Europe: From the Subprime to the Breakdown

By LUIS MIRANDA | THE REAL AGENDA | AUGUST 10, 2012

The storm that began in the U.S. five years ago, swept governments, banks and mortgage financiers.

The outbreak of the subprime mortgage crisis in the U.S. arrives to its fifth year with a legacy that includes a global economic crisis that seems endless: the almost certain breakdown of the euro, and in the case of Greece, Spain, and most likely France, Portugal and Italy , among others, the need to seek bailouts from the European Union.

After five years, Greece is no longer owned by its people, but by bankers. The country experienced a total collapse since the alarm bells went off on August 9, 2008. The same has happened to Spain, that went from a growth rate of 4% to a negative one which is expected to be 1.5% in 2012. As it happened in other sovereign debt stricken countries, Spain lost half of its stock market value — not that it really means anything in the real world — and corporate profits, depending on who you ask, have seen dramatic losses or dramatic gains.

Almost all Euro zone countries have seen their ability to request loans erased or deeply eroded, given their loss of reputation as trustworthy borrowers. That fact has also made it more expensive for nations to pay for the already existing debt, which turned attention to their leaders. In response to the fiscal challenge, governments simply decided to continue business as usual, that is, borrowing more money at higher interest rates, in order to finance the gigantic welfare systems they do proudly own.  Through the years, the deficit has grown, and so has the debt and the interests on it. The sovereign debt bubble, to use a familiar term, is that much closer to burst, given countries like Spain’s inability to make the payment on its debt, while continue to borrow.

The negative of the European governments to act in accordance with the best interests of their people, resulted in more unemployment, more debt, less production, and less sovereignty. In the Euro zone, most countries have been downgraded by the banker created rating agencies, such as Fitch and Moody’s which resulted in the increase of borrowing costs.

The risk premium, index of investor confidence in the sovereign debt of a country is measured by the spread between ten-year national bond and the German for the same period, went from complete anonymity to becoming the essential indicator for all economies. In August 2007 the risk premium of Spain, for example, which is the measure of the extra costs demanded by investors for buying Spanish sovereign debt compared to Germany, was 12 basis points, compared to the 630 points it has now.

Even though the subprime crisis was rooted in the United States, where all kinds of schemes were created to defraud borrowers, lenders, families and investment funds, the shock waves rapidly arrived in Europe, where big banks had invested themselves — knowingly and otherwise — in the same fraudulent financial products stained with the subprime lending scam. One of the triggers of the crisis in Europe was the temporary suspension of the liquid value of three funds owned by BNP Paribas on August 9, 2007. This move was a direct consequence of the subprime mortgage debacle in the U.S., where investing firms used customer money to gamble, while their risk was minimum. From every $100 that was put at risk, $97 belonged to pension funds, credit unions , retirement accounts and average investors. Only $3 came out of the pockets of those who risked their customers’ assets.

In most cases, unregulated U.S. financial institutions diversified the risks of subprime mortgage loans through securitization, transferring them to other banks in the credit derivatives market. Derivatives are themselves a form of artificially created ‘financial products’ with little or no value. The lack of transparency and little clarity in the terms of the derivative contracts make this financial instrument the most attractive, but also the riskiest one. In the case of the crisis of 2008, investors only got to know the risk and not the promised high returns in their investments. That is how many individuals, companies and organizations saw their monies simply disappear. Someone had simply ran away with their money.

The supposed harmless securitizations involved the transformation of an asset or a non-negotiable right to payment (eg. a mortgage) into homogeneous debt securities or bonds, standardized and open to negotiation on organized securities markets. Financial institutions took on the risk for two reasons. First, because it was not their money the one at risk, but that of investors. Second, because they knew that government would come to the rescue, as it has now happened. The immediate impossibility to know the total value of these toxic assets and who was exposed to them launched even worse tsunami waves that deepened the crisis to levels never seen before.

The contagion in financial markets collapsed and worked as the perfect excuse for the European Central Bank (ECB), U.S. Federal Reserve and other central banks to take initiate the largest transfer of wealth ever seen in history. Not only had the banks ran away with investors’ money, but they were also about to receive the largest taxpayer funded bailouts ever — which are still ongoing — even though they were the only ones to blame for the collapse of the existing system. Total bailout cash has now reached $1 trillion and this money has mostly been given to selected people in governments as well as international banking institutions. It is important to note that some calculations set the fraudulent derivative market value at $1 quadrillion.

Right at the beginning of the crisis, and in one transaction alone, the European Central Bank gave away 94.841 million euros, one third more than the 69,300 million euros injected on 12 September 2001, a day after the attacks in New York. This move meant little or nothing as the connections in a globalized economy began to reveal that the problems were just about to get worse. The storm started by some U.S. mortgage financing firms became a gale that has so far crushed governments like Greece, Italy and France, mortgage financing giants Fannie Mae and Freddie Mac and investment banks like Bear Stearns and Wall Street’s Lehman Brothers. Those two banks along with many others were literally absorbed and digested by bigger banks, that with taxpayer money, healed all losses they would have and still were left with much more cash to pay fat bonuses to their corporate leaders.

The crisis has gotten to a point where it has mathematically bankrupted almost all if not all developed countries — even though their leaders say otherwise — due to the impossibility for those nations to pay off their debts. Their implosion is just a matter of time. With Spain, France and Italy being unable to meet their obligations and not willing to seek sane fiscal and monetary policies, the break up of the Euro zone is all but imminent. As mentioned in previous articles, the length of time that will pass until the full collapse occurs is in the hands of the banking institutions who originally caused the crisis.

The financial crisis of confidence and credit has led to recession after another in the developed world and has slowed the growth in emerging markets like Brazil or China, but mostly has jeopardized the survival of the single European currency. The effects of the crisis remain to be seen in those regions of the world, where their economies have begun to contract already.

European Bankers Readying to Ransack Greek Treasure

An ‘orderly default’ of Greece means bankers will finally collect what they fraudulently acquired through indebtedness.

By
UK Telegraph
September 12, 2011

Philipp Roesler, Germany’s economy minister, said an “orderly default” for Greece could no longer be ruled out and branded the country’s deficit-reduction measures “insufficient”.

The warning is likely to spook financial markets further and comes despite Greece yesterday announcing a fresh €2bn (£1.7bn) of budget cuts and the introduction of a country-wide real estate tax.

Evangelos Venizelos, the finance minister, said the cuts and tax measure were necessary to allow Greece to meet obligations demanded by the European Union and IMF in exchange for bail-out funds.

Writing in the Die Welt newspaper, Mr Roesler said: “To stabilise the euro, we must not take anything off the table in the short run. That includes as a worst-case scenario an orderly default for Greece if the necessary instruments for it are available.”

He said such a default would mean “re-establishing the affected state’s ability to function, perhaps with a temporary restriction of its sovereign rights”.

Mr Roesler’s comments come as Germany’s Der Spiegel magazine said finance minister Wolfgang Schaeuble had ordered preparations be made for a Greek bankruptcy. The report claimed the German government is preparing for two eventualities under that scenario – Greece staying in the euro or the country exiting and reintroducing the drachma. Despite the speculation, the European Commission said it was sending a team to Athens “in the next few days” tasked with finalising the payment of a new tranche of loans for Greece by the end of the month.

EU economy commissioner Olli Rehn said the team – which represents the troika of the Commission, the European Central Bank and the IMF – would “provide technical support to the Greek authorities”. The previous team was pulled out of Athens earlier this month because of a lack of progress by the Greek government in reducing its deficit.

Mr Rehn on Sunday praised Greece’s new cuts, saying they would “go a long way to meeting the fiscal targets” for 2010 and 2011. “Greece needs to meet the agreed fiscal targets and implement the agreed structural reforms to fulfil the conditionality and ensure funding from its partners,” he said.

G7 finance ministers late on Friday vowed to “take all necessary actions to ensure the resilience of banking systems and financial markets”. However, underlining the difficulties facing German authorities, a survey showed 53pc of Germans oppose further aid for Greece and would not save the country from default should it fail to fulfil loan criteria.

Manipulated Markets Make a Come Back

Does it make sense that during the deepest depression since 1929, the U.S. Stock Market comes back up from a 6oo+ point decline? Only a manipulated system where speculators have complete control could recover from a rout that showed how little confidence investors have in the market today.

by Luis R. Miranda
The Real Agenda
August 9, 2011

While countries are in dire straits to make payments on mostly illegally acquired debts and the price of oil continues to fall; while little to nothing is produced or manufactured in the industrialized world and no ingenuity makes it big anywhere in the world; while the most important currencies continue to tumble and other financial markets turn more sour; while unemployment continues to grow from the low 20’s and more people make use of food stamps and unemployment benefits; while more jobs are exported to third world nations that support slave work for their populations and inflation is only tamed by artificial manipulation of the currencies; while numerous people look to gold and silver as their salvation, surprisingly the stock market came back from the pantheon and surged to recover from the slide seen just a few hours ago.

There is very little that can't be done when someone or something controls fiat currencies, rating agencies, and financial markets.

But not only did the stocks came back strong; they had the largest gains in more than two years. Along with this “come back” the U.S. dollar got weaker and the Swiss franc rose the most since 1971. Even the very same Standard & Poor Index managed to recover almost 5 percent, the most significant gains since 2009. In the meantime, the origin of the financial disaster, the privately owned banks headed by the Federal Reserve announced their intent to print more worthless money into the economy as a way to “boost” confidence. Even though QE1 and QE2 failed to provide any confidence, or for that matter failed to provide anything positive, the FED believes it is appropriate to bring up QE3. With this, the FED shows its interest to purchase more government bonds, which will consolidate its position as the largest holder of U.S. government debt.

“The Fed is clearly setting up a situation that could offer them the potential to do something significant, if necessary,” Bruce McCain, who helps oversee $22 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland, said in a telephone interview. “That could be viewed as a positive,” added McCain. “People are starting to realize that what we’ve had in the market was an overreaction.” Really? Positive? How so?

Artificial Surge after the Decline

How can a stock market come back from a 600+ point decline in just a few hours if one considers that the cause of such loss -the downgrade of the U.S. debt rating- has not been dealt with? It simply boggles the mind, doesn’t it? The United States credit rating was lowered from AAA to AA+ by Standard & Poors, a rating agency that is paid by the banks to evaluate financial products and which is in part responsible for the current financial catastrophe. Together with Moody’s, S&P was created the by the banking system to carry out “independent” evaluations of financial products as well as credit confidence on institutions, state and local governments and of course whole nations.

According to Bloomberg, Stocks came back from a loss of $ 1 trillion after S&P downgraded the U.S. credit rating last Friday evening. The results of the downgrade were not felt until Monday, when the Markets opened all over the world. The S&P index sank about 11 percent and the stock market lost 648 points or more than 6 percent. But just 24 hours later, everything was different. “The MSCI All-Country World Index rose 2.1 percent for its biggest gain of the year”, says Bloomberg. “The index started the U.S. session valued at about 12.1 times profits, down from 21 in 1995..The MSCI Emerging Markets Index pared today’s drop to 2.2 percent after tumbling as much as 4.4 percent.”

Stocks Rally? What Rally?

In the Stock Market, the Dow Jones climbed almost 430 or 4 percent, failing to completely recover from the recent loss. The stocks experienced the 1oth more significant gain in its history. Can you believe it? In the middle of a Depression, the stocks rally the much?

Meanwhile, in the S&P, shares got to the front of the line due to the numerically significant gains. In total, they accumulated some 8.2 percent all together. This is the biggest rally since May 2009, which meant a complete recovery from Monday’s low. Bank of America Corp., which is now being sued by AIG for fraud, managed to gain 17 percent while other players like Hartford Financial Services got back 16 percent.

Of course the main stream media is giving all credit to the Federal Reserve, due to its announcement that it intends to “boost” the economy by injecting worthless cash into it. The FED’s head, Ben Bernanke and his aides came out to try to calm the demise a bit, although not everyone at the FED agreed with the move to bring along a new quantitative easing move. Three members from the policy committee dissented and instead called for maintaining interest rates low for a longer period of time.

As the docu-film “The Inside Job” impeccably exposes, there is very little that can’t be done when someone or something has the power to create money out of thin air, create rating agencies, control those agencies to give AAA ratings to whatever they choose and electronically manipulate the financial stock and bond markets whenever it’s convenient in order to perpetuate the fraudulent debt-based system the world has worked under since 1913.

False Policy Changes

The best way to perpetuate the above cited financial system is to have the available tool continuously reinforce the falsehood of the Central Bank sponsored plans. So, Moody’s has come out to praise the FED’s move to maintain the interest rates at a quarter of a percent in order to bolster the downturn. It’s a  “major policy change,” said Augustine Faucher, director of macroeconomics at Moody’s. “By providing a more explicit time line for raising rates, the Fed is telling markets it is concerned about recent economic weakness and the potential for a near-term contraction, and is dedicated to spurring stronger economic growth,” Faucher added.

Just as this statement by Faucher is baseless, so is the belief that because the U.S. dollar is the world’s reserve currency, it can stand more beating than any other one. In fact, one of the reasons why the U.S. has not been downgraded further is that its currency is still consider valuable. Ironically, the dollar has lost 98 percent of its value since it became the subject of manipulation by the bankers. Moody’s has stated that the U.S. dollar can support larger levels of debt than other currencies. How do they figure that with a currency that is so devalued. They can’t figure it out. They just make it up.

The one world reserve currency scheme is only beneficial to those who control it, because the rest of the nations need to do business while devaluing their own. In sound economics, the value of paper money is based on a country’s production or manufacturing, therefore, the U.S. dollar can no longer be such reserve currency. U.S. manufacturing has eroded so badly, that it has cost the jobs of some 18 million people in the last few years.

If the U.S. dollar is still the world’s reserve currency, why are there other currencies that have better exchange rates than the dollar itself? I am no economic expert, but if the Swiss Frank rates higher than the dollar in currency exchange markets, shouldn’t the Frank be the reserve currency? Or even better, shouldn’t a commodity like gold be the reserve currency given its capacity to withstand recessions, depressions and financial market manipulations? It should. The reason why gold is not the reserve currency or at least the commodity over which a paper money currency is supported is that bankers cannot monopolize it, “hug” it or manipulate it.

High Market but Low Results: The World Economy in Shambles

While the banks try to extend the suffering period for the middle and low classes, countries in Europe are scrambling for a life boat to jump on. Although France and Germany are said to be negotiating an agreement to buy Spain’s and Italy’s debt in order to avoid a deeper economic collapse, some sources claim that the rescuers believe the Italian debt is too large to save. Both Nicolas Sarkozy and Angela Merkel began to hear opposition voices that are calling for a different position from the German and French governments. The reason for this is that an eventual bailout of Italy and Spain could cost the rescuers their AAA rating. This is seen as a possible trigger to drag the world’s economy further into the precipice.

Although U.S. markets artificially revived themselves on Tuesday, other countries were not as lucky. In Italy, the bond market saw a loss of 11 percent on its 10 year note. Just as the FED has done in the United States, the European Central Bank kept Italy and Spain afloat through the purchase of their bonds for a second day in a row. That was not enough to save the Spanish 10 year notes, as they collapsed eight basis points to 5.08 percent on Tuesday.

Meanwhile, oil prices hit some of the lowest levels for the year by getting down to $79.30 a barrel. Conversely, gold prices soared and added 4.1 percent to get to a record price of $1,782.50 an ounce.

Dollar tumbles on Bernanke speech, euro rebounds

Reuters
July 13, 2011

The dollar fell against most major currencies on Wednesday after Federal Reserve Chairman Ben Bernanke said the central bank could resort to more monetary stimulus if a sluggish U.S. economy weakens further.

That pushed the euro above $1.41, moving it further from the prior session’s four-month low beneath $1.39 and on track for its best day since mid-April.

Surprisingly swift Chinese growth data also helped divert attention, at least temporarily, from a worsening euro zone debt crisis, as Fitch Ratings, which said an ambitious Italian deficit reduction plan would help stabilize its credit rating.

“The comments from Bernanke and Fitch amount to a double whammy for the dollar and a boost for the euro and riskier assets. It’s all positive for risk,” said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.

The Fed ended its most recent asset-purchase program in June. Traders said that another round of easing would flood the financial system with more money and encourage investors to reach for higher-yielding currencies and assets.

Major U.S. stock indexes rose more than 1 percent and gold hit a record high. The euro was last at $1.4142, up 1.2 percent. It also rose 1.7 percent against the yen.

The high-yielding, commodity-sensitive Australian and New Zealand dollars rose sharply.

Fitch’s remarks eased worries about Italy, which saw its borrowing costs soar this week for fear a default in Greece would hurt European banks and strain other countries’ finances.

Italy is considered especially vulnerable, as it has the euro zone’s second largest debt-to-output ratio, which would become harder to finance with higher borrowing costs.

Still, some analysts said markets remained anxious. European leaders, set to convene an emergency meeting on Friday, have yet to agree on a second Greek bailout.

“I’d call this a short-term respite,” said Firas Askari, head of FX trading at BMO Capital Markets. “If we don’t hear anything substantial from Europe by the weekend, people will be back to shorting the euro next week.”

In the options market, one-month risk reversals were elevated in favor of euro puts — options to sell the currency, with plenty of event risks ahead, including the results of stress tests on euro zone banks due out on Friday.

Reflecting that unease, the yen soared against the euro and hit its highest level against the dollar since Japan’s March earthquake as investors unwound risky trades funded with yen.

The dollar was last at 79.08 yen, not far from its 78.48 four-month low.

That brought warnings from top Japanese officials worried that a strengthening yen will hurt Japan’s fragile economy, raising the possibility that authorities could intervene to weaken the currency.

The dollar also fell to a fresh record trough of 0.8250 Swiss francs after Bernanke’s testimony, and Askari said markets were also on edge about a pending deadline to lift the U.S. debt ceiling.

“We still have not seen the political will in either Europe or the United States to resolve the key issues,” Askari said, which makes positioning for currency investors difficult.

“With currencies, it’s hard to be short everything. The Swiss franc is appreciated, but even Swiss banks won’t be immune from a meltdown in Europe,” he said.

Obama Stimulus Made Economic Crisis Worse

Bernanke dares to disagree and says the FED and the government acted and save the world from ‘global meltdown’.

Bloomberg

U.S. President Barack Obama and his administration weakened the country’s economy by seeking to foster growth instead of paying down the federal debt, said Nassim Nicholas Taleb, author of “The Black Swan.”

Nassim Nicholas Taleb

“Obama did exactly the opposite of what should have been done,” Taleb said yesterday in Montreal in a speech as part of Canada’s Salon Speakers series. “He surrounded himself with people who exacerbated the problem. You have a person who has cancer and instead of removing the cancer, you give him tranquilizers. When you give tranquilizers to a cancer patient, they feel better but the cancer gets worse.”

Today, Taleb said, “total debt is higher than it was in 2008 and unemployment is worse.”

Obama this month proposed a package of $180 billion in business tax breaks and infrastructure outlays to boost spending and job growth. That would come on top of the $814 billion stimulus measure enacted last year. The U.S. government’s total outstanding debt is about $13.5 trillion, according to U.S. Treasury Department figures.

Obama, 49, inherited what the National Bureau of Economic Research said this week was the deepest U.S. recession since the Great Depression. Even after the stimulus measure and other government actions, the U.S. unemployment rate is 9.6 percent.

Governments globally need to cut debt and avoid bailing out struggling companies because that’s the only way they can shield their economies from the negative consequences of erroneous budget forecasts, Taleb said.

Errant Forecasts

“Today there is a dependency on people who have never been able to forecast anything,” Taleb said. “What kind of system is insulated from forecasting errors? A system where debts are low and companies are allowed to die young when they are fragile. Companies always end up dying one day anyway.”

Taleb, a native of Lebanon who gave his speech in French to an audience of Quebec business people, said Canada’s fiscal situation makes the country a safer investment than its southern neighbor.

Canada has the lowest ratio of net debt to gross domestic product among the Group of Seven industrialized countries and will keep that distinction until at least 2014, the country’s finance department said in March. Canada’s ratio, 24 percent in 2007, will rise to about 30 percent by 2014. The U.S. ratio, now above 40 percent, will top 80 percent in four years, the department said, citing IMF data.

“I am bullish on Canada,” he told the audience. “I prefer Canada to the U.S. or even Europe.”

Mortgage Interest

Canada’s economy also benefits from the fact that homeowners, unlike their U.S. neighbors, can’t take mortgage interest as a tax deduction, Taleb said. That removes the incentive to take on too much debt, he said.

“The first thing to do if you want to solve the mortgage problem in the U.S. is to stop making these interest payments deductible,” he said. “Has someone dared to talk about this in Washington? No, because the U.S. homebuilders’ lobby is hyperactive and doesn’t want people to talk about this.”

Taleb also criticized banks and securities firms, saying they don’t adequately warn clients of the risks they run when they invest their retirement savings in the stock market.

‘Have Fun’

“People should use financial markets to have fun, but not as a depository of value,” Taleb said. “Investors have been deceived. People were told that markets go up regularly, but if you look at the last 10 years that’s not been the case. The risks are always greater than what people are told.”

Asked by an audience member if returns such as those posted by Berkshire Hathaway Inc. Chief Executive Officer Warren Buffett — who amassed the world’s third-biggest personal fortune through decades of stock picks and takeovers — are the product of luck or talent, Taleb said both played a part.

If given a choice between investing with Buffett and billionaire investor George Soros, Taleb also said he would probably pick the latter.

“I am not saying Buffett isn’t as good as Soros,” he said. “I am saying that the probability Soros’s returns come from randomness is much smaller because he did almost everything: he bought currencies, he sold currencies, he did arbitrages. He made a lot more decisions. Buffett followed a strategy to buy companies that had a certain earnings profile, and it worked for him. There is a lot more luck involved in this strategy.”

Soros gained fame in the 1990s when he reportedly made $1 billion correctly betting against the British pound.

Taleb’s 2007 best-seller, “The Black Swan: The Impact of the Highly Improbable,” argues that history is littered with rare, high-impact events. The black-swan theory stems from the ancient misconception that all swans were white.

A former trader, Taleb teaches risk engineering at New York University and advises Universa Investments LP, a Santa Monica, California-based fund that bets on extreme market moves.