How A Good Central Banker Is Supposed To Behave

not like this under Greenspan and Bernanke

David Merkel, here:

A good central bank fights the politics of the nation of which it is a part and tries to preserve purchasing power, ignoring labor unemployment. It tries to be a paper "gold standard." That has not been the Fed for 25+ years.

Germany's Lonely Realists About The Euro

From Ambrose Evans-Pritchard, here:

Thilo Sarrazin is not everbody’s cup of tea. The ex-Bundesbanker and shock-jock critic of Islam in Europe loves to make mischief.

But his latest broadside against monetary union in the Frankfurter Allgemeine is spot on. ...

Mr Sarrazin is almost alone in German public life, at least until the dam breaks, which cannot be far away.

His one big ally is Hans-Olaf Henkel, former head of the German industry federation and author of a master plan to break EMU in two – with Germany and northern allies withdrawing, leaving France and the Latin bloc with the euro. ...

He is a brave man, the survivor of two years of vilification in the German press for daring to challenge orthodoxy.

EU Deal Spikes Both Gold And Oil, Ratio Remains Near 19

Gold shot up on Friday to about $1,604 the ounce, as did oil to almost $85 the barrel, in doing which both proved that neither gold nor oil really believes in the concurrent and dramatic stock market gains, nor that Merkel's concessions to Italy and Spain are fundamentally positive.

The Shiller p/e ratio is elevated over 35 percent above the mean of 16, as the Standard and Poor's 500 itself lagged both gold and oil and was up only 2.5 percent. In other words, it's closer to its upper bound than is gold, which vaulted 3.5 percent, and oil, which spiked over 9 percent. In the only contest that counts, hard assets won again.

Spain and Italy need to borrow more cheaply than the bond market is allowing at the moment, and now we are told both countries are going to be allowed to borrow from the European Stability Mechanism, which doesn't yet exist, hasn't been approved by all members, has so far very little capital, and both Italy and Spain are themselves supposed to be contributors to it at the same time they need help from it.

As others have pointed out, the ESM will fail because it will not provide an infinite pool from which to borrow. Once its limited reserves have been tapped, the bond market will come calling again.

It is noteworthy that this time the sovereign borrowing will not subordinate other borrowers. This is being viewed as a way to de-link the sovereigns and the banks and maintain the value of the bond pool and hence subdue rising yields, making it easier for the sovereigns to borrow. What it really represents is the further debasement of the sovereigns.

Also noteworthy is the fact that the borrowing will not be counted against EU fiscal requirements, and will be lawfully conducted off balance sheet. This amounts to a step toward less transparency, not more, and resembles nothing so much as the gigantic global banking operations who seek sovereign protections while carrying structured investment vehicles off the books.

All of which amounts to Germany giving its approval to cheating by Spain and Italy because they are too big to fail if the euro is to succeed. Portugal, Ireland and Greece were not similarly treated. So much for the rules.

"Europe" is still a fiction, except to the extent that this deal looks hastily cobbled together so that everyone can go enjoy their 6-week summer vacation.

Pretty shabby.

How To Explain 2008: "Liability Without Control Leads To Disaster"

So John Hussman, here:

German Chancellor Angela Merkel explained the entire situation in five words: "Liability and control belong together." This is a profound phrase, because it also summarizes how the U.S. got into the housing crisis - the government deregulated the banking system and abdicated proper control, while still assuming the liability through deposit insurance and other government backstops. Liability without control leads to disaster.

The control was abandoned in November 1999 with the adoption of the Gramm-Leach-Bliley Act.

Nine years later, kaboom.

EU Fascism: Methinks Mr. Barroso Doth Protest Too Much Of Democracy

So does Ambrose Evans-Pritchard here, who for prudential reasons does not call Mr. Barroso's EU fascist, but he might as well have:

I would accept that six or seven of the EU states are genuine long-established democracies. Others are – frankly, to borrow Mr Barroso’s diction – on probation, in historical terms. Some do not qualify at all. (I refrain from naming them for fear of extradition by one of their politico-magistrates under the European Arrest Warrant scheme, sold to voters as an anti-terrorism device and now used to muzzle free speech).

As for the EU itself, the organisation toppled the elected governments of Italy and Greece last year, replacing them with EU technocrats.

It ignored the NO votes to the European Constitution in France and The Netherlands, ramming through the slightly-altered text as the Lisbon Treaty without referendums – except in Ireland. When the Irish voted NO to that as well, they too were ignored.

That was the moment when the EU crossed the line altogether and lost fundamental legitimacy (at least for me). Lisbon is a rogue Treaty. Mr Barroso – charming though he may be – is a rogue president of a rogue Commission.

The whole construct has become authoritarian and will become autocratic if this crisis is exploited to force through fiscal union.

So we face democratic danger if they take the necessary steps to rescue the euro, and we face financial danger if they don’t.

Thanks a lot.

It's not like the analogy hasn't occurred to him very recently, either, as here:

It was for this outcome that the Greece’s elected government was toppled last year in an EU Putsch. We now learn from ex-premier George Papandreou that this was "all Sarkozy’s fault".

France’s leader refused to let Papandreou call a referendum on the bail-out terms (which would almost certainly have passed), and Chancellor Angela Merkel went along with this shoddy act of EU colonialism. The EU threatened, in effect, to cut off Troika payments. The PASOK government was replaced by an EU-appointed technocrat. ...

Year after year of "internal devaluation" will drive [Greek] unemployment to catastrophic levels before it breaks the back of the labour movement sufficiently to clear the way for drastic pay cuts. It is basically a Fascist policy. Mussolini pulled it of in 1928 under the Lira Forte policy, but he had coercive advantages.

Goodbye Euro. Get Ready For The New Thaler, The Dollar's Forebear.

From Germany, of course.

Ambrose Evans-Pritchard summarizes the recent developments about a North-South split in Europe, here:

Unease over escalating euro rescues is building by the day in Germany. Forty economists and professors have written a joint letter to Mrs Merkel proposing a break-away "Northern Euro", exhorting her to step back from the brink before making the "even greater error" of ratifying the ESM.

The group said Berlin must clarify exactly how much Germany could stand to lose from the ECB's internal payments system, known as Target2. The Bundesbank claims on fellow central banks have exploded to €699bn, or 27pc of German GDP. The arcane issue of Target2 has fueled a hot-tempered debate in Germany over who foots the bill if monetary union falls apart.

The professors called for study laying out the pros and cons of a return to the D-Mark, or the creation of a new currency or "North Euro" led by Germany, the Netherlands, and like-minded states.

The idea of a North Euro -- or "Thaler", the coin of the late Holy Roman Empire -- was first [m]ooted by the former chief of the German Industry Federation, Hans-Olaf Henkel.

It would let southern EMU states to keep the euro and uphold euro debt contracts. The region could reflate and regain trade competitivenes with a weaker exchange rate.

While the letter is unlikely to sway thinking in Berlin, such radical proposals are gaining a wider hearing. Georg Schuh, chief investor of Deutsche Bank's DB Advisers, said the crisis is terminal. "A break-up of the eurozone is very likely. Capital markets have already priced it i[n]. I think we are in the end-phase," he said.

With Deposit Guarantee Schemes in PIIGS Flat on Their Backs, ELA Stands Ready

Bloomberg here had the awful truth buried in an article at the end of May:

Spain has dipped into its guarantee fund, which stood at 6.6 billion euros in October, to cover loan losses for buyers of failed banks. It used the facility to inject 5.25 billion euros into Caja de Ahorros del Mediterraneo when it agreed to sell it to Banco Sabadell SA in December. The deposit-guarantee program will also reimburse the bank-rescue fund for the 953 million euros it paid for a stake in Unnim Banc, which was sold to Banco Bilbao Vizcaya Argentaria SA. (BBVA) The country had 931.2 billion euros of deposits at the end of March, according to ECB data.

In other words, in October 2011 Spain had at best only 7 billion euros guaranteeing roughly 931 billion euros in deposits. After covering the losses mentioned, Spain is down to 0.4 billion euros covering 931 billion euros.

As if that's not bad enough:

Italy’s deposit-insurance program is still unfunded, with banks pledging to contribute if and when necessary. Silvia Lazzarino De Lorenzo, a spokeswoman for Roberto Moretti, chairman of the Interbank Deposit Protection Fund, declined to comment. The country had 1.1 trillion euros of deposits at the end of March, ECB data show.

Compared to Italy which can cover nothing, and Spain which can't cover one tenth of one percent, Portugal looks like a veritable paragon of prudent planning with 0.85 percent of deposits covered:

Portugal has a deposit fund of 1.4 billion euros collected from banks through annual contributions, according to Barclays. The country’s total deposits stood at 164.7 billion euros at the end of March, according to the central bank.

John Mauldin, depending on David Kotok, here, must think that all that is really quite beside the point since the ECB funnels liquidity to the various European national banks through secretive ELA, "emergency liquidity assistance". These transfers then become debts on the books of the sovereigns, which only make their borrowing problems, and their euro area spending compliance problems, that much worse.

Notice the dramatic explosion in ELA funding by the ECB in May 2012.

Obviously, the ECB was getting ready for today's big event.

Between Greece with about 150 billion euros left in the banks and Portugal with a like amount, and Spain and Italy with about 2 trillion euros between them, the ELA backstop for the banks of those four countries represents at best about 10 percent of deposits.

It's a stop-gap measure which might work, but the euro area's problems will only continue to fester and worsen no matter what happens today in Greece.

Who knows, maybe that spat between Merkel and Hollande was just for show so that Hollande gets what he needs today in his own elections in France, after which they'll work it on out.

Hope springs eternal. 

Obama Blames High US Unemployment On . . . Europe!

Betcha thought he blamed Bush again, right?

The story is here:

Obama, speaking at a Chicago fundraiser on June 1 as he bids for re-election in November, said that a report showing the slowest month of U.S. employment growth in a year was in large part “attributable to Europe and the cloud that’s coming over from the Atlantic.” The “whole world economy has been weakened by it,” he said.

With this guy the buck always stops somewhere else.

The Triumph of Newspeak in the EU: Spending is Austerity

The only voice which doesn't whine in the language of Newspeak appears to be Angela Merkel's in Germany. For the rest, the plain record of increased spending on the failed EU welfare state experiment gets called austerity.

Investors.com puts it best, here:

Austerity? Spending has boomed in the EU over the last decade. During the 2000s, EU member nations collectively boosted government outlays by 62%. Average government spending by EU nations today stands at about 49.2% of GDP — vs. 44.8% in 2000.

On its own website, the EU itself ridicules the notion of government austerity as a "myth."

"National budgets are NOT decreasing their spending, they are increasing it," the EU says, noting that in 2011, 23 of the 27 nations in the EU increased spending. This year, 24 of 27 will do so.

Did that decade-long spending increase boost GDP growth? No. During the 2000s, average annual GDP growth in the EU fell to 1.2% from 2.2% in the 1990s.

So the idea that Europeans are "tired" of austerity is false. You can't be tired of something you haven't tried. This is why an exasperated German Chancellor Angela Merkel said Monday she'll continue to demand that other countries make real cuts in spending.

German Leftist Gregor Gysi Savages The Two-Faced Angela Merkel

Ambrose Evans-Pritchard had the quotations, here:

Die Linke ('Left') leader Gregor Gysi was electrifying. "It is the arrogance of power," he began, and never let go.

"Every week you come up with a different story about this crisis."

"We were told there would be no leverage and you have reversed everything in a matter of weeks. Now we learn that the 20pc loss will fall entirely on taxpayers. They alone will pay. That is the decision you are taking."

"Why don’t you tell German taxpayers the truth? They are being asked to pay the losses for French banks."

Those domestick traitors, bosom-thieves,

Whom custom hath call'd wives;

the readiest helps

To betray the heady husbands,

rob the easy.

-- Ben Jonson

Angela Merkel Believes in Magic, Which is a Very Bad Sign For Us All

As reported here, by Ambrose Evans-Pritchard:

Chancellor Angela Merkel said the ruling validated her rescue policies, and once again vowed to do whatever it takes to ensure the survival of monetary union.

"History has shown that countries with a common currency never wage war against one another, and that is why the euro is far more than just a currency. If the euro fails, Europe fails. It must not fail, and will not fail," she said in an emotional speech.

This faith in a mere currency construct is the same sort of faith neo-conservatives in America have in the political-economic construct known as democracy, the chief article of which faith is that democracies don't make war on democracies. Nevermind that Washington, DC, has been at war with the fifty united States since the American War Between The States. And make no mistake about it . . . that war has not been won even yet, otherwise there would be no such thing as a Tea Party.

If and when that war is won and the Tea Party disappears, the rest of the world should be afraid. Very afraid. For that is when you will discover that democracies have always gone to war to survive.

Long live The Republic.

Democracy? Not so much.

Spending Cuts, Not Default, Are What Obama and Democrats Fear, and Loathe

American news organs appear to be incapable of the accurate formulation.

You won't find it put better anywhere than here:

Without agreement by August 2, the U.S. government will have to impose immediate spending cuts of about 44 per cent to stave off a default on its huge debts.

The Federal Reserve's ZIRP is Another Form of Age Discrimination

Baby boomers, like Ben Shalom Bernanke, are such a self-loathing brood. First they put us all out of work, and then they pay us nothing on our savings:

[I]t is reasonable to call Bernanke the enemy of savers, because he is the enemy of savers. When one can’t earn anything over one year without risk, something is wrong. ...

Saving deserves a return. Let the Fed raise the Fed funds rate by 1%, and they will see that there is no harm to the banks, and little harm to the economy. Once you have 1% slope between twos and tens you have more than enough oomph to make the economy move. What, does the AARP have to bring a age discrimination lawsuit against the Federal Reserve to make this happen? The Fed is discriminating against the elderly.

David Merkel has more to say here.

Who Said It?

"We can’t constantly explain to our voters that taxpayers have to be on the hook for certain risks, rather than those who make a lot of money taking those risks."

-- Barack Obama Angela Merkel

Beware Of Greeks Defending TARP

James Pethokoukis of Reuters actually defends the fact that American politicians have ROBBED the taxpayers, always the last in line for money, to rescue the bankers, who are always first:

Of course, voters should be skeptical of paying for other people's financial mistakes. But it seems short-sighted for them to penalize politicians when they actually do something that's unpopular but right. And the TARP bailout does seem to have been the right thing. Despite its high sticker price, the final cost to American taxpayers will likely be a fraction of that thanks to speedy bank repayment of government capital injections.

Yeah. Speedy repayments. Sort of like GM's with TARP funds. If they could do it so quickly, maybe you overestimated the gravity of the original problem, and discount now how banks' profits are made possible by capital from the taxpayers.

Maybe it's because of what Spengler has recently observed about the Greeks, James:

[C]orruption pervades Greek society to the point that to purge it would destroy the social fabric: all political and social relations are premised on corruption.

You may be willing to justify theft, but the voters in Utah don't accept accommodation with corruption, throwing out Senator Bennett in the Republican PRIMARY. And now the voters in West Virginia have joined them, throwing out Representative Mollohan in the Democrat PRIMARY. All this after Germans just voted against Angela Merkel last Sunday after agreeing to bail out the Greeks.

Do you see a trend here, James?

Better get used to it.