Crisis Management

Bruce Yandle is one of my favorite people.

And he comes up big with this nice essay in Freeman.  Excerpt:

The more serious the crisis, the greater the media outcry; and the tighter the calendar for resolving it, the better the chances that members of Congress could attach special interest promises to a final bill that would be passed at the very last minute. In fact, forcing any resolution to the last minute made it possible to hang even more meat on the hooks, since few critics would have the time or interest to look for it, much less take it out. Remember: At the zero hour, all eyes are focused elsewhere.


So when the fiscal fix train left the station, how much pork stood packed in the last car? According to a Wall Street Journal analysis, there was $12 billion in benefits for producers of windmill energy, $222 million in tax rebates for liquor makers, some $78 million in writeoffs for NASCAR track owners, a special $62 million tax credit that will keep StarKist operating the only meaningful industrial plant in American Samoa, and—best of all—a $410 million special tax treatment gift to Hollywood movie studios. But even as these porcine free riders sat front and center in the fiscal train’s caboose, there was an even bigger political goodie hidden among the bill’s baggage.

According to the New York Times, drug maker Amgen may have won the blue ribbon for rent-seeking. The fiscal cliff legislation contained language that delayed limits on drug prices that had been a part of previous legislation intended to bring down Medicare costs. When politicians regulate prices, all kinds of things can happen. That goodie is worth $500 million over the next 10 years, we are told. Without mentioning the word "Amgen," the last-minute legislation exempted one of the firm’s major products from previously mandated price controls. It is reported that Amgen had 74 lobbyists working on the deal. You read that right. That’s 74 people working the halls of Congress while the fiscal cliff battle was being fought. So, do the math: 74 people produced $500 million in future net revenues. That’s $6.75 million per worker. With gains that big, the Amgen government affairs office must surely be counted as a major profit center along with other Amgen divisions.

The 7% solution

This morning, yields on 10 year Spanish government bonds hit 7%. That is a Euro-era record for Spain and a clear sign that the bank "bailout", which basically created billions of Euros more of senior debt to be repaid, didn't work and Spain is again on the ropes. The Spain - Germany spread is almost 550 basis points!

Either Germany and its Northern Neighbors are going to have to cough up a ton of cash (not loans) or the ECB is going to have to seriously print Euros, or the whole enterprise is doomed.

Mr. Rajoy gets something right

And that something was,"España no es Uganda".

No mountain gorillas, no chimps, no tree-climbing lions, no future for their young people, a worse credit rating, Spain is indeed quite distinct.

 Hey Mariano! Want to know something else Spain isn't anymore? Spain.


 Hat tip to Matt Y, who perhaps not surprisingly has a different take.

A new record

As "pro-bailout" parties take the lead in Greek polls, focus turns more to Spain, where the spread between its 10 year bonds and Germany's broke the 500 basis point barrier, hitting the highest level since the dawn of the Euro.

Spanish 10 year bonds are currently "yielding" 6.49%.

Yikes!

Lagarde vs. Lagarde

Chrissie, you got some 'splainin' to do!

 The head of the International Monetary Fund warned that in addition to cutting yawning budget deficits Europe needs to do more to promote growth and stop the crisis from spreading to the world economy. "It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand," IMF Managing Director Christine Lagarde said before the German Council on Foreign Relations. "A moment, ultimately, leading to a downward spiral that could engulf the entire world," she said. 

 People, one of the most effective remedies for the "1930s problem" was for countries to exit the gold standard and devalue their currencies (you are allowed to agree with this even if you favor a gold standard by simply believing that they'd chosen the wrong parities). The situation in Europe is eerily similar. The PIIGS need to exit the Euro-zone and devalue their currencies! As far as I can see, the IMF is dead set AGAINST this proven remedy to "1930s problems"

 Instead, the IMF is actually a big part of the forced austerity movement! The IMF is part of the group threatening further payouts to Greece unless they do what? INCREASE AUSTERITY!!

The IMF is making Greek negotiations with private creditors much harder by refusing to take any haircuts on their own loans to Greece (the IMF's insistence on being paid in full makes the required private haircut to hit the IMF's 120% debt in 2020 target even harder).

 In other words, as is usually the case in a financial crisis, THE IMF IS PART OF THE PROBLEM.

The only viable alternative to self defeating austerity is exit and devaluation. I believe that IMF economists know this, but the leaders of the organization are more concerned about French and German banks than they are about economic performance and living standards in Greece and Portugal, so we get these ridiculous & hypocritical lectures.

 

Random Observations on the EU crisis

Even if Draghi could wave a designer wand and make the Greek & Italian sovereign debt mountains go away, the Greek and Italian economies would remain horribly uncompetitive even vs. France, let alone Germany.

You know your central bank has little credibility when the market reaction to a promise to lend banks Euros at 1% for 3 years is to push bank stocks sharply down!

Saving the Euro is not the same thing as saving Europe.

There are actually worse things than countries expeditiously exiting the Euro zone; we may see some of them fairly soon.

It's hard for me to see how much blame falls on Germany. They reformed their economy and became super-competitive. People act like that was somehow nefarious.

Turn out the lights

Yikes! 10 year Italian government bond yields are now well over 7%!! That was the level that sent Ireland, Greece, & Portugal down the rabbit hole of "bailouts".

The party is indeed over.

An observation entirely appropriate for the Euro debt summiteers

“After one strips out all the window dressing there is no way to make $6 billion in liquidity worth more than $6 billion in liquidity. But there are several creative ways to make it less.”

~Ken Rogoff [quoted by Paul Blustein in his wonderful book "And the Money Kept Rolling In (and Out)]

Don't cry for me Argentina

In my international econ class, we just finished reading and discussing Bluestein's excellent book: "And the Money kept rolling in" about the Argentine financial crisis.

It's distressing to see Greece following the same path and the international community making the same mistakes today.

In class today, we are going to act out the crisis, PTI roleplay style, with heads on sticks! From Rogoff to Cavallo to Mulford to Menem to O'Neil to El-Erian.

Here are some of the heads waiting to receive their sticks: