My printing presses are operating 24/7!

On the first day of Christmas, my country gave to me

A debt bigger than GDP

Yep, that’s right. US Public debt stands at more than 100% of GDP. The last time debt was this high, we were fighting a World War across two continents and building a peaceful prosperous world, whose basic shape would endure for generations. That was money worth spending. On this occasion, however, we’ve run up the debt, in order to protect Wall Street bankers – yet the sebanks are still crammed full of unsustainable assets. It won’t be long before the Fed further loads its balance sheet with worthless toxic assets … thereby transferring liabilities from the reckless bankers to US citizens. Maybe not quite such a good buy, huh?

On the second day of Christmas, my country gave to me

Debt for the poorest

According to Nobel Prize-winning economist, Joseph Stiglitz, the share of American GDP going to wages and salaries has falled to about 43% since 1970. At the same time, the slice going to companies in after-tax profits has doubled since just 2005. How have the US middle classes even vaguely been able to sustain their living standards? Answer: by taking on unpayable debt that chokes the financial system and throttles economic growth. It’s an appalling situation and it’s not set to change.

On the third day of Christmas, my country gave to me

Bernanke trashing dollars

Impact of money printing and currency debasement

Ben Bernanke, Chairman of the Federal Reserve, is not an elected official. Prior to taking his current job, he was a classic ivory tower economist: a guy who couldn’t do any harm because no one was dumb enough to give him any power. Then he took control of the Fed: an organisation whose structure and oversight has barely been altered since 1913 when it was created, under vastly different conditions. Back then, GDP was just $40 billion. By contrast, in 2011, the interest on US debt was $454 billion despite interest rates at 200-year lows. Since taking charge of the Fed, Bernanke has printed trillions of dollars – a plan that trashes the value of the dollar in your pocket, and a plan with no plausible exit strategy. The plain fact is that pumping money into the economy does nothing to boost real growth or real output – it just inflates bubbles in property and stock, as has been shown repeatedly for thirty years and more now. If you’re not convinced, just check the graph.

On the fourth day of Christmas, my country gave to me

Overpriced healthcare

Good quality healthcare is, in my view, a human right and Obamacare, for all its faults, brings that right a little closer to millions of Americans. But the United States, under every administration and every Congress, has completely lost control of health costs. We currently pay about $8,000 per head in health costs. (That figure includes household, corporate and government spending.) Our major competitors spend between $2,900 per head (Japan) and $4,500 (Canada). And they have better healthcare. To find OECD countries with worse performance on ‘years of life lost’, you have to travel south to Mexico or east to Hungary. All other countries in the OECD fare better.

On the fifth day of Christmas, my country gave to me

Quarreling leaders

Iceland is no banana republic

We pay politicians to solve problems, right? We just had an election at which alternative views were put to the people, for their decisions on the way forward. And this country of ours has some fair-sized problems. So what happens? We have the ultimate This-Needs-A-Decision-Now situation in the fiscal cliff, and both sides cleave to their existing rigid positions until (wait for it) they come up with some dumb and unsustainable last minute compromise. That’s not what they’re paid to do. These same politicians think that raising the debt limit will stimulate the economy. Wrong! At a global level, the growth in credit instruments has outpaced growth in the real economy by a factor of around four times. That’s not healthy for the world, and it’s not healthy for the debt-dependent United States. I predict that the US will enter a recession in 2013.

On the sixth day of Christmas, my country gave to me

Corruption on Wall Street

You could have a whole 12 days song just for Wall Street corruption and its toothless regulators, so endemic is the problem. But let’s narrow the microscope, so we’re only looking at SEC enforcement

Zero high profile bankers in jail = 0 regulation

actions since 2009. Firms affected include: Citigroup (multiple times), Commonwealth Advisors, Goldman Sachs, ICP, JP Morgan (multiple times), Mizuho, Stifel Nicolaus, Wachovia, Wells Fargo, American Home Mortgage, Bank Atlantic, Countrywide, Credit Suisse (multiple times), Franklin, Fannie Mae, Freddie Mac, Indymac, New Century, Option One Mortgage, Thornburg, TierOne, Bear Stearns, Charles Schwab , Evergreen, Morgan Keegan, Oppenheimer, Reserve Fund, State Street, TD Ameritrade, Bank of America, Brooke Corp, Brookstreet, Colonial Bank, Taylor Bean & Whitaker, KCAP Financial, and UCBH. The list includes firms where executives from that firm were charged. In total, 133 entities and individuals have been charged. Total penalties and similar charges amount to $2.6 billion. Aside from the SEC, other regulators have been equally active. And has anything fundamental changed? Nope. Nothing at all. Wall Street is still rotten to its core. And why would it change? When these fines represent perhaps 10%, if that, of the ill-gotten gains why on earth would bankers change their business models? They just need to keep paying the toll.

On the seventh day of Christmas, my country gave to me

Despairing workers

This time its worse..

One of the big talking points ahead of the election was whether the jobless rate would come to Obama’s rescue. And sure, the rate has nudged down to below 8.0%, from closer to 10.0% three years ago. But that’s not the most striking piece of economic data to come out of the Bureau of Labor Statistics. The most striking – and saddening – data is that we now have, by far, the lowest civilian labor force participation rate for thirty years. Workers are leaving the labor force because the jobs aren’t there. It’s a waste of a generation. Meantime, we should use a new unemployment metric that reflects the true US jobless rate rather than a politically sanitized version. A little honestry, transparency and accountability can go a long way.

On the eighth day of Christmas, my country gave to me

Corporate tax scams

GE's CEO advises the Obama administration on economics, go figure!

In 2010, General Electric paid no corporation tax. None. Not even one miserable dollar. In the five years to 2010, GE accumulated $26 billion in US profits and do you want to guess how much of that was passed to the IRS? You’re guessing zero, right? Unfortunately, you’re wrong. The answer’s worse than that: they accumulated a net benefit of $4.1 billion. Oh, and though the firm is America’s biggest corporate lobbyist, the truth is that countless big firms are playing the same game – and the data shows that the more you lobby, the better your shareholders fare. I’m guessing that’s not quite the way the Founding Fathers intended things to work.

On the ninth day of Christmas, my country gave to me

A huge Farcebook rip-off

Morgan Stanley banked profits on this IPO

Just in case anyone needed proof that Wall Street has absolutely no ethics at all, the Facebook IPO popped up to remind us. Extravagant valuations on launch led to an intra-day high of $45.00, before reality set in and the stock plunged to a way more realistic $17.55. The winners: company insiders and Wall Street. The losers: the retail investors who believed the hype. (Oh, and since we’re talking about hype, then Apple at its current $500 a share is way more reasonable than it was at closer to $700. It’s a wonderful firm, but it’s in a commodity business where the competition, finally, is catching up.) On Facebook, meantime Morgan Stanley has just been fined $1.5 million for an operation whose profits were well in excess of that sum. Again: why change a business model if the fines are mere pinpricks?

On the tenth day of Christmas, my country gave to me

The power to hope

Ho HO HOPE

This is America. However bad things get, we can still believe in the possibility of improvement. We can believe that our leaders will find the ability to be responsible, to think about the good of the country before the good of their parties. We can believe that the media and regulators can find their teeth. Can demand transparency and enforce accountability. Above all, we can believe in the power of the American people to demand change. To slash debt, return to honest money, to speak truth in politics. And perhaps, who knows, we can return to the old ways of making money: by making stuff and selling it instead of through ever more opaque financial dealings based upon fictional future value, a mountain of debt, and way over-leveraged derivative products.

A merry Christmas to you all.

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.

The post garnered a remarkable number of comments, the majority of which agreed strongly with the view I expressed. Just one thing disturbed me, however, which was the number of people who assumed I was taking a partisan position. To remind you: the article argued strongly for a full and open enquiry into the Fast and Furious affair. I guess a lot of people reasoned as follows, ‘The Republicans are bashing the Democrats over this enquiry, this guy Feierstein wants an enquiry, so he must be a Republican.’

I don’t blame people for making these assumptions. Our whole country has become infected with this kind of logic. Our entire political debate has caught the virus. Yet it makes no sense. No sense at all. Here are two facts and one conclusion. Fact One: A federal agent has been shot dead. Fact Two: there are allegations — which may be true or false — that the gun used to shoot him was in circulation only because of an ineptly managed operation conducted by the Bureau of Alcohol, Firearms and Tobacco. Conclusion: These allegations are serious enough to deserve an open investigation, period. Partisan bickering and political spin is simply a diversion from the action that a dead federal agent deserves — and the truth that the American people require.

I say all this because I’m about to call attention to another government department. That department is the Bureau of Labor Statistics. Now I know that Republicans are currently bashing President Obama over his jobs record. I know that Obama is bashing back. But, people, the issue at stake is the creation of jobs in America and the way those things are being recorded and reported. The issues I’m about to address were present under George W. Bush. They haven’t changed under Barack Obama. The depression which struck this country in the wake of financial crisis might have peaked under a Democrat, but it was born in a Republican era. If you yourself are so partisan that you want to make fine distinctions about these things, you should go ahead and make them. Me: I see two peas in a pod.

Good. Preamble over. Here’s the issue. The number of jobs created in America stood at 80,000 in June. That wasn’t nearly enough to budge the jobless rate, which remains stuck at a high 8.2%. (Mitt Romney’s comment: ‘another kick in the gut to middle-class families.’ Barack Obama’s rejoinder: ‘a step in the right direction’ whilst he acknowledged, ‘it’s still tough out there.’)

But let’s put the partisan spin-factory to one side, and instead have a think about the number of jobs being reported. Businesses are born and businesses die. When a business is occupied with either of those processes, it has better things to do than call up the BLS and discuss hires and fires. The BLS therefore estimates the net impact on the joblessness figures of the birth and death of businesses. You can read its full discussion here, but the key line says:

‘There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.’

A non-sampling method: that’s geek-speak for ‘guess.’ We don’t know how many new jobs are being created or lost by business churn, so we’ve got to guess. And you want to know the BLS’s estimate for the number of such jobs ‘created’ (net of losses) in June? Answer: 124,000. In May, the answer was over 200,000.

So, in crude terms, the net jobs growth reported by the BLS — the same one being lambasted by Romney and praised by Obama — is only in positive territory at all because of some number that’s simply a guess. A smart guess probably. One made by intelligent statisticians… but still. In this economy? With Europe in turmoil, China slowing, the country heading for a fiscal cliff which could thrust us back into recession, plus massive uncertainty over the path of healthcare costs per employee? The BLS has never been in this position before, because the economy hasn’t been. And after all, who in their right minds would be hiring new staff given these conditions? Most savvy businesspeople will be watching, waiting… deferring spending and hiring.

The truth is employment in the U.S. might be growing or shrinking. We just plain don’t know. What we do know is that if you add together the unemployed, workers discouraged from seeking work, plus those working part-time when they’d prefer to be working full time… you have an ‘underemployment’ rate of at least 15% — while our labor force participation rates are kicking around decade long-lows. These things are terrible economic news, but they’re terrible on a human scale too. Let’s consider the graduates looking to repay the more than $1 trillion in government-guaranteed student loans. These graduates are America’s future. Those BLS data points represent human lives, human potential. And the outlook is grim.

Vangelia Pandeva Dimitrova

To repeat, I’m not making a partisan point here. I’m making a bigger one. The American economy is in deep trouble. The reported data we have is unreliable. What we do know is that we have too much debt, too much money printing, a culture of total irresponsibility on Wall Street and consequently an absence of credibility in the financial and political promises that underpin our economy. All this, plus a political culture which is not addressing these things in a mature and responsible way.

This country’s in a mess. And partisan bickering will never pull us out of it. We all need to change our mindsets. I voted for change in the last election and I believe that today’s DC landscape is the most polarized in my lifetime. Are things better? Are we going to be offered a real choice in this election year? And where can I get a refund?

I published this article in today’s Huffington Post.

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

‘Frankly, we are not here to receive lessons in terms of democracy or in terms of how to handle the economy,’ he said. ‘This crisis was not originated in Europe; seeing as you mention North America, this crisis originated in North America and much of our financial sector was contaminated by, how can I put it, unorthodox practices, from some sectors of the financial market.’

Hmmm. So evil Americans are responsible for European woes, huh? That’s an interesting claim, but does it really stand up? And who, really, is to blame for this extraordinary mess?

Who’s to blame? World leaders assemble for the G20 summit in Los Cabos, Mexico

In the spirit of Euro 2012, I thought I’d follow a system of ‘player ratings’. I’ve listed the major players in the Eurozone crisis below. A score of 10 implies, ‘Totally to blame. Why are these guys not in jail already?’ A score of 0 implies … well, it doesn’t really matter: there are no zeroes. Who’s to blame for the Euro crisis? Here are the major players with their scores.

1. American Banks 4/10

OK, I’m no fan of the US banking system. US regulators completely failed to enforce their own rules. The banks screwed up horribly and did a vast amount of damage to the the US economy. But there’s the point: they blew up the American finance system, not the European one. Get a map, Manuel. That big blue thing? It’s the Atlantic Ocean.

2. European banks 9/10

European banks, on the other hand, are vastly to blame for the mess in Europe. For one thing, a lot of the mess in the US was created by the US subsidiaries of European banks: outfits like HSBC, Deutsche, RBS. But then Societe Generale, Paribas, Lloyds, Northern Rock, Bankia, Unicredit, Dexia – these are all home-grown awful, and it’s their problems which have added so much to the European debt load.

Star performer: Greece must take full responsibility

3. Greece (Star Player) 10/10

Every team needs a star man, a Steven Gerrard, Captain Reliable character. The Euro-Blame Team has to name Greece as that €500 billion star. It cooked its books. It never even attempted to reform its economy. It doesn’t get its citizens to pay taxes. It offers crazy pensions. Its rail system notches up losses that exceed its sales. It has a mountain of Ponzi debt that, even after vast write-offs, will be unpayable. You can’t beat that performance. Greece: it’s ten out of ten, all the way.

4. Spanish Real Estate 9/10

It wasn’t so long ago that the Spanish state looked prudent. It had debt levels way lower than those of Germany. (Indeed, it still does.) Its economy thrived. It had a team that played beautiful football. What could possibly be wrong with this picture? Answer: a real estate bubble even worse than the one in America and Ireland. A bubble that Spanish regulators never even attempted to address. A bubble that is currently threatening to wreck not just the Spanish government, but the entire Euro project.

Spain is higher up the radar of international investors at the moment, but Italy is a whale of even larger dimensions. In the decade to 2010, do you want to know how many economies had worse growth than Italy’s? Answer: just two. Zimbabwe and Haiti. If you add to that terrible economic performance a mountainous debt and a corrupt and dysfunctional state – well, 8/10 seems way too generous. I must be Mr Nice Guy as it’s sunny in London today. Portugal, by the way, has somewhat similar problems, but the country’s size means I can’t award it more than a 6/10. Think of it as an impact sub.

6. France 6/10

France lies even further from international radars than its two big southern neighbours, but when you think about a highly indebted country with an exceptionally leveraged banking system, gigantic unfunded pension liabilities, an addiction to state spending, and huge assets parked in the not-so-safe countries of the Mediterranean … well, you probably don’t feel like putting your funds on deposit anywhere that smells of garlic. Stay away.

7. The European Central Bank 9/10

The ECB. What can you say? How Ponzi-ish, irresponsible, non-transparent and undemocratic can a central bank be? The answer, it seems, is ‘very’, four times over. The ECB enabled asset bubbles to form in Spain and elsewhere. It permitted a vastly overleveraged financial sector. And its response to crisis: to extend trillions of euros in soft loans to insolvent banks to gamble on dubious bonds issued by failing governments. That’s not monetary policy. It’s monetary insanity.

Damaging to Britain: But can Sir Mervyn King and Gordon Brown really be blamed for the eurozone crisis?

8. Gordon Brown & Swervyn Mervyn King 6/10

If we were talking about how far this pair of superheroes had injured the UK economy, we’d be pulling out perfect tens. But the question here is about the damage to the European economy and although Britain has been saddled with eye-watering debt, hideous inflation, rotten banks and a stagnant economy, those things have only a marginal impact on the Eurozone. That little strip of blue, Manuel? It’s the English Channel. (And don’t call it La Manche.)

9. Angela Merkel 7/10

OK, this is a tough one. Germany has a strong economy. It has weak and overleveraged banks, a scarily under-recognised pension problem, and too much government debt. But still. Angela and team didn’t create this problem, they’ve only compounded it. They’ve compounded it by always choosing to kick the can down the road, instead of addressing and fixing the giant issues in the European system. Germany’s not mostly to blame, but still. It should have done so much better.

10. Jacques Delors 9/10

Jacques Delors, the principal architect of the Euro, has admitted that the project was structurally flawed from the outset. He’s even admitted that British objections to the idea had real substance. (Thanks, Jacques, and it only took you 15 years to figure that out.) Basically, this project could never have worked and now here it is not working. Quelle surprise.

L’homme culpable: European Commission President Jose Manuel Barroso should take a look in the mirror

11. Jose Manuel Barroso 9/10

Manuel Barroso: if you have a mirror anywhere in your €1.4 billion offices, take a look. The person looking out at you is responsible for maintaining and boosting an impossible system. If EU officials had ever had any respect for democracy, this crisis would never have occurred. If the EU had ever recognised the real gravity of the crisis, if it had allocated blame and responsibility in the right quarters and in a timely way, this would never have happened. Manuel Barroso, l’homme culpable – c’est vous.

Meantime, and in light of the football theme of this article, I have a simple, neat suggestion to make everything right. Spain wants to be bailed out by the German taxpayer. German taxpayers, understandably, aren’t all that keen with the idea. But there’s a footie tournament on, right? Spain and Germany: the two favourites. So what about a simple little wager, double or quits according to which team fares better. And that’s a game I’d pay to see. 

I published this in todays Daily Mail

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

A day at Wimbledon

This week, Mervyn King, the long-standing Governor of the Bank of England, said about the 2008 financial crisis, ‘We should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so called ‘light-touch’ regulation hadn’t prevented any of this.’ Since one of King’s colleagues, Andrew Haldane, has estimated the total global impact of the fiscal crisis at somewhere between $50 and $200 trillion, you’d think that any failure to hit the early-warning alarms would prompt a somewhat fulsome apology.

But no. King is largely unrepentant, saying, ‘the power to regulate banks had been taken away from us in 1997. Our power was limited to that of publishing reports and preaching sermons. And we did preach sermons …’ In short, and to use a local London-ism, ‘It wasn’t me, guv.’

The same absence of contrition is equally apparent in the United States. Giving testimony to the House Committee on Oversight and Government Reform, former Chairman of the Federal Reserve Alan Greenspan, did admit that, ‘Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.’ And yet, those moments of almost-apology never lasted long and thinned out the more they were tested.

The Maestro fiddled while Rome burned

Same thing in Europe. At a press conference given as he was standing down from the presidency of the European Central Bank, Jean-Clause Trichet responded angrily to a questioner (who was, by the way asking, quite reasonably, about the ECB’s shocking accumulation of poor-quality sovereign debt). Trichet snapped, ‘Can I remind us, that in 2004 and 2005 some important governments in Europe were asking for weakening the Stability and Growth Pact? Do you remember that? Do you remember which governments? [A dig at France and Germany.] …We have delivered price stability over the first 12 years and 13 years of the euro — impeccably, impeccably. I would like very much to hear the congratulations for an institution which has delivered price stability in Germany better than what has ever been obtained in [that] country over the last 50 years.’

Congratulations?

Triangulating between these comments gives, roughly, the gist of the central bankers’ case for the defence. They kept inflation low. They warned about the coming risks. But, hey, what could they do? They didn’t have the regulatory powers that would have enabled fiercer action and, sadly, their great and silvery wisdom had a blind spot: they couldn’t quite imagine how dumb other people were.

And this is all wrong. Completely wrong. Central Bankers did as much to cause the financial crisis as any other group in the world. Arguably, they were the most culpable single group. One role of their job was to restrain inflation, an essential role which they chose to construe as narrowly as possible. The consumer prices (excluding food and energy) did indeed remain relatively subdued (constrained, very largely, by the flood of cheap goods from China), but excess money has to go somewhere. If it wasn’t feeding a classic wage-price spiral in the real economy, it would have to boost asset prices.

The US housing market was the most obvious bubble, but that bubble spawned smaller ones in a thousand other places. Mortgage backed securities were wrongly priced. Credit default swaps, keyed off those securities, were also mispriced. As for the banks that held or issued these things, their debt was misvalued too.

High asset prices mean that the income yield generated by those assets looks paltry. So all that excess money and massive leverage went chasing off to find yield. Investors bought Greek bonds, they bought Spanish and Irish real estate, they bought the banks that traded these things, and they bought the bonds issued by the kind of highly leveraged companies which should have been filing for bankruptcy, not raising new capital. In market after market, prices and the amounts of insane leverage extended lost touch with reality. The collapse of 2008 showed up the costs of that inflationary failure.

Nor should we believe the central bankers when they say they knew all this and didn’t have the tools to fix it. That’s false and falser. Mervyn King stated in August 2007 that ‘Our banking system is much more resilient than in the past. Precisely because many of these risks are no longer on [bank] balance sheets but have been sold off to people willing and probably more able to bear it.’ He made these statements just as the subprime market was starting to collapse. If that’s what he means by ‘preaching sermons’ on risk, it’s little wonder that the sinners kept on sinning. Furthermore, far from adding resources to the Bank’s financial stability division, the Bank cut it. It was a similar story elsewhere.

Worse still: nothing has changed. No lesson has been learned. Central banks are still spraying the financial markets with money. Yields on government bonds ought to be higher at the moment because sovereign borrowers (including the US) are riskier now than for a very long time. Yet central bank intervention has driven those yields down to absurd levels. So everything else becomes mispriced too. I’ve written recently about Apple and Facebook, but you only come across egregious examples like these when the entire market is overhyped. The property market in Europe is still trading way over fair value. As for the impending crash in sovereign and bank debt, the potential costs there are so vast, it’s barely possible to quantify them.

And of course, none of this is new. The Alan Greenspan Doctrine, born in the mid-1990s, was roughly, ‘If the financial markets hit a rough patch, do everything you can to bail them out.’ That was the posture adopted in relation to the Asian financial crisis, the bailout of LTCM (a hedge-fund), the dotcom crash, and the subprime mortgage bust. It’s a doctrine, born in the US of A, which has spread almost worldwide, a doctrine now being most assiduously followed by the once-conservative European Central Bank.

The impact of these failures is colossal. Take, for example, the losses accumulating on the balance sheet of all these banks. When the Fed or the ECB accept dubious collateral for their cheap-money loans, they are exposing themselves to loss. Those losses were originally made in the private sector and should be borne by the private sector. That’s capitalism. By effectively taking responsibility for these lousy assets, the central banks are taxing all those who hold and have savings in the relevant currency.

Furthermore, capitalism works through a restless, destructive creativity. Bad companies and bad lenders need to face the consequences of their actions. Shareholders need to take a hit. That way, the ground will be cleared for better managed companies and stockholders will be reminded about the responsibilities of ownership.

And central bankers should take responsibility too. Failure should mean failure: loss of office with immediate effect. But I’m not holding my breath. The evasion of responsibility starts right at the top. When Congress is esteemed lower than pornography and polygamy, you know that voters are trying to send a message. It’s about time politicians – and central bankers – started to listen.

Blue whale? Giant redwood? Some kind of deep sea critter? No, no and no. The right answer is the honey mushroom. You’ll see the thing growing out of trees in Oregon and Washington. It doesn’t look particularly creepy, or at least no creepier than these things normally do.

Except it turns out the individual mushrooms you see aren’t separate organisms. They’re connected through long underground filaments to such a frightening degree that the vast bulk of the organism lies beneath the soil. The thing you see on the tree beside you is the same living thing that’s poking out of a tree way over yonder. The largest known honey mushroom lives in Oregon and it covers a stunning 2,200 acres. It’s around 2,400 years old and it’s killing the forest above it.

If you want a model for our debt-ridden, Ponzi-ish world, you have it right there. A huge beast that lies largely out of sight and kills what it touches. More than that, it tricks you into thinking that the various problems are discrete — this mushroom here, that mushroom there — when really it’s all part of the same ugly whole.

Take, for example, the current murmuring about student debts. Average student debts have now reached $25,000. Since 80% of those debts are government-guaranteed (or indeed, issued direct from Uncle Sam’s Magic Wallet ), those debts are also our debts. We’re on the hook.

And because we have lived through two decades in which debt was never regarded as a problem — certainly never as a problem to be faced now — the results are all too familiar: a mountain of liabilities. Just $80 billion in 1999, student debt reached some $870 billion last year. That’s $870 billion heading rapidly for the $1 trillion level.

In the case of the subprime market, spiraling liabilities were not matched by a corresponding increase in quality assets. That’s why we had the bust. The same thing is true of student debt. (Honey fungus, remember: it’s the same thing everywhere.) That increase in liabilities hasn’t come about because of a tenfold increase in student numbers or a tenfold increase in tuition quality. On the contrary, as Mark Zandi, the Chief Economist at Moody’s Analytics, comments, universities ramp up the cost of what they were providing anyway:

Universities and colleges just raise their tuition. It doesn’t improve affordability and it doesn’t make it easier to go to college … Of course, it’s very hard on the kids who have gone through this, because they’re on the hook. And they’re not going to be able to get off the hook.

Data from the Bureau of Labor Statistics show that over the past three decades, student tuition prices have risen at four times the rate of consumer prices generally: 439% instead of 108%.

And with subprime mortgages, who lost out? You may remember that the banks responsible for those crazy loans made out just fine. They got bailouts whenever they needed them. Their bonuses were protected in line with the unwritten 28th Amendment: The federal government of the United States shall not permit any bank or banker to suffer economic loss. The people who suffered were the homeowners. Not just the subprime borrowers, who should never have taken out a loan, but everyone else too. Everyone caught up in a housing bust not of their own making, or trapped in a recession Made in Wall Street, Felt on Main Street.

And it’s the same thing here. It’s always been the case that taxpayer loans to students were protected through bankruptcy: that is, a student or ex-student could not use bankruptcy to wash away their debts. That provision made sense for two reasons. One, taxpayers deserve protection as well as students. Two, federal loans always had generous hardship provisions which suspended repayments for borrowers encountering financial hardship. The bankruptcy rules were simply the flip-side of those hardship provisions. Tough, but equitable.

Naturally, however, Wall Street lobbyists saw those protections and thought they’d like a slice of that pie. Wall Street wouldn’t relax its demands for repayment in case of hardship, but it would like its loans to ride unscathed through any bankruptcy. And in 2005, Wall Street got its way. A rule designed to protect taxpayers and to maintain a fair relationship with the students morphed into something designed to produce a win-win outcome for Wall Street.

But if Wall Street is enjoying a win-win outcome, you can bet your bottom dollar that someone is suffering a lose-lose. And that person is you (if you’re a taxpayer) and doubly you if you’re a taxpayer who is also a student or recent graduate.

The taxpayer loses because we’re guaranteeing far too many of these loans. When students default — and they are defaulting at terrifying levels right now — the taxpayer will have to bear the cost.

The student loses because the cost of your tuition has been ramped up by universities keen to feed at an ever-expanding trough. Students lose again, because a failing economy is not providing jobs for our young people.

But let’s not make the mistake of thinking that the student debt problem is, well, a problem of student debt. It is and it isn’t. It’s the honey fungus error again: you think the things are separate, but there’s a huge beast lying underground and killing your forest. The problem here is an economy that’s become vastly over-reliant on debt and vastly over-protective of bankers.

I’d like to scratch the unwritten 28th Amendment and replace it with a written one of my own devising. The federal government of the United States shall never protect any bank or banker from economic loss. A no bailout rule with no exceptions. A fungicide that could cover an entire country. A fungicide that might, even at this late date, save the forest.