Flashman Letters

The 'Merkozy' Summit - Bad Politics, Bad Economics

The Sarkozy-Merkel press conference provided the now-obligatory statement that they will 'do whatever it takes' to save the Euro. But what does this really mean? Does saving the Euro require all seventeen members to pass constitutional debt brakes over the next few years? One hardly needs to be an expert on European politics to hazard a guess that these proposals will run into serious problems in a number of Eurozone countries. 

 

The Eurozone is something of a Hotel California construct: Even if a country’s government may feel it was a mistake to join, that doesn’t mean that it is easy to leave. The French and German proposals to require constitutional fiscal policy constraints as a condition of Euro area membership raise the question of how they plan to usher the countries that don’t want these constraints through the Euro’s (currently non-existent) exit door.

 

These proposals also increase the probability that some countries may decide that the price of Euro membership is not worth the hassle, leading to a messy break-up of the Euro area. It may turn out that some of the measures promoted as saving the Euro will be seen by future historians as setting the scene for its demise. It is certainly unlikely that a continent-wide campaign to pass rigid fiscal rules that run counter to textbook macroeconomic principles will do much to boost the Euro’s popularity.

via www.iiea.com

Not quite what one have expected.... Gold Share Index v Gold ETF

Dueling Cliches

"Because things are the way they are, things will not stay the way they are."

Brecht

"For things to remain the same, everything must change"

Lampedusa

It seems that over the last two years governments have tried to implement the Lampedusan solution. Unfortunately, I think we are now entering the Brechtian denouement. With this in mind, it is well worth watching: http://fora.tv/2011/06/28/Liaquat_Ahamed_The_Lords_of_Finance

 

The Policymaker’s Fear Of The Italian Penalty Shot

At the push of an ECB “buy” button, Spanish and Italian sovereign bonds have effectively been taken out of the markets, and it is now hard to see how (without some sort of restructuring or other) they can now ever get back in again.

In ceding to pressure from Europe’s leaders to take this decision, the central bank has now gotten itself locked onto the horns of a huge dilemma, and they are going to have great difficulty finding a way to extract themselves from it. Monsieur Trichet has lodged his finger well and truly inside the wall of the dike, and should he even momentarily take it out again, the whole structured could easily rupture, with many of the things we now know and love getting carried away in the ensuing flood.

Of course, the mere threat that he might one day do this does serve to concentrate all the various minds involved, but what is involved is a form of brinksmanship which could in itself one day become a problem.

A glimmer of what the bank is now getting itself involved in can be seen in last week’s ECB balance sheet reading, since it grew to the year-to-date high of 2.073 trillion euros last, largely as a result of increased lending to eurozone financial institutions and additional sovereign bond purchases.

via fistfulofeuros.net

Chavez Orders $11 Billion of Gold Home - One should not read too much into this: Chavez just wants to be able to steal it.

“If there isn’t enough room to store the gold in the central bank vaults I can lend you the basement of the Miraflores presidential palace,” Chavez said.

via www.bloomberg.com

Justice Dept. Investigating S&P - Sure they did a crappy job - but this really looks Banana Republic

Sources told The New York Times on Wednesday that the Justice Department is investigating the credit-rating agency Standard & Poor’s for improperly rating dozens of mortgage securities in the years leading up to the financial crisis. The investigation began before S&P’s high-profile downgrade of the U.S.’s AAA credit rating, but it is sure to add to the controversy over that decision. It is not immediately clear if the Justice Department investigation includes the other two rating agencies, Moody’s and Fitch. Sources also told the Times that the Securities and Exchange Commission is investigating S&P for possible misconduct.

via www.thedailybeast.com

An early tea party meeting.....

via m.youtube.com

Visa Exposed As Massive Credit Card Scam

According to indictments filed in U.S. District Court, Visa posed as a reputable lender, working through banks to peddle a variety of convincing-looking credit cards carefully designed to dupe consumers into spending far more money than they had. The criminal group would then impose a succession of escalating fees on unpaid balances, allegedly bilking some $300 billion from victims in the past year alone.

"This is criminal behavior of the most vile sort," Attorney General Eric Holder said in a press conference following the arrests, estimating that one in three Americans have fallen for the scam since its inception in the 1970s. "By masquerading as a legitimate business, this illicit syndicate was able to prey on helpless citizens for decades, charging unfathomable interest rates on the order of 15, 20, even 30 percent or more. It's staggering. Nobody could afford that."

"The actions of the Visa crime ring amount to nothing less than mass extortion," Holder continued. "Anyone who's holding a Visa card has most likely already been ripped off."

Calling the scam's breadth and sophistication "unparalleled," Holder said the ringleaders of the plot carefully portrayed themselves as top-level financial executives, spent untold sums of victims' money on a luxurious high-rise headquarters in San Francisco, and employed scores of graduates from elite business schools—all as a means to perpetuate an elaborate confidence game.

Investigators said Visa often targeted vulnerable individuals, such as those with limited financial resources, students, and even the elderly. The group's typical con involved direct solicitation through letters supposedly written by the CEO himself, which often praised the recipients by name and stated that they had been hand-selected for favored treatment.

via www.theonion.com

Italy's confidence crisis: Bad policies from bad politicians - not sure I agree with the conclusions but a good bi

It is as if Berlusconi and Tremonti suffer both from the “last cigarette” syndrome of Zeno in Italo Svevo’s masterpiece Zeno's Conscience.¹ The fact of the matter is that the key people in the current government do not believe in structural reforms and have very short horizons.

Politicians who understood Italy’s structural problems would take advantage of the times of “extraordinary politics”. They would use, if needed, the international organisations as scapegoats while cutting public spending in pensions (currently absorbing some 50% of current primary expenditure) and public administration.

But neither Berlusconi nor Tremonti believe in the growth-enhancing properties of these reforms. This is why they keep postponing and buying time—and in doing so, just making things worse. Their goal, it seems, is simply their own political survival regardless of the cost to Italy. This is the reason Tremonti stated that without him the fiscal consolidation process was at risk—the worst sort of signal to send to markets (and fortunately not true). It is also the motivation behind Berlusconi repeatedly blaming unpredictable external factors—as if Italy could not do anything to save itself. This is another wrong signal to send to markets that do not believe in an escalation of the European involvement in the Italian crisis and consider Italy to be “too big to be saved”.

via www.voxeu.org

David Stockman: Rick Perry Is Right, the Fed Is “Totally Wrong” - Click to link to the interview

Stockman, who has long been a critic of the Fed's low interest rate policy, says it is "totally wrong." Stockman says "exceptionally low" interest rates have resulted in excessive speculation on Wall Street "that is utterly destroying our capital markets" and adding to the already unsustainable debt crisis. He goes on to say, "The fact is the Fed is the number one problem holding back this economy, punishing savers, savaging low income people trying to buy food, energy or fuel."

Stockman fears the worst is yet to come when current tax breaks and stimulus come to an end in 2013. "The mother of all Keynesian contractions is coming in 2013 -- when all these tax cuts expire, when all this stimulus is gone."

via finance.yahoo.com