Month: October 2011

In Credit Default Swaps We Trust
by David Atkins

The European debt crisis has been a maddeningly complex story to follow, but the latest development is fairly simple:

After marathon talks, they emerged early Thursday to announce that a new package of measures to rescue the euro currency had been agreed on. The deal entails increasing the firepower of Europe’s bailout fund to about $1.4 trillion, getting holders of Greek debt to take losses of 50%, injecting Europe’s biggest banks with about $150 billion to withstand those losses and providing Athens with an additional $140 billion to stay afloat.

“We have reached an agreement which I believe lets us give a credible and ambitious and overall response to the Greek crisis,” French President Nicolas Sarkozy told reporters, adding that “the results will be a source of huge relief worldwide.”

Or is it? The devil is in the details, specifically regarding credit default swaps (CDS). If you followed the U.S. financial crisis or read your Taibbi or Michael Lewis, you know that credit default swaps are essentially insurance on bonds, be they nation-state treasuries or mortgage-based collateralized debt obligations. Theoretically, they help encourage investment in the same way that having car insurance helps you afford a car: if it the investment wrecks, then the buyer is not at a total loss. The details are much more complex; it doesn’t work precisely like car insurance, but it’s a decent analogy. So what’s the problem with CDS? Well, for starters, an infinite number of people can buy an infinite number of credit default swaps on any given package of loans. In a bubble when the value of everything is going up, this isn’t a problem: the investors make money, their losses are insured for far less than the profit on the investment, and the CDS sellers make big profits.

Of course, when there’s a downturn, look out. That’s what happened in 2008, when the chits got called in on $70 trillion worth of CDS, much of it guaranteed by AIG. If AIG had defaulted, it would have been like an earthquake insurance company defaulting in the event of an earthquake, in a market built on a fault line where no one would have bought property but for the insurance. So the government bailed out AIG, in essence as a way of bailing out the rest of Wall Street. Readers of Taibbi’s Griftopia will recall Goldman Sachs’ particularly vicious, mafia-like tactics in blackmailing AIG and the government to pay what Goldman thought it was owed, even as all the other financial firms were willing to take a haircut to make a deal.

Credit default swaps in their current form are, in fact, a terrible thing for the economy. If they were regulated and limited like most other forms of insurance (e.g., no betting your neighbor’s house will burn down, only one person able to take insurance on a house, and so on metaphorically speaking), they might be beneficial like other forms of insurance. But in their current unregulated form, they’re a disaster. Failure to regulate credit default swaps in even basic ways stands out as by far the biggest failure of the Dodd-Frank regulatory reform, and proof of the inability of Washington to do even the bare minimum to put Wall Street back on a leash.

Why bring up CDS in relation to the Eurozone situation? Because under the current plan, the value of CDS is about to come under major scrutiny, with potentially harmful economic consequences:

Although it’s better than a 100% loss, a 50% haircut is still pretty bad, at least for those who paid face value for Greek bonds. What makes it worse, though, is the characterizing that the loss is voluntary. That appears to prevent holders of the debt from cashing in the credit default swaps they bought as insurance on the bonds.

To the extent that the average person knows anything about credit default swaps, he or she probably thinks they’re exotic and risky financial instruments that amplified the impact of Lehman Bros.’ demise. In fact, they can be a useful tool for hedging risk. And if investors can’t hedge, they’ll be less willing to take chances with their money, restricting the flow of capital. That’s a bad thing for the economy.

Anyway, the EU’s move undermined swaps on sovereign debt, if not more broadly. That has some traders worried about even bigger problems to come as other European countries come under fiscal pressure. Here’s a telling, although unfortunately anonymous, quote from a Reuters piece:

“People talk about Greek CDS triggering being destabilizing, when it’s really the opposite,” said one global credit trading head at a major European bank. “If there is a 50% haircut and it’s voluntary, then my worry is all my sovereign CDS protection in Europe is useless, and my net exposure [to European sovereigns] is much higher. The next level will be calculating how much actual exposure people have, and how much is hedged out by CDS — the exposures could be much bigger.”

Yes, it’s true: the plan to make bondholders eat their risky investment in Greece and thereby weaken the CDS market will almost assuredly hamper corporate investment, particularly in the financial sector. The cost of borrowing may indeed go up, and the value of assets in the bond and stock markets may decline.

But honestly, that is what is supposed to happen. The entire world got caught up in an addiction to cost-free, bubble-fueled asset-based growth. Having a $70 trillion unregulated credit default swap market is an insane idea, no matter how much it helps prop up largely unproductive investment assets in the short term. A financialized economy built on asset growth rather than wage growth is inherently unstable and unsustainable, as I wrote at length last week. It is also guaranteed to dramatically increase income inequality, which is ultimately destabilizing for societies and for democracy itself as global protests have proven.

Insofar as world economies have spent the last 20-30 years pursuing the next fix in financialized asset-based growth (and the Anglosphere has not been alone in doing this), going into rehab is going to be a painful process. Every heroin addict knows that simply injecting more heroin seems a heck of a lot easier in the short term than going through rehab. But if they want their life back, rehab is the only option.

But the advantage of going cold turkey on credit default swaps is that one can come out with a sustainable, equitable financial system on the other side. Those who call for safety net austerity while trying desperately to score another financialized asset-based fix will end up flatlining their economies and their entire social systems as well, just as surely as the druggie who goes without food and medicine to get high will flatline his heart rate.

Despite the concerns, the Eurozone is haltingly doing the right thing here, even as the Anglosphere still pretends it doesn’t have an asset addiction problem.

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Sub-humans R Us

by digby

Here’s yet another story about dirty hippies befouling the environment. This time, aside from the usual defecating all over the place, they’re accused of being sexed crazed beasts jerking off in public:

Once again, I feel the need to point out that members of the Tea Party never did anything like this.

Occupy Madison has temporarily been denied an extension in their protesting permit because members of the movement violated “public health and safety conditions.” The group also did not properly fill out the form.

City officials cited several specific reasons for their decision. The most notable was repeated complains from a nearby hotel, which stated that protesters were “publicly masturbating” in full view of passersby.

The city also cited health violations because the group had “no restrooms,” implying that the protesters may have been defecating in public as well.

Yes, that’s what it implies. Of course it does.

Here’s a picture of some of the animals in question:

It’s ironic that the people who carried signs showing the president as an ape are now calling the Occupy protesters sub-humans who defecate in public. Oh wait, that isn’t ironic at all.

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Scientists are all in it for the money

Too Late
by David Atkins

Republicans are starting to get scared that their whole “hate Latinos” shtick might hurt them in the future:

While the Republican presidential campaign trail bristles with talk of moats, militarization and electrified fences when it comes to illegal immigration, the view among some Congressional Republicans has become more nuanced and measured.

Now many Republican freshmen, lacking the scar tissue of previous Congressional attempts to make sweeping changes in immigration law, are advocating that policy be changed in small, bite-size pieces that could help bring order to the system and redefine their party’s increasingly anti-immigration image, even as they maintain a strong push for better federal border security.

The move comes as some leading Republican voices are warning that the view of their party among Hispanics is doing significant political damage and causing economic disruption.

“It does cause me a great deal of concern,” said Mark Shurtleff, the Republican attorney general of Utah, where the Republican-controlled Legislature recently passed a law to give some protections to illegal workers who find employment in the state. “The rhetoric I hear from the Republican candidates, and that state legislatures that are passing enforcement-only provisions, are both damaging the economy. We ought not to be doing things to hurt the economy right now, and I think this hurts us politically.”

In addition to worrying that Hispanics are turning away from their party, some Republicans feel the heat from local employers, who need immigrant labor to fill jobs they have repeatedly been unable to fill with American workers. Others still worry about the drain of American-trained math and science students back to their home countries, where they will compete with Americans in building businesses.

“We Republicans are hearing more and more from businesses and the agricultural communities that this system isn’t working,” said Representative Raúl R. Labrador of Idaho. “The subtle difference that I see right now is that more and more Republicans are saying that, yes, we need border enforcement, but we also need to create a guest-worker program that works at the same time.”

Nice try, fellas. Too late. Some sort of immigration reform will happen, of course: big business interests and progressives alike want it to. But that’s not the point.

The notion that one should do everything one can to win in the short term with no thought for the morrow is central to the conservative free market mentality in both business and politics. But for the “Greenspan Put,” almost all of Wall Street would be out of business right now due to short-sighted bets. The idea that we can invade other countries at will and worry about blowback later is a short-sighted bet. The notion that big business can ignore climate change today and just deal with the effects later is a shortsighted bet being proven wrong even today as the Thai floods disrupt industrial supply chains. The idea that a country can run up massive income inequality and massive deficits through tax cuts on the rich while imposing austerity, without fostering revolutionary sentiment, is a short-sighted bet that elites have come to rue time and again.

During much of the latter half of the 20th Century, Republicans made a short-sighted bet: they would take all the racists who hated the Civil Rights Movement, all the homophobes, all the misogynists, etc., and worry about dealing with the blacks, the gays, the feminist hussies, etc. later. Then later on they would repair the damage by paying lip service.

Sarah Palin didn’t fool women. Herman Cain, like Alan Keyes before him, isn’t fooling African-Americans. No matter how hard the Tea Party tries to appropriate the imagery of Martin Luther King, Jr., no one is fooled about who they really are. The Log Cabin Republicans aren’t fooling the LGBT community.

And Marco Rubio and his guest worker program won’t fool Latinos, either. Groups that have suffered discrimination have long memories, and they know better than anyone who has been an ally and who hasn’t.

Republicans have been political grasshoppers, eating up all the older white suburban and rural voters as fast as they could, using whatever tactics it took to get them agitated. But their demographic winter is coming. And unlike Wall Street, there won’t be anyone politically able to bail them out. As Meg Whitman found out in California, all the money in the world can’t buy you love from people who know exactly where your heart is.

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You’ve Got Mail!

Here’s a picture of JP Morgan employees looking down on the protesters:

Occupy The Boardroom

More on the action at DKos.

People have often wondered why the Democrats are such “bad negotiators.” “Why don’t they ask for the moon and demand something far to the left,” they ask, so as to force the discussion onto their end of the playing field, thus making the final compromise where they wanted to be in the first place? Isn’t that negotiating 101?

Robert Greenstein of the Center on Budget and Policy Priorities has not been traditionally opposed to a deficit reduction plan. The CBPP supports chained CPI, for example. So it’s quite something to see Greenstein, along with Paul van de Water and Richard Kogan, savage the Democratic opening bid in the Catfood Commission II, describing it as to the right of Bowles-Simpson, the Gang of Six and other deficit plans.

The new deficit-reduction plan from a majority of Democrats on the congressional Joint Select Committee on Deficit Reduction (the “supercommittee”) marks a dramatic departure from traditional Democratic positions — and actually stands well to the right of plans by the co-chairs of the bipartisan Bowles-Simpson commission and the Senate’s “Gang of Six,” and even further to the right of the plan by the bipartisan Rivlin-Domenici commission. The Democratic plan contains substantially smaller revenue increases than those bipartisan proposals while, for example, containing significantly deeper cuts in Medicare and Medicaid than the Bowles-Simpson plan. The Democratic plan features a substantially higher ratio of spending cuts to revenue increases than any of the bipartisan plans.

Since the GOP certainly isn’t going to negotiate from the left (although at this point, you have to wonder if they don’t see this as more than a fake electoral opening…) they can only be doing this if they want the Democratic position to be to the right of Simpson-Bowles. Maybe they think they can get some Republicans to take yes for an answer. Who knows if there are enough Blue Dogs available to make up for those who won’t. But if this is another of their devious plans to make the GOP look “unreasonable,” I guess they must believe that “reasonable” is to edge ever closer to Paul Ryan’s Randian lunacy.

Modern Anachronism

by digby

What’s wrong with this picture?

“The idea that a younger son should become monarch instead of an elder daughter simply because he is a man, or that a future monarch can marry someone of any faith except a Catholic, this way of thinking is at odds with the modern countries that we’ve all become,” Cameron told reporters.

Because monarchies are so modern …

* I say that as a smart-ass American. I don’t really give a damn. I will say that the fact that the two longest living monarchs in British history and another one arguably being the greatest British monarch of all time happen to be women does argues for this teensy little change. Plus the religious nonsense which seems truly stupid. But then it always was. (But boy did it cause a lot of trouble …)

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“A lot more room to find common ground”

by digby

Who says that the two sides can’t come together and find bipartisan union?

Rival deficit-cutting plans advanced by Republicans and Democrats on Congress’ secretive supercommittee would both mean smaller-than-expected cost of living benefit increases for veterans and federal retirees as well as Social Security recipients and bump up taxes for some individuals and families, according to officials familiar with the recommendations.In all, the changes would reduce deficits by an estimated $200 billion over a decade, a fraction of the committee’s minimum goal of $1.2 trillion in savings.A final decision by the panel on legislation to reduce deficits is still a few weeks off, and given the political difficulties involved, there is no certainty that the six Republicans and six Democrats will be able to agree.The two sides exchanged initial offers earlier this week, and each side swiftly found fault with the others’ proposal in the privacy of the committee’s rooms as well as in public.House Speaker John Boehner, R-Ohio, noting published reports that Democrats are seeking $3 trillion in higher taxes, said, “This is the same number that was in the president’s budget, the same number that — that they — I don’t know that they found any Democrats in the House and Senate to vote for.”“I don’t think it’s a reasonable number,” he said. Boehner also chided Democrats for recommending $50 billion in savings from Medicaid over the next decade, well below what Republicans are seeking.“Let’s understand over the next 10 years, we’re going to spend $10 trillion on Medicaid. I just think there’s a lot more room there to help find common ground,” he said.

Read on. It gets better …

Thai Tea
by David Atkins

As flooding worsens in Thailand, causing tens of thousands to flee their homes and damaging auto and electronics supply chains as well as 6 million tons of rice paddy yields, it’s worth remembering this from September 13 of this year:

Bangkok at risk of sinking into the sea

Parts of Thailand’s capital could be underwater by 2030 unless the government takes steps to prevent disaster, say experts

Among the pressing challenges facing the new government of Thailand, brought to power by the July elections, is the fact that Bangkok is steadily sinking. The gloomiest forecasts suggest parts of the Thai capital may be underwater by 2030, but experts are also critical of the lack of any clear policy to prevent impending disaster.

Several factors – climate change, rising sea levels, coastal erosion, shifting clay soil – are threatening the great city on the Chao Phraya delta, founded in 1782 by the first monarch belonging to the Chakri dynasty, which is still ruling today.

The population has greatly increased, with about 10 million people now living in the city and its suburbs. Even the weight of the skyscrapers, constantly on the rise in a conurbation in the throes of perpetual change, is contributing to Bangkok’s gradual immersion. Much of the metropolis is now below sea level and the ground is subsiding by 1.5 to 5cm a year.

In the medium to long term more than 1m buildings, 90% of which are residential, are under threat from the rising sea level. In due course the ground floors of buildings could be awash with 10cm of water for part of the year, according to the Asian Institute of Technology.

In the port of Samunt Prakan, about 15 km downstream from the capital, the residents of detached houses along the river already spend several months a year up to their ankles in water.

It seems to me that this is a problem that could totally be solved by tax cuts for the wealthy, more economic growth from development of available natural resources, and looser environmental regulations instead of listening to those parasite government employee engineers, and those scientist freaks who keep warning about climate change.

If Bangkok sinks to the sea, no problem. The Thai people should listen to good men like Dennis Hastert and bulldoze Bangkok and New Orleans, if spending government tax money for public works and doing something about climate change are the only “solutions” that could save the cities. Crazy talk. The poor who are being flooded out in Bangkok are underprivileged anyway, so moving to a new city should work out very well for them.

Besides, that Grand Palace is a waste of good real estate. It should be sold off to private owners. The New Bangkok located farther from the water’s reach would be better off with luxury condos and a WalMart SuperCenter downtown than some gaudy, useless piece of government property.

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As California goes

by digby

It’s official:

Gov. Jerry Brown scored a budget win Thursday as the Obama administration approved a major share of Medi-Cal cuts that health care providers and patient advocates said would cut off medical access to the state’s most vulnerable residents.The federal Centers for Medicare & Medicaid Services (CMS) will allow the state to cut reimbursement rates by 10 percent this fiscal year for a variety of Medi-Cal providers, including physicians, pharmacists and optometrists. The state Department of Health Care Services says it will not cut rates paid to pediatricians, home health providers or nursing homes.California Medical Association CEO Dustin Corcoran said Thursday his group will file suit asking the court to immediately block this latest round of Medi-Cal cuts.The state expects to save a significant part of the projected $623 million associated with the rate cut, though it may fall short due to excluding some services.

Doctors, pharmacists and patient advocates lobbied CMS this summer to block the Medi-Cal cuts, suggesting that many providers would abandon the system.”We are providing California with flexibility to address their difficult budget circumstances while protecting the health care needs of Californians served by the Medicaid program,” said Cindy Mann, Deputy Administrator and Director of the Center for Medicaid and CHIP Services, in a statement. “Many of the state’s rate cut proposals are now off the table, and we and the state will monitor implementation of the remaining reductions on an ongoing basis to ensure that they do not jeopardize Californians’ access to care.”California, which already ranks among the nation’s worst in Medicaid reimbursements, approved 10 percent rate cuts as part of the 2011-12 budget deal. The state initially faced a $26 billion deficit, which lawmakers and Brown resolved by a mix of cuts and an assumption that tax revenues would grow throughout the fiscal year.

Well at least they won’t be cutting home health care and nursing homes. I don’t think the Soylent Green factories are finished yet. (Shovel ready!)