Bunga, Bunga is back!

The return of the undead

Berlusconi to return to Italian politics. Mario Monti to quit (and return to Goldman Sachs for a annual honorarium of $50,000,000). The Italian long bond to go to 600 basis points over bunds. Investors to notice that Italy is still in the position of having massive debts and a completely stagnant economy. Panic to break out (again).

The bursting of the bubble

London property has been wearing anti-gravity boots for years now. Hey, the market has become so frothy that know-nothing footballers have been turning themselves into property developers (a sell signal if ever there was one.) But those anti-gravity boots are starting to lose their potency. Stand by for a massive fall in London prices. Property elsewhere in the UK will have a sympathy fall too.

Japan to have stable leadership

After too much calamitously indisciplined and indecisive leadership, Shinzo Abe has a real chance to holding onto power for a good stretch. He’s got massive problems to contend with. A structurally weak economy, massive debts and a prickly neighbour to the west. But just possibly, Abe-san is the man for the job. We’re wishing him luck: he’ll need it.

Francois Hollande to become most unpopular French President …

… since the last one. Hollande came to power on the back of anti-austerity promises, as though Sir Taxalot and his good steed Spend-Some-More was going to get France out of trouble. By now, Hollande has started to notice that France is in a fiscal mess, with chronically weak banks and far too much government spending. Will the French public enjoy Hollande’s conversion to the path of fiscal probity? We’re thinking non.

English middle classes to subsist on potatoes

Er, unless porridge is cheaper. As food inflation continues to skyrocket – beef up 75%,  lamb up 55%, fruit up 26% – and real wages continue to stagnate, more and more people will be forced to trade down to the cheapest (and least healthy) foods simply to get by. Oh, and as fuel prices continue to surge, we’re going to see a whole lot more people burning their floorboards to keep warm. But there is good news. The bankers are OK, people! And corporate profits are great! So you don’t need to worry about the FOGOs (Friends Of George Osborne). They’re all going to be fine.

The LIBOR scandal to grow

Three minnows arrested so far in the LIBOR scandal while the whales remain at large. That number’s going to rise faster than the yields on Spanish debt. If we’re lucky, we’ll start to see the stirrings of similar enquiries into the market for US Treasuries market. That market is stitched up tighter than Tony Soprano’s waste management business … and involves less savory individuals.

London Whale a "tempest in a teapot"

More of the same

Ever noticed that central bankers – ivory-tower academics for the most part – have been wrong about virtually everything for thirty years? Ever noticed that the same old advisors (take a bow Larry Summers) are recycled again and again, making the same failed policy prescriptions? Yep, well, 2013 is the year of no change at all. Same faces, same policies, same failures. Our big tip for the next big appointment: J.P. Morgan’s Dimon will smash the Goldman-only rule in Washington politics by leaving Wall Street for public service (that is: looking after his friends on Wall Street at the expense of everyone else.)

‘Triple-dip’ to become phrase of the year

If 2012 was the year of double-dip in the UK, 2013 has every chance of making it a recessionary hat-trick. Of course, the phrase is a con: it suggests that another recession now will be like some kind of temporary setback before the economy’s inevitable resurgence. But we had ten years of growth built on debt. Now we’ve got ten years of stagnation as we pay that debt back down. Triple-dip? How does quintuple-dip sound?

Civil unrest in Spain

Super Mario Draghi saved the world in 2012 (by promising to buy shoddy debt without limit for as long as needed.) We can’t even think what’s wrong with that policy … but here’s our bet: that Spain hits another crunch in 2013. Catalonian unrest grows. Unrest among those 50% of youth unemployed grows. And all of a sudden those – totally understandable – expressions of discontent force a financial, political and economic crisis. How will you escape this time, Mario?

Wanting to be head of the EU......

Merkel to be re-elected with 99% of the vote

Angela Merkel is Ms Reliable in German politics. Unfortunately she’s achieved that position by shirking every major decision in the Euro crisis, as a result of which the continent has racked up massive, unsustainable Ponzi-ish debts aided and abetted by lying bankers and southern European politicians who are either corrupt or incompetent. (Or, Silvio, both.)

Gold to hit new highs

What’s bad for money is good for gold. After a long bout of profit-taking, we expect gold, silver and other commodities to hit new highs. Meantime overvalued tech companies (we’re looking at you, Farcebook) will continue to lose value. And Exchange Traded Funds will increasingly be exposed as the new subprime market. Stand well back if you don’t want to be hurt.

Problem solved

The US fiscal cliff? OK, here’s what’s going to happen. The Democrats will sit down with Republicans. Both sides will call attention to the fact that the US fiscal gap (taking into account the oncoming medical and social security express train) is among the worst in the world. Both sides will set aside party differences and put together a plan which will be based on serious revenue increases and major cutbacks to entitlements. None of these things will be popular, but leaders from both parties will explain the logic truthfully and dispassionately to their electorates. Another US recession avoided. Also, pigs will fly.

Need a compact guide to the crisis?

Fortunately we have one for you: Mitch Feierstein’s Planet Ponzi. If only George Bush and Gordon Brown had had a copy …

If he had only read Planet Ponzi...

The British calling in the calvary

A hundred years ago, a generation of men – many of them volunteers – fought an unprecedently bloody war for almost invisible gains. The men were heroes, but the generals commanding them were too often blunderers, too little conscious of the ever-mounting casualties. David Cameron is right to demand that our schoolchildren are reminded of the Great War and the vast sacrifices involved.

He’s right, but he’s also showing some chutzpah. History remembers those men as ‘lions led by donkeys’. Heroes betrayed by blundering and unimaginative leaders. We are not – thank God – at war on that scale now, but in economic terms we are deep in our own version of trench warfare and David Cameron has too little idea how to lead us out.

The current recession is the longest and (almost) the deepest in modern British history. Its costs are borne, primarily, by those least able to afford them. Those responsible for the damage – the bankers, the regulators, the New Labour generation of politicians – have been largely untouched. The fraudsters who manipulated LIBOR, who missold subprime assets, and so much else, are sitting in Monaco, instead of in jail. The politicians in charge now too often rely on soundbite and deflection; there’s still a shocking lack of transparency and accountability.

The British people bear all this with a huge amount of dignity. High inflation, stagnant wages, crazy property prices, an economy that seems only ever to move sideways? ah well, could be worse. Mustn’t grumble. We’re lions, led by donkeys.

What time is Murray Playing?

But it’s not just in Britain where an economic Great War is laying waste to lives and savings.

In the US, a presidential election is unfolding that will do nothing to solve the fiscal crisis that is engulfing the country of my birth. The fiscal problem has become so bad, the politicians can’t even talk about it. Republicans won’t raise taxes. Democrats won’t cut benefits. The result is a fiscal jam so bad that serious economists estimate true US indebtedness at over $200 trillion. That’s more than three times the total GDP of Planet Earth. And virtually no one talks about the issue.

In Europe, meantime, the latest rescue of the latest crisis is beginning to fail. Again. Spanish bond yields have fallen from their high of nearly 8.00%, but they’re still glued close to the 6.00% mark. And a country in deep financial crisis, mounting debt and deepening recession cannot fund itself at that rate for long. Meanwhile, the wealthy Catalans are beginning to reconsider their ties to the rest of Spain. The ratings agencies are cutting their ratings, again. Italy is in pretty much the same position, only a step or two behind. Germany is beginning to backtrack on the deals that averted the crisis that loomed earlier this summer. The slow-mo European crisis is getting ready for the next hideous encore.

Welcome to Spain - nearly 60% youth unemployment - this will not end well

 

 

You might think that nothing changes, but you’d be wrong. A year or two back, the IMF believed that a £1.00 cut in government spending would only reduce economic activity by £0.50, as new private sector growth surged into the gaps created. That clearly hasn’t happened. We’ve had the exact reverse pattern where increasing austerity has led to increasing recession… and an increased deterioration of government finances. The IMF now estimates that the same £1.00 cut actually depletes the economy by £1.30. The task ahead of us is getting worse.

It’s the same with the banks. Forget the pre-Thatcher miners or the teaching unions under Labour – if you want real government largesse, the financial sector still outshines the rest. When you hear of the Bank of England ‘pumping money into the economy’, what it is actually doing is propping up the trading profits of the same handful of bloated institutions that created this mess in the first place. And those self-same institutions are still not lending, the economy still not moving. Meantime, the stock of dubious debts and inflated assets rises just that little bit more. A burden that the rest of us will have to pay for: through absent growth, stagnant wages, high inflation, and a hopelessly unsustainable property bubble.

Amidst such confusion, it would be easy to think that there’s no fix out there. Easy and wrong. We don’t need rocket-science, we need common sense.

Although I don’t like a lot about what the current government is doing, I do like its approach to the deficit. Under George Osborne, the government is still borrowing 8p in every £1.00 generated by the economy. So when you earn £100 at work, the government has just borrowed £8. Since that’s obviously nuts, government borrowing needs to come down. At least Osborne has got that part right.

But then consider monetary policy. The Bank of England is widely expected to announce an expansion of its quantitative easing programme to £425 billion. Which is just a fancy way to say it’s printing £425 billion of new money, which is a sure fire way to create inflation. (Just ask Zimbabwe.) It’s craziness – or, in fact, craziness doubled, given that the intended effects of the policy (boost lending and encourage investment) have clearly not happened.

Or take the banks. It’s pretty obvious that bankers don’t need our sympathy. (Many of them, in fact, need jail terms.) Far from coddling the banks any further, we should force them to play by the same rules that all the rest of us have to live by. If a bank goes bust, it should be left to fail. Small depositors should be protected. Everyone else should get no sympathy. Instead, we pump money into the system and pretend we’re helping the broader economy. It’s insanity squared.

I wrote a book about these matters: Planet Ponzi, which is out now in paperback. That book tells you in detail, and in easy, everyday language, just how bad the problems are – and what we need to do to fix them.

I didn’t write the book because I wanted to make money, but out of belief – even passion. I’ve been involved in the financial markets for thirty years. Over that time I’ve seen a kind of sickness take hold. A belief in the power of debt. A belief that any problem is OK, so long as you can defer the reckoning. The sickness isn’t confined to Britain (though we are now the world’s most indebted country). The problem is equally bad in Europe, maybe worst of all in the United States.

The cure for this disease is, in essence, simple. It’s total transparency, total accountability. That needs to apply to politicians: no more false promises, no more evasions of responsibility. But the same magic formula needs to apply to banking and the media. And we, the voters, need to retain our sense of anger. When we hear politicians evading an important question, we need to demand a real answer. When we see bankers grossly manipulate the financial markets, we need to reject any outcome that does not end up with one or more bankers doing some serious jail time.

I first conceived of writing Planet Ponzi, when the first tremors of the financial quake were starting to strike. I thought the issues covered in the book were the most urgent matters facing the Western world since the end of the Second World War. I still do. It’s not too late to turn things around – but we can’t delay our actions any further. Planet Ponzi has got to stop. We still need our lions, but it’s time to lose the donkeys.

Accountable: A letter in the Sunday Times called for Osborne to begin spending cuts a year earlier than planned

In February 2010, twenty economists published a letter in the Sunday Times calling on George Osborne to begin spending cuts a year earlier than planned. The key sentence of that letter stated that, ‘In order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament.’

The logic was clear. If you say you’re going to do something hard but essential, you need to do it at a credible pace. Saying you’re aiming to do something in five years time and after a general election is rather like admitting that you’ve no intention of doing it at all.

You probably agree with that logic. If you are in charge of your household budget and you notice that your expenditures are running ahead of your income, you’ll almost certainly want to address that gap right now this minute. It’s not pleasant doing it, but you do it anyway. Businesses think the same way.

What’s strange then is why those same economists have now reversed themselves. Just three of the original twenty economists are thought to stand by their original view. The Daily Telegraph will this week print opinion pieces from a range of other economists all calling upon the Chancellor to reverse course, slow down the fiscal tightening. Spend more, tax less.

Some of the specific ideas have real merit. Britain has an acute shortage of good affordable housing. Plenty of people would seek to buy a house if suitable properties were available at a vaguely sane price. Yet, as things stand, planning restrictions artificially restrict supply while the construction industry is staggering under its post-Olympic hangover. In principle, therefore, you could release demand and reignite an industry by changing planning laws so as to enable the provision of new homes.

Another good idea is widespread tax reform. The British tax system is too complicated and tax rates are too high. Simpler, broader taxes would allow tax rates to be lowered without any overall loss of revenue. The economy would surely benefit from such a reform. There would also be a huge boost to fairness, as the super-wealthy would find themselves having to pay tax instead of dodging it.

Bad plan: Certain other plans for spending cuts are just bananas, such as cutting stamp duty. Britain has long suffered from a huge property bubble, which is at its worst in London
So some of the ideas floating around at the moment are entirely valid. Some of the reforms mooted are obvious and overdue. But certain other ideas are just bananas. Cut stamp duty? Really? Britain has long suffered from a huge property bubble, which is at its worst in London.

A valid alternative? Alistair Darling wants new investment in power stations, airports and railways

Stamp duty is a tax that’s hard to evade and which keeps some kind of lid on prices. Abolishing the tax will just encourage prices upwards: a disastrous step backwards to the bubble economy of 1997-2008.

And higher prices will of course make it even harder for ordinary people to own their own homes, which should be a perfectly reasonable aspiration for working families in a twenty-first century democracy.

Other ideas are more marginal. Alistair Darling wants new investment in power stations, airports and railways.

He’s right, of course, that Britain’s infrastructure does look ragged compared with that of our European competitors. New investment makes good sense, in principle. But why should we expect the government to fund that investment? If there’s a market demand for new airport capacity, the private sector should be able to fund it. If planning restrictions get in the way, Osborne needs to look at the planning laws – he shouldn’t just pull his chequebook out. Same with the railways. Same with power. Those services need to exist, but they need to be funded by the people who use them. Any other approach is a reversion to the jam-today, pay-tomorrow culture of the previous decade.

This debate is going to rumble away for some time to come. Osborne will face a thousand calls from a thousand directions to reverse course, to back off, to ease the pain. But before you join that chorus, please just remember the position we’re in. According to the IMF’s data, the British government will this year borrow 8% of GDP. That’s £124 billion. Of every £1 that the government spends, about 18p is borrowed money. That’s plainly unsustainable.  If you look at all debt in the economy – household, government, corporate, banking – then our debt to GDP ratio is a terrifying 500%.

Those numbers were produced in April. Since then, the economy has deteriorated, the outlook darkened. That doesn’t make is less needful to get the finances in order, but more needful. This entire crisis – from the collapse of Northern Rock to the travails of the Eurozone – arose because of too much debt. Too much stupid debt. Urging George Osborne to borrow more for longer is like telling an alcoholic to use cider as a way to get through his whisky withdrawal pangs.

For the same reason, it’s sheer madness for the Bank of England to cast around for new ways to loosen policy. The IMF’s commodity price index has almost doubled from its early-2009 lows. London house prices are crazy. The financial markets are also at unsupportable levels. These things are certain harbingers of inflation – and sure enough, last month, the RPI inflation index rose again, to 3.2% and it won’t stop there.

You would think these things would act like a cold shower on policy-makers. That they would remind them of basic truths: that debt is bad, that fiscal responsibility matters, that money-printing is destructive. Instead, though, it sometimes seems that those in charge of policy will do anything but face the facts. There’s talk about changing the way inflation is calculated – the classic government dodge: if the facts don’t change, fiddle the numbers. Meanwhile, the IMF wants the Bank of England to cut the base rate from 0.5% to 0.0%, as though current rates aren’t already absurd. The lunatics are trying to take over the asylum.

But personally, I think George Osborne understands all this. He’s not a dummy. He gets that you can’t cut expenditure without causing pain. He understands that too many people are still hooked on the Ponzi-ish belief that we can enjoy things today and pay for them tomorrow. Over the next few years, George Osborne might not be Mr Popular. He may yet prove to be Mr Right.

Solution? Business secretary Vince Cable has said he wants to nationalise the 18pc of RBS that isn’t already owned by the taxpayer

Vince Cable wants to nationalise RBS. You can see his logic. The taxpayer owns 82% of the firm already. Nationalisation is hardly such a radical idea; it’s more the logical completion of a process.

It’s true that full nationalisation was never the advertised outcome. We were promised that these part-nationalised banks would be rapidly strengthened and restored to full private ownership.There were even muttered suggestions that the government could end up making a profit on its stake.

But it would be daft to make policy on the basis on what bankers and governments choose to tell us. In 2007, the US Treasury Secretary, Hank Paulson, told the world that he didn’t see the subprime mortgage market as ‘imposing a serious problem. I think it’s going to it’s going to be largely contained.’ Sure, Hank. We know how that prediction worked out.

That same year, the head of financial insurance giant AIG’s financial products division said ‘it is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [credit default swap] transactions.’ He was almost right – he was off target by just $183 billion, the amount the US government ended up spending on AIG’s bailout.

It’s the same in Europe. Greece has missed 210 of 300 economic targets given it during the course of its extended bailout misery. More recently, the Spanish government of Mariano Rajoy promised financial markets that it would meet its deficit targets and that a bailout was out of the question… until of course it missed those targets and the only bailout question remaining is how many hundreds of billions of euros are required. It was much the same thing in Ireland and Portugal. It will be much the same in Italy too.

So let’s set intentions and promises to one side and look at the facts. First of all, it’s clear that RBS is not about to return to the private sector. The company has just made a six-monthly loss of £1.5 billion. Its computer systems are clearly dysfunctional. It seems certain to get hit with major fines for its role in the LIBOR fixing scandal. The bank’s core business of lending to British companies is gummed up and directionless. The bank’s size makes proper management difficult and restricts competition both on the high street and in business lending.

Struggling: RBS has been dogged by technical problems and poor management, running up a £1.5bn first half loss

And if private ownership remains a pipe-dream, the current arrangement seems like the worst of all worlds. The principal shareholders (you and me) can’t take effective operating decisions because of the private minority. Meanwhile the entire country suffers from a failing banking system. So nationalisation is the first part of the answer – and Vince Cable is brave and right to suggest it.

But nationalisation is only the first step of a long and difficult journey. The next step – the tough one – involves utter honesty about the balance sheet. European sovereign bonds need to be valued at their actual market value. That’ll imply huge losses. Loans backed by British real estate also need to be fiercely written down. Outside a developing property bubble in London and surrounding areas, UK property prices are nosing down. That’s not surprising. In a world where real wages are decreasing, and after a decade long property bubble, prices have nowhere to go but down. That means RBS’s property book is softer than a baby’s bottom.

So government auditors need to bring reality to these accounts. No soft-soaping for the stockmarket. No desperate excuses about ‘trading out of trouble’. (You can’t trade out of trouble if you make losses of £1.5 billion in half a year. That’s trading into trouble, right?)

My own suspicion is that if RBS’s assets were properly valued, it would not be solvent. (I don’t think RBS is alone there, by the way. I think most European banks are insolvent: a belief that others, including the head of Deutsche Bank, share with me.) The traditional government response to financial distress is to pour your money into the stricken institution. It’s what Gordon Brown did like crazy in 2008-09. It’s what countless other governments did too.

And it’s the wrong way. Funnily enough, capitalism already has a solution to insolvency, and it’s called bankruptcy. Bankruptcy is a wonderful thing. In most cases, bankruptcy doesn’t mean the death of a company. If a company is a going concern – that is, if its core business is fundamentally OK, just encumbered by too much debt and too much bad management – bankruptcy is the place to clean it up. Shareholders lose their money (but it’s already lost anyway). Creditors lose a slice of theirs (and it’s already gone too, just slowly and painfully.)

But that’s good. Those losses are good. They’re good for two reasons. One, if creditors make bad loans, they need a reminder to do their due diligence. That’s the only way to avoid the same mistakes in the future. Secondly, as creditors take their losses, RBS can emerge from the ashes with a strong balance sheet, and a sense of confidence. It can start to invest again: in computer systems, in business lending, in all that bread and butter stuff that the firm has neglected so long.

Bankruptcy would help for a third reason too. RBS is too big, too bloated. It needs to be broken up into smaller, nimbler firms that can reintroduce competition to our dysfunctional industry. That can’t be done with a firm that’s already struggling for financial solvency. It needs to be done on the back of a new, strong balance sheet. And it needs to be done without taxpayers contributing a single penny more to the process. We’ve done enough already. It’s time for a new start. It’s over to you, Vince.

Mitch Feierstein is CEO of Glacier Environmental Fund and author of Planet Ponzi: How Politicians and Bankers Stole Your Future

You know, there would have been a time when a financial contributor for the Daily Mail was restricted to the little stuff. Share tips, muttering about monetary policy, that sort of thing.

Not any more. Over the last few years, there’s been no breaking news like finance news. No war, no election, no natural disaster has long been able to displace finance from the front pages. This new emphasis makes perfect sense. When your job is threatened, your pension demolished, your child’s prospects seriously impaired, you need to know why these things are happening. The answers all revolve around matters financial.

So: another week, another row. Hot on the heels of last week’s news – another banking scandal, another repentance-free resignation – we have this week’s headline. Ed Miliband wants to force the big banks to sell up to 1000 branches each. He wants a specialist financial unit inside the Serious Fraud Office. Vince Cable has lambasted the banking sector’s ‘anti-business’ culture and accuses it of ‘throttling’ an incipient British recovery.

And they’re right. Bang-on-the-money, hole-in-one, jackpot-hittingly right.

Take each of those points in turn. Should the big banks be forced to sell branches? Of course they should! How is there even any argument? The mergers, acquisitions and bank failures which took place during the 2007-09 period have left British high streets with a dangerously oligopolistic industry. That means less competition. It means aworse deal for borrowers, a worse deal for savers – and a much-reduced capacity for corporate lending. It’s a market gone badly rotten. Competition from sizeable, properly funded institutions is essential for us all.

As for a specialist finance unit inside the SFO – I’m frankly astonished there isn’t one already. What’s more, such a unit needs to be lavishly funded. It needs to be able to employ professionals who understand the nuances of the financial markets. If that means paying top dollar, so be it. The money would easily be recaptured from the fines that would result.

And after all, how much more evidence do we really need that these banks have utterly lost touch with their ethics? They are happy to mis-sell a wide array of products to consumers. They are happy to fiddle interest rates. They are happy to sell totally inappropriate derivatives to corporate users. They will help an entire country, Greece, fiddle its books so it can enter the Euro.

I was about to write that there is nothing these people won’t do, and then I wondered. Mass murder? Genocide? Are there perhaps some limits still prevailing? Some matters a board of bankers would still not countenance? I don’t know. Maybe. But until those bankers find their ethics again, we need a fraud unit with as much finding and as much investigative authority as it plausibly needs. The hard truth is that until we see a fair few bankers serving long jail terms, these people will continue to feel immune. And no wonder. They have been immune. Bob Diamond may have resigned last week, but he hasn’t apologised, he hasn’t handed back any of his £100 million pay, he hasn’t indicated that he intends to waive his £20 million odd serverance package – and he isn’t facing jail. (Incidentally, Barclays stock price has declined 52% since February 2011 and 75% in the past five years. So how exactly does he think he earned that money?)

Blame: Vince Cable has slammed the banking sector’s ‘anti-business’ culture and accused it of stifling the chances of a speedy British economic recovery

As for Vince Cable’s comments about the anti-business culture of these firms – well, duh! Of course they have an anti-business culture. Banks have made money over recent years by (i) acquiring lousy assets (Greek bonds, American subprime debt, over-leveraged domestic mortgages), (ii) mispricing them on their books (so they don’t recognise the true impairment in value), (iii) waiting for the Bank of England to print more money as a way to support creaking asset markets and, when in dire straits, (iv) waiting for a handout from the taxpayer. None of these items have anything at all to do with real, ordinary banking business. None of them supports the broader economy. You’ll also note that the last two items involve massive support from the state, yet that support is somehow not inconsistent with the payment of massive bonuses. Explain that one if you can.

The trouble is that many banks are a zillion miles from becoming responsible citizens again. Their balance sheets are rotten. They may not admit that rottenness in public – there would be a bank run if they did – but they know perfectly well that their balance sheets are in a desperately weakened state. Because of that, they flinch from offering corporate loans – which involve real business risks in a difficult climate – and prefer to trade government paper. That way, their capital ratios look alittle better, no matter than no real banking work is being done.

You don’t have to take my word for these things. A strong bank will have a stock market ‘price to book’ ratio of more than one. That is: the stock market regards a given bank as being worth more than the collection of financial assets (less debt) on the bank’s balance sheet. A ratio of one exactly would mean that the bank was worth its financial assets but that its actual franchise – its ability to generate additional profits from those assets – was worth zero.

Action: Labour leader Ed Miliband wants to force the big banks to sell up to 1000 branches each

Most of our banks are today rated at far less than one. Barclays Bank, for example, has a price to book ratio ofjust 0.36. That is: the market regards the bank’s valuation of its own assets as laughably optimistic. While that continues to be the case, the bank willhave neither the strength nor the outlook needed to finance recovery.

So Miliband is right. Cable is right. The Tories are, on the whole, lamentably silent on this issue. (The worst offender is the bankers’ own apologist, Boris Johnson.) That’s not to say the Labour record has been glorious – very far from it. Ed Balls’s recent Oscar winning performance in front of the LIEBORgate enquiry was a frightening reminder of how useless and responsibility-evading his party was when in power. Until we have politicians ready to accept accountability and transparency while in power, we will continue to have a government that is wholly ineffective in the face of the banking lobby.

Nevertheless, and that said, Miliband and Cable are currently seeing these things more accurately than George Osborne and his colleagues. So here’s what has to be done. Break up the banks. Stop printing money. Deflate the housing bubble created by QE. Punish fraud. Force banks to publish honest balance sheets. The solutions are obvious. But will they happen? Of course they will: a Brit just needs to win at Wimbledon first…

Mitch Feierstein is CEO of Glacier Fund and author of Planet Ponzi: How politicians and bankers stole your future

I published this in the Daily Mail.

Two bits of news in the last couple days. One, Ben Bernanke, Chairman of the Federal Reserve, has decided to extend Operation Twist, a policy whereby the Fed sells short-dated government paper in order to buy the longer-dated sort. It sounds boring but it involves $267 billion, so it’s kind of consequential all the same. Oh, and traders warn that the disappearance of the Fed’s holdings of short-dated government paper could gum up those markets, thereby causing costs greater thany any likely benefit. But still, mere reality doesn’t deter Bernanke, who asserts, ”We are prepared to do what’s necessary. We are prepared to provide support for the economy. Additional asset purchases would be among the things that we would certainly consider if we need to take additional measures to strengthen the economy.”

So: $267 billion of your money is being put at risk on a complex long-dated debt operation of dubious benefit, while the leader of that operation comments that much more money might be needed down the road. That’s news item one.

Money printing is all I know.....

News item two: Moody’s announced a mass downgrade of American and European banks. Goldman Sachs and Morgan Stanley took a hit. So did Bank of America, JP Morgan and Citigroup. So too did a raft of European banks, including some of the biggest. The markets didn’t react much to these downgrades, but only because the credit failings of these banks has long been baked into the price. Credit default swaps on two nationalized British banks, RBS and Lloyds, are already priced at junk levels. Anything Moody’s says now is like a punch line delivered long after the party guests have departed. In reality, the truth is probably worse even than Moody’s is suggesting. Many of these banks will see further downgrades, some of them sharp, before this crisis is done.

Now these things are connected. They’re connected in the simplest of ways. The central banks are committed to a policy of debasing the currency, manipulating interest rates and artificially inflating asset bubbles. Meantime, the Western financial system is in parlous shape. Well, duh! Of course. You don’t fix lousy banks by printing wild sums of money to prop up the markets. You fix lousy banks by writing off bad loans, forcing shareholders and creditors to take the hit. You clean up and move on. It’s so obvious a child could see it.

But not Ben Bernanke. Part of the problem is a kind of academic groupthink. Two of the world’s leading central bankers are Ben Bernanke of the Fed and Mervyn King of the Bank of England. King was a visiting professor at Harvard and then MIT, where he shared an office with the then Assistant Professor Ben Bernanke. They come from the same intellectual hutch, the same narrow world-view.

And please note, that world view is born of academic theory, not practical reality. It’s born of an obsession with the Great Depression in the 1930s … forgetting that everything, but everything, has changed since then. Back then, trade was limited, international finance modest, government finances strong, consumer credit exceptionally low, derivative markets all but non-existent. Not one of those things is true today. Government finances are shot to hell. Derivatives markets have bcome too big to regulate and too vast to fail. Consumer credit is terrifying. And the whole world is connected in one lethal stew of poor credit, mistrust and non-disclosure of losses.

So let’s keep this simple. I argue the Great Depression has almost nothing to teach us. The academic central bankers who have guided us into this crisis, and have been printing money throughout it, are only making the problem worse. The mess our banks are in is in large part due to the failures of these same central bankers, the like-minded Nobel laureates and the same old recycled economic advisors.

The recipe for recovery is simple too. You need to rip the bandages off. It’ll hurt, but the patient will get better. Banks (and central bankers) need to face up to their losses. If shareholders and bondholders have lost money, then tough. Why on earth should taxpayers pick up this tab? Because the banks have hired expensive lobbyists to purchase politicians’ favor? I don’t think so.

We are currently in the midst of a major depression. Unemployment (measured by U-6) is at almost 15%. The economic projections in the White House’s budget are clearly powered by the kind of substances that President Clinton once smoked (but did not inhale). The government deficit is in meltdown, yet hasn’t remotely engineered the kind of growth-led recovery we had been led to expect.

I’m not surprised. Here on Planet Ponzi we hold these truths to be self-evident. That the Fed is becoming impotent; it’s running out of bullets. The Fed is out of touch with reality, printing trillions of dollars without the consent of the people of America. That the Fed is taking on a giagantic risk position in long-dated securities, which will have catastrophic consequences if — or rather when — interest rates rise. That existing policies have clearly, plainly and unequivocally failed — yet are still being implemented seemingly without end.

It’s time for a change, and the change can’t come too soon.

I published this in todays Huffington Post

The United Kingdom has too much debt. Reports normally focus on government debt: currently around 80% of national income, unless you take into account (as you should) the debts of the bailed-out banks and their toxic portfolios, which would pretty much double that figure.

But what about consumer debt? Mortgage debt? Business debt? The huge slabs of debt incurred by our banking system? The truth is, if you want to know how much the United Kingdom owes, you need to add up everything.

And the answer is terrifying. We owe about 500% of GDP. So for every pound you earn in a year, someone, somewhere owes £5.  Add it all up and you get to a total just shy of £8 trillion.

Burden: Including bank bailouts, the UK’s national debt is already around 160% of GDP

You don’t have to be a rocket-scientist to figure out that this is a problem. Indeed, you’d have to be living under a stone not to have noticed that our economy has plunged into a depression because of this weight of debt. The banks started it, but we’re all in it together. And it’s not just Britain, it’s Europe too. And the US economy is way more fragile than is sometimes reported.

The dictionary definition of a depression is ‘a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle.’ That’s us. That’s where we are. The Great Depression of the 1930s did not destroy output to the same degree and recovery was faster. This is the worst depression in British economic history.

And what is the solution to this crisis, as cooked up between George Osborne and Mervyn King, the Bank of England chief? 

I love Wimbledon, it's Smashing!

George Osborne and Mervyn King have announced their intention to make around £100bn of cheap loans available to banks, allowing them to lend to businesses

Answer: more debt! Clearly, these wise souls believe that the whole problem with the British economy is that we don’t have enough debt. So let’s have more. In fact – and how’s this for a plan? – let’s make soft loans at cheap rates to the same klutzy British banks that created this mess in the first place and hope that somehow that sparks off a spiral of investment and innovation. You might as well plan for world peace by selling arms to the Middle East. (Or, come to think of it, making Tony Blair a peace envoy.) It’s the same crazed logic.

Fortunately, though, businesses aren’t stupid. The main barrier to investment isn’t the availability of credit; it’s the dire economy. Businesses are, quite rightly, looking at the devastation and lack of governance around them and thinking this might not be the best possible time to launch new ventures or expand old ones.

And the solution?  Well, there isn’t one short of de-leveraging. The only way to a problem of excessive debt is to have less debt. You can’t achieve that by waving a magic wand, you achieve it by working hard, paying down your loans, and remembering that, next time, you better keep your credit card in your pocket when you pass those nice, inviting stores.

But meantime, the plan does reveal something important about the decision-makers in charge of the economy. George Osborne I have some time for: at least he realises he needs to get the government to borrow less; at least he knows that the banks have to be tamed. But Mervyn King: what is he for? We are currently paying him to print money and shovel cheap loans at dodgy banks fueling a property bubble of epic proportion. 

Athens burns: Does this look like the creation of aggregate demand, Mr King?

Creating asset bubbles and money printing are terrible policies that King has become addicted to. He’s past his sell by date and has to go.
 

I published this in the Daily Mail

Meantime, over the same weekend, another rescue act took place. This ‘rescue’ involved €100 billion of taxpayer money (though not yours, fortunately) and is intended to bail out the worst Spanish banks whose balance sheets have been looking desperately fragile in recent months.

Global stockmarkets have been so relieved by the transaction that they leaped almost 2% on opening for business today. Let’s see how long that lasts…

Bailout: Eurozone finance ministers agreed to lend Spain up to $125billion to help its battered banks

Only, what actually has been rescued?  There are at least four problems with the Spanish economy at the moment. One, too much debt. Two, not enough growth. Three, a government austerity programme that’s been forced on the country by the first issue but which is severely worsening by the second. You can add a fourth issue to this list: a housing bubble that’s burst so badly, the construction and other ancillary industries will be decimated for at least a generation.

The first three of these issues aren’t just Spanish problems; they’re European ones. Germany itself is normally spoken of as an exception, but if so it’s a very partial one. The fact is that the Spanish government is less indebted than the German one. German growth which, despite everything, has been relatively healthy since the financial crash has started to stutter badly. And no wonder: it’s hard to sell to people without money.

Criticism: Spanish Prime Minister Mariano Rajoy has been slammed by Greece for the deal

But go back to that list of Spanish problems. Spain has just borrowed a further €100 billion. Forgive me for stating the bleeding obvious, but you cannot spend your way out of debt by borrowing more money. And let’s assume – a generous assumption this one – that Spain uses that money with prudence and wisdom, that it cleans up its dodgy banks, that it removes dead assets from their balance sheets, that good management is installed, that lending procedures are overhauled, that their capital base is made strong, that boards and shareholders learn to oversee their charges with intelligence and care.

Truth is, you only have to write that list to know that those things are never going to happen. The banks that got intro trouble did so by being incredibly stupid, badly run and forgetting every rule of sober banking. They aren’t about to turn themselves overnight into some shining examples of financial wisdom.

But, I’m an optimist, let’s assume a miracle happens and the banks come good. What then?

Well, so what? The burden of debt that Spain has to bear is still €100 billion greater than it was. The banks are hardly going to act as the engines of a new Spanish economy for two reasons. First, Spain is acutely short of credible international businesses to lend to. Secondly, the Spanish economy is shrinking not growing. Under such circumstances, intelligent bankers should be doing all they can to preserve their capital and avoid making risky loans. 

And how credible is the Spanish government as a borrower? We know what the international financial markets think: they think Spain is dangerously at risk. That’s why Spain borrows at some six and a half percent, when German can borrow at less than one and a half.

To be sure, this ‘rescue loan’ isn’t coming from the financial markets. It’s coming from ‘Europe’. I put ‘Europe’ in inverted commas, just to make it clear that the cash doesn’t come via any recognizable electoral or democratic process. Politicians and unelected officials have essentially conspired to make these decisions without the assent of their peoples.

 

Pain in Spain: You cannot spend your way out of debt by borrowing more money and banks are simply not going to act as the engines of a new Spanish economy

Would Germans, if given a vote, want to lend €100 billion to Spain? Would the Dutch? Would the Finns? And what would these people say if asked to give their verdict on the European Central Bank’s ‘LTRO’ programme, under which it has lent €1 trillion or more to European banks? Truth is, everyone knows what the outcome of any referendum would be. That’s why the people are never asked. That’s why these bailouts are effectively based on the theft of taxpayer funds.

Optimistic: Spain’s Minister of Economy Luis de Guindos said he hoped that companies would have more solvent banks as a result of the bailout

But back to the question. Spain is being lent €100 billion by baffling European institutions, without democratic oversight. Normally when loans are made under these circumstances, international lenders insist that some tough eligibility criteria are enforced, but in this case – no criteria.

It would be nice to think that Spanish politicians had proved their mettle to such a degree that no such criteria were required. But this is a government that has already missed its fiscal targets. That has long claimed no banking bailout was necessary. That has, in fact, already engineered one failed bailout (the one that led to the creation of Bankia and it’s shares are down 70%) and is now desperately seeking another. That has 55% youth unemployment, a shrinking economy, deep popular dissatisfaction and no proven ability to control its spendthrift regions. Oh, and one of the largest housing busts in the world. That’s the government which has just been given a no-strings-attached loan.

Britain, thank goodness, stands on the edge of all this. And of course, every new bailout, every new loan, every new increase in the tidal wave of debt, defers the problem a little longer. Deferring these problems isn’t smart, of course. Adding to the debt mountain only makes the fundamental problem worse. But that’s fine. Politicians only care about the next election. About keeping one step ahead of their voters.

Spain did enjoy a rescue act at the weekend, but it came from Fabregas’ boot. The faux European bailout has just made things worse.

This was published in todays Daily Mail.

But although the horizons are red with fire and every new day brings news and rumours of further catastrophe, you need to realise that we’re on the brink of something bad. We’re not actually in it.

So what comes next? It’s a question that you may reasonably ask (worried about job, savings, wages, inflation). But it’s also the question which is being asked across Europe: in the governments of Greece and Spain, those of France and Germany, by the central banks, by the banking industry – and indeed, by every private sector entity which touches those things, which is to say absolutely everyone and everything.

Expect a messy exit: A paint-spattered protester outside the European Central Bank

And no one knows. Or, to be precise, no one knows the exact way events will unfold, but there are some broad predictions which we can make with some confidence.

Prediction One: Greece will leave the euro. The ‘bailout’ offered by the EU was help of absolutely the worst sort. It was generous enough (just!) to prompt a beleaguered government to accept it. But the terms were so parsimonious that it left Greece still just inches from the financial disaster zone. It was as if the EU saw a starving man and chose to give that man just enough food to keep him from death, but not enough to permit recovery. If the Greek people are rebelling against the terms they were offered, they have my sympathy. I think they’re right.

Prediction Two: as Greece falls, the other weak countries of the Eurozone will come under intense pressure – worse than anything we saw even in the dark days of last autumn. Ireland (with its fundamentally strong, flexible and low-tax economy) will probably be OK. But the countries of southern Europe face some terrifying problems: weak growth, a woeful lack of flexibility, dodgy banks, and no fiscal room for anything except more austerity.

And the thing is, if you take a reasonably decent economy – Ireland, Britain, Germany – and impose austerity, it’ll be painful (it always is) but you know that the economy will, sooner or later, spring back into growth. The situation in the south of Europe isn’t like that at all. Italy, despite years of easy money, grew by just 2.5 per cent between 2000 and 2010. That’s not 2.5 per cent a year, it’s 2.5 per cent a decade.

The storm clouds are gathering: Greece’s departure from the Euro will place Spain and Italy under intense pressure

Or take Spain. Spanish growth looked good, but it was boosted by an utterly unrealistic reliance on construction – an industry which accounted for one sixth of the entire economy at its peak. Since Spain is now grossly overbuilt, that one-sixth is now pretty much dead and will never come back. Toss some brutal austerity measures onto these horrible starting conditions along with massive unemployment and it’s little wonder that the bond markets are nakedly terrified that they won’t get their money back. (Oh, and if you read that sentence and think, “serves the damn bankers right”, you might just want to remember that your pension fund is probably invested in those markets.)

Prediction Three, then: the failure of the euro won’t stop at Greece. It’s hard to say from here which country will be first to follow its lead, but I personally wouldn’t buy Spanish, Italian, or Portuguese bonds at anything more than 20-30 per cent of face value. (And that’s being nice: Greek bonds have lost much more than that.)

French President Francois Hollande was elected on an anti-austerity platform – but may struggle to keep his promises

Thus far, my predictions would be fairly widely shared among financial experts. Thereafter, it’s hard to read the future. Take, for example, the ‘simple’ question about what happens if Greece quits the Euro. Any business (and any bank) will have its liabilities denominated in euros, not drachma. Foreign creditors won’t want to be repaid in devalued drachma instead of the promised euros, so a wave of bankruptcies seems likely. Not just the government, but probably all of the banks, and countless businesses too. Naturally the Greek government will want to pass laws that reconstitute those businesses in double-quick time, but the scale of the task is Herculean. And the Greek government isn’t exactly noted for economic and administrative prowess.

Since the imminent failure of Spain and Italy would create problems far larger in magnitude, the ripple effect could be enormous. In fact, can you scratch that term ‘ripple effect’. There are no ripples here, only tsunamis. Just think for example, how France would be affected by the collapse of Spain and Italy. The French economy is deeply entwined with those two and their failure would bring the financial storms right to the steps of the Quai D’Orsay. Francois Hollande may have been elected on a no-austerity platform, but he might as well promise an end to gravity. So, Prediction Four: the French are about to endure a savage austerity programme of their own. And bonne chance in explaining that one, Monsieur.

Thereafter, what to say? The central banks won’t take any blame for creating more than a decade and a half of loose money and massively inflated asset prices. Politicians will continue to prefer comforting lies to brutal truths. No bankers will go to jail, even though they’ve done more than anyone else to create this mess. Germany will be fine. Britain too, in the long run, though it’ll be a long, slow slog: longer and slower than any of the official forecasts had predicted. And when even Ed Balls is still mulling the possibility of a British referendum on Europe, who knows how far the whole European project might yet unravel?

But these are big questions and perhaps distant ones. What about you? Your job, your savings, your pension? Well, I honestly hope and pray you’ll be OK. These are rough waters we’re entering. We ain’t seen nothing yet.

My article was published in todays Daily Mail