too fucked to bail

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Reinflating the Housing Bubble…

From my favourite arch-Keynesian provocateur (and fellow sci-fi fan):

The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

He got his wish, and it ended in 2008 with the great crunching, squelching sound of death by delinquency (via securitisation).

But now the housing bubble is coming back — on steroids (or methamphetamine, whichever analogy is more appropriate).

Via the newly-extended HARP (HAARP?) program, for $100 down, under-water homeowners can pick up a $200,000 government-insured loan for “repairs” and “renovations”. That’s 2000:1 leverage — steep even for Wall Street.

A covert stimulus package by any other name — but more importantly, it’s another bailout to creditors who lent huge quantities of money to people who couldn’t afford to repay it.

From Of Two Minds:

President Obama is taking credit for a new government plan to “save homeowners.” That is of course pure propaganda to mask the plan’s true goal: the perfection of debt-serfdom. The basic thrust of the plan is straightforward: encourage “underwater” homeowners whose mortgages exceed the value of their homes to re-finance at lower rates.

The stated incentive (i.e. the PR pitch) is to lower homeowners’ monthly payments via lower interest rates.

This is the Federal Reserve’s entire game plan in a nutshell: don’t write off any debt, as that would reveal the banking sector’s insolvency, but play extend-and-pretend with crushing debtloads by lowering the cost of servicing the debt.

The key purpose of this “plan” is to leave the principle owed to banks on their books at full value while ensnaring the hapless debt-serf (the “homeowner”) into permanent servitude to the banks.

Moreover, all that easy capital will go toward (re-)inflating more bubbles beyond just housing. Bubbles replacing bubbles — just like Krugman envisioned.

Is that the model for sustainable economic development? Or is that the model for the disastrous crisis-bailout-crisis-bailout-crisis cycle that we see today in so many nations?

The problem is that with every cycle of government-driven malinvestment, productive capital gets diverted to bullshit that society doesn’t really need. Housing inventories are already overstocked — that’s why prices are weak. Blowing more money at the housing market might shore up too-big-to-fail balance sheets, but it’s not going to make housing any less overstocked. And all of those materials, time, energy and resources going into reinflating the housing bubble could go to things America actually needs — like better infrastructure, and a market-driven alternative energy strategy (sorry Solyndra) to reduce oil dependency.

But — with a financial system filled with junkies who only think about tomorrow — can anyone really be surprised that the Obama administration is employing such a short-sighted vision of economic development? Obama is just giving into the braying mob who live on speculative bubbles at the cost of America’s future.

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Surprise Surprise

And just as I predicted (back when policy-makers said it was “impossible”) it turns out van Rumpuy & co in Brussels are going the absurd route: attempting to railroad the people of Europe, completely against their will, toward fiscal integration and, effectively, a United States of Europe.

From the Telegraph:

European Union chiefs are drawing up plans for a single “Treasury” to oversee tax and spending across the 17 eurozone nations.

The proposal, put forward by Herman Van Rompuy, the European Council president, would be the clearest sign yet of a new “United States of Europe” — with Britain left on the sidelines.

The plan comes as European governments desperately trying to save the euro from collapse last night faced a new bombshell, with sources at the International Monetary Fund saying it would not pay for a second Greek bail-out.

And in case anyone needs any reminder as to just why this is totally ridiculous:

There is no way that the German people will be shoehorned into picking up the bill for Greek, Portuguese, Spanish and Italian borrowing.

Well, at least they got the message that there is no way a monetary union can work without fiscal integration. The problem is they are about to find out just how hard-to-swallow fiscal integration will be for Germans, who are expected to backstop the free-spending ways of the mediterraneans.

Even if Merkel sells her soul to Brussels for cheap kudos on the internationalist circuit, there is no way the German people will accept the  transfer of vast swathes of their productive economy to bail out bankers who lent money to free-spending Greeks, Spaniards and Italians.

And let’s be clear: the bailout money is being used to keep the house of cards also briefly known as the global financial system functional, and to keep bankers’ bonuses rolling.

From the Washington Post:

More than half of the money lent to Greece so far by the International Monetary Fund and European nations has gone to repay bondholders, a transfer of billions of dollars from taxpayers around the world to European banks and pension funds that invested in the troubled Mediterranean nation.

As the country struggles with a collapsing economy, violent strikes and historic levels of unemployment, a new analysis of an international bailout program shows the degree to which money provided to support Greece has been used to pay off its debts to the private sector.

And that’s “capitalism” — wealthy banks and mutual funds that made bad investment decisions get bailed out by everyone else. That’s bullshit — not capitalism.

The system is, in the long run, too-fucked-to-bail. German finance minister Wolfgang Schaeuble called for an orderly Greek default in 2010 when it would have cost 1/3 of what it is expected to cost now. The system needs to break and be rebuilt in a more sustainable shape before it reaches critical mass and collapses in a manner that precipitates global disorder, global hunger and global conflict. Stop the bailouts. If a house keeps falling down then usually there is something fundamentally architecturally wrong with it, and it needs to be rebuilt from the ground up. 

I hate to bring this up, but does anyone remember what happened the last time Germany were forced into pledging vast amounts of cash (or “reparations”) to other European nations? No?

It wasn’t pretty.