Tag Archives: Philosophy

Kenneth Rogoff: Some European Countries Are Fundamentally Bankrupt

US economist Kenneth Rogoff makes a clarifying interview with Der Spiegel, Monday, pointing out that several European countries are fundamentally – not just technically – bankrupt. According to Rogoff, Wall Street analysts and central banks have been plain wrong, over and over again, in their forecasts. He thinks it was a mistake to except the emerging southern economies into the euro zone, and believe the latest blunder by the US Congress have weakened the presidency.

“Policymakers have to get the idea out of their heads that there is going to be big rebound every time we see an uptick. That will not happen as long as debt levels are so high.”

Kenneth Rogoff

Now, we’re talking! Professor Rogoff nails several important facts to the wall in today’s interview with German Der Spiegel. Most important, in this bloggers opinion, is the need for a thorough reality check amongst analysts, bankers and politicians. The idea of a rapid recovery, and the return a pre-crisis economy,  has to be dismissed completely. The world has changed, and we have to change with it. A whole lot of debt has to be written off, losses has to be taken in full, before we can make a new fresh start. The longer we wait, the more painful it’ll get.

59-year old Kenneth Saul Rogoff  is currently professor of Public Policy and professor of Economics at Harvard University.

Between 2001 and 2003 he was chief economist at the International Monetary Fund (IMF).

He is an elected member of the American Academy of Arts and Science as well as a Fellow of the Econometric Society, and a former Guggenheim Fellow.

In October 2009 he published the book This Time Is Different: Eight Centuries of Financial Folly,” together with Carmen Reinhart, in were they make an analysis of all the financial crisis in world, dating back to the 1500’s.

Rogoff and Reinart document what they call the “This-Time-Is-Different Syndrome,” explaining:

“The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many booms that preceded catastrophic collapses in the past (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy.”

Sounds familiar?


Earlier this year professor Rogoff was awarded the Deutsche Bank Prize in Financial Economics.

Here’s some highlights from the interview with Der Spiegel:

“The markets are simply adjusting to the reality of a continuing slow and halting recovery. They realize there will be no boom anytime soon. Wall Street forecasters, and many central banks, had been starting to think that there was going to be a sharp uptick in the recovery. But they have got this wrong again and again because they keep wanting to use normal postwar recessions as a frame of reference. But this is a post-financial-crisis recovery, a rarer and very different animal.”

“The mentality that this is just a big recession, “the Great Recession,” has led to wrong policy decisions, such as the premature end of quantitative easing by the US, and the belief in Europe that there is a brisk recovery around the corner that will save the day and enable policymakers to avoid tough decisions on periphery country debt.”

“I believe that central banks should accept somewhat elevated core inflation for several years, higher than the normal 2 percent. Whereas I believe monetary stimulus is coming, I am worried that it will not be forceful enough to have any material effect on balance sheets.”

“Policymakers need to focus on relieving overextended private balance sheets in the short run, and stabilizing public debt in the long run. A fiscal stimulus cannot be the main solution. It may provide temporary relief, but there will be no traction without some normalization of private debt levels.”

“The stock markets had built-in pretty rapid growth. Now they see they were too optimistic. Wall Street, the Federal Reserve and others had all bet on pretty brisk growth and that was plain wrong. “

“I just cannot understand how President Obama made so many concessions in the latest negotiations over the debt ceiling. He was holding all the cards and he was still stared down by the Tea Party. He should have said: “I do not negotiate with terrorists.”

“Greece needs a massive restructuring plan, Portugal as well, probably Ireland, too. Ultimately, Germany has to guarantee all the central government debt in Spain and Italy, and that will be very painful.”

“Clearly it was a mistake to accept some of the southern countries prematurely into the euro zone, but there is now no other way to pay for their debt than through transfers.”

“Policymakers have to get the idea out of their heads that there is going to be big rebound every time we see an uptick. That will not happen as long as debt levels are so high.”

Read the full interview with Kenneth Rogoff, conducted by Gregor Peter Schmitz and Thomas Schulz, at SPIEGEL ONLINE.

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S&P Cuts the US Credit Rating – An Era is Over

Standard & Poor’s announced Friday night that it has downgraded the US  credit rating for the first time, dealing a symbolic blow to the world’s economic superpower, making history and marking the end – or the beginning – of a financial era.

“Global financial markets will reopen on Monday to a changed reality. There are immediate operational consequences, from re-coding risk and trading systems to evaluating collateral and liquidity management.”

PIMCO

So, now the unthinkable have happened. The world’s only financial superpower has lost its triple-A rating. What happens now, is anybody’s guess. But one thing is absolutely certain: When the markets opens on Monday, there will be a frenetic activity and level of fear we have not seen before.

The reason for lowering the US credit rating to one notch below AAA, is a result of “political brinkmanship” in the debate over the debt, something that has made the US government’s ability to manage its finances “less stable, less effective and less predictable,” the credit rating company says.

According to The Washington Post, the bipartisan agreement reached this week to find at least $2.1 trillion in budget savings “fell short” of what was necessary to tame the nation’s debt over time and predicted that leaders would not be likely to achieve more savings in the future.

“It’s always possible the rating will come back, but we don’t think it’s coming back anytime soon,” says David Beers, head of S&P’s government debt rating unit.

The decision came after a day of furious back-and-forth debate between the Obama administration and S&P.

Treasury Department officials fought back hard, arguing that the firm’s political analysis was flawed and that it had made a numerical error in a draft of its downgrade report that overstated the deficit over 10 years by $2 trillion.

Officials had reviewed the draft earlier in the day.

“A judgment flawed by a $2 trillion error speaks for itself,” a Treasury spokesman said Friday night.

The downgrade to AA+ will push the global financial markets into uncharted territory after a volatile week fueled by concerns over a worsening debt crisis in Europe and a faltering economy in the United States.

The AAA rating has made the US Treasury bond one of the world’s safest investments — and has helped the nation borrow at extraordinarily cheap rates to finance its government operations, including two wars and an expensive social safety net for retirees.

Treasury bonds have also been a stalwart of stability amid the economic upheaval of the past few years.

The nation has had a AAA rating for 70 years.

Analysts say that, over time, the downgrade could push up borrowing costs for the U.S. government, costing taxpayers tens of billions of dollars a year. It could also drive up interest rates for consumers and companies seeking mortgages, credit cards and business loans.

A downgrade could also have a cascading series of effects on states and localities, including nearly all of those in the Washington metro area. These governments could lose their AAA credit ratings as well, potentially raising the cost of borrowing for schools, roads and parks, the Washington Post writes.

But the exact effects of the downgrade won’t be known until at least Sunday night, when Asian markets open, and perhaps not fully grasped for months. Analysts say the initial effect on the markets could be modest because they have been anticipating an S&P downgrade for weeks.

Here’s the full statement from S&P’s:

Federal officials are also examining the impact of a downgrade in large but esoteric financial markets where U.S. government bonds serve an extremely important function. They were generally confident that markets would hold up but were closely monitoring the situation. Regulators said that the downgrade would not affect how banking rules treat Treasury bonds — as risk-free assets.

Here’s the full statement:

Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
National Credit Union Administration
Office of the Comptroller of the Currency

Agencies Issue Guidance on Federal Debt

Earlier today, Standard & Poor’s rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. With regard to this action, the federal banking agencies are providing the following guidance to banks, savings associations, credit unions, and bank and savings and loan holding companies (collectively, banking organizations)

For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected.

(And just for the fun of it: Here’s US Treasury Secretary, Timothy Geithner, in an interview recorded in April this year, saying that there is “no risk” that the US will lose its AAA credit rating).

Amongst the first comments, is the worlds largest bond investor, PIMCO:

There will be endless debate on whether S&P, the rating agency, was justified in stripping America of its AAA rating and — adding insult to injury — even attaching a negative outlook to the new AA+ rating. But this historic action has now taken place, and the global system must adjust. There are consequences, uncertainties, and a silver lining.

Not so long ago, it was deemed unthinkable that America could lose its AAA. Indeed, “risk free” and “US Treasuries” were interchangeable terms — so much so that the global financial system was constructed, and has operated on the assumption that America’s AAA was a constant at the core, and not a variable.

Global financial markets will reopen on Monday to a changed reality. There are immediate operational consequences, from re-coding risk and trading systems to evaluating collateral and liquidity management. Key market segments will be closely watched, including the money market complex and the reaction of America’s largest foreign creditors.

Meanwhile, for the real economy, credit costs for virtually all American borrowers will be higher over time than they would have been otherwise. Animal spirits, already hobbled by the debt ceiling debacle, will again be dampened, constituting yet another headwind to the generation of investment and employment.

It is hard to imagine that, having downgraded the US, S&P will not follow suit on at least one of the other members of the dwindling club of sovereign AAAs. If this were to materialise and involve a country like France, for example, it could complicate the already fragile efforts by Europe to rescue countries in its periphery.

The future role of rating agencies will also now come under close scrutiny, bringing to the fore the question of who rates the rating agencies? S&P’s action will likely unite governments in America and Europe in an effort to erode their monopoly power and operational influence. This will also force all investors to do something that they should have been doing for years: conduct their own ratings due diligence, rather than rely on outsiders.

More worryingly, there will now be genuine uncertainties as to wider systemic impact of this change. With America occupying the core of the world’s financial system, Friday’s downgrade will erode over time the standing of the global public goods it supplies – from the dollar as the world’s reserve currency to its financial markets as the best place for other countries to outsource their hard-earned savings. This will weaken the effectiveness of the US as the global anchor, accelerating the unsteady migration to a multi polar system while increasing the risk of economic fragmentation.

These factors will play out over time, and will possibly do so in a non-linear fashion. Some of the immediate impact will be forestalled by the fact that no other country is able and willing to replace the US at the core of the global system. Other than a general increase in risk premia and volatility, it is therefore hard to predict with a high degree of conviction how the global system will react. Specifically, will it simply come to a new normality, with an AA+ at its core, or are further structural changes now inevitable?

Read the rest at Zero Hedge.

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EU Leaders Clueless As Borrowing Costs Soars

Italian and Spanish 10-year bonds dropped in value, while German bunds rose on Tuesday, pushing the difference in costs (yields) to 381 and 397 basis points, respectively – a record high since the euro was introduced 12 years ago.  Yet, top EU leaders still don’t understand what’s going on, and they still refuse to discuss the possibility of more national bailouts.

“Astonishingly, since our Summit the cost of borrowing has increased again for a number of euro area countries. I say astonishingly, because all macro economic fundamentals point in the opposite direction.”

Herman Van Rompuy

Well, well, well… Mr. Rompuy – you just don’t get it, do you? Ever since the Irish finance minister stated that “the worst is over” in December 2009 and the EU president Jose Manuel Barroso in September last year declared that the EU had survived the crisis, I’ve been wondering if these people are just ignorant, or if  they deliberately are speaking against better knowledge. Frankly, I’m still not sure.

In an op-ed published in several European newspapers, Tuesday, the president of the EU council, Herman Van Rompuy, writes that the behavior of the financial markets are “totally out of line” and that the rating agencies who have downgraded the credit ratings of countries like Spain and Italy have acted in a “ludicrous” way.

He did not mention that the Spanish premier minister last week called for early elections, amid growing public anger over soaring unemployment, caused by the austerity measures.

The true cause of market worries, in Van Rompuy’s view, is the aftermath of the financial crisis of 2008, and the interdependence with the debt-stricken USA.

“It is imperative to bear in mind that this is not a crisis about the euro,” he writes.

“In the aftermath of the financial crisis of 2008, all developed countries are faced with increased public debt. Given the interdependence of these economies, as we have clearly seen first hand in the European Union, it is in everyone’s interest that each country should find a solution to this burden, tailored to their own needs, which will have a direct effect on jobs and growth in the coming years. In light of this we are confident that the US will find a solution to their current stalemate for their own sake and for that of the stability of the financial market-at-large.”

“Economic growth has picked up in Europe and is on average 2.5% in Western European States. Those countries currently in loan programmes will see a return to growth in 2012. As soon as consumers and businesses see that debt levels and deficits are going down, this will have an extra positive effect of boosting consumer confidence and corporate investments. A win-win situation.”

Here’s a copy of Mr. Rompuy’s letter to who-knows-who: 

American novelist William Gaddis once said; “stupidity is the deliberate cultivation of ignorance.”

He may be right.

“What is this guy thinking?”

In that perspective, Mr. Rompuy seem to be a perfect illustration:

At a dinner for the EU leaders on June 23 – devoted to a discussion about the threat of Greek bankruptcy and new austerity cuts – Van Rompuy started to hand out a glossy brochure for the new €240 million  EU council building.

The brochure itself for the new EU summit venue, and Van Rompuy’s new office complex, is said to have cost €100,000 to print.

“[UK leader] Cameron and [German Chancellor] Merkel just looked at each other as if to say “What is this guy thinking?”” one EU diplomat said.

Adding: “It’s true that the building was planned a few years ago and everything, but you have to ask if it was a good idea to draw attention to it now.”

“When you see a document being circulated with a great glossy brochure about some great new building for the European Council to sit in, it is immensely frustrating,” David Cameron said afterwards.

“You do wonder whether these institutions actually get what every country and what every member of the public is having to go through as we cut budgets.”

It seems obvious that they don’t…

And – of course – no one will admit that the possibility of another (perhaps several) national bailout is being discussed.

Not even after Cyprus accidentally blew up their whole electrical system with 2.000 tonnes of gunpowder:

“With our inaction we are risking the ability of refinancing the state and the consequences will be instant and serious,” a statement from the largest Cypriot commercial bank says after President Demetris Christofias failed to put together a new cabinet over the weekend, according to the EUobserver.com.

And – of course – the EU commission is maintaining the same line as for other countries which ultimately were given a financial rescue package: Nothing of that sort is being discussed.

“The question of a programme of emergency aid is certainly not on the table,” Chantal Hughes, a commission spokeswoman for economic affairs says.

Certainly not…

UPDATE: According to Reuters, picking up on a story from Le Monde, on Wednesday, Nicolas Sarkozy wants to give Herman Van Rompuy the role as coordinator and spokesman for the eurozone.

Well, those two have, at least, the same fundamental understanding of how the financial markets works.

(God help us all!)

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