interconnectedness, many banks, credit unions and mutual funds.  Even more insanely insurance companies underwrite policies against each other’s insolvency.  This is a derivative know as a default swap.  The failure of one threatens the solvency of all.

This is exactly what happened to AIG. They had insured the assets and solvency of GM, Chrysler, Lehman Brothers and Merrill Lynch.  When they went belly up AIG did not have the assets to cover the losses, so the good old U.S. taxpayer was called to the rescue.

To make matters worse, the repeal of the Glass-Steagall act has allowed the banks to become insurance companies and to issue some charming little derivatives known as  “naked swaps.”  These are nothing more than insurance policies issued to individuals and corporations who hold no underlying interest or liability in the insured asset (if you want to call debt an asset, but that’s not the point).

Picture if you will, you want to buy a new car.  You have the down payment or the trade-in but you need to go to the bank and borrow $20,000.00 to complete the purchase.  In order for the bank to loan you that money you must show them that you have insurance to recover the value and repay the loan in case of theft, an accident or some other total loss.  Now imagine that 99 of your neighbors also took out insurance policies against the value of your car.  They don’t make the payments, they don’t pay the taxes and they don’t buy you gas, but if you suffer a loss, not only does the insurers have to pay off your creditor for the $20,000 loan, they also have to pay your 99 neighbors $20,000 each on their claims.  So the insurance companies end up shelling out $2,000,000 on an asset that was only worth $20,000. 

Criminal fraud you say?  My point exactly, but that is just what we are faced with.  It’s not just the $140 billion in Greek debt that would get wiped out in a default, but $1.4 TRILLION in derivative insurance policies (Credit Default Swaps) that would come due and could not possible be paid.  Now multiply that number by 4 or 5 for Spain and 6 or 7 for Italy and you might begin to see just how untenable a situation the banks have put the entire world in.  So greedy are they to collect small premiums on hundreds of huge policies that they have placed us all in peril. BofA alone has underwritten $50 Trillion in derivatives, JP Morgan another $70 Trillion (that they admit to).    The total derivative market is estimated at over $1.4 QUADRILLION!  How many people can even grasp the size of that number? I know I have a hard time with it.  I do know it is more money than exists or has ever existed.

If I am afraid of anything it most certainly is not being faced with any sort of caustic hyperbole.  But derivatives do scare me, as they should scare anyone who has even the smallest grasp of economics and the size of the numbers involved.

Unfortunately for the politicians and their media hacks, once the derivatives issue enters into any honest analysis of the current financial crisis, they destroy both the arguments of the right for so-called austerity and the arguments of the left for more stimulus and increased taxation.  Hence the refusals by both sides to consider or even discuss them in any context.  Better for them to pretend they don’t exist or are irrelevant to the situation.

Anyone who knows me understands that I hold the POLITICAL right and left in equal contempt as they are both beholding to the same crony capitalist (i.e. fascist/Fabian socialist) financial interests on Wall Street and at the Eccles Building.  The concepts of formation and implementation of policy have not been subsumed but completely lost in the obfuscations of political arguing.

What I am is an unrepentant classical liberal and capitalist, the very thing that both sides mutually fear and loathe.  Neither side wants the voting public or even their own political hacks and operatives to understand that in the post Eisenhower/Kennedy period we have politically devolved into a one party state that just happens to have a façade of right and left wings. 

We elect Republicans for a term or two and they pillage our economy and rights.  We get tired of them so we elect Democrats for a term or two and they do the same thing until the public grows weary of their pillaging.  Rinse repeat, rinse repeat. Nothing changes except for the worse, and the game goes on with each side concerned with nothing but the maintenance of their own position and power. 

As it now stands we are reaching the limits of this corrupt game.  The cancerous infection of debt and deficits has grown beyond the point of any possible political excising, not that either party would be willing to do that even if it were possible.  Their aforementioned financial owners would never allow it.  Such an action would not only destroy their institutions but would leave individuals exposed to criminal charges both nationally and internationally.

The precedent for such trials was established at Nuremberg where Nazi finance minister Hjalmar Schacht was in the dock along with the other leading Nazis.  That he was acquitted was a great travesty of justice.

(As an aside, I state that not just as a personal opinion. In the early ‘70’s I had the great pleasure of meeting Bernard Metzler, the man who was originally charged with preparing the prosecution’s case against Schacht.  He asked to be removed from that charge after complaining to Chief Prosecutor Roberts that he was coming under pressure from other member of the staff to drop the charges “for political reasons.”  He also stated that in conversations he had with Roberts and some of the judges after the trial, that Schacht was acquitted because “the political pressures were to great.”  He further said that in his mind he interpreted that to mean threats, but he didn’t think it could ever be proven.  Schacht’s personal and financial connections to FDR’s Ambassador to the USSR, Averell Harriman, were to numerous and ugly to withstand scrutiny at the time. He was too powerful and too well placed within the Truman administration.)

So then the financial elites will fight to the very end to protect themselves and their power, to keep the citizens in perpetual debt bondage.  They will use their politicians and media operatives as their front line shock troops to hide their own culpability.  They know full well that the end result of their game will be disastrous, but they think they are well enough insulated by power and money that they will be left as the last man standing so to speak.  They will be laughing all the way to the their vaults as the politicians, media shills, and naïve hacks end up bearing the brunt of the public’s wrath.

We need to wake up, all this talk about raising taxes a few billion here or there or cutting the budget a few billion over 10 years is utterly meaningless.  You might as well try to lower the level of Lake Michigan with a bucket.

Nothing in the worlds of political economy or financial gamesmanship is as simple as any left vs. right argument.  Anyone who tells you it is, is either a fool or trying to play for one.

And that is why I have said taking everything, all sovereign debt back to zero is the one and only debt solution.  Would that be fair to some and unfair to others?  Yes but it would strip the banksters of much of their power and provide a foundation upon which economies might be rebuilt.  Unless of course you like the idea of a deflationary collapse followed by hyper-inflation like no one has ever seen.

On Wisconsin Redux.

 I  first posted this back in February of 2011.  With the recall election coming up this Tuesday I thought it was worth posting again.  The fundamentals have not changed.

It’s fitting if not ironic that Wisconsin, the birthplace of the public employee union may well become its burial ground as well. Maybe we should call what is unfolding there the “Nightshade Revolution,” as they seem to be poisoning themselves by the consumption of the fruits of their own corruption.

So then I have a few questions for our liberal and union friends that are in need of answers.

1. How is it not corrupt, if not morally incestuous, for public employee unions to use the state to forcefully expropriate dues from its compulsory members and then use those dues to elect the very politicians with whom they negotiate their contracts?

2. Is it simply beyond the intellectual capabilities of the left to see the hypocrisy of chanting for freedom and democracy while attempting to block a vote by duly elected representatives? Or that Democrat State Senators have fled from the democratic process because they know they will lose that vote?

3. Are these same Democrats that so loudly protested Republican efforts to use the established rules of the US Senate to block President Obama’s Agenda now celebrating an abrogation of the rules of the Wisconsin Senate?

4. When President Obama said “Elections have consequences,” and “We won,” did he mean that they only have consequences for his opponents, and his friends in organized labor should be exempt from the consequences of elections or their own corruption?

I for one welcome the public employee unions taking the hard line in Wisconsin. The sooner they self expose their attitude that the State’s purpose is to serve their employees and line the coffers of the unions, over and above the needs and concerns of the public they are supposed to be serving, the sooner this monster can be slain and shoved into the grave of history it so justly deserves. That the union bosses would sooner risk the jobs of their members rather than their corrupt power structure should be telling to anyone who takes the time to do any critical thinking about what is going on here, as to just who they are really looking out for.