Felix Salmon

Corzine’s culpability

Felix Salmon
Dec 8, 2011 15:40 UTC

The good news, today, is that Jon Corzine is testifying; the bad news is that he’s almost certainly not going to say anything substantive in his testimony. His prepared statement is a bit odd: he says that he has “had limited access to many relevant documents, including internal communications and account statements, and even my own notes, all of which are essential to my being able to testify accurately” — and then says that somehow he might have been able to gain such access between now and January, as though anything will have changed between now and then.

In any case, when it comes to the huge black hole where MF Global’s customer funds should be, Corzine’s testimony is clear: “I simply do not know where the money is, or why the accounts have not been reconciled to date.”

But Christopher Elias has an idea — he reckons that the hole in MF Global customer accounts might well be due to rehypothecation.

You’ll remember rehypothecation from the Lehman bankruptcy: brokerage customers of Lehman in the US got their money back much more easily than brokerage customers of Lehman in the UK, because in the UK brokerages are allowed to “rehypothecate” customer funds — essentially, to use them for their own corporate purposes, including putting them up as collateral in their own trades.

And guess what: MF Global, too, had a UK subsidiary, MF Global UK Limited, which had over 10,000 accounts. Just as Lehman monies sloshed back and forth chaotically from New York to London and back in the company’s final days, it seems that something similar was going on at MF Global: after all, JP Morgan Chase in London seems to have been transferred quite substantial sums in the days before MF Global’s bankruptcy.

This is all highly speculative, of course. And given the utter mess which investigators seem to have found when trying to piece together what happened to customer funds, it’s entirely possible that we’ll never know exactly where they went. Money’s fungible, and once it disappears into the global financial system, it can’t easily be traced.

Corzine’s statement includes an apology “to all those affected” by MF Global’s bankruptcy; he also takes responsibility for entering into the ill-fated repo-to-maturity trades. But he doesn’t seem inclined to admit that as CEO of the company, it was his job to ensure that customer funds were well looked after:

As the chief executive officer of MF Global, I ultimately had overall responsibility for the firm. I did not, however, generally involve myself in the mechanics of the clearing and settlement of trades, or in the movement of cash and collateral. Nor was I an expert on the complicated rules and regulations governing the various different operating businesses that comprised MF Global. I had little expertise or experience in those operational aspects of the business.

This is an abrogation of responsibility, but it also rings true: back-office clearing and settlement operations are largely ignored by senior management most of the time. Still, Corzine was responsible for them. And he testifies that in its final week, “MF Global undertook extraordinary steps” in an attempt “to sell assets and generate liquidity”. It it possible that those extraordinary steps included hands entering cookie jars where they weren’t actually allowed to enter? I’d say it’s not only possible but likely. And that the more “extraordinary” the steps that Corzine was encouraging his lieutenants to take, the more likely that he would have been effectively condoning the idea that customer funds could be used in an attempt to stave off bankruptcy.

Ultimately, of course, it was the missing customer funds which torpedoed any prospects of MF Global being sold to a deep-pocketed buyer: Corzine might have scrambled a bit too much in those “chaotic, sleepless nights” which he now recollects so dimly. I sincerely hope that his actions in those days and nights can be pieced together with hindsight. Because at some point he’s going to have to be held accountable for what he did.


“Is Sarbanes-Oxley still on the books?”
Yes, yes it is.
The problem is the meaning of the word “is” adequate…..Whoops!!!! Another president.

The problem is the meaning of the word “adequate”
“Adequate” is…uh….er, adequate to make it appear that we have laws that are EFFECTIVE to stop financial fraud,and to deflect attention from Wall Stree criminality.
But not ACTUALLY effective to prosecute, and certainly not effective enough to convict anyone of anything. So Sarbanes Oxley is a perfect law….from the standpoint of our leaders (Wall street).

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Nick Rizzo
Dec 8, 2011 02:43 UTC

Here’s the leaked report from European Council President Van Rompuy  — FT

Herman Achille Van Rompuy has been said to have the “charisma of a damp rag” — Reuters

Greek deposits continue to fall – Spiegel

These charts show that it’s hard for the US to decouple its economy from Europe — Tim Duy

These charts show that the ECB might have to start printing money — VoxEU

And these charts show who’s dropping out of the US labor force — Modeled Behavior

The 30-year-old MF Global bankruptcy “boy wonder” who despises Corzine — Fortune

A well-reported portrait of what it’s like to be dragged into poverty — HuffPo

And the Gingrich campaign still has a lot of debt, half of it for private jets — WaPo

Can TomTom help solve the congestion problem?

Felix Salmon
Dec 8, 2011 00:24 UTC

Traffic congestion is one of those problems to which there is no single silver-bullet solutions. If a city has too much congestion, the main thing it needs to do is build out much better public transportation infrastructure — something which takes many years and many billions of dollars. But failing that, or in the mean time, is there anything else?

Balaji Prabhakar reckons he can try to give prizes to people who drive at non-peak hours; it’s a cute idea, but I don’t think it scales. And then there’s congestion pricing, of course. But right now, there’s surprisingly little evidence that it actually works, and some evidence that it doesn’t, at least in the medium term: in London, congestion went up after it went down, and much of the small decline in congestion can be attributed to better public transportation rather than the congestion charge itself.

The people at GPS maker TomTom, however, have another idea about how to reduce congestion, at least at the margin. TomTom has a lot of Live devices, which are constantly transmitting their location; on top of that, every time the old-fashioned GPS devices get plugged in to a computer and upgraded, they also upload details of where they’ve been and when. And TomTom also has data from cellphone companies about how fast various phones are moving on certain streets at certain times of day.

Put it all together, and you get a very rich database of where to find congestion, both in terms of geography and in terms of time of the day and week.

This information can reduce congestion in one of two ways. Firstly, the information can directly change driver behavior. TomTom claims that it can reduce travel times by up to 15% — which obviously reduces overall congestion in and of itself a little bit, since that car is on the road for less time. And if we ever reach a point at which 10% of drivers are using that technology, then you see further benefits: enough cars get rerouted from busy to less-busy streets that the busy streets clear up a bit and move faster. Overall, TomTom reckons that congestion gets reduced for everybody by 5%, even if they’re not using any GPS device at all.

And then there’s bigger changes which can be made at the municipal level. TomTom has a whole business which sells congestion information to cities, which can then use that information to inform minor decisions like traffic-signal timings, and major ones like rebuilding roads. Historically, cities have needed clunky hardware like cameras and in-street loops to detect how much congestion there is; the TomTom data is cheaper than that, it’s much more precise, and it covers all roads rather than just the main arteries.

This is great news, right? Yesterday, for instance, we got detailed information on pedestrian congestion in NYC. The “pedestrian volume index” has now reached 113.2 from 100 in 2007, and we know about individual blocks with great specificity: on West 14th Street between Hudson and Eighth, for instance, there were 11,166 pedestrians per day between 4pm and 7pm in September, compared with 8,911 in May and 7,055 the previous September.

That’s very useful information — but it pales in usefulness when compared to equally detailed information on automotive congestion. Finally, we can settle once and for all whether the pedestrianization of Broadway has resulted in higher or lower traffic speeds. We can find out what happens to congestion when bike lanes are installed. And we can measure congestion overall in the city, with an eye to working out how much the deadweight cost of congestion is, and whether some kind of congestion charge might make sense. Most obviously, the real-time TomTom data is good enough that it can and should be used to adjust traffic signals in real time, as and when traffic jams appear.

So, is this happening? Turns out, that question is very difficult to answer. I spoke to a couple of TomTom executives three weeks ago, and they told me that they had done a little study, just for their own edification, on the Herald Square area, to see what happened to traffic speeds there when Broadway got pedestrianized. I asked if they would send it to me, and they said that they’d be happy to — they just wanted to check with the city of New York first.

And then, last week, I was told that a New York Department of Transportation Deputy Commissioner asked TomTom not to share its data with me.

TomTom is still looking for some data, somewhere in the world, that it can share with me — but I don’t have anything yet. And this data is very hard to find, for anybody outside TomTom: the company informs me that even TomTom’s own non-profit, The Traffic Foundation, which says that it will be “tapping into TomTom’s community of 50 million users”, has no access at all to this wonderful and enormous traffic database, which now has more than 4 trillion datapoints.

If this data were a little more public, researchers could plug away at it to see what the effects of infrastructure changes are on congestion, for instance, and to help create a set of best practices for what kind of interventions get the best congestion-reduction bang for the buck. But that doesn’t seem to be happening. And TomTom is very quiet indeed about which municipalities have bought its data, and what those municipalities are doing with it.

There’s an amazing opportunity, here, to use advanced statistical and quantitative techniques to painlessly improve city life: it’s exactly the kind of thing that the TED people got so excited about when they decided to award their TED Prize to The City 2.0. But I worry that TomTom is keeping this data far too close to its chest, and that cities like New York are similarly unhappy about the idea that it might become public in any way.

Of course, TomTom is a public company, with an obligation to its shareholders to maximize the amount of money that it can generate from its database. And it doesn’t want to annoy potential clients, especially not when its share price has been bumping along at very low levels for the past couple of years. Sooner or later this information is bound to start getting used widely — can’t Google just buy TomTom, already, and make it much more public? The entire company, after all, has a market capitalization of less than a billion dollars. The profit motive, here, shouldn’t get in the way of the massive public good that can come from this database.


don’t forget for a minute that this is all a very complex band-aid. traffic volume will continue to grow and absorb all the savings you get from better routing around congestion. at some point, the road system with all its smartly guided vehicles will fill up again and the question of systemic shift to transit, different land use patterns, road pricing, etc etc will all have to be confronted again with much less wiggle room.

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Will the ESM guarantee Eurozone bonds?

Felix Salmon
Dec 7, 2011 15:13 UTC

TBI’s Simone Foxman has got her wonk on and is getting into the weeds of Eurozone bail-in policies — a crucial subject about which there isn’t nearly enough public coverage. Simone says that I’m wrong, and that the EU is in no way intending to guarantee the debts of the PIIGS. And I very much hope that she’s right about that.

Part of the problem here is that we’re all just working from whispered and unsourced news reports: it’s not like there’s any clear public language about what Merkozy is proposing. And even if there were, it would of course be subject to change over the course of the current negotiations.

Foxman points me to a form of words in an official Eurogroup statement from November 28:

Rules will be adapted to provide for a case by case participation of private sector creditors, fully consistent with IMF policies. In all cases, in order to protect taxpayers’ money, and to send a clear signal to private creditors that their claims are subordinated to those of the official sector, an ESM loan will enjoy preferred creditor status, junior only to the IMF loan.

And today there’s a letter from Merkozy which is even more opaque:

As far as the private-sector involvement is concerned, the ESM treaty should be revised to make clear that Greece required a unique and exceptional solution. We recall that all other Euro area Member States reaffirm their inflexible determination to honour fully their own individual sovereign signature. A recital in the preamble should clarify that the euro area will apply the IMF practice. As agreed, common terms of reference on CACs shall be introduced in national legislations.

The good news here is that it looks like there won’t, after all, be anything like an explicit Eurozone backstop of all members’ sovereign debts: the only thing which is abundantly clear about both of these formulations is that they’re explicit about absolutely nothing.

For one thing, the idea that anybody could turn to “IMF policies” for guidance on these matters is laughable: there are no IMF policies on the subject, beyond a general rule that the IMF itself won’t lend to a country which is in default to its private creditors. (And even the IMF seems happy to break that rule when it needs to.) As for “IMF practice”, that basically means a case-by-case “we’ll cross that bridge when we come to it” approach. Which is reasonably sensible.

So I suspect that the “IMF policies” language is going to stay in there, precisely because no one really has a clue what it means. I doubt, however, that we’ll keep the bizarre notion that that the ESM will both have preferred creditor status and be junior to the IMF. The whole point of preferred creditors is that they never take losses, while the whole point of being junior is that you might take losses. I’m pretty sure that the IMF would be very unhappy indeed with the precedent-setting idea that a preferred creditor could accept a haircut, even if that preferred creditor was not the IMF itself.

And meanwhile, the “inflexible determination to honour fully” sovereign debts is being devolved down to the individual member-state level, where it has always been, rather than being run up to the EU level.

So where does this leave private-sector bondholders? They could still get bailed in if the ESM takes a haircut — but the ESM is clearly determined not to take a haircut, as is evidenced by its attempt to give itself preferred creditor status. But if a Eurozone country gets into fiscal trouble and is forced to hand over a certain amount of fiscal sovereignty to the EU, will the EU then force that country to restructure its bonds? My feeling here is that the answer is no.

If the ESM goes according to plan, then basically what happens is that the EU as a whole steps in when a country can’t get its fiscal act in order, and takes over to provide adult supervision and to force hard decisions to get made. One of those decisions will be to honour fully all sovereign debts. Ex hypothesi, the country in question can’t roll over those debts — which means that the ESM will have to step in to fund all budget deficits. And so even as private-sector debts are coming due and being rolled off, the ESM will be providing new-money funding.

All of which looks very much like an EU guarantee of sovereign debt.

But at the same time, the chances of the ESM going entirely according to plan have to be reasonably slim. And there’s enough wriggle room in the language as currently envisioned that if things start going really pear-shaped in Italy or Spain, private-sector bondholders could still see themselves forced to accept some kind of haircut.

It would just take the failure of the ESM for that to happen.

So is the ESM an EU guarantee of all Eurozone sovereign debt? To a first approximation, if it works, then I think it probably is. But it’s not a blanket, iron-clad guarantee. And that, at least, is good news.


The Department of Engineering Science and Mechanics (ESM) will be an internationally distinguished department that is recognized for its globally competitive excellence in engineering and scientific accomplishments, research and educational leadership.
fx 比較

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Smackdown of the day: Bloomberg vs the Fed

Felix Salmon
Dec 7, 2011 01:04 UTC

Historically, it was hard for institutions to reply in any effective manner to press reports which they thought were full of egregious errors and mistakes. They could complain to various editors, and maybe even get a short response on the letters page, but they rarely got the opportunity to reply in their own words and at the length they thought the reply deserved.

The web, of course, has changed all that, and ISDA’s media.comment blog is a great example of a criticized institution taking matters into its own hands. It names and links to the articles it’s criticizing, and I’m pretty sure that it would happily engage in real debate, if those organizations ever deigned to reply. Which they don’t. As a result, ISDA seems — is — more transparent and open than the likes of the New York Times and Bloomberg.

The Federal Reserve, on the other hand? Not so much.

In a six-page letter today addressed to the Senate Banking Committee, Ben Bernanke lashes out at “a series of articles–one just last week–concerning the Federal Reserve’s emergency lending activities”. He says those articles “have contained a variety of egregious errors and mistakes”. And he encloses “a memo prepared by Board staff that addresses some of the most serious errors and claims in those articles”.

Nowhere in those six pages is a single article actually identified. The Fed memo, similarly, has no named author. And the whole thing is available only as one of those PDFs-from-a-copy-machine, which makes it impossible to copy-and-paste or to search. The Fed put the letter up on its website and made sure that various economic journalists, like myself and Binyamin Appelbaum, knew all about it. But the whole thing is an incredibly passive-aggressive way of attacking Bloomberg, which, to reiterate, is never actually named.

Bloomberg did not let the opportunity go to waste. It’s clearly the main object of the Fed’s ire, but because it isn’t named, it can do two rather clever things in its official response. The first is to respond to the Fed’s complaints by citing various different stories it’s written over the years — since the Fed never actually specified which story or stories it had issues with. And the second is to simply deny that it said what the Fed is complaining about at all. When the Fed, for instance, says that “the articles misleadingly depict financial institutions receiving liquidity assistance as insolvent,” Bloomberg simply and effectively replies that it “never described any of the financial institutions mentioned in its bailout stories as insolvent”.

All of which makes the exchange less of an actual debate and more of a case of two powerful institutions talking past each other.

The Fed has various blogs; it could easily have used one to single out specific errors in the Bloomberg article, which Bloomberg would then have had to respond to directly. But instead it just writes a memo talking vaguely about “these articles”, and in doing so plays straight into Bloomberg’s hands.

And of course both the Fed memo and the Bloomberg response perpetuate the myth that Fed officials don’t talk to Bloomberg reporters on a daily basis. There’s lots of back-channel noise, here, which isn’t seeing the light of day; the memo and official response are just the carefully-chosen public face of a debate which is happening primarily in private. (The Fed’s a bit like Goldman Sachs: it loves talking “on background”, but hates saying anything on the record. Which is why a large part of Fed-watching is working out which reporters are getting the coveted phone calls from Fed board members, and then reading between the lines to work out who’s telling them what.)

Bloomberg has won this particular round, just because it’s being very open about what it’s saying, while the Fed memo seems mealy-mouthed and less than fully open about what it’s trying to say. If you’re going to complain about “egregious errors and mistakes”, it behooves you to be specific about exactly where the errors and mistakes lie, and to quote them directly. If you don’t do that, you automatically look as though you have a weak case, and you open yourself up to counterattacks like the one from Bloomberg.

Which is not to say that the Fed is being completely disingenuous here. The Bloomberg article in question ginned up rather more scandal than there really was. “Details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger,” it says, breathlessly — but really they don’t: the details that Bloomberg managed to obtain really don’t tell us anything about the Fed’s lender-of-last-resort operations in aggregate that we didn’t already know. They do give us new information about a few specific banks, none more so than Morgan Stanley.

Or, take this passage, under the sub-head “$7.77 Trillion”:

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

If you read the passage very carefully, there’s nothing actually inaccurate there. But the impression given is that “the amount of money the central bank parceled out” was $7.8 trillion, a sum which “dwarfed” TARP and is more than half of US GDP. And that’s not true — the actual amount that the central bank parceled out never exceeded $1.2 trillion, a fact you won’t find in the Bloomberg article.*

And this, too, is misleading:

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, says banks “were either in bad shape or taking advantage of the Fed giving them a good deal. The former contradicts their public statements. The latter — getting loans at below-market rates during a financial crisis — is quite a gift.”

The Fed says it typically makes emergency loans more expensive than those available in the marketplace to discourage banks from abusing the privilege. During the crisis, Fed loans were among the cheapest around, with funding available for as low as 0.01 percent in December 2008, according to data from the central bank and money-market rates tracked by Bloomberg.

The 0.01% funding was one loan, to one bank, on New Year’s Eve, as the emergency-lending program was coming to an end: in no way is it indicative of the interest rates charged by the program as a whole. And Baker’s characterization of the Fed loans as being “at below-market rates” is left conveniently undefined, in the context of the fact that the credit market had seized up and that there were no real “market rates” any more in the interbank market. Indeed, the comment makes it into a caption in the article, which says that “banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates”.

The fact of the matter is, as the Fed points out in its letter, that the Fed set the interest rates on the lending at a penalty over normal market rates. And — you really have to work to get this — Bloomberg’s methodology doesn’t actually take into account the interest rates charged by the Fed at all! Bloomberg just takes the amount of money that the banks borrowed from the Fed, and then multiplies it by their net interest margin — the profit they reported on loans. The Fed could have been lending at a penalty rate of 25%, and according to Bloomberg the banks would still have made $13 billion in profits on the loans, so long as their net interest margin didn’t change. Just because the banks had a positive net interest margin does not mean that the Fed was lending them money at below-market rates, as Bloomberg would have you believe.

The Bloomberg article reads like a highly partisan attempt to paint the Fed in the worst possible light, with misleading assertions and extensive quotes from Fed critics. The Fed could, if it wanted to, have spelled this out. But in attempting to be high-handed and refusing so much as to utter Bloomberg’s name, it just seems out of touch and opaque — which is exactly the impression Bloomberg would love you to have.

So Bloomberg wins — and the Fed ends up looking even worse. Maybe next time the Fed will be a bit more transparent and heartfelt and honest. It will find itself in a much stronger position if it goes there.

*Update: You will find the fact that the banks never borrowed more than $1.2 trillion in the article, but it’s subtle enough that I missed it on multiple readings. At the top of the piece, we’re told that the banks”required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day”.


8th attempt at least to spin thr same stale old news as outrage

http://mobile.bloomberg.com/news/2011-12 -11/no-one-says-who-took-586-billion-in- fed-swaps-done-in-anonymity.html

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Nick Rizzo
Dec 6, 2011 22:24 UTC

Uh-oh: construction’s grinding to a halt in Chinese “ghost towns” — WSJ

I’m a big fan of Paul Krugman’s headline pun — NYT

Corzine suggested he’d quit if board members didn’t trust his MF Global Euro bet — WSJ

After promising not to, Wall Street firms have re-violated fraud laws at least 51 times — NYT

Be afraid of a run on the shadow banking system — WSJ

This is grisly: for-profit hospices are paying referral fees for dying patients — Bloomberg

Romney spent $100,000 in state money to erase his gubernatorial record — Reuters

A list of historical figures Newt Gingrich has compared himself to — The Atlantic Wire

Yahoo prepares to battle a brain drain — WSJ

Sorry, “international waters” is not itself a business model — Atlantic Cities

Why does the police department of Tampa, Florida need a tank? — The Daily


Rizzo, a suggestion: Just put “(paywall)” next to a link if it’s like the WSJ situation. You choose your counterparties, we choose whether to click

Posted by ottorock | Report as abusive

How the ECB could be forced to print money

Felix Salmon
Dec 6, 2011 15:52 UTC

The European Central Bank has been notoriously reluctant to print money during this crisis. But what if it had to?

Aaron Tornell and Frank Westermann have a wonky post up at VoxEU about the flows between various national central banks within the Eurozone, which includes this key chart:

Assets of the Bundesbank


The line to concentrate on, here, is the solid one in blue. It shows a key part of the Bundesbank’s assets — its loans to other institutions — falling perilously low to zero, even as its loans to other European central banks — the maroon dotted line — continue to rise inexorably. (These loans from one national central bank to another are known as the TARGET system.)

Up until now, the Bundesbank has managed to fund the latter by means of selling off the former: when it’s asked to lend money to PIIGS central banks, it just sells off some other loans and advances the cash to the Irish or Portuguese central bank instead.

But it can’t do that any more, because the Bundesbank is down to its last €21 billion in private loans. And when that hits zero, the only things left to sell are the Bundesbank’s gold and reserves. Which, it’s pretty safe to say, the Bundesbank is not going to sell.

There’s good news and bad news here. The bad news first:

Before long, the Bundesbank’s stock of domestic assets is going to hit zero, and it is highly unlikely that it will agree to sell its gold or borrow more in private capital markets. At that point, the Bundesbank will not be able to lend more funds to the Eurozone TARGET mechanism… If a critical mass of agents were to engage in capital flight away from fiscally weak countries, the TARGET system would be overwhelmed. In principle, a speculative attack could occur within a day, and the ECB would have to assume all of the marketable securities from countries that suffer the speculative attack. Since the ECB has a relatively small capital base, it would not be able to purchase a large amount of assets from countries that suffer the attack.

This is a bank run, basically, with the banks suffering the run being the central banks of euro-periphery nations. Bank runs are always about liquidity, and so long as there’s a firehose of liquidity somewhere able to give anybody who wants it all the cash they want, bank runs are non-issues. But the point here is that the network of European central banks is running out of cash, and that the Bundesbank — which has been the main provider of liquidity to date — has now pretty much run out of it.

Here’s how Izabella Kaminska reads this:

If the ECB doesn’t act to discourage the borrowing (or for that matter fails to somehow top up the Bundesbank’s assets), it could become a victim of a speculative attack not dissimilar to that experienced by the Bank of England during the ERM crisis of 1992.

There are, after all, many similarities in both situations. Most notable is the fact that both central banks seem to have under-estimated the amount of quality assets (or foreign exchange in the case of the BoE) they needed to hold to defend their monetary policy effectively.

I, on the other hand, am (uncharacteristically) a little more optimistic here. Faced with the imminent collapse of a national central bank, it seems to me that the ECB would have no choice but to print as much money as was necessary to meet that country’s demand for liquidity. The problem in 1992 was that the pound was overvalued, and that the market was demanding Deutschmarks, which the Bank of England couldn’t print. In this case, the market would be demanding euros, which the ECB can print.

Basically, there’s a constant flow of money out of the European periphery and towards the center. Up until now, that flow has been matched by an equal and opposite flow of central bank lending from the Bundesbank to the PIIGS central banks. And when the Bundesbank runs out of money to lend those central banks? The ECB will have no choice but to step in and print all the money necessary to stop those banks from going bust. And that, I think, is how we’re going to see the ECB finally take on the lender-of-last-resort role it has been so reluctant to adopt until now.

Update: Karl Whelan takes issue with Tornell and Westermann’s assumptions.


The whole issue of TARGET balances as alleged loans among eurozone NCBs has been discussed for quite some time now. The problem is, the central assumption here is plainly wrong. TARGET balances are claims by the national central banks on the ECB. It’s an accounting system, NOT “loans from one national central bank to another”.

Concluding that the Bundesbank was selling off loans to fund TARGET balances is hence just not the case. Loans to banks are declining because there has been less liquidity demand by German banks. It’s a shame really that there’s still so much misconception around, in this case exaggerated by clipping the chart at 2006, as the Bundesbank was in a TARGET “deficit” prior to that.

Whelan’s response is a good one, there are more by the ECB http://www.ecb.int/pub/pdf/mobu/mb201110 en.pdf (p-35), Bundesbank http://www.bundesbank.de/download/presse  /pressenotizen/2011/20110222.target2-sa lden.en.php, and Storbeck http://economicsintelligence.com/tag/tar get2/, all explaining the system in more detail…

Posted by jushuma | Report as abusive

The euro zone’s terrible mistake

Felix Salmon
Dec 6, 2011 04:36 UTC

The FT is reporting today that the new fiscal rules for the EU “include a commitment not to force private sector bondholders to take losses on any future eurozone bail-outs”. If this principle really does get enshrined into some new treaty, it will be one of the most fiscally insane derelictions of statesmanship the world has seen — but it certainly helps explain the short-term rally that we saw today in Italian government debt.

Right now, the commitment is still vague:

Ms Merkel agreed that private sector bondholders would not be asked to bear some of the losses in any future sovereign debt restructuring, as she had insisted this year in the case of Greece’s second bail-out. However, future eurozone bonds will still include collective action clauses providing for potential voluntary rescheduling of private debt.

Ms Merkel said it was imperative to show that Europe was a “safe place to invest”.

You can safely ignore the bit about collective action clauses. They’re part of the sovereign-debt architecture now, and taking them out would be far more trouble than it was worth: they have to stay in, no matter what. The important thing is that they won’t be used — because if no one’s going to ask bondholders to bear any losses, then they won’t have any proposals to agree to.

The impetus for this completely insane policy seems to have come from the ECB, which genuinely seems to believe that bailing in private-sector banks, in the Greece restructuring, was the “terrible mistake” which caused the current euro crisis. Talk about confusing cause and effect: it was Greece’s fiscal disaster which caused the restructuring and the necessary bail-in.

To understand just how stupid this is, all you need to do is go back and read Michael Lewis’s Ireland article. The fateful decision in Ireland was to take the insolvent banks and give them a blanket bailout, with the banks’ creditors all getting 100 cents on the euro. That only served to put a positively evil debt burden onto the Irish people, forcing a massive austerity program and causing untold billions of euros in foregone growth, while bailing out lenders who deserved no such thing.

Are we really going to repeat — on a much larger scale — the very same mistake that Ireland made? Does no one in Europe realize that this is the single worst thing they can do?

Markets reflect underlying realities, and up until now, the realities have been clear. Europe’s periphery is sinking under the weight of too much debt, and the result will be inevitable pain for private-sector creditors. The best case scenario is that those countries bite the bullet and restructure their debt now, since to delay is to make any restructuring much more painful and expensive than it needs to be.

The worst case scenario is that the EU kicks the can down the road with one new bailout facility after another, until it eventually gives up throwing good money after bad and imposes the restructuring which was inevitable all along. In that case, as one hedge fund manager was explaining to me last week, private sector creditors get devastated: because the EU and the ECB and the IMF won’t take any losses on their loans, all of the haircut, pretty much, will have to be borne by a private sector which accounts for only a fraction of the debt. So the private sector could end up with very, very little indeed.

Now, however, Angela Merkel has come up with another plan. The details aren’t clear, but it seems to involve the EU guaranteeing the debts of its member states. Why this is acceptable while eurobonds aren’t acceptable is a mystery: a mulit-trillion-euro contingent liability is hardly preferable to a couple of hundred billion euros of real liabilities. But there’s eurologic for you.

The immediate result of this plan is that everybody will rush into the highest-yielding bonds in Europe, which is exactly what seems to have happened today. The other effect of the plan, however, is that every country in Europe is now effectively guaranteeing everybody else’s debt. Which is more than sufficient to explain why S&P is minded to downgrade every country in Europe, up to and including Germany.

In order for markets to work, lenders need to suffer when they make bad lending decisions. If the Europeans didn’t learn from Ireland, couldn’t they at least learn from the Fed’s much-criticized decision to pay off all AIG creditors at 100 cents on the dollar? Blanket guarantees at par are pretty much always a really bad idea — and this one, if it comes to pass, will be the biggest one yet. It won’t end well.


“Are we really going to repeat — on a much larger scale — the very same mistake that Ireland made? Does no one in Europe realize that this is the single worst thing they can do?”

If you assume that the whole goal of the ECB/Euro leadership is to ensure that northern European banks get repaid in full (in the short term), and d*mn the consequences, then everything they’ve done makes perfect sense.

Posted by Barry_D | Report as abusive


Nick Rizzo
Dec 5, 2011 23:03 UTC

Mario unveils a new austerity budget to rescue the princess save Italy’s credit rating — NYT

But Stiglitz argues that cutbacks aren’t what the euro zone needs — Project Syndicate

And despite Merkozy’s deal, S&P could downgrade 15 euro nations — Bloomberg

Look what’s driving public debt in the major European economies — Touchstone

The worldwide decline of “safe” assets — FT Alphaville

Goldman: home prices will drop another 2.5% before bottoming out — FT Alphaville

Bank deposits are up, but it’s “hot money” — WSJ

The Connecticut town where one-third of the population is over 60 — NYT

And Google and Facebook might already receive half of global digital ad spending — AllThingsD


Another link for you, given you insisted on giving the Bloomberg stories – and the regurgitations in ProPublica – a public hearing. Some of these statements are rather familiar to me…..

http://www.federalreserve.gov/generalinf o/foia/emergency-lending-financial-crisi s-20111206.pdf

Posted by Danny_Black | Report as abusive