too big not to fail

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European Leaders Scrabble For Agreement

From the BBC:

The outline of a large and ambitious eurozone rescue plan is taking shape, reports from the International Monetary Fund (IMF) in Washington suggest.

It is expected to involve a 50% write-down of Greece’s massive government debt, the BBC’s business editor Robert Peston says.

The plan also envisages an increase in the size of the eurozone bailout fund to 2 trillion euros (£1.7tn; $2.7tn).

European governments hope to have measures agreed in five to six weeks.

The bizarre thing is that the real issue is not whether or not some agreement can be reached, but whether or not any agreement will really have any real effect on the state of the European financial system. I am extremely dubious that the thrifty Scandinavian and Germanic nations will commit huge swathes of their wealth to save the Mediterranean ones. But even if an expanded EFSF can be brought together to successfully bail out Greece and recapitalise European banks who have to write down significant chunks of Greek debt, there is no guarantee whatever that any of these measures will address the underlying fracture in European budgeting. Namely, that European governments are spending like they are monetarily sovereign — in other words, behaving as if they can print as much money as they want to cover debts — when they are not.

Of course, there is no real guarantee that Europe will even effectively stabilise its banking system.

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Government Can Be Bought Cheaply

If you’re a corruption-heavy sleaze bag looking to rack up crooked profits, the easiest way to do it is by rigging the game. And what better to rig the game than to buy off government and have them offer you tax breaks while “regulating” your competitors out of business?

So how much would it cost to buy the Presidency?

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Will China Bail Out the World?

With fear running high on global markets, particularly regarding sovereign debt in the Eurozone, many commentators are asking: will developing nations flush with cash (i.e. China) ride into town and save the day?

From Reuters:

Italian Economy Minister Giulio Tremonti said on Thursday that Asian investors are reluctant to buy Italian bonds because it sees they are not being bought by the European Central Bank.

Speaking at a news conference, Tremonti also said it would be desirable for the central bank to follow the lead of the Japanese and Swiss central banks in taking expansionary steps to tackly the euro zone’s crisis.

“I note that the Bank of Japan today launched quantitative easing and the Swiss cen bank cut rates to zero, we are waiting for decisions if possible, but desirable (from the ECB),” Tremonti said.

When you talk to Asia they say: “We don’t understand what Europe is,” he continued. “The second point is that they say ‘if your central bank doesn’t buy your bonds, why should we buy them”?

That is a fairly unqualified no. And why should they? As Amschel Mayer de Rothschild famously put it:

Buy when there is blood on the streets

And China are entitled to hang onto their money and let asset prices depreciate further to get more bang for their buck. But some signs suggest they will act. The more Europe and America deteriorate, the weaker the demand for Chinese goods.  And China’s massive FX holdings’ value is dependent on the system of international trade and the economies of various Western nations retaining functionality. Most importantly, the only remedies that Western governments have are money-printing, and (China’s worst nightmare) debt-forgiveness, neither of which the Chinese would like to see.

Of course, China stepping in to buy shoddy debt isn’t going to offer any  solutions to underlying problems. At best it will kick the can do the road awhile, as Europe muddles around and continues to fail to come to any kind of meaningful or coherent agreement on its future. So as as Europeans clutch furiously at (Chinese manufactured) straws, there is still only one bailout party in town:

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On Solyndra

A few days ago Solyndra, a Bay Area maker of industrial solar panels, announced plans to file for bankruptcy.

From the L.A. Times:

It wasn’t just a blow for the company’s 1,100 laid-off employees or the investors who have pumped millions into the venture. It called into question the Obama administration’s entire clean-energy stimulus program.

Two important questions are raised by Solyndra’s failure: Should the government be in the business of picking winners and losers by providing loan guarantees to risky energy ventures? And is Obama using stimulus funds to reward his political contributors?

Now — to be clear — this isn’t solely Obama’s problem. George W. Bush, Bill Clinton, and many other administrations both in America and overseas have had lots of troubles with crony capitalism. Obama is by no means the worst next to twenty years of subsidised Japanese zombification.

So just what is the problem with crony capitalism, and with Solyndra in particular? Personally, I am the biggest supporter of solar technology out there. In my view, transitioning to solar energy is potentially the best thing that could happen to the US economy for reasons of energy independence, minimising carbon emissions, long-term sustainability, decentralisation and so forth. So I have no problem with solar energy, and I have no problem with the government supporting research into solar energy. But I still think this was a bad investment. It wasn’t supporting basic research, only a manufacturing process that was unviable in the market.

When it comes to marketable products, only the people out in the economy know what they want, and what they want to spend their money on. That’s why when government tries to pick winners and losers, it very often gets it totally and stupendously wrong.

From NBC:

Solyndra was touted by the Obama administration as a prime example of how green technology could deliver jobs. The President visited the facility in May of last year and said  “it is just a testament to American ingenuity and dynamism and the fact that we continue to have the best universities in the world, the best technology in the world, and most importantly the best workers in the world. And you guys all represent that.”

And why wasn’t Solyndra a winner.

From BusinessWeek:

All told, Solyndra raised $1.1 billion from private sources. The extra federal support ended up having the well-intended but unfortunate effect of letting Solyndra ramp up manufacturing in a hurry, even as evidence was emerging that the company had badly misread the changing economics of the solar panel market. A few years ago, prices for the silicon wafers used in most flat solar panels were soaring. Solyndra proposed building an entirely different panel, using cylindrical tubes coated with thin films of copper-indium-gallium-selenide that would pick up light from any direction.

In funding documents, Solyndra insisted that its tubes would be far cheaper than the silicon alternative. No such luck. Silicon prices have plunged nearly 90 percent from their peak in 2008, making conventional panels the better bargains.

So the government backed the wrong player, whose business model wasn’t economically viable. For the system to work, economically viable ideas have to succeed, and unviable ones have to be allowed to fail, and with government favouritism in the market, that just doesn’t work. Now that doesn’t mean to say that I don’t believe in some government role. In my view, the role of government is to create a level playing field for a free market to exist. Supporting basic research is the right role for the government in solar, so that solar efficiencies can be increased to a level where solar can compete on a level playing field with coal and oil.

Let’s move away from Solyndra (which is really a very small example), and onto the main target: the global financial system.

From Bloomberg:

Would you give money to a compulsive gambler who refused to kick the habit? In essence, that’s what the world’s biggest banks are asking taxpayers to do.

Ahead of a meeting of the Group of Seven industrialized nations’ finance ministers in Marseilles this week, bankers have been pushing for a giant bailout to put an end to Europe’s sovereign-debt troubles. To quote Deutsche Bank Chief Executive Officer Josef Ackermann: “Investors are not only asking themselves whether those responsible can summon the necessary willpower … but increasingly also whether enough time remains and whether they have the necessary resources available.”

Unfortunately, he’s right. As Bloomberg View has written, Europe’s leaders — particularly Germany’s Angela Merkel and France’s Nicolas Sarkozy — are running out of time to avert disaster. Their least bad option is to exchange the debts of struggling governments for jointly backed euro bonds and recapitalize banks. European banks have invested so heavily in the debt of Greece and other strapped governments, and have borrowed so much from U.S. institutions to do so, that the alternative would probably be the kind of systemic financial failure that could send the global economy back into a deep recession.

But the problem is the destructive and failed nature of the financial system itself. If government doesn’t allow banks that made bad decisions to be punished by the market, then the bailed-out zombie banks can rumble on for years, parasitising the taxpayer in the name of ever-greater bonuses for management, while failing to lend money, create new employment, or help the economy grow.

The global financial system isn’t working because there are fundamental structural problems with the global economy. These include over-leverage, the agency problem, trade deficits, failed economic planning, massive debt acquisition, Western over-reliance on foreign oil and goods, military overspending, systemic corruption, fragility and so forth. Stabilising the global financial system merely perpetuates these problems. The market shows that it needs to fail — preferably in a controlled way so that real people don’t get hurt — so that we can return to experimental capitalism, where sustainable ideas prosper, and unsustainable ideas don’t.