Archive for March, 2013

Banking Debacle In Cyprus; Grand Theft Auto In Brussels

March 21st, 2013 Comments off

For those who thought that the Eurozone debt crisis had
simply gone away, they received a rude reminder that this destructive fiscal
disaster is not only still with us, but that its contagion continues to metastasize.
The private banks in Cyprus were among many privately-owned financial institutions
in the Eurozone that lost heavily on their investments in Greek debt-both
public and private. Proportionate to the size of its assets and the GDP of
Cyprus, the banks in that Island nation
were especially exposed to the ravaging collateral affects of the Greek sovereign
debt crisis.

As with other Eurozone economies whose private banks faced
insolvency, the Eurozone rescue specialists in Brussels offered a bailout
package to save the banks, with strings attached. In the specific case of
Cyprus, the terms were especially onerous. The price of a rescue package by the
Eurozone for Cypriote banks was the requirement that the individual depositors in
those banks bear most of the cost of the bailout. All savers with deposits of up
o 100,000 euros would pay a levy of 6.75 percent of the amount they had deposited with the
financial institution-a deposit of over
100,000 euros would be required to sustain a staggering levy of 9.9 percent.

Was it hubris, or simply rank stupidity (or perhaps a
combination of both) that led the politicians in Brussels and Nicosia to
believe that the Cypriote public that was about to be legally robbed, after
being lied to by their own government with sublime assurances that their deposits
were safe, would simply take such an outrageous policy prescription lying down?
When the understandably angry people of Cyprus engaged in mass protests, the
spin that came out of both Brussels and Nicosia simply defied all logic. The political
decision-makers claimed that they thought since half of the depositors of Cypriote
banks are Russian citizens living offshore, they could never imagine the
remaining Cypriote citizens who were about to be fleeced to pay for bad investment
decisions they had nothing to do with would feel so upset.

Now that reality has intervened in the bizarre punitive
bailout scheme hatched by the politicians, there is frantic back-peddling in
Nicosia. When the bank levy came before the Cypriote parliament, not a single
legislator voted in favor of it, for to do so would clearly be political
suicide. The policymakers are now scrambling for a “plan B,” but meanwhile
the damage has been done. The legalized theft of depositors’ assets that politicians in the Eurozone attempted
to enact is a precedent. Despite assurances
from Brussels that this was a one-time scenario only designed for Cyprus, every
citizen residing in the Eurozone, and in other advanced economies afflicted by
the sovereign debt crisis, now knows that a desperate government can, at any
time, seize their life savings, and employ them to bail out private investors
and bond holders. Again we see robust application of the economic maxim of our
age:”privatize all profits, but socialize all losses -with a


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Sequestration: Economic Russian Roulette Comes To America

March 7th, 2013 Comments off

Russian roulette is the macabre  game of death, in which a revolver with a single bullet is passed around, each player pointing a gun at his head and pressing the trigger. There is, mathematically speaking, a one in six chance of blowing one’s brains to smithereens. This morbid game of chance, strangely enough, has now been adopted as the primary fiscal model by that once-august body known as the United States Congress.

As numerous commentators have observed, the two-party political oligarchy that dominates American politics has becomes hopelessly polarized. That polarization in turn has morphed into  political paralysis, leading to an inability by policymakers to craft rational economic directives in the midst of an ongoing global economic crisis. The result is tepid economic growth at best, fueled by massive, trillion dollar per annum deficits that require staggering amounts of borrowing by the U.S. Treasury to stave off national insolvency. Therein lies the problem. The Obama administration must periodically come to Congress for authorization to raise the national debt limit; without such congressional approval, the government loses its authority to borrow money.  In a situation where Congress is politically divided, with the Republicans controlling the House of Representatives and venting unrestrained hostility towards President Obama,  the entire economy of the United States is held hostage to this political version of sausage-making. 

The last stand-off over the debt limit led to The Budget Control Act of 2011. The GOP acquiesced to raising the debt limit on condition that the Obama administration concurred with over 900 billion dollars in spending cuts over the next decade. And herein lay the minefield.  Since the Democrats and Republicans could not reach consensus on  those precise deficit reduction measures, they did agree  to creating a poison pill for themselves, which has since become known by the non-pharmaceutical name of sequestration. If Congress could not agree on which spending cuts to implement, arbitrary reductions in federal spending outlays would occur automatically, with 85 billion dollars in budget cuts coming into effect in the current fiscal year.

That wasn’t supposed to happen, for this was playing Russian roulette with fiscal policy and management of the overall national economy. Who in their right mind among the two political parties controlling Congress would want the entire globe to witness American legislators playing a game of Russian roulette as their methodology of economic management?  Yet that is exactly what has now happened.

There are arguments currently underway as to how much of an impact 85 billion dollars in arbitrary spending reductions will have on a still fragile economy. These concerns miss the essential point.  The fact that America’s political establishment has allowed such a spectacle to occur presents a discordant image to the global bond market that is essential for lending the credit that keeps the United States solvent. And increasingly, those critical lenders are seeing the fiscal decision-making of the United States being transformed into a farcical display of political expediency. There will come a time when  the bond vigilantes will simply have had enough of an increasingly dysfunctional political system still acting as though it presides over an unassailable superpower. When that time has come, the mother of all sequestrations will have arrived.