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Monday, May 03, 2010

A Violent Modernization

That's the way a Greek newspaper described the 146 billion (USD) bailout package agreed upon this weekend. Reuters. Note the GDP projections, which probably are optimistic. Greek GDP shrank last year; Greece is pretty much doomed to a depression. A lot of middle-class Greeks will fall out of the middle-class. The architects know it; part of the package is an aid package to Greek banks to shore up their bad loan losses from income losses in the population.

Some basics. 110 billion in Euros, which is about 146 billion in US dollars. The IMF is going to be involved, which is something Merkel seems to have fought for tooth and nail, and Trichet opposed. Merkel now has to get the German legislature to approve Germany's contribution. Germany is not greeting the news with cries of joy and elation.

It still remains unclear why this would really improve the situation of other debt-loaded European countries that much. It stops the panic and buys them a few months to a year, but is it really going to make private buyers of sovereign debt much more optimistic? I think the fallout from this will be similar although less draconian austerity measures forced upon quite a few other European countries, including Italy. Notably, Trichet is promising that banks can still use Greek bonds as ECB collateral regardless of the rating, so that policy will probably become the ipso facto solution to the banking crisis portion of this. Greece really has defaulted; it's all a game of "let's-pretend-Greece-is-solvent" now.

Regarding the IMF involvement, I am guessing that Merkel wanted the IMF so that the books couldn't be cooked again. In any case, it is a real smackdown for Trichet.

The Euro did not respond well to the news, and the reason is that it was never Greek's fiscal problems which were the issue, but rather the fiscal problems of other European countries.

The end result of this will surely be that the US will be forced to deal with its own fiscal problems. As soon as traders learned to take default seriously, that logic was always going to be applied to the US. Kan (Japanese finance minister) made a statement saying that Japan needed to clean up its own fiscal situation as a result of the Greek wake-up call. Bernanke has been issuing similar hints.

Currently the USD and Treasuries are supported by a genuine crisis in Europe, a remarkably poor lending environment for banks in the US, which is forcing them to buy Treasuries, and doubts about China. I estimate the jig will be up in 15-18 months, and after that Treasuries will be valued according to some sort of realistic methodology. If the US Congress hasn't begun to curb our fiscal excesses by then, we are going to start paying dearly.

Since the first month of this year, oil has been trading correlated to the USD. The USD went up again, and so did oil. European markets are quite subdued.

Again, I am going to reiterate that this never had much to do with Greece at all. The issue was the debt of other European countries, which is why the bailout was so huge.

How huge was the bailout? The population of Greece is about 10.8 million. That's all. Let's call it 11,000,000. The bailout is 146,000,000,000. 146,000/11 = $13,272 per capita. Much of it is in the form of loans, which basically will be used to pay off the previous bondholders. Greek's nominal 2008 GDP was around 340-350 billion.

This is why I can't see this measure truly calming investor concerns about other debt-loaded nations. It has to be obvious that the creditors of larger nations would not receive the same treatment, simply because it is unaffordable.

Here's the crux of the US political question, as I see it. Let's say we get a Republican Congress in next year. Let's then say that the unthinkable happens: a failed Treasure auction, to which Congress responds by cutting spending by some unthinkable amount, say 12 percent. Let's say that the Democratic occupant of the White House, egged on by various constituencies in and out of Congress refuses to sign it. Is this sufficient cause for impeachment?
NJCommuter - no, it is not. Under the Constitution, the sitting president can veto legislation. Then Congress has the option to overrule the veto by a 2/3rds majority.

You can't impeach someone for exercising their constitutional function, even if you think they are doing it incredibly badly.

I am not sure Obama would do so; his entire history shows that he pretty much goes along with someone else's agenda. I think he would make a few bullet points and ask for some cosmetic changes.

The real problem is that the Republicans have shown that they are not fiscally responsible.
Geting the IMF involved in the Greek bailout gets the U.S. involved by way of the funding the U.S. provides for the IMF. Pretty clever, really.
The president has the right to veto legislation, yes. But he also has an obligation to preserve, protect, and defend the Constitution and the Republic. I'll rephrase my question slightly: is allowing the country to go bankrupt, with all the damage that implies, sufficient cause for impeachment?

I think that a failed Treasury auction combined with a refusal to fix the problem might open a serious debate on the matter.

The real problem is that the Republicans have shown that they are not fiscally responsible.

I'd say that depends on the results of this fall's elections. If the "K-street gang" Republicans get spanked hard enough, the remainder will probably get religion.

As to President Obama, IF we have a major crackup, and IF he is seen as the roadblock preventing action to ameliorate it, and IF the Republicans have solid control of Congress, then I think he's likely to be impeached. I have no doubt they'll find something impeachable, if required. Let's face it--if Nixon hadn't screwed up the economy, there would not have been a President Ford. Watergate wasn't that big a deal, in and of itself (certainly no worse than anything FDR, Truman, and Johnson did).

That's a lot of IF statements, though.
fboness - yes, that's true. The US has infused money in recent years in other ways - one example was all those credit lines it gave to other central banks!
NJCommuter - well, does being a traditional US politician really count as high crimes and misdemeanors? I doubt it. If endangering the nation through fiscal irresponsibility were such a crime, shouldn't 90% of national politicians be impeached?

The prospect of being forced to make a sudden correction such as Greece's is terrifying, though.

Neil - I can only hope that the GOP gets the fiscal responsibility religion. So far, it has shown absolutely no sign of doing so. A few of them have begun to walk the walk, such as in asking for cuts to pay for additional unemployment benefits, but they don't have their party's support, really. My worst nightmare is that the GOP regains Congress and then plays its own version of "Bankruptcy Jeopardy".

In a lot of ways, splitting a government might work better. At least during Bush's administration the Democrats were talking about the extra cost of Medicare Part D. Since then they have just promised to eliminate the cost-saving portions of it.

You are probably correct, and I am probably over-optimistic.

The cure is for politicians to come to the conclusion that over-promising benefits to various special interests no longer results in votes and campaign cash. The most likely way for this to happen is for voters to realize that the promises politicians make are no damn good.

Foks are starting to realize this, but it's probably going to take some more time to fully sink in. Then again, that's the basic premise behind the Tea Parties. Perhaps events are changing people's behavior more quickly than would otherwise be possible...

I just don't know. This fall will tell the tale.
MOM, expect it to take repeated Treasury auction fails. Unlike the Greek, who can't print more Euros, we *can* print dollars (the Fed acts as buyer of last resort, which of course makes the next auction fail that much more spectacularly).

As for the electorate getting Neil's point about politician's spending promises being no good, it will take 2 to 3 electoral cycles for that to happen (2014 at the earliest).
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