Why Canada Can Avoid Banking Crises and U.S. Can’t

In populist democracies, the regulation of banking is used as a political tool to favor some parties over others

Since 1790, the United States has suffered 16 banking crises. Canada has experienced zero — not even during the Great Depression

ByVictoria McGrane

It turns out Canada can thank the French for their stable system, according to a paper by Columbia University’s Charles Calomiris, presented at the Atlanta Fed’s 2013 Financial Markets Conference.

When it became a British colony, the majority of Canada’s population was of French origin — and the French inhabitants hated the British government.

So to keep the colony firmly within the Empire, British policymakers steered toward a government structure that would limit the power of the French-majority while also giving Canada more and more self-government. The eventual result was a highly-centralized federal government which controlled economic policy making and had built-in buffers for banker interests against populist forces, the paper argues.

That anti-populist political system — known in political science as liberal constitutionalism or liberal democracy — is a key ingredient in Canada’s stable banking track record, Mr. Calomiris contends in his paper, which is a summary of a much longer book he’s written with Stephen Haber due out in September. That’s because this kind of political system makes it difficult for political majorities to gain control of the banking system for their own purposes, the authors contend.

Populist democracies like the U.S., on the other hand, tend to create dysfunctional banking systems because a majority of citizens gain control over banking regulation that steers credit to themselves and to their friends at the expense of the citizens that are excluded from the banking system, he said.

The contrast between the U.S. and Canada was part of Mr. Calomiris broader argument that dysfunctional banking systems — which are by far the norm rather than the exception around the world — are the result of political factors.

“Whether societies have dysfunctional banking systems is really not a technical issue at all. It’s a political issue,” Mr. Calomiris said at the conference, introducing his premise as “we do know how to avoid dysfunctional banking but that we make political choices – you might even say consciously” not to have functional banking systems for most of the modern era in most countries of the world.

The history of the U.S. banking system is one in which the government forms partnerships with different interest groups at different points in history, and those coalitions jointly influenced the way the banking system was regulated, Mr. Calomiris argues.

“In populist democracies, such as the United States, the regulation of banking is used as a political tool to favor some parties over others. It is not that the dominant political coalition in charge of banking policy desires instability, per se, but rather, that it is willing to tolerate instability as the price for obtaining the benefits that it extracts from controlling banking regulation,” he writes in his paper.

This will end badly

It’s official: Global economic policy now firmly in the hands of money cranks

by DETLEV SCHLICHTER

The lesson from the events of 2007-2008 should have been clear: Boosting GDP with loose money – as the Greenspan Fed did repeatedly between 1987 and 2005 and most damagingly between 2001 and 2005 when in order to shorten a minor recession it inflated a massive housing bubble – can only lead to short term booms followed by severe busts. A policy of artificially cheapened credit cannot but cause mispricing of risk, misallocation of capital and a deeply dislocated financial infrastructure, all of which will ultimately conspire to bring the fake boom to a screeching halt. The ‘good times’ of the cheap money expansion, largely characterized by windfall profits for the financial industry and the faux prosperity of propped-up financial assets and real estate (largely to be enjoyed by the ‘1 percent’), necessarily end in an almighty hangover.

The crisis that commenced in 2007 was therefore a massive opportunity: An opportunity to allow the market to liquidate the accumulated dislocations and to bring the economy back into balance; an opportunity to reflect on the inherent instability that central bank activism and manipulation of interest rates must generate; an opportunity to cut off a bloated financial industry from the subsidy of cheap money; and an opportunity to return to sound money and, well, to capitalism. Because for all the thoughtless talk of this being a ‘crisis of capitalism’, a nonsense concocted on the facile assumption that anything that is noisily supported by bankers must be representative of free market ideology, the modern system of ‘bubble finance’, cheap fiat money and excessive debt has precious little to do with true free-market capitalism.

That opportunity was not taken and is now lost – maybe until the next crisis comes along, which won’t be long. It has become clear in recent years – and even more so in recent months and weeks – that we are moving with increasing speed in the opposite direction: ever more money, cheaper credit, and manipulated markets (there is one notable exception to which I come later). Policy makers have learned nothing. The same mistakes are being repeated and the consequences are going to make 2007/8 look like a picnic.

From ‘saving the world’ to blowing new bubbles

 Of course, I was never very optimistic that the route back to the free market and sound money would be taken. At the time I left my job in finance in 2009 and began to write Paper Money Collapse, the authorities had already decided that to deal with the consequences of easy-money-induced bubbles we needed more easy money. ‘Quantitative easing’, massive bank bailouts, deficit spending and ultra-low policy rates had become the policy of choice globally. But at least the pretense was upheld for a while that these were temporary measures – ugly and unprincipled but required under the dreadful conditions of 2008 to safe ‘the system’. The first round of debt monetization after the Lehman collapse – the exchange of $1 trillion of mortgage-backed securities on bloated bank balance sheets for freshly minted bank reserves from Bernanke’s printing press under ‘quantitative easing 1.0’ (QE1) – was presented as an emergency measure to avoid bank collapses and a systemic crisis.

 I never thought that this was a convincing rationale as it was clear to me that whatever the accumulated dislocations were, there was ultimately no alternative to allowing the market to identify and liquidate them. Aborting, delaying and sabotaging this essential process of economic cleansing and rebalancing would only cause new problems. Even on the assumption that these were measures to deal with extreme ‘tail events’, I could not then and cannot now support them. But it is becoming abundantly clear that these measures are neither temporary nor restricted to avoiding bank runs or systemic chaos but that now, after the public has become sufficiently accustomed to them and a cheap-money-addicted financial industry has begun to incorporate them into their business models, they constitute the ‘new normal’, that they are now the accepted ‘modern’ tool kit of central bankers. Zero interest rates, trillion-dollar open-market operations to manipulate asset prices and to ‘manage’ the yield curve are now just another day in the modern fiat money economy. Nobody talks of restraining central bank activism. Rather, the temptation is growing to use these tools to kick-start another artificial boom.

In his excellent new book The Great Deformation – The Corruption of Capitalism in America, David Stockman provides a fascinating account of how the principles of sound money, balanced budgets and small government have progressively been weakened, betrayed, undermined and ultimately completely abandoned in American politics (often by Republican politicians and even some of the alleged ‘free market heroes’ of Republican folklore), and how today’s cocktail of bubble finance and trillion-dollar deficits represents the delayed but inevitable blossoming of destructive seeds that were sown with Roosevelt’s New Deal and Nixon’s default on the Bretton Woods gold exchange standard. In a chapter on the recent crisis, Stockman argues convincingly that the shameful bailout of Wall Street in 2008, in particular of Goldman Sachs, Morgan Stanley, and a few other highly leveraged entities via the bailout of ‘insurance’ giant AIG, were sold to Congress and the wider public with exaggerated claims that the nation’s real economy was at imminent risk of collapse. From my position as an economist and a market participant at the time of these events, Stockman’s analysis and interpretation strike me as entirely consistent and correct. But even if we were willing to give more credit to the claims of the ‘bailsters’ and interventionists that the fallout for Main Street would have been substantial, that would only further underline how far the Fed’s preceding easy money policies had destabilized the economy, and the question would still remain whether it could ever be a reasonable objective of policy to sustain these large-scale dislocations against market forces.

My Hyperinflation Vacation

A trip to the Iranian resort island of Kish illuminates the pressures, limits, and strange consequences of economic sanctions

by GRAEME WOOD

For years, I have been advising my cash-poor friends: the secret to an ultracheap international holiday is a Google News search for the words runaway inflation. The place listed in the dateline of any recent articles including that phrase should be your destination. En route to your home airport, visit the bank and withdraw U.S. dollars in crisp hundreds and fifties. At your beleaguered landing place, the local currency’s value will be melting away like a snowman in July. Your greenbacks will remain pleasantly solid. Everyone at your destination—hoteliers, restaurant staff, tour guides—will covet them and cut you deals. For you, luxuries will suddenly become affordable. Until your return flight (assuming you make it back safely, and are not robbed by an increasingly desperate local mob), you will experience the dismal science at its most cheery.

Economists’ name for truly berserk runaway inflation is hyperinflation. America’s most nightmarish bout of inflation—in recent memory, at least—came and went at the end of the Carter administration, when prices rose by about 14 percent in 1980, the peak year. Hyperinflation, by contrast, is beyond nightmarish: a rise in prices of at least 50 percent a month, according to the generally accepted definition. Thankfully, it is rare. Steve Hanke, an economist at Johns Hopkins University, has documented 56 instances since 1795, ranging from a comparatively benign monthlong burst in Taiwan in 1947 (prices rose by a little more than half in that month, then the increase slowed), to a truly surreal year in Hungary in 1945–46, when at one point prices doubled every 15 hours. In Slobodan Milošević’s Yugoslavia in 1994, hyperinflation stopped only when the presses at the national mint, in Topčider, overheated to their breaking point.

The most famous recent case of sustained hyperinflation is Zimbabwe in 2007–08, when prices, at the peak, doubled every 24 hours. “It was the only case where the inflation completely ran its course, and the government just printed money until people just no longer used it,” says William Masters, an economist at Tufts University. Eventually, after the inflation rate reached 80,000,000,000 percent a month, folks simply stopped showing up at the central bank to pick up Zimbabwean dollars, and the U.S. dollar and South African rand spontaneously became the country’s primary currencies.

We will never learn

Just Keep Dancing: Introducing The 97-Month Auto Loan

by Michael Krieger

While many of us have been shouting about this from the rooftops for years now, with each passing day it becomes more clear what a terrifyingly gigantic powder keg we have created.  There is no debate that this will end in a compete financial holocaust, the only question is when and how.  As time progresses, the practices and desperation of the status quo to keep the sheeple in debt and consuming is getting increasingly insane.  We learn from the Wall Street Journal that:

The average price of a new car is now $31,000, up $3,000 in the past four years. But at the same time, the average monthly car payment edged down, to $460 from $465—the result of longer loan terms and lower interest rates.

In the final quarter of 2012, the average term of a new car note stretched out to 65 months, the longest ever, according to Experian Information Solutions Inc. Experian said that 17% of all new car loans in the past quarter were between 73 and 84 months and there were even a few as long as 97 months. Four years ago, only 11% of loans fell into this category 

Henry Ford's Amazon Dystopia

Fordlandia: Rules over rulers

by TOM W. BELL

Libertarians daydream about building private cities in the developing world. It will never happen, though, if they ignore real-world nightmares. Consider the biggest, baddest failure of private government: Fordlandia.

In 1927, the American industrialist Henry Ford began building a private city—Fordlandia—in the depths of the Brazilian Amazon forest. His company had won title to nearly 2.5 million acres of land—over 3,800 square miles—for a planned rubber plantation and company town. Ford spent over $20 million (about $300 million in today’s dollars) putting in roads, water and power systems, rail lines, factories, offices, medical facilities, homes, schools, and stores.

Drawn by the prospect of good jobs and modern living, thousands of workers and their families flocked to Fordlandia. Soon, however, waves of rioting, looting, and burning roiled the city. Ford abandoned his namesake in 1945, leaving it to rot in the jungle. 

Hubris

Why did Fordlandia end in failure?  

 Perhaps because it was born in hubris. Its founding genius ranked as the richest man in 1920s America. He made his fortune founding and running the Ford Motor Company, one of the world’s largest and most profitable firms. But Henry Ford cared about more than making cars and money. He wanted to make a new kind of worker.

 Ford’s mass production assembly lines needed regimented, reliable employees. Ford got them by paying nearly double the prevailing wage and by subjecting his workers to the oversight of Ford Motor Company’s own sociology department, which directed workers’ personal hygiene, household management, and off-hours recreation. 

 Ford exercised still more control over workers who lived in the Ford Motor Company towns built across the upper Midwest to harvest timber from the company’s huge and remote forests. Henry Ford took a detailed interest in the company towns, dictating what workers should plant in their front yards and what dance steps their children should learn at school.

What is the purpose of insurance?

I am from the government and i am here to help

By GREG MANKIW

A friend points me to this passage:

At a White House briefing Tuesday, Health and Human Services Secretary Kathleen Sebelius said some of what passes for health insurance today is so skimpy it can't be compared to the comprehensive coverage available under the law. "Some of these folks have very high catastrophic plans that don't pay for anything unless you get hit by a bus," she said. "They're really mortgage protection, not health insurance."

I have the same problem with my other insurance policies.  My homeowner insurance doesn't cover the cost when my gutters need cleaning, and my car insurance doesn't cover the cost when I need to fill the tank with gas. Instead, the policies cover only catastrophic events, like my house burning down or a major accident. Now that the Obama administration has fixed the health insurance system, I trust they will soon move on to solve these other problems.

Spain’s Descent Into Banana Republicanism

At what point will the line be drawn

by Don Quijones

It seems that nary a day goes by without some new seismic political scandal breaking in Spain. In just the first few days of April, King Juan Carlos’ daughter, La Infanta Cristina, was charged with aiding and abetting her husband, Iñaki Urgangarin, in his myriad scams to embezzle money from the public purse.

Never one to be outdone in the corruption department, Spain’s governing party, the Partido Popular (PP), was also engulfed in yet another scandal, this time revolving around the president of the Galician regional parliament Alberto Núñez Feijóo’s past ties to a known smuggler and drug trafficker.

The uproar followed El Pais’s publication of a series of photos from 1995 showing Feijóo, then deputy health secretary of the region, enjoying both a luxury yacht cruise and a mountain road trip with Marciel Dorado, a known smuggler and widely suspected capo of the Galician drug-smuggling mafia.

A Smuggler’s Haven

Perched on Spain’s rugged North-Western coast and boasting a wealth of hidden bays and isolated beaches, Galicia has long been one of Europe’s most important entry points for contraband merchandise.

“It’s a historic tradition here that really took off in the late 1960s, early 1970s, with American tobacco,” Susana Luana, a journalist for the regional daily Voice of Galicia, told the BBC. “A number of local fishermen used their fishing infrastructure, including boats, to transport the goods and used their knowledge of the thousands of tiny coves and beaches here to bring them safely ashore.

Europe's Poorest? Look North

ECB Survey Puts Southerners on Top in Household Wealth, Germans Near Bottom

By BRIAN BLACKSTONE and NINA KOEPPEN

German households are among the poorest—on paper, at least—in the euro zone, according to a study by the European Central Bank that adds a new twist to the debate over how far taxpayers in Northern Europe should go to support weaker countries.

The ECB's findings, released Tuesday, don't give the full picture of a society's living standards, which are affected by things like social protection and infrastructure as well. It also is based primarily on data from 2009 and 2010—early days in the still-festering euro crisis.

Most significantly, the report doesn't adjust for differing rates of homeownership, which is particularly low in Germany.

Nevertheless, the report offers a reminder that citizens in some of the countries hardest-hit by Europe's debt crisis aren't as bad off as many believe.

The question of how much taxpayer money should be put up to bail out governments in Greece, Cyprus and Portugal tops the political agenda in Germany, Europe's biggest economy and financial backer.

The ECB's findings could encourage efforts to further involve the private sector in any future government rescues by imposing wealth taxes or losses on large bank deposits, which would reduce the price tag for Germany and others, analysts said.

The figures "clearly give more weight for bail-ins" of the private sector in countries that need assistance, said Carsten Brzeski, an economist at ING Bank in Brussels.

The report, compiled through a survey of over 60,000 households across the euro zone, shows a dichotomy between cash-strapped governments and a rich citizenry, as high private-sector wealth didn't prevent governments in Southern Europe from racking up large debts.

By one ECB measure of typical households, Germany is the poorest country in the euro bloc, behind even Slovakia and Portugal. A number of factors appear to have skewed the results, such as the emphasis on homeownership, household size and small-business ownership that favors countries in Southern Europe.

Monetarism and Keynesianism

Identical Sides of the Same Adolescent Coin

By John Tamny

About the U.S. not being an impregnable economic island, monetarists should take note as their theory similarly presumes Fortress U.S.A.  They believe dollar credit is controlled by the Fed through the banks it regulates, as opposed to credit for dollars being a rather broad concept such that any Fed ‘tightness’ has historically been made up for by inflows of dollars (think the eurodollar market among countless others)  from around the world.

Monetarists correctly argued that inflation is always a monetary phenomenon, but the newly revived theory that was long ago dismissed even by Friedman is merely a variation of the much discredited Phillips Curve. To put it plainly, monetarism is a parallel version of Keynesian demand management.

Whereas Keynesians naively believe that government spending is a source of economic growth, monetarists in a similarly naïve way believe that money creation for the sake of it boosts the economy. Much as Keynesian demand through government spending allegedly increases growth and the price level, so does monetarist money creation per the other School’s theory. One School thinks government boosts growth, the other thinks money creation does, and both come to the same conclusion that inflation can be the end result of their central planning that allegedly leads to prosperity first. Comically, both sides believe that if they can manage the spending and money creation, that their expertise ensures a lack of what they presume inflation to be.

So while monetarism is associated with Friedman, and as such is viewed by some as ‘free market,’ make no mistake about what it really is. Monetarism, like its Keynesian twin, is central planning. Keynesians once again believe that growth is as simple as Washington taxing or borrowing away resources from the private sector so that it can be spent from the Commanding Heights. The juvenile logic underlying this school of thought is that when “aggregate demand” is down, governments must take funds from the private sector and spend without regard to the economic value of the spending.

Qatar Cuts Egypt Loose as Financial Picture Darkens

With the IMF loan in limbo and Qatar now unwilling to help out, Egypt may be at the mercy of the White House

By gail norton

Egypt’s death spiral is now scaring off even its closest friends. Last year, Qatar give an Egypt in crisis $5 billion in aid money. But Qatar won’t help Egypt anymore, according to the FT. Qatar’s decision comes as Egypt continues its downward spiral:

Shortages of diesel in recent weeks have already created long queues in filling stations, fraying tempers and sparking anger, while villagers frequently cut roads and railway lines over such grievances as water cuts and irregular gas supplies.

The country’s toxic political atmosphere, with fractious leaders intent on undermining each other, could also fan the flames of popular fury and speed up a descent into chaos.

On top of that, the rising price of imported food ingredients is putting heavy financial burdens on the country’s poor. Reuters reports:

Flour and sugar are 50 percent more expensive than they were a year ago, said [baker Mohammed] Alif, and for now the bakery feels it has no choice but to absorb the increase rather than passing it on to customers:

“I can’t make it more expensive because people cannot pay,” he said, pausing between filling shelves with freshly baked rolls and serving a steady flow of shoppers on the pavement.

A $4.8 billion grant from the IMF could stanch the bleeding, but it requires Egypt to accept austerity measures. Austerity remains deeply unpopular with most Egyptians, and politicians are reluctant to risk losing support among constituents.

With the IMF loan in limbo and Qatar now unwilling to help out, Egypt may be at the mercy of the White House. The Obama administration may be about to face a deeply ugly choice: watch Egypt sink further into chaos or ask Congress to send even more aid money than we’ve already promised—to bail out a Muslim Brotherhood government. 

Quotation of the Day…

From The Indispensable Milton Friedman 

… is from pages 250-251 of the collection of previously unpublished essays by Milton Friedman, The Indispensable Milton Friedman (Lanny Ebenstein, ed. 2012); specifically, it’s from the October 2000 interview with Friedman done by the producers of The Commanding Heights:

INTERVIEWER: Do you think the Chile affair damaged your reputation, or more importantly, made it harder for you to get your ideas across?

MILTON FRIEDMAN: That’s a very hard thing to say, because I think it had effects in both directions.  It got a lot of publicity.  It made a lot of people familiar with the views who would not otherwise have been.  On the other hand, in terms of the political side of it, as you realize, most of the intellectual community, the intellectual elite, as it were, were on the side of Allende, not on the side of Pinochet.  And so in a sense they regarded me as a traitor for having been willing to talk in Chile.  I must say, it’s such a wonderful example of a double standard, because I had spent time in Yugoslavia, which was a communist country.  I later gave a series of lectures in China.  When I came back from communist China, I wrote a letter to the Stanford Daily newspaper in which I said, “It’s curious.  I gave exactly the same lectures in China that I gave in Chile.  I have had many demonstrations against me for what I said in Chile.  Nobody has made any objections to what I said in China.  How come?” 

If Europe had only listened to Thatcher’s warning

Euro-skepticism Thatcher’s most relevant legacy

By Amotz Asa-El

 “I am not prepared to accept the economics of a housewife,” said Jacques Chirac in 1987.

Margaret Thatcher, to whom the future French president was referring, was then at the height of her career, having already won her place in history as the restorer of Britain’s economic resilience, and the winner of the Falklands War.

Yes, her macroeconomic gospel was as controversial as it was resolute. However, her stance concerning European federalism in general, and the launch of the euro in particular — now seem prophetic, despite the misgivings of adversaries like Chirac.

Thatcher arrived in power 50 years after the Depression. Her faith in human enterprise and market efficiency had been doubted in Europe for two generations. When she sold British Aerospace and Cable & Wireless, the very term privatization was hardly known, and even for the economists who did know it, it was but the theoretical antithesis of nationalization, the reality that dominated Britain’s postwar economy.

By the time of Thatcher’s political departure in 1990, the whole world knew what privatization was, as Britain had sold even a universally familiar brand like British Airways, and also shed behemoths like British Steel and British Coal.

The Invincible Mrs. Thatcher

Britain’s most recognizable and individual peacetime prime minister was also the first to be known by someone else’s name

By Charles Moore

Not long after she resigned as prime minister, in 1990, Margaret Thatcher began to write her memoirs. I met her at a dinner party and asked her what she would call them. The famous blue eyes flashed at me: “Undefeated!” she declared.

This expressed a sober arithmetical fact. Uniquely at that time in British politics, Margaret Thatcher had won three general elections in a row as party leader and had never lost any. Before she had the chance to contest her fourth, she was deposed by members of Parliament from her own party in a coup. Yet, even in that contest, the pure numbers were on her side. In 1990, when the Conservative Party staged a challenge to her leadership, she won more legislators’ votes than her main rival, but not enough to avoid a second ballot. Her Cabinet colleagues convinced her that she would be humiliated in the runoff, and she resigned.

In the end, those memoirs were given a more boring title (The Downing Street Years), but that one-word exclamation succinctly expressed the great Thatcher myth of invincibility. And in a sense it was true. Much more than any other modern British politician—particularly Conservative politicians accustomed to swimming against a leftish cultural tide—Margaret Thatcher fought, and Margaret Thatcher won. Her victory was so great that it changed her political opponents—the Labour Party—as much as it changed her own party. Her defeat of the left made Tony Blair possible. And today, with David Cameron having finally led the Conservatives back to No. 10 Downing Street and wrestling with a massive inherited government deficit, as Mrs. Thatcher did 30 years earlier, all the old debates have become relevant once more.

As well as elections, Margaret Thatcher won wars. When Argentina invaded the British colony of the Falkland Islands, in the South Atlantic, in April 1982, she sent a task force of 27,000 across the world and recaptured them by June. As the force set sail, she paraphrased Queen Victoria: “Failure—the possibilities do not exist!” With Ronald Reagan in the White House for most of her time as prime minister, she was able to re-forge a mighty defensive alliance that outpaced the Soviet Union and hastened the end of the Cold War. After Saddam Hussein invaded Kuwait, in September 1990, she attended a conference with Reagan’s successor, George H. W. Bush, who was undecided about how best to act. She told him, “Look, George, this is no time to go wobbly!”

Looking Back at Reagan

He was the last president who even glanced at the Constitution once in a while

by Joseph Sobran
Reading Ronald Reagan’s newly published letters reminds me how much I’ve always liked him, even after I stopped admiring him as a president. He was always a modest, decent, good-humored man, with more common sense and a keener sense of proportion than most politicians. And he loved a good laugh.
But the very qualities that made him charming and convivial underscored the absurdity of entrusting him, or any man, with the awful power of the American presidency. The superlatives his adulators heap on him seem as wide of the mark as the exaggerations of his detractors: he was really quite an ordinary man, and he never pretended to be anything else. He should never have had all that power, but who should? At least it should be in the hands of a man who didn’t take himself too seriously and wouldn’t abuse it as grossly as most.
He only shocked me once. That was in 1983, shortly after the grisly bombing of the U.S. Marine barracks in Lebanon, when he ordered the retaliatory shelling of a village that was said to be a terrorist stronghold. Such an act was bound to kill indiscriminately. It was murder! And the Ronald Reagan I knew wasn’t a murderer! This couldn’t be happening!

Britain’s Conviction Politician

Even her adversaries knew that Margaret Thatcher meant what she said

by PETER WHITTLE

Within hours of Margaret Thatcher’s death, some concerned voices on the Left expressed hope that their comrades would have the self-possession to remain reasonably dignified in reacting to the news, bearing in mind that this was not just the passing of an obviously towering political figure, but also of a frail 87-year-old lady. You’d think such an appeal to decency would be unnecessary, but that is to be unfamiliar with the more unhinged elements of the British Left, which, in the former prime minister’s declining years, have boasted of the parties they would throw when the day finally came. As I write, the ugliness is already evident: the hard-left Member of Parliament George Galloway has taken to Twitter with the message “Tramp the dirt down,” and the Durham Miners Association has declared Thatcher’s death “a great day” for coal miners. Not far from where I sit, the long-running stage musical of the film Billy Elliott—set during the 1984 miners’ strike—features a song celebrating the future death of the hated lady. I wonder what will happen when it gets performed tonight. Will it be left out of the show from a sense of decorum, if nothing else? Or will it be sung with even greater gusto? Perhaps the latter, given the cultural and artistic establishment’s abiding hatred for a woman whose greatness often seemed better appreciated outside Britain.

That Margaret Thatcher inspired loathing as well as adoration—that she was what the media habitually call “a divisive figure”—is beyond doubt. But the nature of that loathing is revealing. Its intensity derives not just from opposition to her policies, or even to the fact that she trounced her opponents in three straight elections. It stems from bitterness among the formerly entrenched Left about something more fundamental: a realization that it has lost the argument.

Some of the criticisms of Thatcher by the great and good of the cultural elite went beyond pure political antipathy. They were marked by naked, unashamed snobbery and sexism. They hated her not just for what she believed, but also for what she was, a grammar-school-educated meritocrat from lower-middle-class origins. This is partly a characteristic of British society. Whereas few, if any, Americans knew what Ronald Reagan’s father did for a living, everybody in Britain knew Thatcher was a grocer’s daughter.

The Real Cyprus Template

The One You're Not Supposed To Notice

by Charles Hugh-Smith

The Real Cyprus Template reveals the core-periphery Neocolonial-Financialization Model in all its predatory glory.

Much has been said about "the Cyprus Template" (the so-called bail-in, where deposits are expropriated to recapitalize the insolvent banks), but virtually nothing has been written about the Real Cyprus Template.

Longtime correspondent David P. (proprietor of Market Daily Briefing) charted some very interesting data that enables us to follow the money--specifically, Eurozone money in the "foreign deposit sources" (deposits in Cyprus banks that originated from outside Cyprus).

It appears the key preliminary step of the Real Cyprus Template is that money-center banks in Germany and other "core" Eurozone nations pull their money out of the soon-to-implode "periphery" nation's banks before the banking crisis is announced.

As David observed, "I think this explains a lot about something that has always puzzled me: why the delay in resolving Cyprus after the Greek haircut?"

Here is David's explanation and two key charts:

---

"The Cyprus situation had been simmering for at least a year when in March of 2013 it finally broke; Cyprus had a week to take care of its banking situation or else face a cutoff of access to the eurosystem by the ECB. This brought matters to a head; the Cyprus Bail-In was finally settled upon, where uninsured depositors in the two largest banks in Cyprus took major haircuts, and must wait for return of their money until the assets of the banks are run down.

The banking problems in Cyprus had their roots in the Greek Sovereign Default, and were known by the general public for about a year prior to the recent default; a New York Times article dated April 11, 2012 lays out the particulars.

Looking at Cyprus bank security assets in data provided by the ECB, the problems were visible earlier - right after the first Greek haircut in mid 2011, and a second haircut finalized in early 2012. This was a 11 billion euro hole in a system with 100 billion in assets total, centered upon two banks that held half the deposits in the system.

Greek Crisis Timeline

Date	Event
April 2010	Greek Sovereign Bonds Declared Junk
May 2010	110 Euro bailout, no haircut
July 2011	"Private Sector Involvement" decided at EU Summit
Oct 2011	130 Euro bailout, 53% face value haircut
Mar 2012	Haircuts take effect; actual haircut 85%

You can see the effects of the increasing haircuts in the chart below. The chart lists all types of bonds owned by all the banks on Cyprus. The red line is the important one. It shows "all off-island Eurozone Government Bonds."

The Fruits of Moral Hazard on a Global Scale

Inevitable Catastrophe

Insulate participants from risk with policies like the Bernanke Put and you guarantee destruction of both the market and institutional legitimacy

By Charles Smith (June 24, 2011)

Identify the common characteristic of these three statements:

1. The Federal Reserve will never let the stock market decline, i.e. the "Bernanke put"

2. The Chinese government will never let property prices decline

3. The European Central Bank will never let Greece default

The answer of course is moral hazard: a person who is insulated from risk will have an insatiable appetite for risky bets because any gains will be theirs to keep but any losses will be covered by the central bank or government. The global financial authorities’ success in propping up assets (stocks in the U.S., real estate in China, banks in Europe, etc.) over the past three years has strengthened this asymmetric disregard for systemic risk into a dangerously quasi-religious faith that central banks and governments have essentially unlimited power to keep asset prices aloft via printing money, manipulation of markets and financialization of their economies.

What happens if markets crumble despite massive, sustained central bank and government intervention? The institutions that created moral hazard will be revealed as false gods, and that faith will be destroyed.

This loss of faith in the transparent functioning of markets will trigger what I call the delegitimization of both the markets and the institutions which have essentially promised a permanent upward bias in assets.

We can see the global scale of this central bank-cnetral State induced moral hazard in the tight correlation of all markets: the stock exchanges rise and fall in near-perfect unison, oil and gold rise and fall in parallel with equities, and so on.

As I have noted before, beneath the surface there is really only one trade in the entire global marketplace: all assets on one side and the U.S. dollar on the other. Correlation is not causation, of course, but it is more than peculiar that every decline in global equities is matched by a concurrent rise in the dollar.

Transparent, independent markets do not move in lockstep. The campaign to prop up all asset classes with implicit guarantees of intervention has completely insulated institutions and punters who believe that the Bernanke Put and the Chinese government's equivalent prop under real estate is not just policy but a guarantee of god-like power.

Thus the gains from gargantuan speculative bets are yours to keep, and any losses will be made good by the central bank or government. This is the ideal recipe for misallocation of capital and speculative derangement on an unprecedented scale.

Moral hazard is the ultimate perverse incentive: it rewards all that is unproductive and risky and punishes long-term investment and prudent risk assessment.

A second feature of the global central bank's moral hazard is the necessity to punish any punters who dare to bet against the banks' manipulations. Thus Fed Chairman Bernanke could opine that oil would decline and presto-magico, a "surprise" release of oil by central authorities occurs the next day.

This second feature of central bank manipulation leaves a market devoid of short sellers and thus of any buyers as markets crumble.

Once trust is lost, it cannot be won back. Once participants' faith in the markets and in the god-like power of central bank intervention is crushed, the markets will lose participation on a grand scale. The authorities' favorite game, goosing asset prices to create an illusion of recovery and rising wealth, will be revealed as a global fraud.

Announcements of future interventions will be scornfully dismissed and thus they will have lost their power to prop up the markets.

All of this flows from the very nature of moral hazard: insulate participants from risk and give them unlimited leverage and "free money" to play with, and what you eventually end up with is catastrophe. There is no other possible end state.