The Cyprus Case - Looting the wealth out of the banks and the government

The Gloriously Ballooning Bailout Bedlam Of Cyprus

BY WOLF RICHTER

Bailouts start out small. At first, Cyprus just had a funding crisis; the markets had gotten smart, after years of dousing the country with cheap euros. Not that the risks weren’t there before. But markets opened their eyes. So Cyprus went begging to Russia, and got €2.5 billion in November 2011. That money evaporated without a trace. Then last June, the two largest banks were deemed to need €2.3 billion – €500 million for the Bank of Cyprus and €1.8 billion for Laiki Bank – to fill a void in their regulatory capital, the story went. No big deal.

But the banks had been eviscerated by mismanagement and corruption, and their balance sheets were loaded with deteriorating Greek corporate debt; Greek government bonds that had received a 70% haircut; loans to developers extended during the real-estate bubble that had blown up; loans on developments that were never finished or were built so shoddily that they’ve been declared uninhabitable; loans to politicians that were written off as gifts; and mortgages extended to homeowners who were tangled up in a title-deed scandal that the banks themselves had aided and abetted, leaving 130,000 properties (in a country with 838,000 souls) without title deeds, with disputed ownership, and often worthless mortgages.

So by the end of June, as bailout talks with the Troika took off, “sources” mumbled something about €10 billion, including a government bailout, that hadn’t been on the table before. People gasped. But it was just the beginning. In August, Central Bank Governor Panicos Demetriades told parliament that the banks alone would need €12 billion! Plus a government bailout. Rumor consensus settled on €15 billion total. Then in September Russian Finance Minister Anton Siluanov upped the ante: Cyprus would indeed need €15 billion from the Troika, plus €5 billion from Russia, for a total of €20 billion.

Every time someone looked at the cesspool that these banks were, the bailout amount jumped. By March 25, the Troika’s number had risen to €17 billion. But it would be a new way of doing bank bailouts. The EU would contribute €9 billion, the IMF €1 billion, and €7 billion would be extracted from Cypriot uninsured depositors, bank bondholders, public sector workers, pensioners, corporate taxpayers, and others. Laiki Bank would be dismantled. The alternative would have been the collapse of the banks and the default of the government. It was an elegant, finely tuned instrument designed to keep the Eurozone intact – regardless of the price.

The havoc was immediate. So it was tweaked while banks were closed for over a week and draconian capital controls were imposed. The economy froze. But the deal stuck. Until late Wednesday.

The Aerodynamics of Nihilism

We live in a world now which may be described as, "Nothing Matters"
 

"Nothing matters until the day that it does and then everyone asks why it didn't matter before."

                                           -The Wizard

By Mark Grant

The money pours in each month from America, Europe and Japan and overrides anything and everything else. With pre-payments and calls the estimated amount of money provided by the Fed for the world's monetary supply is approximately $100 billion every month. It is not just the American banks that are the recipients of the hand-out but the foreign ones who ship it back to Europe or buy European sovereign debt courtesy of Mr. Bernanke. I suspect that if the American taxpayers were aware of the scheme that the citizens would not be pleased but then what the Fed is doing is not generally part of polite conversation in America and so it is not discussed.

Yields on European sovereign debt are at incredibly low levels given the underlying economies. Europe trumpets the cause as renewed faith in the European Union but that is a highly unlikely conclusion. Again, it is the "Central Banks Effect" that feeds that stove of consumption and lowers yields, raises the stock markets and has created a world-wide bubble in every asset class on earth. The economies in Cyprus, Greece, Spain, Slovenia, Portugal, Ireland and Italy are all in serious decline but; "Nothing Matters."

The "Stalin Axiom" has taken over the world. It is not the data but how the data is counted!

The unemployment rate in America is not 7.7% but 11.6% if all you do is add in the people that have supposedly left the workforce. Did you think these people had retired? Gotten rich in the stock market and were making plans for St. Tropez this summer? Moved to Costa Rico for the winter? No, they have left the workforce because they are now on the public dole and those that are working are picking up their tab.

In Europe sovereign debt ratios do not include guaranteed liabilities, contingent liabilities and every asset under the sun is marked, "Risk Free." The problem, of course, is that many of these liabilities, oft times called "investments" by the Europeans, are now coming around for payment and the "not counted" does not change the "not paid," I can assure you. 

From Harare to Buenos Aires...

The Great Money Migration

By by Bill Bonner

Back in the USA, stocks rose again yesterday. The Dow finished up 128 points. Gold fell $25 per ounce yesterday... and everybody seems to think it will be going down forever. (A word of caution: probably not.)

Last week, we went to São Paulo, Brazil. There, too, we found taxi drivers who knew a lot more about monetary crises than the typical US economist. Said one:

I remember. I was just a kid. But my father would call and tell us to run to the grocery store. He had just been paid. We'd dash for the grocery story, meet him there and buy everything we could. We spent every cent in just a few minutes.

Our friend was recalling what it was like in the late 1980s in Brazil. The government had caused inflation... then hyperinflation. Prices rose so fast that as soon as people got some cash they ran to the grocery store to spend it.

Later, there was no point. In 1990, hyperinflation in Brazil reached 30,000%. What cost 1 real (the Brazilian currency) in 1980 cost 1 trillion in 1997. The hyperinflation wiped out the middle class... and wiped the shelves clean.

"It's hard to run a business when you don't know what your money is going to be worth," said our friend. "Businesses tended to just stop."

And here in Argentina, there came an announcement this week. The government will freeze the price of gasoline for the next six months.

Price controls didn't work for the Romans. They didn't work for the Germans. They didn't work for the Zimbabweans... or any of the other hundreds of governments that have tried them. But who knows? Maybe they'll work for the Argentines...

Or gasoline will begin to disappear from the filling stations.

A magnificent but temporary interlude in a great nation's bizarre, remorseless self-dissolution

Thatcher thought Britain was worth fighting for

A generation on, the Thatcher era seems more and more like a magnificent but temporary interlude in a great nation’s bizarre, remorseless self-dissolution

By mark steyn

A few hours after Margaret Thatcher's death on Monday, the snarling deadbeats of the British underclass were gleefully rampaging through the streets of Brixton in South London, scaling the marquee of the local fleapit and hanging a banner announcing, "THE BITCH IS DEAD." Amazingly, they managed to spell all four words correctly. By Friday, "Ding Dong! The Witch Is Dead," from "The Wizard of Oz," was the No. 1 download at Amazon UK.

Mrs. Thatcher would have enjoyed all this. Her former speechwriter John O'Sullivan recalls how, some years after leaving office, she arrived to address a small group at an English seaside resort to be greeted by enraged lefties chanting "Thatcher Thatcher Thatcher! Fascist Fascist Fascist!" She turned to her aide and cooed, "Oh, doesn't it make you feel nostalgic?" She was said to be delighted to hear that a concession stand at last year's Trades Union Congress was doing a brisk business in "Thatcher Death Party Packs," almost a quarter-century after her departure from office.

Of course, it would have been asking too much of Britain's torpid Left to rouse themselves to do anything more than sing a few songs and smash a few windows. In "The Wizard of Oz," the witch is struck down at the height of her powers by Dorothy's shack descending from Kansas to relieve the Munchkins of their torments. By comparison, Britain's Moochkins were unable to bring the house down: Mrs. Thatcher died in her bed at the Ritz at a grand old age. Useless as they are, British Socialists were at one point capable of writing their own anti-Thatcher singalongs rather than lazily appropriating Judy Garland blockbusters from MGM's back catalogue. I recall, in the late Eighties, being at the National Theatre in London and watching the crowd go wild over Adrian Mitchell's showstopper, "F**k-Off Friday," a song about union workers getting their redundancy notices at the end of the week, culminating with the lines:

"I can't wait for

That great day when

F**k-Off Friday

Comes to Number Ten."

You should have heard the cheers.

Alas, when F**k-Off Friday did come to 10 Downing Street, it was not the Labour Party's tribunes of the masses who evicted her but the duplicitous scheming twerps of her own Cabinet, who rose up against her in an act of matricide from which the Tory Party has yet to recover. In the preferred euphemism of the American press, Mrs. Thatcher was a "divisive" figure, but that hardly does her justice. She was "divided" not only from the opposition party but from most of her own, and from almost the entire British establishment, including the publicly funded arts panjandrums who ran the likes of the National Theatre and cheerfully commissioned one anti-Thatcher diatribe after another at taxpayer expense. And she was profoundly "divided" from millions and millions of the British people, perhaps a majority.

Nevertheless, she won. In Britain in the Seventies, everything that could be nationalized had been nationalized, into a phalanx of lumpen government monopolies all flying the moth-eaten flag: British Steel, British Coal, British Airways, British Rail ... . The government owned every industry – or, if you prefer, "the British people" owned every industry. And, as a consequence, the unions owned the British people. The top income tax rate was 83 percent, and on investment income, 98 percent. No electorally viable politician now thinks the government should run airlines and car plants and that workers should live their entire lives in government housing. But what seems obvious to all in 2013 was the bipartisan consensus four decades ago, and it required an extraordinary political will for one woman to drag her own party, then the nation, and, subsequently, much of the rest of the world, back from the cliff edge.

The "It Can't Happen Here" Syndrome

Denial is an integral part of atrocity

by Patrice Lewis

Here is a short quiz for you. Ready?

• What’s the current situation with Lindsay Lohan’s rehab?

• Who won the latest “Dancing With the Stars”?

• Name five celebrities with “baby bumps.”

• Explain how the Cypriot banking crisis could impact the European economy.

If you answered the first three questions but are clueless on the fourth, you’re in good company. Estimates are that up to half the population in America is ignorant about the situation in Cyprus. Oh sure, they hear snippets on the evening news, but since it’s far away and happening to other people, they don’t worry about it.

These people are suffering from a Normalcy Bias.

Just what is a Normalcy Bias? Wikipedia defines it as a mental state that “causes people to underestimate both the possibility of a disaster occurring and its possible effects.” It’s sometimes called the “It can’t happen here” syndrome. The assumption is that since a particular disaster has never occurred before, it never will. Any disturbing indications that something bad may happen are dismissed or trivialized.

Originally, the Normalcy Bias referred solely to natural disasters. The scale of devastation and societal disruption from Hurricane Katrina can be attributed in part to a Normalcy Bias – the refusal of the people of New Orleans to believe their beloved city could ever receive a direct hit from a major hurricane, despite its physical vulnerabilities. I distinctly remember seeing a live news report from New Orleans on the evening of Aug. 28, 2005, that showed people partying in the street with a (then) Category 4 hurricane hours away from landfall. Disaster? Nah. It can’t happen here. Gimme another beer.

But the Normalcy Bias has been extended to include political and social disasters as well. The most extreme example is Jews (and to an extent, some Germans) during the reign of the Nazis. Despite all the warning signs, many people remained in denial. Concentration camps? Genocide? Nah. Too crazy. It can’t happen here.

When we hear the mainstream media assuring us in soothing, condescending tones that we’re in an economic “recovery” – despite all evidence to the contrary – we want desperately to believe them. We don’t want anything to disrupt our ordinary, comfortable lives. We genuinely believe that if we cling to our normal way of life and habitual methods of doing things – despite overwhelming proof that something dangerous is looming – then everything will be OK. It can’t happen here.

But the situation in Cyprus is potentially international in scope. North Korea is doing some serious saber-rattling. America’s debt is so out of control that an economic crash is a statistical certainty. Sweeping anti-gun legislation is being enacted in various states even as we speak. As Ayn Rand so memorably put it, “You can ignore reality, but you can’t ignore the consequences of ignoring reality.”

Why Money Printing Makes You Poorer

Except for the few insiders, speculators and sharpies who are first in line to get the EZ money, everyone else gets poorer

by Bill Bonner

We can barely catch our breath. We can't stop laughing.

Last week, Japan announced that it would undertake a bold and radical experiment. After 23 years of on-again, off-again deflation, the new government decided it had had enough of things getting cheaper.

The Bank of Japan will now obediently monetize debt until inflation reaches 2%. This, the country's central bankers believe, will encourage people to spend. The economy will take off.

Why is it better for people to spend more tomorrow than they want to spend today? Why is it better for prices to go up 2% than to go down 2%? Why is an economy that "takes off" better than one that sits calmly on the runway?

Those questions will have to wait for another day; no one bothers to ask today. Economists say the secret to prosperity is to stimulate demand. Anything that stimulates demand is thought to be a good thing.

It doesn't seem to matter that this proposition is transparent poppycock. People always want stuff. Demand is infinite. Government doesn't have to stimulate it.

What really matters is buying power. And buying power is limited. The authorities try to get around this problem by printing money. Then, with this new money in hand, it is almost as though people had real demand!

The Demand Delusion

But that's what is so breathtaking and so funny about this time we live in. Who really believes you can increase demand... and make people wealthier... by just printing up money? Who really believes you can give people more buying power by giving them more pieces of paper?

Apparently, just about everybody! Ha ha ha!

Real demand depends on real earnings, not more currency. People buy things by producing things. That's "Say's Law," named after Jean-Baptiste Say. Buying power -- or demand -- comes from production, not pieces of paper.

Economists and central bankers cannot increase real demand. But they can sure move it around!

Cyprus Bailout Swells to $30 Billion

An even bigger challenge for Cyprus

By Jeurgen Baetz

The cost of bailing out Cyprus has swollen to euro 23 billion ($30 billion), with the crisis-hit country having to take on the lion’s share of the measures needed to avoid bankruptcy, according to a draft document by the country’s international creditors.

The draft document, obtained by The Associated Press Thursday, says the country will have to find 13 billion euros ($17 billion) — an increase on the 7 billion euro contribution agreed during the country’s chaotic bailout talks last month. The money will be raised by imposing heavy losses on large bank deposits, levying additional taxes, privatizations and a part-sale of the central bank’s gold reserves.

“The sheer size of the increase has underlined the extent of the enormous challenges facing Cyprus itself,” Jonathan Loynes of Capital Economics said in an analyst note.

The so-called troika of international creditors — the European Commission, the European Central Bank and the International Monetary Fund — are set to grant the Mediterranean island nation a 10 billion euros ($13 billion) rescue loan package to recapitalize Cyprus’s shaky banking system and keep the government afloat. For its side of the deal, Cyprus was supposed to contribute 7 billion euros to the rescue.

In the latest draft document, however, the troika has revised the overall cost of bailing out Cyprus amid a gloomier economic outlook for the country, adding an extra 6 billion euros to the bill.

The Cypriot government blamed the gulf between the original total and the new 23 billion euro bill on the previous left wing administration and the time it took to properly negotiate a bailout — delays which pushed the cost of recapitalizing its banks much higher.

Government spokesman Christos Stylianides accused former President Dimitris Christofias of failing to “take responsibility and complete indecisiveness” in promptly negotiating a bailout.

As part of the original deal, Cyprus agreed to raise the 7 billion euros mostly by overhauling its bloated banking industry and tax increases. This would involve breaking up its second-largest bank, Laiki, and imposing losses on savers who have more than 100,000 euros there and in another lender, the Bank of Cyprus.

Classical Liberalism and the Austrian School

The Economics of Liberty

by Anthony Gregory

The Great Liberal Heritage

If any one word is responsible for more confusion in the United States than “liberalism,” I’d surely like to know what it is. To the average American, a liberal is someone who votes Democratic, favors redistribution of wealth from rich to poor, wants more government regulation of the market, probably champions gun regulations, loves public education, and generally stands on the opposite side of the spectrum, such as it is, from what passes as “conservative” these days.

Yet outside the United States, and for more than a century, “liberalism” has carried a different meaning, something quite distinct from, if not diametrically opposed to, the modern American definition. Liberalism is the tradition of Adam Smith and John Locke and the more radical of the Founding Fathers – the tradition of the British opponents of the Corn Laws, of French economists and legal theorists such as Frédéric Bastiat, and of Americans who questioned the very necessity of the state in the late 19th century. Liberalism is, in other words, the political creed of those who favored liberty above the state, believed peace was preferable to war, and saw free trade and free association as the very foundations of a just and equitable society; who saw the moral status of wealth accumulation as being determined not by how much was accumulated, but rather by how it was accumulated – whether by the peaceful and productive means of voluntary free exchange or the political means of plunder and government privilege.

Liberalism, in short, is the philosophical antecedent to modern libertarianism. And though many of today’s liberals claim the legacy of old liberalism for themselves, saying that economic realities and refinement of theory forced them into their more collectivist mold, it becomes clear from studying the liberal tradition that its core values of individual liberty, belief in the self-organizing effectiveness of society, and distrust in government have much more in common with today’s consistent opponents of tax-and-spend liberalism than with its proponents.

We libertarians are lucky to have a great historian in Ralph Raico, whose Classical Liberalism and the Austrian School contains nine fantastic essays that shed much needed light on these profound philosophical issues. Raico, our premier historian of classical liberalism, is fluent in the intellectual foundations of those ideals as well as in economics, particularly Austrian economics, rendering him uniquely qualified to discuss the intimate relationship between the most radical of free-market schools and the struggle for individual liberty.

Defining liberalism

Raico laments that “no serious effort has been made to provide an overall account of the history of liberalism” outside of the work of Guido de Ruggiero, which he considers “deeply flawed” and notes “was limited to … Britain, France, Germany, and Italy.” Another problem arises with the very definition of liberalism: “[A] survey of the literature on liberalism reveals a conceptual mayhem. One root cause of this is the frequent attempt to accommodate all important political groupings that have called themselves ‘liberal.’” That approach does not impress Raico, who points out the absurdity of defining liberalism so broadly:

If one holds that the meaning of liberal must be modified because of ideological shifts within the British Liberal Party (or the Democratic Party in the United States), then due consideration must also be given to the National Liberals of Imperial Germany. They – as well as David Lloyd George and John Maynard Keynes – would have a claim to be situated in the same ideological category as, say, Richard Cobden, John Bright, and Herbert Spencer. Yet the National Liberals supported, among other measures: the Kulturkampf against the Catholic Church and the anti-socialist laws; Bismarck’s abandonment of free trade and his introduction of the welfare state; the forcible Germanization of the Poles; colonial expansion and Weltpolitik; and the military and especially naval buildup under Wilhelm II.

About that ‘hydrocarbon bubble’ theory of the ‘peak oil’ enthusiasts

No more hope in Peak Oil Theory

By Mark J. Perry 

Despite a growing body of empirical evidence to the contrary, there is a small, fringe group of energy analysts who stubbornly promote the theory that America’s shale oil and natural gas revolution is somehow an unsustainable “hydrocarbon bubble” that is on the verge of bursting. Comparisons are frequently made to the housing and dot-com bubbles, although those comparisons have never seemed convincing, since those were bubbles in asset prices (houses and stocks), which doesn’t seem to necessarily apply to oil or gas prices, or the energy industry in general.

The announcement yesterday from the Potential Gas Committee that America’s supply of natural gas is actually 26% higher than previous estimates – and enough for the next 110 years at current consumption rates - can be added to the growing body of statistical evidence that runs counter to the ”hydrocarbon bubble” theory of the “peak oil” enthusiasts.

In a recent commentary, Forbes contributor David Blackmon, managing director of Strategic Communications for FTI Consulting, addressed the “hydrocarbon bubble” theory and two of its main proponents – David Hughes and Art Berman. Mr. Blackmon poses the following question in the title of article “Shale Oil and Natural Gas – Whose Bubble is Really About to Burst?“, and he starts out by pointing out that there are “thousands of practicing oil and gas geologists, engineers and other professionals in the industry itself who, based on hundreds of billions of dollars in investment in shale oil and natural gas resources by their companies, obviously disagree with Hughes and Berman.”

Here’s more:

One way to understand the utterly fallacious nature of the position of Hughes and Berman is to review how capital is allocated within the companies who are drilling most of the oil and natural gas shale wells in the U.S. today:

·         Most of these companies are large, multi-billion dollar corporations, whose portfolios of potential drilling projects include a variety of unconventional and conventional properties across the U.S. and internationally.

·         Investors and Wall Street analysts grade these companies’ performance based on how well the companies maximize their returns to shareholders.  These companies have every incentive to fund their most profitable projects first.

·         The main factor in determining capital allocation within each company is each project’s anticipated rate of return on capital expenditures, i.e., each project must compete with every other potential project in the company’s portfolio in order to receive funding to be drilled.

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.