Tuesday, August 9, 2011

A European Fall: A Youthful Rage

For all of the talk about American extremism, American politics and the grievances thereof are largely civil affairs.  Riots are an absent feature of our political discourse, even though we may shout at representatives who pass by the protest lines during healthcare debates or debt ceiling compromises.  In point of fact, Americans may shout a lot, but it's a real testament to our civility that our pundits are shocked at shouting.  The things pundits complain about here are largely much ado about nothing: crosshairs on political districts, rhetoric that suggests but never endorses violence outright, and malapropisms in political speeches.

In Europe, however, things are getting out of hand, largely because populations where half of the young people have no jobs, no futures, and no prospects are simmering with resentment.  Europeans have been raised for sixty years with the expectation that their governments will do something, or, from an American perspective, everything.  Europeans are raised to expect cradle to the grave healthcare, publicly financed education, government mandated workweeks and holidays that are generous by any standard, and when Europeans are faced with the loss of a lifetime's worth of expectations, they are not surprisingly prone to demonstrate their displeasure.

A totalitarian state may survive so long as it delivers on the social welfare front.  When it does not, people are no longer inclined to trade their freedoms for the security of having their needs and a few of their desires met.  Even in the most generous of welfare states, people have to work.  If there are no jobs to be had, it's difficult for people to find subsistence.  They get in the streets and protest because there isn't anything else to do.

Last week, police in the Tottenham suburb of London killed a young man named Mark Duggan, and Tottenham exploded.  This is not unprecedented, because when the police raided a home in Tottenham back in 1985, a young woman suffered heart failure and died, and this led to riots as well.  The riots have spread to other cities throughout Great Britain as well.  It is no coincidence that London has the highest unemployment rate for 16 to 24 year olds, some 22%.

The unemployment rate throughout the United Kingdom has gone from 12% in 2004 to some 20% today.  Economic opportunities are few and far between, with 40% of the overall unemployed workforce falling into the 16 to 24 year old age group.  The further north you go in the United Kingdom, the higher the unemployment statistics trend for 16 to 24 year olds.

These trends are the same throughout Europe: 42.9% unemployment among 16 to 24 year olds in Spain, 24% in France, 25.2% in Hungary, 27.6% in Ireland, 22.8% in Finland, 21.6% in Luxembourg, 20.9% in Belgium, and 26.2% in Sweden.  Only the Netherlands has single digit unemployment in this demographic.

What this means is that each of these countries, like the United Kingdom, is simply waiting for a catalyst.  Just one event, like a young man being shot by the police, is all that it will take to set off social unrest locally in European countries with high unemployment and economic malaise.  It is coming.  You can think of the IMF and European Central Bank reforms being foisted on nations like Greece along the same lines as the onerous compensation terms forced on Germany after World War I.  It is simply an invitation for trouble.  These people have spent their entire lives with one set of expectations, and those expectations are not being unraveled gradually.  Outside forces are dictating the terms of their political solutions, and this naturally fosters resentment among individuals who think on national terms when globalist forces attempt to dictate terms without regard for the democratic consent of majorities.  If the reforms being pushed through in Greece were to be put to a vote among the the Greek people, there wouldn't be a question as to the outcome of that vote.  The technocrats and financiers who make up the IMF, World Bank, and the European Union Central Bank are only cognizant of seizing the levers of power in legislatures, and they are riding roughshod over the majoritarian sentiment by using those legislatures to force reforms through that average voters never gave their governments a mandate to impose.

In essence, a crisis is on the horizon as a result of the unbridled arrogance of the financial sector.  On the one hand, the sector begged for publicly financed bailouts, and now it seeks to assert its rights against sovereign states in the role of creditor without a hint of comprehension as to the irony involved.  The greatest threat to the stability of the civilized world emanates from the arrogance and hubris of the financial sector, and the system it perpetuates, and the myths that underlie that system.  No banking system that appeals for publicly financed bailouts can call itself a product of the free market.  The governments of the world bailed out the financial sector because they could without ever asking one key question: whether or not they should.

The time has come to realize that there are fundamentally errant assumptions that underlie the solutions put forth to preserve a banking system that should never have been allowed to survive without significant overhauls.  Derivative make money for banks, but at what cost?  Is the risk less than the reward?  With over $1.14 quadrillion in derivatives, the world financial system cannot dispute that it is fatally over-leveraged. If the debt that underlies just 1% of that amount starts to sour, the entire financial system will be faced with the prospect of collapse.  The $23.7 trillion that comprised the total package of bailouts, loans, and guarantees for the financial system in the U.S. was over 2% of the overall amount of derivatives in circulation.  We see where our economy is almost three years later.

It is simple enough to understand that structural reforms need to be implemented, and that the financial system has to be changed drastically in the process. Derivatives allow a structuring of both private and public debt that is most unhealthy and fraught with risk, given that Greece would have never met the EU's standards for deficits to GDP ratios without the aid of derivatives designed by Goldman Sachs.  We might simply outlaw derivatives and be done with the problem.

When derivatives work, they provide staggering profits. When they fail, they provide incomprehensible losses so steep that governments cannot possibly afford to finance bailouts without driving the value of their currencies into oblivion.  Capitalization levels cannot be high enough to offset the potentials losses associated with derivatives without fundamentally limiting the liquidity available in short term commercial paper markets; and if we allow derivatives to continue, we will have a banking system whose purpose is to offset the risk of investment banks rather than financing businesses and home ownership.

The time has come to make difficult decisions, or face the prospect of youthful rage overtaking our societies in the Western world.  If young workers do not have jobs, nihilism is the next best thing, and we are seeing long simmering resentments burst forth whenever catalysts arise in the form of police brutality or government overreach.  Be it Tunisia or Tottenham, the world is on the brink.  It is time for reasonableness and moderation in leadership to emerge and make implement what are radical solutions on their face in order to prevent radicalism from taking hold.  Do not think that what is going on abroad cannot come here to these United States.  It can, and with nearly 20% official unemployment among our young workers, it will if something is not done to correct our current course.

Monday, August 8, 2011

Standard & Poors: Fire for Fire

On the one hand, I'm a guy who doesn't like the fiscal policy of my country.  On the other hand, I'm a guy who realizes that my country isn't going to default on its debt, ever.  We're the United States.  We never have defaulted on our debt and we never will. The debate that occurred over the debt ceiling was never anything more than window dressing, and the downgrade that followed is just a continuation of that window dressing.  

Here's why you shouldn't take Standard & Poors seriously: for starters, they rated derivatives made up of subprime loans AAA, and the unraveling of those devices caused the world financial crisis and the economic catastrophe that followed.  There's a credible argument to be made that Standard & Poors simply doesn't know what the hell it's even talking about.  

And there's another reason you shouldn't take Standard & Poors seriously: they are an extension of a corrupt financial system that turns a blind eye to impropriety and accounting shenanigans when it's convenient, only to raise concerns over those very things when something deeper is at stake.  Wall Street covets the money that is deducted from your paycheck to fund Social Security, and a lowered debt rating for the United States is the first step towards making our debt more expensive to repay.  Ergo, it's a means of forcing the U.S. to cut entitlements programs or siphon more money from those programs to service its debt.  

Despite the fact that Social Security is a pay as you go program with a dedicated revenue stream that has been so solvent as to provide $2.5 trillion in loans to the federal government since 1985, we hear that it's on the verge of insolvency and collapse.  If it is, it's only because Congress looted the surpluses produced by Social Security to reduce the amount of their reported operating deficits.  This little trick was used to great effect by the Clinton Administration for four years to produce a surplus.  Those of us who understand basic accounting realize that when you have to borrow money, you don't have a real surplus.  

Men like Peter G. Peterson salivate over the idea utilizing the revenues from the withholding tax that funds Social Security to invest in their derivatives and securitized flavors of the month.  You can bet your last dollar that an effort to privatize entitlements as a means of delivering revenue to retire debt will be mounted by the likes of Peterson and his allies.  Never mind that this economic crisis was created by the private sector, which lobbied heavily for deregulation and mark to market accounting nonsense and then proceeded to engage in legalized or ignored fraud. 

If you really want to get down to the nitty gritty, our financial sector lobbied for a bailout and a stimulus, and then had the temerity to object to fiscal profligacy. You don’t say?! Just about all of the overreach, some $23.7 trillion in bailouts, loans, and guarantees, along with the stimulus, had the financial sector and its leaders as their catalyst.  And today, one of their rating agencies, an agency that foresaw no problem whatsoever with their securitized devices that would later wreck the world economy, questions the ability of the United States to repay its debt on the grounds of political gridlock.  This is horseshit.  The public debt of the United States shall not be questioned.  That is the 14th Amendment of the Constitution, a document that is the supreme law of our land. 

It is also the unquestioned policy of these United States. We pay our debt and meet our obligations.  We do not default, because we are not Argentina.  Let us call Standard & Poors’ actions in reducing our rating for what it is: a political move designed to influence the outcome of the 2012 presidential and congressional elections.  It is a move that is breathtaking in its intellectual dishonesty and sheer arrogance.  Unfortunately, it is also a self-fulfilling prophecy: if your debt rating goes down, your cost of repaying that debt goes up. 

Those who understand how these things work understand that this week presents an opportunity for hedge funds and value investors to descend upon an imploding stock market and pick over the remains of undervalued shares of stock.  Yet another benefit of Standard & Poors’ action in lowering the debt rating of the United States is that those who always make money will have the opportunity to make even more money, because they will buy low and sell high.  It is no coincidence that this happened after quantitative easing ended.  It is yet another way of rigging the market for the benefit of the few, and it paves the way for another round of quantitative easing. 

It is complete and utter bullshit.  Standard & Poors ought to be investigated and raked over the coals, its analysts tarred and feathered first for failing to foresee the obvious issues with derivatives and second for the bullshit decision to lower the credit rating of the United States while leaving ratings for Switzerland, Denmark, and Sweden untouched, even though each of those nations is vulnerable to the impending collapse of the European Union.  Rating agencies shouldn’t have any credibility left whatsoever, because they expend their effort assuring us that derivatives made up of subprime loans are the best quality investments you can make while insisting that the public debt of the United States is not as good of an investment as that of, say, Sweden, Guernsey, or the Isle of Man. 

Rating agencies are to rate the likelihood debts will be repaid or investments made up of debt will mature without incident.  Their job is not to cast aspersions on political parties or individual candidates so as to influence the democratic process in order to ensure that their financial sector allies will have even less oversight and regulation than they had in the lead up to this financial crisis.  This is exactly what Standard & Poors is trying to do; this, and so much more in the form of a framework for justifying further intervention by the Federal Reserve in the form of another round of quantitative easing. 

If the rating agencies will declare war on us, and utilize their influence to drive our currency further into the ground with inflationary monetary stimulus while simultaneously trying to achieve the role of political kingmakers for themselves, then we ought to fight back. There is a legitimate reason to investigate ratings agencies in order to determine why they didn’t catch the problems with derivatives in advance.  If Barack Obama has a shred of political sense or a desire to preserve this country from being undone by a rating agency gone amok, he will direct the Justice Department and the appropriate regulatory agencies towards this end immediately.  Fight fire with fire.