Tag Archives: ethics

A Back of the Envelope Bailout of the Bailout

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Let us say that Greece survives the EU’s assault on democracy (Brüderle’s “It’s a strange thing to do [hold a plebiscite],” for instance), and the Greeks proceed with their referendum on whether they want the latest bailout.  Say, further, that the Greeks reject the bailout.  Now accept, arguendo, that all of the dire things EU leadership claims will happen, do happen: there is a 90% write down of Greek sovereign debt; the Greeks leave, or are dismissed from, the euro zone, and perhaps from the EU altogether; and the Greeks go back to using (a now severely devalued) drachmas.  Beyond these, some are even claiming, apocalyptically, that the future of the euro and of the EU are at stake.

What will, in fact, happen from these desperate consequences, and how might they be mitigated?

Looking at these in reverse order, it’s possible to achieve some clarity.  Greece’s economy is 3% of the EU economy, even in good times.  Greece is one small nation of 27 nations in the EU and 17 in the euro zone—the subset of the EU that actually uses the euro as their common currency.  It just isn’t that big a player.  The threat, such as it is, comes from the large holdings of Greek sovereign debt that private banks, investors, national central banks, and the European Central Bank hold—a total of some €340 billion—and the threat from this sum comes from the fact that those who hold this debt hold it as a central part of their assets.  If the debt becomes worthless, these holders’ survival—at least that of the private banks and investors—becomes problematic.  I’ll address these debt holders in a bit, but it’s clear that the failure of the EU or the euro as a result of a Greek rejection of the latest bailout—of a Greek default—is nothing more than hysteria for political purposes.

On the matter of Greece leaving the euro zone—what the hey, Greece leaves the EU—some other things become apparent.  One is the nature of the downside of Greece leaving and striking out on its own.  I see little beyond the disruption of the leaving process itself.  Greece’s Mediterranean culture and its economic principles and imperatives (large government involvement in its people’s lives, early retirement ages, vast social programs paid for with high taxes, those taxes routinely evaded, the budget deficits associated with this (even if the taxes were paid)) made Greece a poor fit with the northern European EU (with its different work ethic, smaller government and fewer social services, and lower tax rates) from the start.  This nature of this mismatch has made for a large, continuous movement of northern European private and taxpayer money into Greece in the form of those loans, in the unrealistic expectation that they actually would be paid.  Or, maybe the expectation actually was that only the stream of interest income would last long enough for a profit.  With these differences in mindset and in government and economic goals, though, the Greeks could not, and cannot, compete in the EU, and so long-term servicing of Greek sovereign debt, including final repayment, has always been a chimera.  Larger than this, it simply has been a losing proposition all along to try to force inhomogeneous economies and cultures to integrate.  The Greeks are better off on the outside, on their own, and so is the EU.  I’ll come back to how the Greeks are better off, beyond this no longer having to take part in a losing game, in a bit.

As an aside, this same set of differences, with the possible exception of tax collectability, can be said to underlie the relationship of the other major Mediterranean economies (which are, incidentally, the rest of the PIGS: Portugal, Italy, and Spain) with the EU.  And the result of this may well be the same.

Now we come to that write down of Greek debt.  First, let’s put that debt into a perspective.  The banks (private and government, including Greek banks) hold around €340 billion, as I mentioned above.  This is against an EU economy with a GDP of some €12 trillion.  The loss of those €340 billion would be disruptive, to be sure, but it’s not catastrophic.  What exacerbates the problem is the key role many of those banks play in the national and EU economies.  The EU claims that there are around 95, or so, “systemically important” banks, and the EU claims further that these must be propped up virtually at all costs because of that perceived importance.  These are the banks whose reserves are required by the terms of the present bailout proposal to be increased to 9%, an increase intended to enable the banks to handle the disruption from the 50% write down of Greek debt that this bailout envisions.  Oh, yes, one more little fillip: it’s only the private banks that must suffer the 50% loss; the governments’ banks are to be kept whole.

Now let’s look at how this might be handled.  Assuming a bailout ever is appropriate, assuming that it ever is optimal to ignore moral hazard and morality in favor of short term convenience, I offer this solution, which has the advantage of at least being a better targeted, more efficient bailout.

For simplicity’s sake, and in keeping with the back of the envelope estimating of this proposal, let’s take a worst case condition: the Greek debt is written down 100%, not 90%.  The European Stability Fund Facility, set up explicitly for a Greek (and ensuing nation) bailout, has around €234 billion left after the last round of Greek bailout, and it’s capable of borrowing to a current maximum of €440 billion.  Private banks hold around €200 billion of that Greek debt, and the governmental banks hold the remaining roughly €140 billion.  Since Brussels has said that 9% reserves is sufficient to handle the 50% write down of Greek debt, it must be so.  This leaves €100 billion of losses from a complete Greek default to be covered (again, assuming a bailout is at all appropriate).  These “systemically important” banks can be made whole, then, for just €100 billion from the EFSF piggy bank, leaving €134 billion to cover the governmental banks’ complete loss of their €140 billion holdings.  That’s rounding error, but if Brussels’ accountants get too upset, the EFSF easily can tap its debt capacity to borrow an additional €6 billion to top up the bailout.  And with the EU leadership’s views of national taxpayers, it’ll be a simple matter to adjust the national subscriptions to recover the ECB, and the nations can simply ask their taxpayers to pay a tad more for their own national banks.  This bailout is a piece of cake.  And the object lessons here will instruct the rest of the PIGS.

But what of the Greeks, now that they’re on the outside looking in?  To be sure, they’re in for tough times, but the “austerity” measures the existing and EU-proposed bailouts were putting, and are going to put, on them will create the same tough times.  Only without the EU props, now the Greeks will be forced to learn to stand on their own.  They’ll be forced, both their government and themselves, to learn to live within their means.  A cash and carry economy will teach that.  The Greeks will find it hard, as all bankrupts do, to borrow; they’ll be forced to earn their way, and success will come slowly at first, but with each success, the next will come more easily.  Over time (and in less time than will seem possible in the days after the default), the Greeks will earn their way back to respectability.  Borrowing will become possible, albeit expensively so.  With continued prompt repayment, made possible from the lessons of earning one’s own way (of necessity, since there will be no outside help available), borrowing costs will come down to a normal range.  Their newfound understanding of their responsibilities will prevent them from over-borrowing for several generations, as happens with all bankrupts, as happened with the American society after the Great Depression (whose cause was different, but the lessons of work and frugality are the same).

And Bob’s your uncle.

The Bailout, Again

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I’ve disparaged in other posts the Greek people’s response to their economic crisis.  However, the decision of their Prime Minister, Giorgios Papandreou, to put the latest EU offer of a bailout to a plebiscite—to let those Greek people speak directly and for themselves on whether they think the bailout, or its terms, are suitable—has led to an interesting set of responses from the other governments of the Union, and from within the Greek government itself.

On the one hand, there is a great deal of legitimate frustration on the part of those governments over the decision for a plebiscite of the people who would be the “beneficiaries.”  Regardless of what we might think of the bailout itself, a lot of hard work and political capital, and yes, sacrifice and good faith, went into working out the parameters of this latest bailout, and filling in the details will take much more of the same.  On the other hand, how those governments are expressing their frustration says a very great deal about their views of democracy.

French President Nicolas Sarkozy insists, “Giving the people a say is always legitimate, but the solidarity of all countries of the eurozone cannot work unless each one consents to the necessary efforts….”  The Greeks really must have other nations’ permission to speak for themselves.  It’s a cute idea, though; thank you for playing.

Rainer Brüderle, a leader of the Free Democrats Party (part of Germany’s ruling coalition), says in all seriousness, “It’s a strange thing to do [hold a plebiscite], but all you can do is take precautionary steps in case there is a state insolvency in Greece.”  Indeed.  How alien a concept it is, this letting citizens speak and instruct their government.

The Swedish Foreign Minister, Carl Bildt, has Twittered,  “I truly fail to understand what Greece intends to have a referendum about. Are there any real options?”  Aside from the question of whether the Swede’s understanding is necessary to a Greek referendum, his professed inability to understand the matter says more about his understanding of the imperatives of democracy than it does about Papandreou’s decision to consult his employers.

Even from within Greece’s own government, we have a lack of clarity.  “I never expected Papandreou to take such a dangerous and frivolous decision,” huffed Dora Bakoyannis, an independent member of the Greek Parliament.  In the birthplace of democracy, it’s a frivolous thing to have the government’s employers speak up and tell their government what it must do.

Socialist deputy Hara Kefalidou wrote to Papandreou this, among other things: “I cannot back a referendum which is a subterfuge by a government that appears unwilling to govern.”  Letting her constituents, and the constituents of the rest of the government, speak is mere subterfuge, and not democracy in action.  And a government which fulfills this duty is unwilling to govern.  This is interesting….

Even support for the decision to hold a plebiscite is founded, not on recognition of the fundamental tenets of democracy, but on the purely utilitarian grounds of its political practicality: a successful outcome would silence, once and for all, opposition to the bailout in Greece.

Another, ulterior, motive for the EU leadership’s crocodile tears seems apparent.  “While Greece is threatening a vote, nobody will ever give Europe the resources for the enhanced [EFSF],” said Jan Poser, Bank Sarasin’s chief economist.  Those uppity Greeks are going to cause an embarrassment for the EU at this week’s G-20 summit. The EU members had intended to beat the wallets of the other members, especially China and Brazil,  for funding to bail out the now over-committed EFSF, so that it could bailout Greece, and then Portugal, and then Spain, and then Italy, and….  However, with those Greeks so rudely planning to speak for themselves, it seems there will be great difficulty getting anyone from outside the EU to support these efforts.

Apparently, the European view of democracy is that the citizenry very democratically vote politicians into their government, and then the citizens are to shut up, sit down, and let their government speak for them.  But when governments speak for the people, with no obligation to heed those people, governments instead speak in the people’s place.  And the people have ceased to have a voice in their own governance.

No.  Let the Greek citizens speak through their ballot box.  They’ve been speaking in the streets for months, and they’ve been studiously ignored.  It isn’t government’s role to protect people from themselves (leaving aside the minor fact that it has yet to be established that a popular decision to reject the bailout is something from which protection is warranted).  Especially when government does such a terrible job in the attempt.  And putting off the default will only make it worse when it happens.

Metaphors

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The current administration set up, a short while ago, a Web site intended to facilitate the efforts of those seeking Federal employment.  In doing so, the administration internalized a task that had been handled by Monster.com.

The proxy server did not receive a timely response from the upstream server.

This is an all too common complaint about that new USAJobs Facebook wall.  After a multi-million dollar, two-year to “upgrade,” Office of Personnel Management’s new site has less capability and reduced reliability compared to Monster’s original site.  Additionally, not everyone is convinced the price tag for these two years is justifiable.  “I might make some people mad if I say this, but without knowing the specifics of the contract I can’t really see something like this costing over half a million dollars,” Zach Katkin, President and CEO of Atilus, notes.

At the end of 2008 and start of 2009, the government passed TARP, a $780 billion bailout package for failing businesses.  The package was originally intended to buy all the “toxic assets” (credit default swaps, mortgage backed securities, and other even more esoteric debt instrument derivatives) from vulnerable financial institutions to facilitate their recovery.  Then it was morphed—without Congress’ involvement—into outright bailouts of financial institutions deemed to special to be allowed to fail and go through bankruptcy proceedings, and it was expanded in scope to include bailing out car companies and unions.  Thus was born the whole too big to fail thing and the moral hazard stemming from that, demonstrated by all the demands by other businesses, and even individual Americans, for similar bailouts.

Early in 2009, the government passed the Stimulus Bill, a nearly trillion dollar spending package intended, in the finest Keynesian tradition, to stimulate the economy and promote job growth.  The government even guaranteed that this package would keep national unemployment below 8.5%.  National unemployment soon peaked over 10%, and it’s been above 9% ever since.  But we got those trillion dollars successfully spent, and our national debt successfully ballooned.

In 2010, the government passed the Patient Protection and Affordable Care Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act on the claim that health care costs for Americans and our businesses would go down drastically and on the claim that Americans would see more transparency in our business transactions and gain protection from the nefarious machinations of our financial institutions.  The response since has been rising insurance costs, to the point the HHS has threatened to bar insurance companies from Obamacare’s insurance exchanges if they don’t straighten up and fly right.  In addition, small business employers are saying, in droves (30% of them, and rising), that costs for the insurance coverage they’re required to provide will be so high when this part of the law takes effect, they’ll be forced to stop providing insurance coverage at all.

Further, small businesses are facing nearly $3,000 per employee in incremental compliance costs due to Dodd-Frank’s reporting requirements.  And Dodd-Frank hasn’t yet had even half of its required rules written.

And we get great ideas like this one from Rep Jim Moran (D, VA):  “The banks aren’t doing it, but the federal government can borrow money at three-and-a-half percent today. They should use that money to refinance every home mortgage, and that would put $750 billion into homeowners pockets.”

We’ve been getting “The proxy server did not receive a timely response from the upstream server” messages since well before the botched USAJobs effort.

Desperation

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Here come the character assassinations. The lead paragraph in a Politico article says this:

During Herman Cain’s tenure as the head of the National Restaurant Association in the 1990s, at least two female employees complained to colleagues and senior association officials about inappropriate behavior by Cain, ultimately leaving their jobs at the trade group, multiple sources confirm to POLITICO.

The rest of the article contains…carefully unnamed sources and cynically unsubstantiated “facts.”  We get those “multiple sources” from that lead paragraph.  We get a “lengthy roster of former board members, current and past staff and others,” also carefully unidentified.  We get constant repetition of the original allegation, but oddly, no corroborating facts.  We get Cain saying, in response to a interviewer’s question, that he can’t comment “until I see some facts or some concrete evidence” and being accused of being evasive for the dastardly crime of declining to speak in ignorance.  And so on.  They did bury some identified sources on the last page of their article: “Ron Magruder, Denise Marie Fugo and Joseph Fassler, the chair, vice chair and immediate past chairman of the National Restaurant Association board of directors at the time of Cain’s departure, said they hadn’t heard about any complaints regarding Cain making unwanted advances.”  How inconvenient to their thesis.

Is there anything substantive to this matter?  We’ll never know from this level of journalism.  On the other hand, was the purpose here to reveal critical facts about a man’s character, or simply to create doubt through innuendo?

Another assassination attempt is Roger Simon’s, carried out recently on CNN Live (follow the link, and have your browser allow popups—the video is in one.  Simon’s remarks occur at about the 7:10 mark, and sorry about the leading ad):

[W]hy would Perry use [the Birther “issue”] in the primaries…? Well, it’s because being extreme perhaps and a little bit racist perhaps gives you good bona fides in a Republican primary — shows him you’re on the same side as they are.

And there has been for some time, now, the misleading statements about the opposition’s performance.  For instance, we have the following from David Axelrod, as he insists that Republicans, generally, are deliberately trying to trash our economy (again, apologies for the leading commercial, and these particular remarks occur about three quarters of the way through the interview).

They don’t want to cooperate. They don’t want to help.  …so you have to ask a question, are they willing to tear down the economy in order to tear down the president or are they going to cooperate?

We also have the President and his recently begun drumbeat about do-nothing Republicans.  He blames do-nothing Republicans for blocking “jobs” bills, saying, “Over and over, they have refused to even debate the same kind of jobs proposals that Republicans have supported in the past – proposals that today are supported, not just by Democrats, but by Independents and Republicans all across America.”  He blames do-nothing Republicans for blocking his $447 billion “jobs” bill.  And so on.   Of course, he ignores the fact that the do-nothing Republicans passed a budget, in their first month in the present Congressional session, that would have produced jobs and started bringing down the national debt.  He ignores the fact that it was those oh, so active Democrats that refused Sen. Mitch McConnell’s attempt to honor Obama’s “Pass this bill now” demand and bring that expensive jobs bill to a prompt vote, choosing instead to wait until they were ready to play their political games with it.  He ignores the fact that the do-nothing Republicans have passed jobs bills and jobs-related bills that address the excessive regulations that inhibit small businesses and their hiring.  He ignores the fact that every one of these bills, including that budget bill, sit in the activist Democrat Senate being studiously ignored.  He ignores the fact that that same activist Democrat Senate has refused even to attempt a budget bill of its own for the last 900 days.

Finally, there’s the just plain silly.  We get for instance, Cokie Roberts, on ABC News’ “The Green Room,” extolling the virtues of our present overly complex, loophole-laden tax system (again, sorry for the leading ad):

I think we will see the flat tax crash and burn once again. You know, look – the reason America has used the tax code for social good is because we like the private sector. And so Western Europe has basically embraced socialism to do all of these things. What we have embraced is have business do all our health care and our universities and our arts and all of that, and our housing, with garden apartments for middle class people and all of that. And you know, you might like or dislike that, but that’s a result of the tax code and that is something Americans tend to like a whole lot better than having government do it.

We’re only in the primary season, too.  The actual campaign will be…interesting.

Supports and Consequences

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Rep. Collin Peterson (D, MN) has proposed a Dairy Market Stabilization Program to replace existing Dairy Product Price Support and Milk Income Loss Contract Programs, but the debates surrounding the proposal misses a key point.

“The Dairy Market Stabilization Program [proposed by Peterson] is specifically designed to increase milk prices,” the Consumer Federation of America says.  “As milk and dairy prices increase, low-income consumers are hit especially hard.”  National Taxpayers Union, Americans for Tax Reform, and Citizens Against Government Waste warn of other results.  Artificially propping up milk prices “will ratchet up budgetary pressures on the government’s food and nutrition programs.”  Further, the DMSP, if passed, would empower government to limit how much milk is to be produced given falling profits; this is intended to strengthen a “safety net” for a government-favored group.

While these are valid arguments; they don’t go far enough.  The key point is the long list of unintended consequences of this sort of program and of subsidies in general.  One narrow consequence has to do with this: the CBO estimates that the DMSP would save us taxpayers $167 million over five years.  How much would we save if we didn’t have any of these three subsidies?

Another consequence comes from this effort to “help strengthen a vulnerable dairy sector.”  Dairy wouldn’t be a vulnerable sector except that government subsidies have protected it from the strengthening and hardening that competition produces.  The sector is soft and “vulnerable” as a direct result of its having become dependent on government for its “protected” profits and its protection from the risk of failure.

This stems from another unintended consequence.  The bailouts of 2008 and 2009 have simply fostered an environment wherein everyone feels entitled to a bailout; no one should have to suffer the consequences of their own decision-making, or even of plain bad luck (and note carefully that a hand up is not a bailout).  All of us are entitled, goes the new plaint, to having taxpayers indemnify us from life.  However, something that was a mistake the first time is not made correct by repeating it.  It remains a mistake.

Yet another consequence is that ratcheting up of budgetary pressures on the government’s food and nutrition programs that was warned of above.  The NTU, ATR, and CAGW are right as far as they go, but they miss the larger point, one hinted at by the CFA: the subsidies, including other subsidies that would be cascade victims of particular subsidies’ budget pressure, all drive up—by design—prices that consumers, including poor consumers, must pay.  (And so we have food stamp programs, and other food and nutrition programs, to help those poorer consumers pay those artificially inflated prices….)

There’s another unintended consequence.  Consumers—taxpayers—in return for our tax money being taken away from us to pay these supports, have even more of our money taken away from us by our having to pay those artificially high prices that are the goal of these supports.  We’re forced to pay twice for the same milk.

There’s the unintended consequence of the moral hazard involved.  Industries that are protected from failure, government-favored small businesses that are protected from failure, have no incentive to control their own costs, have no incentive actually to compete.  They get high prices (which we must pay, both through those high prices and through the epicycles of subsidies on top of subsidies to prop up those prices and then to help others pay those propped up prices), and they have high costs with which to “justify” those high prices.  This is related to those original mistakes of the 2008 and 2009 bailouts.  How can a businessman, or an investor in that business, or a lender to that business, assess his risk accurately when there is no downside from risk?  Another aspect of the moral hazard question is this: one justification for the supports is that dairy farmers would go out of business without them.  But if they can’t compete, why should they be in business?  Why does any particular business or industry have an inherent right to exist, regardless of market competition forces?  Who decides which business or industry should be artificially continued?

Finally, here is a consequence almost as bad as the moral hazard one, a consequence with more concrete and immediate impact on our pocketbooks.  Supporters of the DMSP worry that were there a repeat of 2009’s economic dislocation (we’re out of that one?), a repeat of the problem of falling milk prices coupled with abruptly rising input prices, “I fear we could lose half our dairies,” as Congressman Peterson puts it.  But why did those input prices rise?  One (but not the only) reason is ethanol subsidies.  These diverted food corn away from the dairy herds (and other cattle herds, and people): nearly 30% of corn went to fuel production in 2009; that expanded to 35% in 2010.  The effect from seemingly unrelated subsidies on those input prices for milk production is apparent.  This diversion, in cascading unintended consequence, reduced our supply of food, raised the price of that food that we must pay, and drove cost increases in those food stamp subsidies.