The Significance of the Euro – A Primer

Europe’s monetary union is simply one of the most important experiments of our time. Can the countries whose wars against each other shaped to a large extent the past millennium, if not longer, form a sustainable monetary union without political union

Debt Restructuring – Uruguay vs. Argentina

With markets now contemplating some sort of debt “re-profiling” by Greece, we thought it would be helpful to summarize the two most recent major debt restructurings by an EM borrower for some guidance on what such a move could imply for ratings, debt trajectories, and triggering CDS events. To us, it is clear that “re-profiling” is a euro zone euphemism for a soft debt restructuring that extend maturities and lowers rates, while “restructuring” now refers to a hard one that involves principal haircuts as well as potentially adjusting maturities and coupons too

Grantham: “Lighten up on risk-taking now and don’t wait for October 1 as previously recommended.”

Jeremy Grantham is seriously bearish again. In part 2 of his latest quarterly newsletter, he departs from the peak resources argument he made in part 1 and focuses on the overvaluation in stocks. His advice: sell!

Inflation

Below are two charts from the Federal Reserve Bank of St. Louis. The first shows the US Consumer Price Index for all urban consumers from 1913 through March. The second shows the same data from 1990. The US has generally had a positive inflation level as measured by the government’s statistics. After the most severe bout of deflation since the 1930s, inflation is rising again. For the U.S. post-1913, inflation is the norm

Are Michigan and Illinois like Greece and Ireland?

Systemic risk is not driven by close macro integration. If this were the case, US states would have far higher exposure to systemic credit risk. Instead, systemic exposure is very high for European sovereigns. The roots of systemic risk lie in the flows, liquidity, risk premiums, and liquidity shocks of financial markets. Managing these financial market channels is crucial in keeping systemic default risk low.

More on Unemployment Insurance for the 21st Century

Unemployment insurance for 21st century in the form of a jobs program could end the malinvestment and predations of politicians and foster a strong economy. We need jobs but we must be mindful of predator state capitalism. My proposal below addresses both of those concerns

Sidelights to 1994

LURING THE UNSOPHISTICATED into the stock market was considered a risk by Federal Reserve Chairman Alan Greenspan in 1994. So much so, that protecting the individual investor was a mandate of the Fed. (The Fed advertises and then omits new mandates faster than spring fashions. My favorite is the brainstorm of former Fed governor Frederic Mishkin in 2007: “The modern science of monetary policy proceeds under the assumption that the central bank’s purpose is to maximize the well-being of households in the economy; the objective function specifies exactly what should be maximized.”) On May 27, 1994, Greenspan told the Senate Banking Committee it was for this very reason that he – his FOMC – had started raising rates in February, 1994: “Lured by consistently high returns in capital markets, people exhibited increasingly a willingness to take on market risk by extending the maturity of their investments.” The People had shifted assets out of bank deposits and the like. The avuncular Fed chairman, by raising rates, was shepherding his sheep: “[S]ome of those buying the funds perhaps did not fully appreciate the exposure of their new investments to the usual fluctuations in bond and stock prices.”

Given this acknowledgement, the Fed later violated its Investor Protection Mandate when it did not raise margin requirements: a means to reduce credit to the stock market, but, as much so, a warning of forbearance to those who do “not fully appreciate the exposure of their new investments.” The Federal Reserve has absolute authority to raise margin requirements at any time. The Dow rose from 3,757 on May 27, 1994 to over 11,000 in early 2000; the Nasdaq from 733 to over 5,000. During these manic years, households served as sacrificial lambs to finance an economy that was funded by rising stock and bond prices

On Ideology, economics and the compatibility of Chartalists and Austrians

Below is a framework that delineates the ideology and economics of two groups of economic thought that are much talked about in the wake of the Credit Crisis: the Chartalists and the Austrians. These two groups are considered outside of the mainstream and this is important because many economists and market pundits in both camps predicted the global credit crisis while almost no mainstream economists did. The questions are why and what separates them from mainstream Keynesians and Monetarists and from each other

A Credible Solution to Europe’s Debt Crisis

In April 1989, Mexico’s external debt negotiator, Angel Gurria, asked his country’s commercial bank creditors for a 55 percent haircut. This was the opening pitch of the newly created Brady Plan, which finally addressed both the debt overhang of developing countries and the weak balance sheets of their commercial bank creditors, ultimately resolving the LDC Debt Crisis.

More than twenty years later, Europe is in the midst of a similar sovereign debt and banking crisis. The EU is in a destabilizing feedback loop that it cannot control. Sovereign credit is deteriorating and this is reducing confidence in national banking systems, causing or increasing the likelihood that sovereigns will have to assume bank liabilities. This further impairs the sovereign credit and increases the lack of confidence in the banks.

We review the basic tenets of the Brady Plan in the context of our personal experience working on many of these sovereign restructurings and how they could apply in a comprehensive solution for the European debt crisis. The markets and the Eurozone desperately need a positive confidence shock in the form a comprehensive plan that simultaneously addresses the sovereign debt overhang and the balance sheets of European commercial banks

Is It 1994 Again?

Fred Sheehan argues that it is unlikely that Ben Bernanke will raise rates. He says either the market or a successor will do so. He adds that there are several similarities between current trends and those in 1994, a year when many institutions were left destitute. Historical analogies can help us imagine what might happen, but identification of differences should be noted too

Reflections on Geithner’s Hatred for Prosecuting Criminal Contributors

By William K. Black cross-posted from New Economic Perspectives In the Savings and Loan (S&L) debacle Speaker Wright became enraged at the Federal Home Loan Bank Board and the Department of Justice when he learned that the FBI was investigating 400 individuals, most of them Texans, for their possible role in the S&L control frauds

Top Marginal US Tax Rates: 1916-2010

Here’s a great graph of US income tax rates back to when personal income taxes were started. You can see the marginal rate for personal income has come way down from its 1945 peak. A few months ago, Michael Hudson answered the question, “Why Did America Have A 90% Income Tax Under Eisenhower? “. Watch the video in the linked post for his answer, but the quote here from another post of his gives you the gist.