The Greek Tragedy and Great Depression lessons not learned

Greece has been the most pillaged country in Europe this Depression, among other reasons, because no one in any leadership position seems to have learned lessons from the 1930s. Plus, banks have more power now than they did then to call the shots.

Despite no signs of the first bailout working – certainly not in growing the Greek economy or helping its population - but not even in being sufficient to cover speculative losses, Euro elites finalized another 130 billion Euro, ($170 billion) bailout today. This is ostensibly to avoid banks’ and credit default swap players’ wrath over the possibility of Greece defaulting on 14.5 billion Euros in bonds.

Bailout promoters seem to believe (or pretend) that: bank bailout debt + more bank bailout debt + selling national assets at discount prices + oppressive unemployment = economic health. They fail to grasp that severe austerity hasn’t, and won’t, turn Greece (or any country) around. Banks, of course, just  want to protect their bets and not wait around for Greece to really stabilize for repayment.

Prior to the Great Depression, the Greek economy experienced years of growth, a healthy commercial activity spree, and like today, a stark increase in (less-leveraged) bank loans to finance it. When the Depression struck, banks and local businesses faced unpayable loans and declining asset values.  (Stop me when this sounds familiar).

Credit constricted immediately, choking internal economic activity.  In 1928, the Greek Drachma was tied to the gold standard, but pegged to the British pound. When Britain devalued its pound in 1931, the Greek government responded by raising public investments and pegging the Drachma to the US dollar.

But by early 1932, central bank reserves had fallen so much that they only backed 40% of Greek bonds. Even without the slow drip of rating agency downgrades to highlight this leveraged debt situation (which is nothing compared to say, today’s US reserves vs. debt leverage), the lack of reserves caused foreign speculators to fleece the Drachma/dollar exchange rate. Bond yields blew out. Borrowing costs shot up.  

So in March 1932, the League of Nation’s (the precursor bank bailout entity to the ECB/IMF) agreed to provide a loan to service Greece’s debt in return for – wait for it - austerity measures. Unlike today, the government said ‘hell no.’ Instead, in April, 1932, it floated the Drachma - which devalued quickly. It also declared a public debt moratorium, and increased infrastructure spending to strengthen its economy. It negotiated repayment terms with creditors for overdue interest.  By 1934, agriculture and industrial production rose, the currency was more stable, employment increased, and the budget balanced.

The situation is different now. Though national Greek banks registered relatively few domestic loan losses in 2009 ( a fact unrecognized by the bailout supporters), they did begin taking losses in their trading books due to various international bets. Their borrowing and margin costs rose sharply and quickly with each rating downgrade which increased their trade losses, and kept them from extending or renegotiating loans locally, which caused more economic pain for the population.

Greece would have been better off, had it not suffered a rapid series of downgrades and been pulverized by subsequent hot-money flight and pressure. Despite a clear warning from the Central Bank of Greece in late 2009 (when Greece was critical, but breathing) that it could sustain its costs if they didn’t rise egregiously, Moody’s (and later others) cut Greece’s sovereign debt rating from A1 to A2 in December, 2009.  From that point on, the international banking community went into ravage mode, fast.

Moody's cut Greece’s debt again, to A3 in April, 2010, to Ba1 (junk) in June, 2010, and to B1 in March, 2011. Three months later, Greece’s rating was cut to Caa1. By September, 2011 the six biggest Greek banks were downgraded to Caa2, a smidge above default levels, crushing national credit flow to the population.

When any country is downgraded from single A to junk within 18 months, it has to issue more expensive debt to stay even, which by definition, makes the credit-worthiness of its bonds decline.  As in any country, Greece's banks are big buyers of its government bonds. They also use those bonds as collateral for other borrowing  and trades - with each other – and with  international banks.

As Greek banks weakened and borrowing costs soared, their ability to buy Greek bonds from their own government diminished, which weakened the value of government debt. Circularly, Greek banks took further hits for holding the devalued Greek bonds and thus become weaker - further reducing their ability to sustain local needs.

That is why the Greek government wants to bolster its now junk-rated banks (in addition to the money that banks are getting directly from bailout-for-austerity loans) and foreign ones, at the cost of hurting the population.  But since the economy (even at its healthiest level ever) can’t sustain its bailout borrowing costs (as opposed to its operating costs which would have been payable without the increased rates and bailout principle mixed in), this is an unstoppable downward spiral.

Greece’s GDP has contracted 13% (by 7% in the last quarter of 2011) from a late 2008 record high. (By comparison, the United Kingdom’s GDP has fallen by 20% in the same period, and though its unemployment rate has risen, its borrowing costs remain manageably low, making it cheaper to sustain its banks.) Greece’s savings rate at 7.5% is at three decade lows (but still higher than that of the US).

Meanwhile, Greece’s debt to GDP ratio is 160%. (It hovered around 100% from 1994 through 2008.) The unemployment rate at 20.9%, and the youth unemployment rate at 48%, has doubled since January 2008. There is nothing to indicate it won’t keep rising.

Money continues fleeing Greek banks, bonds, and stocks, as citizens try to preserve what they can, and foreign speculators play a game of chicken with bailout providers. The Greek stock market stands at just one-fifth of its January 2008 level. Ten year government bond yields are at 33%, compared to 5% just two years ago.

The speed and intensity of Greece’s decline reflects nothing short of an international mafia-style hit.

The majority of Greek workers didn’t break the government’s back, even if a very small subset strained it. Further, the more bailout measures forced on Greece, the more its economy will be ravaged to repay them.  After four rounds of austerity, nationwide protests, $110 billion Euros in IMF and ECB bailouts, escalating interest rates driving borrowing costs higher and choking credit, a downgrade to junk, a Prime Minister replacement, and now another big bailout, Greece’s tragedy is just beginning.

Yet lessons from the Great Depression exist. By floating the Drachma (the equivalent of leaving the Euro), negotiating individually with creditors (telling banks to back off), and increasing internal public focus (the opposite of what's going on now) Greece was able to stabilize more quickly than larger European countries. It’s not entirely too late to try again: but it requires the currently unimaginable: a political will that is population – rather than bank – oriented.

President Obama's State of the Union: Ten Skirted Issues

I confess; I expected to be bored out of my mind listening to President Obama’s campaign - I mean, State of the Union - I mean campaign, speech. I kept hoping some truly earth shattering story would sneak in there beforehand, like say some discovery that Mitt Romney had been having an affair with Newt Gingrich’s ex-wife while he was creating jobs at Bain capital, and we could all focus on that instead.

It turned out that my pre-determination proved accurate. I wonder if the members of Congress felt the same sense of same déjà vu that I did, as they were bopping up and down and applauding. 

Obama's speech was a compilation of highlights from his past ones. One part optimism, two parts repetition equals one total uninspiring. Maybe it’s so boring, because it matters so little at this point. Taking away popularity polls, our national threshold for belief in hope or change has been trampled, not just because of Obama or Romney, but of the whole political apparatus that thrives on deflection of reality and posturing. We don’t have the same energy to expend listening to politicians, the endless spin that renders fact obsolete, responsibility absent, and true accomplishment, unnecessary.

We saw Optimistic Obama in his first address to Congress in 2009: “While our economy may be weakened and our confidence shaken; though we are living through difficult and uncertain times, tonight I want every American to know this: We will rebuild, we will recover, and the United States of America will emerge stronger than before.”

We got Presumptuous Obama in 2010: “As we stabilized the financial system, we also took steps to get our economy growing again, save as many jobs as possible, and help Americans who had become unemployed.”

We watched Philosophical Obama in 2011: “We are the first nation to be founded for the sake of an idea -– the idea that each of us deserves the chance to shape our own destiny.  That’s why centuries of pioneers and immigrants have risked everything to come here… The future is ours to win.”

Now, we had Campaigning on Fairness Obama. He returned to the roots of his pre-Presidential words, having accomplished little to attain the goal that his words implied. Here are ten things that President Obama skirted: 

1) The cost of healthcare insurance. Obama tried to play both sides, slapping a populist spin on an insurance industry gift. “That’s why our health care law relies on a reformed private market, not a Government program.” He claimed he won’t “go back” on things like health insurance companies being able to cancel policies. He didn’t say that insurance premiums have already risen 22% in the past two years. Republicans hate Obama’s ‘signature’ healthcare reform bill because it unconstitutionally forces people to purchase insurance. Democrats support the bill because Obama passed it. The reality is – by the time it takes effect in 2014, premium costs may have doubled. Frame it however you want, that means health insurance could cost twice as much when this bill takes effect as it did before it was passed. Meanwhile, there are more people without insurance (because they can’t afford it) even though insurance companies can’t cancel policies or deny insurance for pre-existing conditions. This bill merely offers insurance companies a wider pool of customers, with a few restrictions on how much they can pillage them.

2) Student Loan Defaults. Obama claimed he wants to cap interest rates on student loans - which would be great, but can only work in this particularly low rate environment. He urged  colleges to keep costs down – again, something that’s worked out really well when he’s mentioned it before. This year, student loan debt surpassed credit card debt, breaching the $1 trillion mark, at an average of more than $25,000 per student (and up 47% over a decade ago, not all under Obama, but still a problem). Not surprisingly, student loan defaults rates have risen alongside this debt increase. Nearly 9% of loans defaulted in 2010, of those that began repayment in 2009, vs. 7% that began in 2008.) Obama didn’t mention this growing concern. 

3) Youth unemployment. Obama took credit for the creation of 3 million jobs (I’m not going to debate that here). Regardless, youth unemployment is at its highest rate since 1948. The unemployment rate for those under age 25 is 18.1%, (31% for blacks) having risen sharply since 2008. Do the math. High student loan debt + diminishing  job prospects =  bad ending. Work-study programs have to be intense to really alter that.

4) Big banks. The largest firms continue to grow their asset bases and fee extrapolation strategies from their captive customer base (If you’re say, a JPM Chase customer, it costs you $5 to extract your own money from a Bank of America ATM – both banks get a cut). It was Obama that re-confirmed Fed Chairman Ben Bernanke for another fourteen years (and yes, a bi-partisan Congress agreed), and who still keeps Treasury Secretary, Tim Geithner around. Both men were gung-ho about the merger mania that dotted Wall Street in the fall of 2008 and making the ‘too-big-to-fail” banks bigger, as they now are.

5) Small banks. President Obama didn’t address the smaller bank closings occurring because the big banks got disproportionate subsides;, 389 smaller banks (with $297 billion in assets) failed from 2009 to 2011. Like during the early years of the Great Depression, this means less choice for individuals, less loans for local businesses, and consolidation of influence and market share for the big banks – which comprise Obama’s largest bundling base.

6) Borrowers. Despite a few tepid programs to help homeowners, the sheer number of foreclosures is higher today than it was in 2008. There were a record number of foreclosure filings:  2.9 million in 2010 and 2.7 million in 2011.  These are predicted to rise in 2012 amidst default surges and more lender notices than in 2011. 

Why? Because Obama’s program (that was supposed to help 5 million borrowers, and helped half a million) had to be approved by the banks. Banks don’t like citizen aid programs, even if they screwed citizens to begin with by fueling a $14 trillion toxic asset pyramid repackaging risky (for people), high interest-bearing (for them). Obama said, “The banks will repay a deficit of trust”? What?! When?! Where?!

7) Recent regulator incompetence. Regulators looked the other way, Obama said, pre-crisis. But he mentioned nothing about regulators' more recent passes; the SEC bestows banks settlements for fraudulent mortgage asset products, without extracting any admission of wrongdoing. He missed saying anything about the lack of related DOJ criminal indictments. The top five banks agreed to pay $1.149 billion to the SEC to settle subprime-mortgage related fraud charges, with no admission of guilt or criminal indictments. (The SEC settlement of $285 million with Citigroup was rejected by Judge Rakoff in November, 2011 and is being re-negotiated.) And Obama wants to create a Financial Crimes Unit? What’s the SEC supposed to be doing? or the DOJ? or the FBI?

8) MF Global and customer money. On the same topic – the deficit of trust thing: Obama avoided any talk about his buddy, Jon Corzine or MF Global, the nation’s eight largest bankruptcy. He didn’t point out how diabolical it was to use and ‘lose’ customer funds that were supposed to have been kept separate from bad bets. He didn’t suggest having a solid separation between customer money and financial firm money - as in - don't have it at the same firm. He claimed, "we will not bail you out again” and yet, we still are.

9) Banks hoarding. Obama neglected to mention the $1.6 trillion that banks are stashing at the Fed in the form of excess (and interest-bearing) reserves, which do nothing for the Main Street economy. Meanwhile, small business loans are at a 12-year low, having shrunk continuously since 2008.

10) Obama conveyed that we dodged a bullet by getting the banking system under control. He didn’t note the rising risk in the banking system: the largest four US banks (JPM Chase, Citibank, Bank of America and Goldman Sachs) control nearly 95% of the US derivatives market, which has grown by 20% since just last year, to  $235 trillion. JPM Chase holds 11% of the world’s derivative exposure, Citibank, Bank of America, and Goldman comprise about 7% each. Goldman has 537 times as many (from 440 times last year) derivatives as assets and it’s still considered a bank holding company (as per Bernanke) that gets federal backing.

In all, the President's speech was reminiscent of George Clooney’s in Ides of March. We’ve heard it all before, maybe with slightly different words: America lost 4 million jobs before I got here, and another 4 million before our policies went into effect, but in the last 12 months, we added 3 million job. We must reduce tax loopholes, and provide tax incentives to businesses that hire in America. We must reform taxes for the wealthy (though he signed an extension of Bush’s tax cuts.) We must train people for an apparent abundance of expert jobs. We need more clean energy initiatives.  We created regulations (big sigh of relief he didn’t use the word ‘sweeping’) to stop fraudulent financial practices. We will help homeowners. Wall Street must make up a "trust deficit.”  Like Jamie Dimon cares. 

In other words, Obama gave Wall Street a pass, while waxing populist. Don’t get me wrong. I expected nothing different. I will continue to expect nothing different, when he gets a second term, given the lame duo the GOP favors his key contenders to be.

Bailouts + Downgrades = Austerity and Pain

The markets (read: traders with big books at mega financial firms and hedge funds) weren’t particularly shocked by last week’s wave of heavily pre-broadcast S&P sovereign debt downgrades. For months, the question wasn’t ‘if’, but ‘when.’ True to form, just as with the US downgrade, S&P’s reasons skated the surface of prevailing wisdom – governments have too much debt, and not enough income. That’s only a fraction of the story.

Nowadays, when any sovereign (including the US) gets downgraded by a rating agency, it's not just because its debt repayment ability is questionable (the publicized logic of rating agencies), but because it incurred more expensive debt to float its banking system. It chose to subsidize banks over people.

The S&P likes moving on Friday nights. It was on a Friday night that it downgraded US debt to AA+ from AAA. On Friday night, January 13, 2012,  it downgraded France and Austria from AAA to AA+, and 7 other European countries, too; Cyprus, Italy, Portugal, and Spain by two notches; Malta, Slovakia, and Slovenia, by one notch. Portugal, Cyprus, Ireland and Greece are at junk status. Germany’s AAA rating is intact.

Nowhere in S&P’s statement about “global economic and financial crisis”, did it clarify that sovereigns were hit due to backing their largest national banks (and international, US ones) which engaged in half a decade of leveraged speculation. But here’s how it worked:

1) Big banks funneled speculative capital, and their own, into local areas, using real estate and other collateral as fodder for securitized deals with derivative touches. 2) They lost money on these bets, and on the borrowing incurred to leverage them. 3) The losses ate their capital. 4) The capital markets soured against them in mutual bank distrust so they couldn’t raise more money to cover their bets as before. 5) So, their borrowing costs rose which made it more difficult for them to back their bets or purchase their own government’s debt. 6) This decreased demand for government debt, which drove up the cost of that debt, which transformed into additional country expenses. 7) Countries had to turn to bailouts to keep banks happy and plush with enough capital. 8) In return for bailouts and cheap lending, governments sacrificed citizens. 9) As citizens lost jobs and countries lost assets to subsidize the international speculation wave, their economies weakened further. 10) S&P (and every political leader) downplayed this chain of events.

The United States

On Aug. 5, 2011, S&P downgraded US government debt to 'AA+'. This was four days after Congress voted to raise the US debt cap - to prevent a downgrade - proceeded by political squabbling and the US Treasury and Fed begging Congress to raise the debt cap. S&P, beacon of stamp-any-toxic-asset-AAA, accountability, claimed, “American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.” In other words, too much debt, too little income.

According to the US Treasury, the main reason for the debt increase was a stalling economy –  lack of enough incoming tax receipts to pay US expenses, (which include interest payments on growing debt.) That’s not true. Tax receipts dropped $400 billion to $2.1 trillion in 2009 vs. 2008. Expenditures jumped to $3.5 trillion in 2009 from $3 trillion in 2008. Treasury debt ballooned by nearly $4 trillion from 2008 through 2010.

Where’s the money? About $1.6 trillion lies on the Fed’s books as excess reserves which banks  - dealers for sovereign debt - put there. Nearly a trillion dollars went to backing Fannie Mae, Freddie Mac - which enabled banks to artificially overvalue related securities, and extra interest payments. There was $700 billion in TARP, which though mostly repaid, never manifested into debt reduction, and hundreds of billions of dollars of asset guarantees underlying big bank mergers. So, 75% of the extra debt went to saving banks. S&P didn’t mention this. The policy repeated across the Atlantic.

Ireland

The Irish government’s pain started when it guaranteed the bonds of Anglo-Irish bank in September 2008. By May, 2010, Central Bank head, Patrick Honohan, assured the world that he’d have ‘two big banks, fixed by the end of the year.’ Upon that endorsement, the government backed bondholders on the banks’ behalf. The economy deteriorated.

Six months later, nobody would lend to Irish banks. Irish austerity promises didn’t change the fact that Irish banks weren’t big enough to contain their waste. By November, 2010, banks paid for $60 billion Euro of maturing bonds with emergency ECB loans, and the ECB became the backbone for the Irish bank guarantee scheme, whose participants included Ireland’s big financial firms: Irish Life & Permanent p.l.c., Bank of Ireland, Allied Irish Bank p.l.c., Anglo Irish Bank Corporation Limited, and Irish Nationwide Building Society. Irish Government Debt doubled from 65.3 billion Euro to 118 billion Euro since 2009.

The ECB deemed the bailout a success. Yet, by the summer of 2011, Ireland was downgraded to a notch above junk and households (and foreigners) accelerated extracting money from Irish banks, weakening the banks’ funding base further. The Irish government now owes 110 billion Euros to the banks, the National Asset Management Agency (NAMA, aka “bad bank”) the EU, ECB and IMF, with no way to repay it.

Spain

According to a recent Business Week article, Spanish banks hold 30 billion Euros ($41 billion) of “unsellable” real estate loans. Just like in the US where smaller banks got hit hardest, small and mid-sized Spanish banks did too. In addition, about 308 billion Euros worth of Spanish loans are ‘troubled.’ Home prices in Spain are off 28% from their April, 2007 peak, with land values in the outskirts of urban areas, down by as much as 75%.

In economic desperation, the public elected conservative party leader, Mariano Rajoy, as Prime Minister in the end of 2011 who promised to lead Spain to economic recovery, by invoking austerity measures in return for backing to help the biggest Spanish banks.

Meanwhile, the top six Spanish banks sit on $33 billion of foreclosed assets having set aside 105 billion Euros in write-downs against bad loans since 2008, with another 60 billion Euros to come. The backdrop is a 23% unemployment rate, triple its 7.9% May, 2009 level. Property transactions continue to decline. Foreclosures keep ramping up. The gap between what banks want to sell foreclosed or troubled property at, and what investors are wiling to pay continues to widen, forcing more small and mid-size banks to buckle under larger than anticipated losses, which in turn squeezes liquidity out of local usage.

Greece

According to an SEC report from the National Bank of Greece (NBR) for the year ending 2010 – loans to businesses and households were expected to “remain under considerable pressure…[due to] “downward pressure on household disposable incomes and firms’ profitability from the austerity measures… are likely to impair further demand for loans.” They weren’t kidding. In order for the NCB (or any bank) to reduce its dependency on ECB funding, it has to reduce loans to its own economy.

The ECB agreed to accept worse collateral (with junk ratings), including bank issued bonds with Greek government guarantees (under a May, 2010 rule change for all member countries). The ECB bought Greek (and other) government bonds in the secondary markets, to support their value and thus, their value as loan collateral. As with the Fed’s QE measures, Euro-style – this only perpetuates a fantasy of demand.

After four rounds of austerity measures, nationwide protests, 110 billion Euros in IMF and ECB bailouts to keep bondholders (and banks) happy, escalating interest rates driving borrowing costs higher, a downgrade to junk, and a Prime Minister swap; Greece remains in tatters with more pain to come.

Italy and Portugal

Last summer, S&P warned it would downgrade Portugal if it didn’t play ball with the IMF and EU over a 78 billion Euro bailout. So Portugal towed the austerity line. Its economy deteriorated. S&P downgraded it to junk status.

The IMF and EU declared that Italy too, needed ‘structural reform’, meaning public austerity and privatization.  National assets went up for fire-sale, as they did in Spain and Portugal, to the highest international bidder. Now, the high borrowing costs the government faces as a result of bolstering the banking system, paying bondholders and selling infrastructure, has resulted in more downgrades and dim prospects.

According to the Italian Central Bank, 500 Italian cities are facing losses on derivatives contracts. JPM Chase and Banco IMI are accepting Italian government bonds as collateral, rather than less risky US Treasuries or cash, certain that the ECB will step in to buy, and thus prop up, Italian bonds if needed, as they did in August, 2011.

As Greece showed, using high-cost sovereign debt as collateral leads to more bailouts to ensure big lenders get their money back. JPM Chase, having weathered the US subprime crisis with support from the US Fed, isn’t about to lose on that bet. Meanwhile, several Italian towns, the City of Milan and the Tuscan region, are suing the big American, German, Swiss and French banks over derivative losses and misleading asset purchases, who will likely get bailout money anyway.

Bailout Economics Doesn’t Work

ECB bailout money didn’t (and won’t) go towards helping any European country’s local economy, any more than it went to aiding the mainstream US economy. The ECB and IMF, at the Fed, US Treasury and US administration’s urging, camouflaged the insolvency of European banks, perpetuating losses with bailouts, and forcing cowardly governments to support them, while turning a blind eye to boosting core economies.

Meanwhile, banks with access to the ECB’s ‘window’ are taking the money and immediately putting it back into the ECB as reserves. Overnight deposits at the ECB continue to break records, currently hovering around 500 billion Euro ($640 billion). As in the US, European banks aren’t using that liquidity to help fix local economies, but hoarding it to preserve themselves. The amount on reserve is 98% of the total made available in emergency 3-year loans in late December at 1% interest; banks get 0.25%, which means they are paying 0.75% interest for the loans, far less than the market would charge them.

The die has been cast. Central entities like the Fed, ECB, and IMF perpetuate strategies that further undermine economies, through emergency loan facilities and  bailouts, with rating agency downgrades spurring them on. Governments attempt to raise money at harsher terms PLUS repay the bailouts that caused those terms to be higher. Banks hoard cheap money which doesn’t help populations, exacerbating the damaging economic effects. Unfortunately, this won't end any time soon.