The Big Bailout of the Eurozone (Another crisis coming? - Seriously)

[seafoid]

Martin Wolf on the bank stress tests

http://www.ft.com/cms/s/0/cb939e1a-5dc7-11e4-897f-00144feabdc0.html

"It is essential not to make too much of these stress tests and asset quality review. Yes, they are real improvements. But they do not mean that eurozone banks will now drive growth. They still have too little capital for that. More important, the eurozone lacks a credible strategy for reigniting demand. If much of the German policy elite continues to deny this is even a problem, the crisis of the eurozone must remain unresolved. That is a disaster."


AIB is a good example of his point.

[Rossfan]

btw, what exactly is your line of work Seafoid ? No need for any revealing details. "Financial services" or suchlike will do.

Sheehy seems obsessed with Seafóid.....

[seafoid]

btw, what exactly is your line of work Seafoid ? No need for any revealing details. "Financial services" or suchlike will do.

Sheehy seems obsessed with Seafóid.....

in both senses

[muppet]

Martin Wolf on the bank stress tests

http://www.ft.com/cms/s/0/cb939e1a-5dc7-11e4-897f-00144feabdc0.html

"It is essential not to make too much of these stress tests and asset quality review. Yes, they are real improvements. But they do not mean that eurozone banks will now drive growth. They still have too little capital for that. More important, the eurozone lacks a credible strategy for reigniting demand. If much of the German policy elite continues to deny this is even a problem, the crisis of the eurozone must remain unresolved. That is a disaster."


AIB is a good example of his point.

It seems everyone in power thinks the only possible solution to the post-credit boom collapse, is to get the banks firing out more credit. They seem to think that the banks won't screw it up again with property (or other) bubbles and the resulting consumption will get the economies all growing again.

So who will borrow all this money?

Ordinary citizens? Not a hope in the short term. Some are underwater from the last credit bubble, others have all their disposable income servicing debt and the new high tax regime leaves very little to spare.

Small businesses? They are closing or downsizing. With the consumers cutting spending due to their debts, this sector has really struggled. Take a walk around a town like Castlebar and see how many businesses are gone under in the last few years. And remember, Ireland is further down the road to whatever recovery we get than the rest of Europe.

Large businesses? Hard to see a huge number of these expanding at this time, in anticipation of a dramatic pick up in demand that comes out of the blue. China's growth is slowing down. This is adversely affecting the world's biggest exporter, Germany, and thus pulling down growth in the whole Eurozone. Why would large businesses expand in that scenario?

The only way demand will pick up is to lower taxes or somehow reduce the private debt burden, or both. The EU/ECB/IMF/FED tackled bank debt only and by default the banks creditors. But they continue to completely ignore the debt handed out by the banks. There will be feck all recovery until this burden is tackled.

Think about the above. They want to us fix the mess caused by a debt crisis, by hoping that we go out and take on more debt and spend .

QE hasn't really worked in the States. It just temporarily inflates the stock market, but it devalues the dollar. They were hoping for inflation within the States, but it only really happened outside the States and pushed food prices up which is a serious problem in poor countries. Now the ECB is going to try it. This is how Greece, Turkey and Italy used to run their currencies. Great.

The fly in the ointment is the dollar coupled with the US Government debt. China and Japan are willing to subsidise the whole show for their own economic reasons. But what happens if they, or others, pull the plug by insisting on some of the US debt being repaid? Something like 40% of the debt is short term (less than 1 year) and has to be re-financed every year.

In times of global economic turmoil, people buy from the US Treasury as they see the dollar as the safest bet. the irony is that if they stopped buying, it would create economic turmoil within the US.

http://www.forbes.com/sites/mikepatton/2014/10/28/who-owns-the-most-u-s-debt/

Conclusion

Given the state of the global markets, the U.S. is still considered to be the best house in a bad neighborhood. Even though more than one third of the debt is owned by foreign nations, as long as there are no safer places to invest, money will find its way here. Therefore, global turmoil would be in the best interest of the federal government. Anything which raises fear will bring money to the Treasury and allay the need for higher taxes. However, one day this unsustainable path we're on will reach its day of reckoning. However, that's probably not any time soon.

[seafoid]

Martin Wolf on the bank stress tests

http://www.ft.com/cms/s/0/cb939e1a-5dc7-11e4-897f-00144feabdc0.html

"It is essential not to make too much of these stress tests and asset quality review. Yes, they are real improvements. But they do not mean that eurozone banks will now drive growth. They still have too little capital for that. More important, the eurozone lacks a credible strategy for reigniting demand. If much of the German policy elite continues to deny this is even a problem, the crisis of the eurozone must remain unresolved. That is a disaster."


AIB is a good example of his point.

It seems everyone in power thinks the only possible solution to the post-credit boom collapse, is to get the banks firing out more credit. They seem to think that the banks won't screw it up again with property (or other) bubbles and the resulting consumption will get the economies all growing again.

So who will borrow all this money?

Ordinary citizens? Not a hope in the short term. Some are underwater from the last credit bubble, others have all their disposable income servicing debt and the new high tax regime leaves very little to spare.

Small businesses? They are closing or downsizing. With the consumers cutting spending due to their debts, this sector has really struggled. Take a walk around a town like Castlebar and see how many businesses are gone under in the last few years. And remember, Ireland is further down the road to whatever recovery we get than the rest of Europe.

Large businesses? Hard to see a huge number of these expanding at this time, in anticipation of a dramatic pick up in demand that comes out of the blue. China's growth is slowing down. This is adversely affecting the world's biggest exporter, Germany, and thus pulling down growth in the whole Eurozone. Why would large businesses expand in that scenario?

The only way demand will pick up is to lower taxes or somehow reduce the private debt burden, or both. The EU/ECB/IMF/FED tackled bank debt only and by default the banks creditors. But they continue to completely ignore the debt handed out by the banks. There will be feck all recovery until this burden is tackled.

Think about the above. They want to us fix the mess caused by a debt crisis, by hoping that we go out and take on more debt and spend .

QE hasn't really worked in the States. It just temporarily inflates the stock market, but it devalues the dollar. They were hoping for inflation within the States, but it only really happened outside the States and pushed food prices up which is a serious problem in poor countries. Now the ECB is going to try it. This is how Greece, Turkey and Italy used to run their currencies. Great.

The fly in the ointment is the dollar coupled with the US Government debt. China and Japan are willing to subsidise the whole show for their own economic reasons. But what happens if they, or others, pull the plug by insisting on some of the US debt being repaid? Something like 40% of the debt is short term (less than 1 year) and has to be re-financed every year.

In times of global economic turmoil, people buy from the US Treasury as they see the dollar as the safest bet. the irony is that if they stopped buying, it would create economic turmoil within the US.

http://www.forbes.com/sites/mikepatton/2014/10/28/who-owns-the-most-u-s-debt/

Conclusion

Given the state of the global markets, the U.S. is still considered to be the best house in a bad neighborhood. Even though more than one third of the debt is owned by foreign nations, as long as there are no safer places to invest, money will find its way here. Therefore, global turmoil would be in the best interest of the federal government. Anything which raises fear will bring money to the Treasury and allay the need for higher taxes. However, one day this unsustainable path we're on will reach its day of reckoning. However, that's probably not any time soon.

Banks are supposed to be intermediaries between people who have money and people who need money. It doesn't have to be massive loans. sometimes it's just a credit guarantee that a small company needs. Or a short term facility.
And that isn't working at the moment in the EZ.

Demand is the big challenge.  It doesn't have to be supported by expanding debt though.

Most of the Central Bank response has been about propping up assets rather than putting money in peoples' hands.
Debt could be converted to equity. Maybe it will be if there is another crash.

There are probably too many banks as well. This notion that debt is sacred and we can't scare the markets is also a problem.

Another big issue is the relative power of money and labour. If workers got a higher proportion of their productivity increases as pay rises demand would rise.  This would hurt corporate profit margins but the f*ckers are just tooling around with Earnings per share scams anyway- it's not like they are actually investing much of it. This could also be addressed by tax policy. Use it wisely or lose it.

http://www.ft.com/cms/s/0/753839f0-e75b-11e3-88be-00144feabdc0.html

"Economic forecasters have yet to internalise the fact that the US economy has fundamentally altered. The purchasing power of the majority of Americans has not only stagnated since the recovery began five years ago – it has actually declined.
At $53,000, the median US household is more than $4,000 – or 7.6 per cent – poorer in real terms than it was at the start of the recession in 2008, according to Sentier Research. Yet the economy as a whole has long since overtaken its pre-recession size."


A big investment programme could also get things moving again.  If you look at Ireland there is a lot that could be done to improve the quality of life.  but that would not necessarily be in the interests of people holding financial assets. Or maybe it would.  A lot of this is about power, I think.

[seafoid]

http://www.theguardian.com/business/economics-blog/2014/oct/29/quantitative-easing-policy-stimulus-janet-yellen-ecb

[muppet]

http://www.theguardian.com/business/economics-blog/2014/oct/29/quantitative-easing-policy-stimulus-janet-yellen-ecb

The helicopter money, as they call it in the article, would have been far better.

Those that needed to reduce debt would have given it straight to the banks while the rest would have either saved it (banks again) or spent it thus increasing demand. The argument that helicopter is permanent while QE is temporary looks very foolish now. QE seems to be here to stay while taxes could have undone any problems helicopter money caused. Instead the wider public just got the taxes.

They needed to increase demand and decided on austerity as the way to do it. I know nothing of economics but surely the basics of supply and demand always apply? Austerity can only reduce demand. QE, as far as I can see has failed, unless you are a smart speculator or a banker.

[macdanger2]

I find it amazing listening to the radio every morning (newstalk @ 0630) to hear them talking about stocks, the markets reaction to various things and what the central banks, etc are going to do to calm the markets. As if the markets actually make a difference to the real economy or the average Joe in the street but yet it seems to be high on the agenda for the central banks and the media

[seafoid]

http://www.theguardian.com/business/economics-blog/2014/oct/29/quantitative-easing-policy-stimulus-janet-yellen-ecb

The helicopter money, as they call it in the article, would have been far better.

Those that needed to reduce debt would have given it straight to the banks while the rest would have either saved it (banks again) or spent it thus increasing demand. The argument that helicopter is permanent while QE is temporary looks very foolish now. QE seems to be here to stay while taxes could have undone any problems helicopter money caused. Instead the wider public just got the taxes.

They needed to increase demand and decided on austerity as the way to do it. I know nothing of economics but surely the basics of supply and demand always apply? Austerity can only reduce demand. QE, as far as I can see has failed, unless you are a smart speculator or a banker.

It would have been far better. QE drove up a lot of asset prices (but none of them are guaranteed to stay at whatever level they are at now).
The net result is the enrichment of a very small proportion of the population.
Big questions about where prices go now.
I think we'll see QE4 the next time markets look like they might cry. 

[muppet]

http://www.theguardian.com/business/economics-blog/2014/oct/29/quantitative-easing-policy-stimulus-janet-yellen-ecb

The helicopter money, as they call it in the article, would have been far better.

Those that needed to reduce debt would have given it straight to the banks while the rest would have either saved it (banks again) or spent it thus increasing demand. The argument that helicopter is permanent while QE is temporary looks very foolish now. QE seems to be here to stay while taxes could have undone any problems helicopter money caused. Instead the wider public just got the taxes.

They needed to increase demand and decided on austerity as the way to do it. I know nothing of economics but surely the basics of supply and demand always apply? Austerity can only reduce demand. QE, as far as I can see has failed, unless you are a smart speculator or a banker.

It would have been far better. QE drove up a lot of asset prices (but none of them are guaranteed to stay at whatever level they are at now).
The net result is the enrichment of a very small proportion of the population.
Big questions about where prices go now.
I think we'll see QE4 the next time markets look like they might cry.

Is it actually policy to try to create bubbles?

[seafoid]

http://www.theguardian.com/business/economics-blog/2014/oct/29/quantitative-easing-policy-stimulus-janet-yellen-ecb

The helicopter money, as they call it in the article, would have been far better.

Those that needed to reduce debt would have given it straight to the banks while the rest would have either saved it (banks again) or spent it thus increasing demand. The argument that helicopter is permanent while QE is temporary looks very foolish now. QE seems to be here to stay while taxes could have undone any problems helicopter money caused. Instead the wider public just got the taxes.

They needed to increase demand and decided on austerity as the way to do it. I know nothing of economics but surely the basics of supply and demand always apply? Austerity can only reduce demand. QE, as far as I can see has failed, unless you are a smart speculator or a banker.

It would have been far better. QE drove up a lot of asset prices (but none of them are guaranteed to stay at whatever level they are at now).
The net result is the enrichment of a very small proportion of the population.
Big questions about where prices go now.
I think we'll see QE4 the next time markets look like they might cry.

Is it actually policy to try to create bubbles?

That is what it looks like. Janet Yellen says she isn't worried about bubbles causing financial instability.
I think she's wrong. they probably are afraid of scaring the horses so they just go along the path of least resistance.
Restructuring the system would be too much effort so it remains  what Martin Wolf calls a doomsday machine

Mohamed El Erian recently commented as follows

"If you tell [investors] we're in a low-growth environment and add on top of that the central banks are your best friend . . . [they] will lever every single risk factor [they] can find"

They will tear the arse out of it. They always do.

Hyman Minsky wrote a paper in the 90s about financial instability

http://www.levyinstitute.org/pubs/wp74.pdf

The first theorem of the financial instability hypothesis is that the economy has financing regimes
under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability
hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable
system to financial relations that make for an unstable system. In particular, over a protracted period of good times,
capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is
large weight to units engaged in speculative and Ponzi finance.  (this is what happened in Ireland in 2005 or so on)

Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities
attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of
previously Ponzi units will quickly evaporate.
 

[TabClear]

I find it amazing listening to the radio every morning (newstalk @ 0630) to hear them talking about stocks, the markets reaction to various things and what the central banks, etc are going to do to calm the markets. As if the markets actually make a difference to the real economy or the average Joe in the street but yet it seems to be high on the agenda for the central banks and the media

You don't have to own loads of sharesto be impacted by the markets. You would be surprised how big a difference a strong market makes to "average Joe". A strong market means

People's pension pots are more secure/larger
Companies are more confident bullish about expansion plans hence more jobs/investment
Large companies can access cheaper debt to invest in jobs/infrastrucure due to higher share price and more institutional investor (i.e. debt providers) confidence

All this confidence in the larger companies does filter through to smaller companies and wages. If the markets are weak or volatile, these instituional investors tend to put money in safer places like gold, treasury bonds etc which do not have the same multiplier effect as investment in large corporates.

[seafoid]

I find it amazing listening to the radio every morning (newstalk @ 0630) to hear them talking about stocks, the markets reaction to various things and what the central banks, etc are going to do to calm the markets. As if the markets actually make a difference to the real economy or the average Joe in the street but yet it seems to be high on the agenda for the central banks and the media

You don't have to own loads of sharesto be impacted by the markets. You would be surprised how big a difference a strong market makes to "average Joe". A strong market means

People's pension pots are more secure/larger
Companies are more confident bullish about expansion plans hence more jobs/investment
Large companies can access cheaper debt to invest in jobs/infrastrucure due to higher share price and more institutional investor (i.e. debt providers) confidence

All this confidence in the larger companies does filter through to smaller companies and wages. If the markets are weak or volatile, these instituional investors tend to put money in safer places like gold, treasury bonds etc which do not have the same multiplier effect as investment in large corporates.

A strong market now means pension pots look better but they are no guarantee that the money will be there on retirement.
Ultimately share prices depend on company earnings and if these are overestimated now the share price will come down over time.
A market less shortsighted and more interested in steady growth would be better for the man and the woman  on the street.

[magpie seanie]

Interesting reading guys as per usual. Makes a lot of sense of my lay man thinking on what I'm observing, thanks.

[mikehunt]

ah it's all a load of bollix. The "market" is a rich mans Paddy Power. Gamblers win and others lose. Leeches like investment managers, brokers, rating agencies, auditors and solicitors take their (massive) cut and encourage others to join the Ponzi scheme by spoofing about robust markets and the like. Fred "the shred" Goodwin was the greatest thing since sliced bread one minute and the next he had to leave in disgrace. At the risk of repeating myself it's all a lod of bollix.

If everyone decided to call all their winnings in at the one time, everything would go t!ts up. There isn't enough to cover all money "invested". The only reason I invest in a pension is because the crowd I work for have to double it. I don't expect anything from it. I'm not convinced the argument about inflation over time either. Tell that to people who invested for the last 30 years and then looked for a pension 5 years ago when they retired and there was nothing there. it's all a load of bollix i tells ya.