Greece must default, dump euro

by Peter Morici
UPI
September 13, 2011

European efforts at economic integration haven’t delivered sustainable prosperity in poorer nations like Greece and Portugal. Instead, these have left Mediterranean governments teetering on bankruptcy and at the mercy of Germany and other rich states that exploit European unity to live well at the expense of their poorer brethren.

The 1992 Maastricht Treaty, which considerably harmonized product and safety regulations and methods of taxation across Europe, was supposed to remove untold barriers to growth. It didn’t, because it didn’t moderate European labor laws and social programs that discourage individual ambition and investment.

The euro, created in 1999, floats against the dollar and yen and its value reflects an average of the competitiveness of its entire membership. This leaves higher productivity economies like Germany with an undervalued currency and trade surpluses and lower productivity economies like Greece with an overvalued currency and in constant need to borrow from foreign investors.

With Maastricht and the euro, German manufactures and technology became more valuable in a more integrated European market. However, Greece, Portugal and others aren’t able to use their lower labor costs to capture assembly plants to the degree, for example, that the U.S. South attracts automotive and high-end electronics manufacturing.

Moreover, Germany and other rich states continue subtle forms of protection that discourage outsourcing even to other EU member states and this frustrates the EU single market promise to more effectively equalize employment opportunities and prosperity between the prosperous core and southern Europe.

Affluent Germany, unburdened by an obligation to share tax revenues with poorer EU states, provides generous pensions, gold-plated employment security and jobless benefits and the shortest workweek on the planet. Meanwhile, governments in Greece and other poorer EU states struggled to keep up and borrowed extensively from banks in Germany and France and other rich countries to keep up.

Now unable borrow anymore in private markets, Greece and other poorer governments are forced to seek emergency loans and concessions from richer states and private creditors. They are being compelled by Germany and others to slash government spending and social benefits, dramatically raise taxes and sell off public assets.

None of this will work, because the private sectors of these economies are so dependent on government spending to maintain employment that austerity will only cause more layoffs among both private businesses and public agencies, thrust their economies into deep recessions and significantly reduce, rather than enhance, their governments’ capacity to tax and pay interest on their debts.

Moreover, to service their restructured debts, poorer governments must pay richer governments and foreign creditors in euros and this will require their economies to accomplish significant trade surpluses by developing new export industries. This would require Germany and the rich countries to let manufacturing activities and jobs migrate south that they heretofore have blocked from moving to lower-wage economies.

With a single currency, building new export industries would require rather substantial cuts in Greek and other poorer country wages and for the Germans and others to relinquish subtle forms of protection that guarantee them higher wages and favorable trade balances.

It is doubtful Greeks are willing to let their economy sink to Third World status to perpetuate the myth of European unity. As important, the Germans too much like lecturing the world about the virtues of Teutonic thrift and efficiency to let go of mercantilism, and to let debtor nations accomplish trade surpluses and obtain the euro needed to repay their debts.

If Greece had its own currency, it would still have had to reduce government spending, increase taxes and cut wages but not by nearly as much as richer EU states and the ECB now demand because Greece could also devalue its currency against those of richer EU economies to make its exports more competitive, accelerate growth and increase debt servicing capacity.

In the end, necessity will trump pan-Europeanism. The Greeks will default on their debt and, if they are smart, eventually dump the euro.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former chief economist at the U.S. International Trade Commission.

Swiss Central Bank Begins Manipulation of Franc

Bankers move against Franc to try to save Euro. Swiss economy to suffer due to artificial manipulation.

Associated Press
September 6, 2011

GENEVA (AP) — In what experts called a last-ditch “nuclear option,” the Swiss National Bank set a ceiling Tuesday on the value of its currency, which has skyrocketed as traders worldwide frantically search for a safe haven in volatile times.

Aiming to protect Swiss exports and the country’s vital tourism industry, the bank said it would spend whatever it takes to keep the Swiss franc from strengthening beyond 1.20 francs per euro. It also indicated it might take even more measures to weaken it further.

“The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss and carries the risk of a deflationary development,” the bank said in a statement, announcing the goal of “a substantial and sustained weakening of the Swiss franc.”

The reaction in markets was immediate. The euro, which had been trading around 1.10 francs before the announcement, shot up to 1.2024 afterward. The dollar jumped from 0.7850 francs to 0.850 francs.

The Swiss stock market cheered the move, with the main index jumping 4.7 percent.

With the United States flirting with recession, many European nations mired in debt, and stock markets showing extreme volatility, international traders have poured money into Swiss money accounts, causing the franc to jump in value. The Swiss economy also fared better than most other nations in debt-saddled Europe, where the financial sector and governments are being forced to cut spending and pay for expensive bailouts.

Its status as a global safe haven for traders has seen the Swiss franc rally this year by as much as 40 percent against the dollar and 30 percent against the euro.

Tuesday’s move was the first time since 1978 that the Swiss authorities have limited the franc’s value in this way against another currency.

The SNB said it would “no longer tolerate” an exchange rate below the minimum of 1.20 francs per euro and would “enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.”

But it said even the rate of 1.20 francs per euro was too strong for the franc and hoped it “should continue to weaken over time.” The central bank said it was prepared to take further measures to make that happen.

The Swiss business federation welcomed the SNB’s decision but indicated its members would like the franc to drop even further against the euro.

“It’s clear that a fair exchange rate would need to be lower,” board member Rudolf Minsch said. “We believe a fair rate to be between 1.30 and 1.40 francs, but this is a good compromise between what’s needed and what can be done.”

Jennifer McKeown, a European economist at London-based Capital Economics, called the decision “a bold move” even though 1.20 francs per euro is still relatively strong for the Swiss currency.

“With exports clearly at risk of slumping, the bank must have felt that it had no other choice,” she said in a note to investors.

Switzerland’s export-driven economy has long thrived on sales of foods like chocolate and cheese, as well as pharmaceuticals, watches, special machinery and tools. Its main trading partners are Germany, the United States, Italy and France.

The Swiss government says because of the soaring franc, it expects a slowdown in growth from 2.4 percent last year to 2.1 percent for 2011 and to 1.5 percent in 2012.

Overall exports rose 0.9 percent in the second quarter, helped by sales of chemicals and watches. But the government said exports of other items such as jewelry, precious metals, machinery and electronics were on the decline.

The last time the Swiss franc’s value was limited was 1978, when its exchange rate against the German mark was lowered. That was achieved at a huge cost, however, said Simon Derrick, a senior analyst at The Bank of New York Mellon.

Derrick said the SNB must now feel added pressure managing its cash reserves, after announcing in July a loss of 9.9 billion francs on its foreign exchange holdings for the first half of the year.

“By its promise to buy ‘unlimited quantities’ of foreign currencies it has effectively agreed to provide an artificially cheap exchange rate for anyone who wishes to seek a safe haven from the uncertainties of the eurozone,” he wrote.

The European Central Bank’s governing council issued a terse statement immediately after the announcement indicating they had no role in the Swiss currency move.

“The governing council takes note of this decision, which has been taken by the Swiss National Bank under its own responsibility,” the ECB said.

Wall Street Aristocracy Got $1.2 Trillion in Loans from Fed

Bloomberg
August 22, 2011

Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.

By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”

(View the Bloomberg interactive graphic to chart the Fed’s financial bailout.)

Foreign Borrowers

It wasn’t just American finance. Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms. They included Edinburgh-based Royal Bank of Scotland Plc, which took $84.5 billion, the most of any non-U.S. lender, and Zurich-based UBS AG (UBSN), which got $77.2 billion. Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an average of $21 million for each of its 1,366 employees.

The largest borrowers also included Dexia SA (DEXB), Belgium’s biggest bank by assets, and Societe Generale SA, based in Paris, whose bond-insurance prices have surged in the past month as investors speculated that the spreading sovereign debt crisis in Europe might increase their chances of default.

The $1.2 trillion peak on Dec. 5, 2008 — the combined outstanding balance under the seven programs tallied by Bloomberg — was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg.

Peak Balance

The balance was more than 25 times the Fed’s pre-crisis lending peak of $46 billion on Sept. 12, 2001, the day after terrorists attacked the World Trade Center in New York and the Pentagon. Denominated in $1 bills, the $1.2 trillion would fill 539 Olympic-size swimming pools.

The Fed has said it had “no credit losses” on any of the emergency programs, and a report by Federal Reserve Bank of New York staffers in February said the central bank netted $13 billion in interest and fee income from the programs from August 2007 through December 2009.

“We designed our broad-based emergency programs to both effectively stem the crisis and minimize the financial risks to the U.S. taxpayer,” said James Clouse, deputy director of the Fed’s division of monetary affairs in Washington. “Nearly all of our emergency-lending programs have been closed. We have incurred no losses and expect no losses.”

While the 18-month U.S. recession that ended in June 2009 after a 5.1 percent contraction in gross domestic product was nowhere near the four-year, 27 percent decline between August 1929 and March 1933, banks and the economy remain stressed.

Odds of Recession

The odds of another recession have climbed during the past six months, according to five of nine economists on the Business Cycle Dating Committee of the National Bureau of Economic Research, an academic panel that dates recessions.

Bank of America’s bond-insurance prices last week surged to a rate of $342,040 a year for coverage on $10 million of debt, above where Lehman Brothers Holdings Inc. (LEHMQ)’s bond insurance was priced at the start of the week before the firm collapsed. Citigroup’s shares are trading below the split-adjusted price of $28 that they hit on the day the bank’s Fed loans peaked in January 2009. The U.S. unemployment rate was at 9.1 percent in July, compared with 4.7 percent in November 2007, before the recession began.

Homeowners are more than 30 days past due on their mortgage payments on 4.38 million properties in the U.S., and 2.16 million more properties are in foreclosure, representing a combined $1.27 trillion of unpaid principal, estimates Jacksonville, Florida-based Lender Processing Services Inc.

Liquidity Requirements

“Why in hell does the Federal Reserve seem to be able to find the way to help these entities that are gigantic?” U.S. Representative Walter B. Jones, a Republican from North Carolina, said at a June 1 congressional hearing in Washington on Fed lending disclosure. “They get help when the average businessperson down in eastern North Carolina, and probably across America, they can’t even go to a bank they’ve been banking with for 15 or 20 years and get a loan.”

The sheer size of the Fed loans bolsters the case for minimum liquidity requirements that global regulators last year agreed to impose on banks for the first time, said Litan, now a vice president at the Kansas City, Missouri-based Kauffman Foundation, which supports entrepreneurship research. Liquidity refers to the daily funds a bank needs to operate, including cash to cover depositor withdrawals.

The rules, which mandate that banks keep enough cash and easily liquidated assets on hand to survive a 30-day crisis, don’t take effect until 2015. Another proposed requirement for lenders to keep “stable funding” for a one-year horizon was postponed until at least 2018 after banks showed they’d have to raise as much as $6 trillion in new long-term debt to comply.

‘Stark Illustration’

Regulators are “not going to go far enough to prevent this from happening again,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund and now an economics professor at Harvard University.

Reforms undertaken since the crisis might not insulate U.S. markets and financial institutions from the sovereign budget and debt crises facing Greece, Ireland and Portugal, according to the U.S. Financial Stability Oversight Council, a 10-member body created by the Dodd-Frank Act and led by Treasury Secretary Timothy Geithner.

“The recent financial crisis provides a stark illustration of how quickly confidence can erode and financial contagion can spread,” the council said in its July 26 report.

21,000 Transactions

Any new rescues by the U.S. central bank would be governed by transparency laws adopted in 2010 that require the Fed to disclose borrowers after two years.

Fed officials argued for more than two years that releasing the identities of borrowers and the terms of their loans would stigmatize banks, damaging stock prices or leading to depositor runs. A group of the biggest commercial banks last year asked the U.S. Supreme Court to keep at least some Fed borrowings secret. In March, the high court declined to hear that appeal, and the central bank made an unprecedented release of records.

Data gleaned from 29,346 pages of documents obtained under the Freedom of Information Act and from other Fed databases of more than 21,000 transactions make clear for the first time how deeply the world’s largest banks depended on the U.S. central bank to stave off cash shortfalls. Even as the firms asserted in news releases or earnings calls that they had ample cash, they drew Fed funding in secret, avoiding the stigma of weakness.

Morgan Stanley Borrowing

Two weeks after Lehman’s bankruptcy in September 2008, Morgan Stanley countered concerns that it might be next to go by announcing it had “strong capital and liquidity positions.” The statement, in a Sept. 29, 2008, press release about a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial Group Inc., said nothing about Morgan Stanley’s Fed loans.

That was the same day as the firm’s $107.3 billion peak in borrowing from the central bank, which was the source of almost all of Morgan Stanley’s available cash, according to the lending data and documents released more than two years later by the Financial Crisis Inquiry Commission. The amount was almost three times the company’s total profits over the past decade, data compiled by Bloomberg show.

Mark Lake, a spokesman for New York-based Morgan Stanley, said the crisis caused the industry to “fundamentally re- evaluate” the way it manages its cash.

“We have taken the lessons we learned from that period and applied them to our liquidity-management program to protect both our franchise and our clients going forward,” Lake said. He declined to say what changes the bank had made.

Acceptable Collateral

In most cases, the Fed demanded collateral for its loans — Treasuries or corporate bonds and mortgage bonds that could be seized and sold if the money wasn’t repaid. That meant the central bank’s main risk was that collateral pledged by banks that collapsed would be worth less than the amount borrowed.

As the crisis deepened, the Fed relaxed its standards for acceptable collateral. Typically, the central bank accepts only bonds with the highest credit grades, such as U.S. Treasuries. By late 2008, it was accepting “junk” bonds, those rated below investment grade. It even took stocks, which are first to get wiped out in a liquidation.

Morgan Stanley borrowed $61.3 billion from one Fed program in September 2008, pledging a total of $66.5 billion of collateral, according to Fed documents. Securities pledged included $21.5 billion of stocks, $6.68 billion of bonds with a junk credit rating and $19.5 billion of assets with an “unknown rating,” according to the documents. About 25 percent of the collateral was foreign-denominated.

‘Willingness to Lend’

“What you’re looking at is a willingness to lend against just about anything,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta and now chief monetary economist in Atlanta for Sarasota, Florida-based Cumberland Advisors Inc.

The lack of private-market alternatives for lending shows how skeptical trading partners and depositors were about the value of the banks’ capital and collateral, Eisenbeis said.

“The markets were just plain shut,” said Tanya Azarchs, former head of bank research at Standard & Poor’s and now an independent consultant in Briarcliff Manor, New York. “If you needed liquidity, there was only one place to go.”

Even banks that survived the crisis without government capital injections tapped the Fed through programs that promised confidentiality. London-based Barclays Plc (BARC) borrowed $64.9 billion and Frankfurt-based Deutsche Bank AG (DBK) got $66 billion. Sarah MacDonald, a spokeswoman for Barclays, and John Gallagher, a spokesman for Deutsche Bank, declined to comment.

Below-Market Rates

While the Fed’s last-resort lending programs generally charge above-market interest rates to deter routine borrowing, that practice sometimes flipped during the crisis. On Oct. 20, 2008, for example, the central bank agreed to make $113.3 billion of 28-day loans through its Term Auction Facility at a rate of 1.1 percent, according to a press release at the time.

The rate was less than a third of the 3.8 percent that banks were charging each other to make one-month loans on that day. Bank of America and Wachovia Corp. each got $15 billion of the 1.1 percent TAF loans, followed by Royal Bank of Scotland’s RBS Citizens NA unit with $10 billion, Fed data show.

JPMorgan Chase & Co. (JPM), the New York-based lender that touted its “fortress balance sheet” at least 16 times in press releases and conference calls from October 2007 through February 2010, took as much as $48 billion in February 2009 from TAF. The facility, set up in December 2007, was a temporary alternative to the discount window, the central bank’s 97-year-old primary lending program to help banks in a cash squeeze.

‘Larger Than TARP’

Goldman Sachs Group Inc. (GS), which in 2007 was the most profitable securities firm in Wall Street history, borrowed $69 billion from the Fed on Dec. 31, 2008. Among the programs New York-based Goldman Sachs tapped after the Lehman bankruptcy was the Primary Dealer Credit Facility, or PDCF, designed to lend money to brokerage firms ineligible for the Fed’s bank-lending programs.

Michael Duvally, a spokesman for Goldman Sachs, declined to comment.

The Fed’s liquidity lifelines may increase the chances that banks engage in excessive risk-taking with borrowed money, Rogoff said. Such a phenomenon, known as moral hazard, occurs if banks assume the Fed will be there when they need it, he said. The size of bank borrowings “certainly shows the Fed bailout was in many ways much larger than TARP,” Rogoff said.

TARP is the Treasury Department’s Troubled Asset Relief Program, a $700 billion bank-bailout fund that provided capital injections of $45 billion each to Citigroup and Bank of America, and $10 billion to Morgan Stanley. Because most of the Treasury’s investments were made in the form of preferred stock, they were considered riskier than the Fed’s loans, a type of senior debt.

Dodd-Frank Requirement

In December, in response to the Dodd-Frank Act, the Fed released 18 databases detailing its temporary emergency-lending programs.

Congress required the disclosure after the Fed rejected requests in 2008 from the late Bloomberg News reporter Mark Pittman and other media companies that sought details of its loans under the Freedom of Information Act. After fighting to keep the data secret, the central bank released unprecedented information about its discount window and other programs under court order in March 2011.

Bloomberg News combined Fed databases made available in December and July with the discount-window records released in March to produce daily totals for banks across all the programs, including the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Commercial Paper Funding Facility, discount window, PDCF, TAF, Term Securities Lending Facility and single-tranche open market operations. The programs supplied loans from August 2007 through April 2010.

Rolling Crisis

The result is a timeline illustrating how the credit crisis rolled from one bank to another as financial contagion spread.

Fed borrowings by Societe Generale (GLE), France’s second-biggest bank, peaked at $17.4 billion in May 2008, four months after the Paris-based lender announced a record 4.9 billion-euro ($7.2 billion) loss on unauthorized stock-index futures bets by former trader Jerome Kerviel.

Morgan Stanley’s top borrowing came four months later, after Lehman’s bankruptcy. Citigroup crested in January 2009, as did 43 other banks, the largest number of peak borrowings for any month during the crisis. Bank of America’s heaviest borrowings came two months after that.

Sixteen banks, including Plano, Texas-based Beal Financial Corp. and Jacksonville, Florida-based EverBank Financial Corp., didn’t hit their peaks until February or March 2010.

Using Subsidiaries

“At no point was there a material risk to the Fed or the taxpayer, as the loan required collateralization,” said Reshma Fernandes, a spokeswoman for EverBank, which borrowed as much as $250 million.

Banks maximized their borrowings by using subsidiaries to tap Fed programs at the same time. In March 2009, Charlotte, North Carolina-based Bank of America drew $78 billion from one facility through two banking units and $11.8 billion more from two other programs through its broker-dealer, Bank of America Securities LLC.

Banks also shifted balances among Fed programs. Many preferred the TAF because it carried less of the stigma associated with the discount window, often seen as the last resort for lenders in distress, according to a January 2011 paper by researchers at the New York Fed.

After the Lehman bankruptcy, hedge funds began pulling their cash out of Morgan Stanley, fearing it might be the next to collapse, the Financial Crisis Inquiry Commission said in a January report, citing interviews with former Chief Executive Officer John Mack and then-Treasurer David Wong.

Borrowings Surge

Morgan Stanley’s borrowings from the PDCF surged to $61.3 billion on Sept. 29 from zero on Sept. 14. At the same time, its loans from the Term Securities Lending Facility, or TSLF, rose to $36 billion from $3.5 billion. Morgan Stanley treasury reports released by the FCIC show the firm had $99.8 billion of liquidity on Sept. 29, a figure that included Fed borrowings.

“The cash flow was all drying up,” said Roger Lister, a former Fed economist who’s now head of financial-institutions coverage at credit-rating firm DBRS Inc. in New York. “Did they have enough resources to cope with it? The answer would be yes, but they needed the Fed.”

While Morgan Stanley’s Fed demands were the most acute, Citigroup was the most chronic borrower among the largest U.S. banks. The New York-based company borrowed $10 million from the TAF on the program’s first day in December 2007 and had more than $25 billion outstanding under all programs by May 2008, according to Bloomberg data.

Tapping Six Programs

By Nov. 21, when Citigroup began talks with the government to get a $20 billion capital injection on top of the $25 billion received a month earlier, its Fed borrowings had doubled to about $50 billion.

Over the next two months the amount almost doubled again. On Jan. 20, as the stock sank below $3 for the first time in 16 years amid investor concerns that the lender’s capital cushion might be inadequate, Citigroup was tapping six Fed programs at once. Its total borrowings amounted to more than twice the federal Department of Education’s 2011 budget.

Citigroup was in debt to the Fed on seven out of every 10 days from August 2007 through April 2010, the most frequent U.S. borrower among the 100 biggest publicly traded firms by pre- crisis market valuation. On average, the bank had a daily balance at the Fed of almost $20 billion.

‘Help Motivate Others’

“Citibank basically was sustained by the Fed for a very long time,” said Richard Herring, a finance professor at the University of Pennsylvania in Philadelphia who has studied financial crises.

Jon Diat, a Citigroup spokesman, said the bank made use of programs that “achieved the goal of instilling confidence in the markets.”

JPMorgan CEO Jamie Dimon said in a letter to shareholders last year that his bank avoided many government programs. It did use TAF, Dimon said in the letter, “but this was done at the request of the Federal Reserve to help motivate others to use the system.”

The bank, the second-largest in the U.S. by assets, first tapped the TAF in May 2008, six months after the program debuted, and then zeroed out its borrowings in September 2008. The next month, it started using TAF again.

On Feb. 26, 2009, more than a year after TAF’s creation, JPMorgan’s borrowings under the program climbed to $48 billion. On that day, the overall TAF balance for all banks hit its peak, $493.2 billion. Two weeks later, the figure began declining.

“Our prior comment is accurate,” said Howard Opinsky, a spokesman for JPMorgan.

‘The Cheapest Source’

Herring, the University of Pennsylvania professor, said some banks may have used the program to maximize profits by borrowing “from the cheapest source, because this was supposed to be secret and never revealed.”

Whether banks needed the Fed’s money for survival or used it because it offered advantageous rates, the central bank’s lender-of-last-resort role amounts to a free insurance policy for banks guaranteeing the arrival of funds in a disaster, Herring said.

An IMF report last October said regulators should consider charging banks for the right to access central bank funds.

“The extent of official intervention is clear evidence that systemic liquidity risks were under-recognized and mispriced by both the private and public sectors,” the IMF said in a separate report in April.

Access to Fed backup support “leads you to subject yourself to greater risks,” Herring said. “If it’s not there, you’re not going to take the risks that would put you in trouble and require you to have access to that kind of funding.”

“Markets Like Totalitarian Governments”

Zero Hedge
March 4, 2011

Wall Street’s shadow king, Blackrock’s Larry Fink who manages over $3 trillion, and is the world’s biggest asset manager, appeared on Bloomberg TV in an interview with Erik Schatzker, and the first thing he said is that the “market likes totalitarian governments.

Blackrock's Larry Fink

 

” That one statement explains everything one needs to know about the market performance over the past two years: there has hardly been a time in the past century when all the globalized regimes supporting stock markets and asset prices have been more “totalitarian” by Fink’s, or any other definition, than they are now. And while the plutocracy may welcome the advent of the Communist States of Iosif Vissarionovich Bernankestein, the common folk, as they always do, ultimately revolt violently against any such attempt at supreme government.

Zero Hedge regular Mike Krieger was quick to proclaim his condemnation: “This is how these elites think.  Even if markets did like totalitarian governments HUMANS DON’T.  This guy is pure scum and is exactly what is wrong with America and its policy today. This is also the guy that told us to buy dollars and treasuries yesterday…” But such are the ways of a dying ponzi regime. Everyone knows the end is coming and is inevitable. And while Wall Street’s self-anointed masters of the universe believe they will be able to avoid the ultimate unwind, they are wrong. Just like Gaddafi is finding out first hand right about now.

Larry Fink on the markets today:

“I believe the market has shifted from euphoria, from August through late January and now we are at a moment of reflection. I think this period of reflection will be sustained for some time.”

Larry Fink on whether he is a buyer or seller:

“If you believe that markets are efficient, some of that uncertainty has been priced in already. We’ve had an increase in oil; there has been no increase in demand in oil. It is that risk premium that has been priced into the marketplace. We’ve had a reduction in equity prices worldwide, especially in the emerging world, where everyone was so bullish one year ago and now money is being poured out of it. ”

“If you believe that all this noise, uncertainty will produce a better outcome, it is probably a buying opportunity. If you think the noise will create a more troublesome world, it may cause some developed economies to revert back into a recession, then we will have rough going for the next year.”

“I am more in the camp that this uncertainty will create a great amount of volatility, the marketplace is pricing this in, and if the market has a setback in terms of prices, I would be a long-term buyer.”

On Treasuries:

“I don’t think an 80 basis point increase in interest rates is a bear market. We have a possibility of rising rates. The outer limits could be 4.40%, on the ten-year. The market knows that the Federal Reserve will be completing its QE2 program by June. The markets are efficient. A lot of this is priced in.”

“We believe rates will creep up. We’re not calling that a bear market. The other issue we need to focus on…We all spend time focusing on the Treasury market but in the United States, we’ve had a collapse in the outstanding of debt.  Corporations, individuals have really pared down their debt. The amount of outstanding debt in America has shrunk…You cannot look at just the Treasury market alone. If you encompass all the cash sitting on the side and you look at how much debt reduction we have seen in the credit markets, I believe there will be a ceiling of how high rates can go. What can throw that out is if we start experiencing a persistence in inflation…If you believe we will have creeping, rising inflation over the next two years, of course interest rates will have to go higher.”

“Inflation will be more moderate. Until I see a labor market that is more robust and until I see factory utilization to be larger, I think inflation in this country will be more muted than what we see other countries.”

Larry Fink on whether he is a buyer of Treasuries:

“If rates creep up over 4%, I would be incrementally buying interest rates.”

“I would definitely be lengthening [duration]. I believe inflation may be a problem in the short run but in the long run, not. You would want to buy if the yield curve shifts upward on the longer end and take advantage of that. If your views of inflation is short, the long end will do the best.”

On European sovereign debt crisis:

“I don’t think [the European debt crisis is over].  I think we will have more volatility there. We still have not addressed the Greek problem. We are in the midst of reviewing what is happening in Ireland. We still have the banking system in Europe which is undercapitalized. You had the governor in Italy saying his banks need more capital. Spain and other countries are saying their banks may need more capital. You put this idea in, the need for more capital to the financial system plus the sovereign credit difficulties, which would probably cause a reduction in capital. We will still have more volatility out of Europe. It will probably be a negative trend.”

“I’m a big buyer of the U.S. dollar here.”

On reports that BlackRock is teaming up with KKR, Warburg Pincus, and others to buy Citi Financial from Citigroup:

“I don’t comment about market rumors…I will say, we do a lot of things for clients….Yes, we are not getting into the consumer-lending business. One should assume that if we are involved in this, it would be on behalf of clients, not for our balance sheet.”

On BlackRock making deals:

“It is not our intention to do another large deal. I don’t see a need for it. Whether regulators are inhibiting us or not, we have said publicly we are happy with our business model as it is today. We made to fill-in acquisitions in different countries or may do an acquisition for the BlackRock technology business, BlackRock Solutions. But it is not my intention to be doing anything large-scale.”

“I remind people and regulators that 100% of our business is a client-serviing business. We are in agent in all our businesses. This is not our capital. This is not our balance sheet. We don’t have leverage. What caused the credit crisis was leverage. We are a different animal. We are only an agent.”

On the Middle East:

“Saudi Arabia is probably the most troublesome country to answer. I think the government will manage the situation properly. They have offered a big infusion into the economy. It is a very wealthy economy with huge oil reserves and huge reserves. It is a very large population in the Gulf region. It is the largest population in the entire Gulf region. That is what produces the uncertainty. The world is dependent on their 8-9 billion barrels per day.”

“That is an uncertainty we have to factor in. If there is uncertainty around Saudi Arabia that produces a slowdown of oil production, then we will have severe issues in this world. That is probably one of the most difficult issues that we are facing today.

“In the short run, you could see oil prices going north of $150 if you had that type of oil shock. It could be $200 at any one moment. My view would be that this would be managed over a course of a period of time.”

On China:

“They are more uncertain. They are the biggest producer of products in the world today. We’re very much dependent on China. It is a similar way we are dependent on Saudi Arabia for oil.”

“I am very concerned about China. China has done a magnificent job about engineering its economy…They have 300-400 million people living at substandard levels. They are in the outer regions outside the river delta valley. They are in many ways minorities and Muslims. They want change…China, because of the size of its population and because the imbalances of standard of living in the country, is an issue. They have done a good job of navigating this but we should put that in as a factor of risk going forward.

“I am more worried about equities today because of this uncertainty. Five-six months ago, I said our economy is better than we thought it would be. I would argue today that we think the economy is better today than it actually is. The enthusiasm has increased dramatically. I think the market is pausing. We need to see how this all plays out. I am quite constructive on Northern Africa, that this will be played out in a positive way. In the short run, democracies are dirty and messy and we could see moments of time in which that uncertainty is a negative uncertainty.”

One third of Americans living on Government Handouts

CNBC
March 8, 2011

Government payouts—including Social Security, Medicare and unemployment insurance—make up more than a third of total wages and salaries of the U.S. population, a record figure that will only increase if action isn’t taken before the majority of Baby Boomers enter retirement.

Even as the economy has recovered, social welfare benefits make up 35 percent of wages and salaries this year, up from 21 percent in 2000 and 10 percent in 1960, according to TrimTabs Investment Research using Bureau of Economic Analysis data.

“The U.S. economy has become alarmingly dependent on government stimulus,” said Madeline Schnapp, director of Macroeconomic Research at TrimTabs, in a note to clients. “Consumption supported by wages and salaries is a much stronger foundation for economic growth than consumption based on social welfare benefits.”

The economist gives the country two stark choices. In order to get welfare back to its pre-recession ratio of 26 percent of pay, “either wages and salaries would have to increase $2.3 trillion, or 35 percent, to $8.8 trillion, or social welfare benefits would have to decline $500 billion, or 23 percent, to $1.7 trillion,” she said.

Last month, the Republican-led House of Representatives passed a $61 billion federal spending cut, but Senate Democratic leaders and the White House made it clear that had no chance of becoming law. Short-term resolutions passed have averted a government shutdown that could have occurred this month, as Vice President Biden leads negotiations with Republican leaders on some sort of long-term compromise.

“You’ve got to cut back government spending and the Republicans will run on this platform leading up to next year’s election,” said Joe Terranova, Chief Market Strategist for Virtus Investment Partners and a “Fast Money” trader.

Terranova noted some sort of opt out for social security or even raising the retirement age.

But the country may not be ready for these tough choices, even though economists like Schnapp say something will have to be done to avoid a significant economic crisis.

A Wall Street Journal/NBC News poll released last week showed that  less than a quarter of Americans supported making cuts to Social Security or Medicare in order to reign in the mounting budget deficit.

Those poll numbers may be skewed by a demographic shift the likes of which the nation has never seen. Only this year has the first round of baby boomers begun collecting Medicare benefits—and here comes 78 million more.

Social welfare benefits have increased by $514 billion over the last two years, according to TrimTabs figures, in part because of measures implemented to fight the financial crisis. Government spending normally takes on a larger part of the spending pie during economic calamities but how can the country change this make-up with the root of the crisis (housing) still on shaky ground, benchmark interest rates already cut to zero, and a demographic shift that calls for an increase in subsidies?

At the very least, we can take solace in the fact that we’re not quite at the state welfare levels of Europe. In the U.K., social welfare benefits make up 44 percent of wages and salaries, according to TrimTabs’ Schnapp.

“No matter how bad the situation is in the US, we stand far better on these issues (debt, demographics, entrepreneurship) than other countries,” said Steve Cortes of Veracruz Research. “On a relative basis, America remains the world leader and, as such, will also remain the world’s reserve currency.”