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Thursday, May 20, 2010

Beat And Starve The Ox

A very funny Bloomberg article about the private-market effect of the political BS in Europe. The politics of envy and malice amount to the economics of poverty:
Company borrowing costs jumped the most in two weeks after Germany’s short-selling ban, wiping out declines triggered by Europe’s $1 trillion aid package that was meant to halt contagion from the sovereign debt crisis.
“What investors need most of all is security and predictability, but they are getting ever less,” said Ciaran O’Hagan, a strategist at Societe Generale SA in Paris. “Instead they are vilified as sharks, wolves or locusts, while governments rack up ever higher debt and contingent liabilities.”
“One thing the markets really don’t like is political interference, and that’s what the German announcement smacked of,” said Tim Barker, head of credit research at Aviva Investors in London. “Investors are trying to come to terms with political uncertainty.”
Higher corporate borrowing costs are an economic drag.

In the meantime, France and especially Italy are quietly working on cleaning up their acts. The first steps (from the UK on ) are to cut high-level government salaries. Italy's finance minister has been trying to manage their situation very tightly, and now unions are saying that their cuts will be much higher:
The Italian government may cut the salaries of public servants by 10 percent and politicians by 15 percent, in a bid to reduce the country’s deficit.
The reports cited unnamed sources who discussed the proposals after a meeting between union officials and finance minister Giulio Tremonti.

Tremonti earlier this month said he aimed to cut the country’s budget deficit by at least 25 billion euros by the end of 2012.
They are also going to cut the federal payments to local and regional governments.

We aren't going to see any acknowledgment of this in DC, but the UK is cutting at least top-level government salaries, and there is much more to come, Spain is cutting government salaries and is reducing welfare payments, Italy is clearly going to get serious, and Sarkozy either will cut or just freeze hiring, which could reduce public payrolls very substantially and eventually might bring the unions to the table after a titular strike or two. This article gives an idea of the sweep, but Spain has also announced that they are going to drop the baby premium next year (2.5K Euros). Spain and Germany are probably going to be cutting a lot of their energy subsidies for that green sustainable stuff which they are finding to be an economic drag. The UK is still debating measures, but it is certain that they will be dismantling portions of their social support measures.

Thus, the irony is that Christie (in NJ) is now following the European model; the liberals in DC who always talk about the benefits of the European approach are sadly out of date. The Tea Bag Party are the Europeanists; DC is just gasping out its last breath in DC Disneyland.

And how crazy is DC Disneyland, fiscally speaking? They keep introducing proposals to pay for everything. Take NoFP's coverage of the "Homeowner's Defense Act":
On April 27th, the House Financial Services Committee approved the Homeowners’ Defense Act of 2009, and sent it to the House floor. The bill, H.R. 2555, would authorize the Secretary of the Treasury to guarantee debt of certain state catastrophic natural disaster insurance. In effect, see Section 202, it's a guarantee for earthquake and hurricane insurance, making the Federal government "the insurer of last resort for nearly every disaster-prone home in the country." Though the bill modestly limits (Section 202) the obligations to $5 billion for earthquakes and $20 billion for all other natural disasters, the legislation would allow the Feds to backstop (see Section 304) an "aggregate potential liability . . . sold in any single year" of up to $200 billion.

If passed, the law would be an "implicit subsidy [making] it practical for developers to build in currently wild or lightly developed coastal areas where conventional private companies won't write policies."
Follow the link for the ugly details. This could be amazingly expensive.

And then, of course, there is the growing drive for the government to assume state government pension liabilities. Snort. We can't even afford to pay Social Security, and now we are going to assume state government pension liabilities? Isn't that a lot like asking Germans to pay for Greek retirements?

Washington is insane - just barking mad. And our press is stupid, except for very few such as Samuelson:
All the mumbo jumbo about stabilizing "debt to GDP" and according special treatment to interest payments are examples of budget-speak. It's the language of "experts," employed to deaden debate and convince people that "something is being done" when little, or nothing, is being done. For example, Obama's target for 2015 would involve a deficit of about $500 billion, despite an assumed full economic recovery (unemployment: 5.1 percent). The commission is also supposed to "propose recommendations that meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending," a mushy mandate. But balance the budget? There's no mention.
It's all just nonsense. That one sentence in bold summarizes so much about our current government, and that mindset encompasses most of our legislators from BOTH parties. There will have to be a sea change before we begin to address reality.

There will have to be a sea change before we begin to address reality.

The federal government will insure us all in the advent of a sea change.
It's an attempt to keep confidence in the status quo.
They are trying to slow down the inevitable as well as
postion themselves for the fall.
I loves it when MOM surveys the world!
Change will happen when we're all below sea level (that is, underwater).

Of course, our politicians have been performing below C level for decades ...
Hear! Hear!
Who Struck John,

Nice, lol.
"C" level?

Shakes head.

Charles - that is all too likely. If these bozos think it up, they'll set up a tax to prevent death and talk about the wonderful benefits they are conferring on us!
"The United States must curb consumption and credit and boost production and savings, but its citizens and leaders so far lack the will to change, economist Paul Volcker said in an appearance at Stanford University."

This is not a run of the mill recession but part of a larger structural problem. The solution as Volcker notes is a change of attitude which seems in short supply.
mom,I wonder how much of this is due to a bifurcated (trifurcated?)society.We have had a separate policial class for quite a while now and the disparities of wealth are immense.And then the rest of us...The politicians have no incentive to do anything for the common good (they are addicts and power is their drug)and are isolated from their "contituents".The truly wealthy live in a different delusion where there are no negative consequences and those from other classes are at best some what valued servants.Both the pols and the wealthy believe that they create their own reality on some level and that they can control the world.It is,truly,madness.I am reminded of a conversation I once had with a paranoid schizophrenic frequently when I read the news.
These experts were formerly advisers to King Canute telling him how to stop the rising tide.
Yeah, I agree with that concept that there are the rich and the rest of us are just servants. All you have to do is deal with someone on the phone from Monterey, CA.
Teri - that had to be the support call from hell. Let's put it this way - there are quite a few people in our society who WANT it to work that way.
M_O_M: Thanks for the link! And note that Senator Gregg's proposed amendment to the Financial Reform bill prohibiting bailouts for holders of state and municipal bonds was defeated 50 to 47. So much for pension reform--prepare to pay.
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