Memorial Day & Greece

For most Americans, this is a day for backyard BBQ's and beer-- and in truth, this is exactly what I'm doing today as well. But before I did this, I visited the local VA graveyard and laid some wreaths for the fallen. For me, having seen wounded soldiers coming back from Beirut as a young Navy Corpsman and having to change the bandages of those who had suffered burns, I got a very up close and personal view of their sacrifices. Many of these young guys were badly burned; changing their bandages was a pilgrimage through pain for me as well as them. Many were upset that they'll never really have a chance to marry because of the scars and the limitations. I see that Google's home page is the normal-- no clever little tribute like they do for artists and earth day. As for me, I remember.

Now onto the economics of the world-- it seems that Greece is slipping into the abyss. Mish posted a link to a Greek site that says that bank withdrawls are picking up the pace. The Greek government and the Troika (IMF/EU/ECB) seem intent on pushing yet more austerity-- and get this-- foreign tax collectors-- onto Greece in the effort to ensure that every last dime is repaid. A default would have serious consequences for the ECB and a number of financial institutions and thus will NOT be tolerated. Unless the Greek people become so unruly that the Army steps in. By nearly all accounts, Greece will run out of money by the end of June. The Greek opposition seems hell bent to block any more austerity and is demanding tax cuts. Here's my guess-- a deal gets done, but when the Greek people begin to understand what it's going to mean for them.. well.. as my tagline says, poverty and serfdom for all.

PS 8pm: It looks like Germany has agreed to another bailout of Greece without bondholders having to take a hair cut. Details are few as yet, but what have they really accomplished other than kicking the can down the road a little further ? How often do we solve a problem of debt with more of it ? I'll be curious to see if foreign tax collectors and more austerity is included.. and whether the Greek opposition (nevermind the people) will buy this one. Also it remains to be seen if Angela Merkel keeps her job.

The Day Greece Collapses

I know, I know-- I seem to harp on Greece and the problems in Europe far more than I probably should. It's just that in my opinion, the EU Zone is in far worse shape than we are here in the States. Problem is, should something like another Lehman occur over there, it would, without a doubt, take us down as well. Simply put, those who cannot pay their debts won't pay their debts. The EU bankers and politicians come up with ever more clever ways to delay the Day of Reckoning thru various loan schemes and hot air, the $985 billion EFSF being the latest iteration of "kick the can down the road", which simply piles more debt onto the already insolvent. You cannot solve a problem of debt with more of it, which has been their prescription from Day One. The "bailouts" also apply strict budget cutting mandates for these governments. Worse, these nations are also (first and foremost) forced to guarantee the loans made by their own banks-- the bigger EU powers will not allow them to simply walk away from the collapsed bank debts like Iceland did. Ireland's bailout mandated that they cough up their government pension fund as a first step of their "bailout". Part of the problem is the size of these debts-- according to the Bureau of International Settlements, Greece, Spain, Ireland and Portugal together owe foreign banks (mostly European) well over a trillion dollars. Greece alone owes nearly $500 billion, although roughly half of it is to it's own banks and investment funds. There is no way these banks can take this kind of hit and survive. But there is no way these insolvent nations can possibly repay. Rock. Hardplace.

First the news from Athens: Since my last post on the German newspaper report of a Greek default, there have been some talks in Brussels about restructuring. They've even come up with some new names for it.. my personal favorite is "re-profiling", which is another way of calling insolvent loans something other than insolvent. Jean-Claude Junker, the chair of the EU finance ministers, came up with that one. But the reaction from the EU powers that be was swift and ugly: there will be no restructuring, default, re-profiling or whatever else it's termed.. they must be forced to pay it all back with interest. The president of the European Central Bank, one Jean-Claude Trichet, angrily stormed out of a meeting when Junker brought up the possibility of "re-profiling". Germany's Jurgen Stark pointed out (correctly) that any restructuring would be catastrophic for Greece's banks and opposed default in any way, shape or form. Many have suggested that in exchange for more bailout money, Greece should put up government owned companies and even land. Greece rightly rejected this. The talks are ongoing, but it looks like very little will get done. Then today, Norway and a couple of other small nations refused to cough up their part of development funds for Greece because the Greeks did'nt get to their budget targets in the bailout agreement. Another small torpedo came from the ratings agency Fitch, which (again) downgraded Greek Government debt from BB+ to B+.. which is still pretty generous. After hours, the other ratings agency S&P downgraded one of France's largest banks, Credite Agricole, due to "Greek exposure". Slowly but surely, the Europeans and Greeks are coming to the painful realization that this absurd notion of solving a problem of debt with more of it is bound to fail.

So-- this brings up the $64,000 question.. how and when ? Some of it depends on how-- there are two possibilities here.

Scenario One is a negotiated default whereby creditors are given the choice of accepting a large (50-60%) haircut or are asked to accept a smaller haircut and a time extension to repay what remains after the hair cut. If given enough time, the foreign banks can prepare by sufficiently capitalizing themselves (in other words, bracing for the losses). Greece itself would suffer tremendously; within months the (already high) unemployment rate of 15.8% would likely double. In this scenario, some sort of EU backing for some (not all) Greek banks would also become necessary. Believe it or not, this is the best of the two scenarios for the EU bankers.

Scenario Two involves a meltdown in Greece-- riots, protests and strikes reach a point where Greece becomes ungovernable, with the government unable to do anything to help the situation. Should this type of scenario play out, I look for the Greek Army to throw out the (incompetent) civilian government. The military only handed over power back to the civilians in the early 1980's. It could easily happen again. At this point, there begins a chain reaction: depositors will immediately empty out any money they have in Greek banks-- if the Army allowed them to even open for business. This will cause a large number of Greek banks (and the loans they took out from other EU banks) to go under. The Greek stock market probably would'nt even bother opening. In the rest of Europe, the stock markets will take a nasty fall, and the ECB (possibly with an assist from Bernanke's Fed) will have to take extraordinary steps to (very quietly) save some large EU banks. The Euro would tank as investors pile out of the Euro and into the US Dollar and Swiss Franc. Talks would begin with the Greek military junta. Ultimately, I think that the new military government will pull an Iceland-- they'll let their own banks go under & announce a 75% haircut of foreign owned debt or something like this. If the bankers can stall the junta for a few weeks, the EU banks will have had time to prepare themselves and will survive this. Greece will enter a depression; unemployment doubles within months. Because Greece instantly pitches so much of it's debt, this is the best scenario for the Greeks despite the Depression. Greece will recover; as prices of everything in Greece fall, tourists will flock there as never before.

My guess-- this happens before the end of 2012 and that it's Scenario Two. But rest assured.. one of the two are absolutely inevitable. A more grim scenario is detailed here by the Telegraph's Andrew Lilico: http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/

While I'm on my European kick, I'm going to pile on a little more doom and gloom here, which comes from Spain, where the unemployment rate is already at a Hoover-esque 21%. There have been growing protests in large cities, so far not too large or violent, but indeed growing in size. Also this weekend there will be an election there, which will replace state level governments. You see in Spain, much of their debt is at their state level. What's feared here is that when the new governors take over these states, the first thing they'll do is to announce that the previous leaders left a far, far bigger debt pile than previously acknowledged. While Spain's bonds have held up pretty well so far this year, I'm thinking that some of it is due to undercover purchases of their bonds by other central banks and not the open markets... except for today, when they had what was essentially a failed auction, a serious event in the bond trading world. After this auction, their bonds sunk (meaning their interest rates went up). While Greece's collapse would be painful and dangerous to the EU banking system, Spain's collapse would be fatal due to the size of it's debts: http://themeanoldinvestor.blogspot.com/2010/05/update-523-worst-case-scenario.html

The US Economy Stumbles

In the last couple of weeks there have been a few discouraging reports on the US "recovery". But before we get to these, lets re-examine what The Fed and the US government have done since the Lehman crash. Shortly after the crash and the election of a new President, our government threw tons of money at the economy.. first was TARP (troubled asset relief program) which was an emergency $700 billion program designed to stop the banking system from collapsing. Shortly thereafter, as deflation was raging and the stock markets were sinking, the Fed initiated their "quantitative easing" program in November of 2008 which began the purchase of mortgage backed securities as well as US government debt as our government began borrowing vast sums of money, primarily the aforementioned TARP. Within six months, the Fed had purchased over $1.75 Trillion in MBS's and US Bonds. In addition, the Fed lowered the rate it charges banks to borrow money to essentially zero.

Then came President Obama's stimulus package, passed in Feb 2009, called the "American Recovery and Reinvestment Act". It was a $787 billion package (most of it debt added onto your children) that included tax incentives, an expansion of unemployment benefits and other social welfare provisions, and spending on domestic education, health care and infrastructure. By March of 2009, the stock market began to rise again, though unemployment remained stubbornly high.

By June of 2010, the Fed had purchased over $2.1 Trillion in MBS's and US Bonds. And still the economy was weak. In November 2010, the Fed announced that they were going to purchase another $600 billion in US Bonds. By early 2011, unemployment had stopped rising and there were signs of both job and economic growth, though prices of commodities began a serious rise. This new program, called "QE2", is set to end this summer. One of the problems of this program is that the Fed has essentially become the buyer of first and last resort for US Bonds.. they do it in the secondary markets instead of direct purchases, which is actually illegal. In early 2011, the Fed had essentially (re)purchased nearly 75% of all US Bonds issued. Their plan is to sell their MBS portfolios and keep up the purchase of US Bonds, which by one estimate should be able to fund the US Government's needs thru the end of this year anyways, though the US government will still have to find buyers for their short term Bonds and Bills when they need to be repurchased.

In summation, our government has thrown (well, printed really) about $3.8 Trillion between various QE's, stimulus packages and bailouts since the end of the Lehman disaster. This money did do some good.. it stopped a deflationary banking collapse in its tracks and has led to a rising stock market and a minimal growth in jobs. It's an indication of just how serious the situation really was in 2008 that it took so much money just to halt the decline.

But last week, two reports came out quantifying what we serfs already knew.. prices are rising for gas and food and there are still no jobs. First came the Initial Jobless Claims report, which had been on a downward slide for about six months.. most had come under 400,000. This one was different.. it came in at 434,000 for the week ending May 7th.. and it followed the previous week's very ugly one of 478,000. The talking heads were spinning these two weeks as best they can, but statistics don't lie. Second came the Producer Price Index, which measures the cost of various goods. Again the rise was ugly.. overall it came in at an annual adjusted rate of 6.8%, with food and gasoline leading the way. For us serfs, gasoline hit $4.00/gal, much to the grumbling of nearly everyone I see at gas stations. In a supremely surreal statement, the Finance Minister of Zimbabwe, which of late printed the ZD100 billion note, has today criticized the US Fed Chairman Bernanke for money printing and said that in light of this, Zimbabwe should should consider going to a gold standard.

For me, it seems to indicate that there is a limit to the amount of good that printing vast quantities of money can accomplish.. and it's my belief that we've arrived at this point. Both Obama and Bernanke were not pleased to say the least.. especially about the initial claims report. Two weeks in a row of bad employment reports is a bad portend. Lets hope it reverses. The Fed has said that fixing unemployment is part of it's mandate. While I dont think we'll see any more QE's for a while, I do believe that between the stumbling unemployment numbers and the need to finance the US Gov't, another round of it will become necessary; I look for it around the end of the year.

In other recent news. there has been a lot of talk recently about a Greek default, especially last Friday when an emergency meeting was apparently held and the German newspaper Der Spiegel ran a story suggesting that Greece was threatening to pull out of the Euro and go back to it's old currency, the drachma. This report was immediately denied by all involved. Make no mistake-- Greece is feeling the pain. Their unemployment rate hit 15.8% and their gas and food prices are rising-- a toxic mix. This weekend another meeting is being held to discuss changing the terms of Greece's bailout. Greek police are doing battle with strikers and protestors in many Greek cities. My hunch is that where there's smoke, there's fire-- I'd wager that there has been much talk from the Greeks about defaulting, and rightly so-- in the end, it's only a matter of when. In all honesty, the sooner the better.. but the EU and IMF seem intent on pushing the Greeks to honor the arrangement by continue to cut expenditures. If there were to be a negotiated default of some sort, the banks and other creditors would have a chance to better prepare and the default would not be a total one. If the people of Greece are pushed too far and the situation becomes desperate, the default will be both sudden and total-- and this risks another crisis. Unfortunately, Mssr Strauss-Khan of the IMF decided to attack a maid in a New York hotel room and now the leading candidate for the French Presidency and current head of the IMF is in the dock awaiting arraignment. This will undoubtedly stall any progress on the IMF's part.

The Story of Ireland's "Bailout" and a Way Forward

With the Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable. By the time the dust settles, Ireland’s last remaining asset, its reputation as a safe place from which to conduct business, will have been destroyed.

Ireland is facing economic ruin.

While most people would trace our ruin to to the bank guarantee of September 2008, the real error was in sticking with the guarantee long after it had become clear that the bank losses were insupportable. Brian Lenihan’s original decision to guarantee most of the bonds of Irish banks was a mistake, but a mistake so obvious and so ridiculous that it could easily have been reversed. The ideal time to have reversed the bank guarantee was a few months later when Patrick Honohan was appointed governor of the Central Bank and assumed de facto control of Irish economic policy.

As a respected academic expert on banking crises, Honohan commanded the international authority to have announced that the guarantee had been made in haste and with poor information, and would be replaced by a restructuring where bonds in the banks would be swapped for shares.

Instead, Honohan seemed unperturbed by the possible scale of bank losses, repeatedly insisting that they were “manageable”. Like most Irish economists of his generation, he appeared to believe that Ireland was still the export-driven powerhouse of the 1990s, rather than the credit-fuelled Ponzi scheme it had become since 2000; and the banking crisis no worse than the, largely manufactured, government budget crisis of the late 1980s.

Rising dismay at Honohan’s judgment crystallised into outright scepticism after an extraordinary interview with Bloomberg business news on May 28th last year. Having overseen the Central Bank’s “quite aggressive” stress tests of the Irish banks, he assured them that he would have “the two big banks, fixed by the end of the year. I think it’s quite good news The banks are floating away from dependence on the State and will be free standing”.

Honohan’s miscalculation of the bank losses has turned out to be the costliest mistake ever made by an Irish person. Armed with Honohan’s assurances that the bank losses were manageable, the Irish government confidently rode into the Little Bighorn and repaid the bank bondholders, even those who had not been guaranteed under the original scheme. This suicidal policy culminated in the repayment of most of the outstanding bonds last September.

Disaster followed within weeks. Nobody would lend to Irish banks, so that the maturing bonds were repaid largely by emergency borrowing from the European Central Bank: by November the Irish banks already owed more than €60 billion. Despite aggressive cuts in government spending, the certainty that bank losses would far exceed Honohan’s estimates led financial markets to stop lending to Ireland.

On November 16th, European finance ministers urged Lenihan to accept a bailout to stop the panic spreading to Spain and Portugal, but he refused, arguing that the Irish government was funded until the following summer. Although attacked by the Irish media for this seemingly delusional behaviour, Lenihan, for once, was doing precisely the right thing. Behind Lenihan’s refusal lay the thinly veiled threat that, unless given suitably generous terms, Ireland could hold happily its breath for long enough that Spain and Portugal, who needed to borrow every month, would drown.

At this stage, with Lenihan looking set to exploit his strong negotiating position to seek a bailout of the banks only, Honohan intervened. As well as being Ireland’s chief economic adviser, he also plays for the opposing team as a member of the council of the European Central Bank, whose decisions he is bound to carry out. In Frankfurt for the monthly meeting of the ECB on November 18th, Honohan announced on RTÉ Radio 1’s Morning Ireland that Ireland would need a bailout of “tens of billions”.

Rarely has a finance minister been so deftly sliced off at the ankles by his central bank governor. And so the Honohan Doctrine that bank losses could and should be repaid by Irish taxpayers ran its predictable course with the financial collapse and international bailout of the Irish State.

Ireland’s Last Stand began less shambolically than you might expect. The IMF, which believes that lenders should pay for their stupidity before it has to reach into its pocket, presented the Irish with a plan to haircut €30 billion of unguaranteed bonds by two-thirds on average. Lenihan was overjoyed, according to a source who was there, telling the IMF team: “You are Ireland’s salvation.”

The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.

The negotiations went downhill from there. On one side was the European Central Bank, unabashedly representing Ireland’s creditors and insisting on full repayment of bank bonds. On the other was the IMF, arguing that Irish taxpayers would be doing well to balance their government’s books, let alone repay the losses of private banks. And the Irish? On the side of the ECB, naturally. In the circumstances, the ECB walked away with everything it wanted. The IMF were scathing of the Irish performance, with one staffer describing the eagerness of some Irish negotiators to side with the ECB as displaying strong elements of Stockholm Syndrome.

The bailout represents almost as much of a scandal for the IMF as it does for Ireland. The IMF found itself outmanoeuvred by ECB negotiators, their low opinion of whom they are not at pains to conceal. More importantly, the IMF was forced by the obduracy of Geithner and the spinelessness, or worse, of the Irish to lend their imprimatur, and €30 billion of their capital, to a deal that its negotiators privately admit will end in Irish bankruptcy. Lending to an insolvent state, which has no hope of reducing its debt enough to borrow in markets again, breaches the most fundamental rule of the IMF, and a heated debate continues there over the legality of the Irish deal.

Six months on, and with Irish government debt rated one notch above junk and the run on Irish banks starting to spread to household deposits, it might appear that the Irish bailout of last November has already ended in abject failure. On the contrary, as far as its ECB architects are concerned, the bailout has turned out to be an unqualified success. The one thing you need to understand about the Irish bailout is that it had nothing to do with repairing Ireland’s finances enough to allow the Irish Government to start borrowing again in the bond markets at reasonable rates: what people ordinarily think of a bailout as doing.

The finances of the Irish Government are rather like a squirrel attempting to catch the falling elephant banking system. While any half-serious rescue would have focused on plugging this hole, the agreed bailout ostentatiously ignored the banks, except for reiterating the ECB-Honohan view that their losses would be borne by Irish taxpayers. Try to imagine the Bank of England’s insisting that Northern Rock be rescued by Newcastle City Council and you have some idea of how seriously the ECB expects the Irish bailout to work.

Instead, the sole purpose of the Irish bailout was to frighten the Spanish into line with a vivid demonstration that EU rescues are not for the faint-hearted. And the ECB plan, so far anyway, has worked. Given a choice between being strung up like Ireland – an object of international ridicule, paying exorbitant rates on bailout funds, its government ministers answerable to a Hungarian university lecturer – or mending their ways, the Spanish have understandably chosen the latter.

But why was it necessary, or at least expedient, for the EU to force an economic collapse on Ireland to frighten Spain? The answer goes back to a fundamental, and potentially fatal, flaw in the design of the euro zone: the lack of any means of dealing with large, insolvent banks.

Back when the euro was being planned in the mid-1990s, it never occurred to anyone that cautious, stodgy banks like AIB and Bank of Ireland, run by faintly dim former rugby players, could ever borrow tens of billions overseas, and lose it all on dodgy property loans. Had the collapse been limited to Irish banks, some sort of rescue deal might have been cobbled together; but a suspicion lingers that many Spanish banks – which inflated a property bubble almost as exuberant as Ireland’s, but in the world’s ninth largest economy – are hiding losses as large as those that sank their Irish counterparts.

Uniquely in the world, the European Central Bank has no central government standing behind it that can levy taxes. To rescue a banking system as large as Spain’s would require a massive commitment of resources by European countries to a European Monetary Fund: something so politically complex and financially costly that it will only be considered in extremis, to avert the collapse of the euro zone. It is easiest for now for the ECB to keep its fingers crossed that Spain pulls through by itself, encouraged by the example made of the Irish.

Irish insolvency is now less a matter of economics than of arithmetic. If everything goes according to plan, as it always does, Ireland’s government debt will top €190 billion by 2014, with another €45 billion in Nama and €35 billion in bank recapitalisation, for a total of €270 billion, plus whatever losses the Irish Central Bank has made on its emergency lending. Subtracting off the likely value of the banks and Nama assets, Namawinelake (by far the best source on the Irish economy) reckons our final debt will be about €220 billion, and I think it will be closer to €250 billion, but these differences are immaterial: either way we are talking of a Government debt that is more than €120,000 per worker, or 60 per cent larger than GNP.

Economists have a rule of thumb that once its national debt exceeds its national income, a small economy is in danger of default (large economies, like Japan, can go considerably higher). Ireland is so far into the red zone that marginal changes in the bailout terms can make no difference: we are going to be in the Hudson.

The ECB applauded and lent Ireland the money to ensure that the banks that lent to Anglo and Nationwide be repaid, and now finds itself in the situation where, as a consequence, the banks that lent to the Irish Government are at risk of losing most of what they lent. In other words, the Irish banking crisis has become part of the larger European sovereign debt crisis. Given the political paralysis in the EU, and a European Central Bank that sees its main task as placating the editors of German tabloids, the most likely outcome of the European debt crisis is that, after two years or so to allow French and German banks to build up loss reserves, the insolvent economies will be forced into some sort of bankruptcy.

Make no mistake: while government defaults are almost the normal state of affairs in places like Greece and Argentina, for a country like Ireland that trades on its reputation as a safe place to do business, a bankruptcy would be catastrophic. Sovereign bankruptcies drag on for years as creditors hold out for better terms, or sell to so-called vulture funds that engage in endless litigation overseas to have national assets such as aircraft impounded in the hope that they can make a sufficient nuisance of themselves to be bought off.

Worse still, a bankruptcy can do nothing to repair Ireland’s finances. Given the other commitments of the Irish State (to the banks, Nama, EU, ECB and IMF), for a bankruptcy to return government debt to a sustainable level, the holders of regular government bonds will have to be more or less wiped out. Unfortunately, most Irish government bonds are held by Irish banks and insurance companies. In other words, we have embarked on a futile game of passing the parcel of insolvency: first from the banks to the Irish State, and next from the State back to the banks and insurance companies. The eventual outcome will likely see Ireland as some sort of EU protectorate, Europe’s answer to Puerto Rico.

Suppose that we did not want to follow our current path towards an ECB-directed bankruptcy and spiralling national ruin, is there anything we could do? While Prof Honohan sportingly threw away Ireland's best cards last September, there still is a way out that, while not painless, is considerably less painful than what Europe has in mind for the Irish.

National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately.

First the banks. While the ECB does not want to rescue the Irish banks, it cannot let them collapse either and start a wave of panic that sweeps across Europe. So, every time one of you expresses your approval of the Irish banks by moving your savings to a foreign-owned bank, the Irish bank goes and replaces your money with emergency borrowing from the ECB or the Irish Central Bank. Their current borrowings are €160 billion.

The original bailout plan was that the loan portfolios of Irish banks would be sold off to repay these borrowings. However, foreign banks know that many of these loans, mortgages especially, will eventually default, and were not interested. As a result, the ECB finds itself with the Irish banks wedged uncomfortably far up its fundament, and no way of dislodging them.

This allows Ireland to walk away from the banking system by returning the Nama assets to the banks, and withdrawing its promissory notes in the banks. The ECB can then learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner. At some stage the ECB can take out an eraser and, where “Emergency Loan” is written in the accounts of Irish banks, write “Capital” instead. When it chooses to do so is its problem, not ours.

At a stroke, the Irish Government can halve its debt to a survivable €110 billion. The ECB can do nothing to the Irish banks in retaliation without triggering a catastrophic panic in Spain and across the rest of Europe. The only way Europe can respond is by cutting off funding to the Irish Government.

So the second strand of national survival is to bring the Government budget immediately into balance. The reason for governments to run deficits in recessions is to smooth out temporary dips in economic activity. However, our current slump is not temporary: Ireland bet everything that house prices would rise forever, and lost. To borrow so that senior civil servants like me can continue to enjoy salaries twice as much as our European counterparts makes no sense, macroeconomic or otherwise.

Cutting Government borrowing to zero immediately is not painless but it is the only way of disentangling ourselves from the loan sharks who are intent on making an example of us. In contrast, the new Government’s current policy of lying on the ground with a begging bowl and hoping that someone takes pity on us does not make for a particularly strong negotiating position. By bringing our budget immediately into balance, we focus attention on the fact that Ireland’s problems stem almost entirely from the activities of six privately owned banks, while freeing ourselves to walk away from these poisonous institutions. 

Just as importantly, it sends a signal to the rest of the world that Ireland – which 20 years ago showed how a small country could drag itself out of poverty through the energy and hard work of its inhabitants, but has since fallen among thieves and their political fixers – is back and means business.

Of course, we all know that this will never happen. Irish politicians are too used to being rewarded by Brussels to start fighting against it, even if it is a matter of national survival. It is easier to be led along blindfold until the noose is slipped around our necks and we are kicked through the trapdoor into bankruptcy.

The destruction wrought by the bankruptcy will not just be economic but political. Just as the Lenihan bailout destroyed Fianna Fáil, so the Noonan bankruptcy will destroy Fine Gael and Labour, leaving them as reviled and mistrusted as their predecessors. And that will leave Ireland in the interesting situation where the economic crisis has chewed up and spat out all of the State’s constitutional parties. The last election was reassuringly dull and predictable but the next, after the trauma and chaos of the bankruptcy, will be anything but. {courtesy of the Irish Times}

Michigan's {Financial} Martial Law

Michigan's newly elected Republican Governor, Rick Snyder-- a former high tech venture capitalist, ran on the platform that he was "one tough nerd". He took over the state government at quite possibly the worst time imaginable since the Depression.. Michigan has the nation's 2nd highest unemployment rate, as well as a rapidly declining population matched only by the equally jaw-dropping decline in housing prices (and thus property tax revenue). Snyder promised tough medicine. One of his first actions as governor set the tone-- he appointed Andy Dillon, a former corporate turnaround expert and an even tougher nerd, as his Treasury Secretary. Together they passed "Public Act 4" on March 15th--  which allowed local governments-- cities, school districts and counties-- to be taken over by a state appointed emergency manager. It was a step taken to avoid a cascade of these locals declaring bankruptcy-- now only the emergency manager has this authority.

These "emergency managers" were given broad, sweeping powers to get the local governments' houses in order-- among them are cancelling union contracts, slashing pension payouts, layoffs, and removing any and all elected local officials. As soon as the law was passed, the Unions and other Democratic Party functionaries demonstrated outside of Michigan's capitol, holding up signs saying "Recall the Ricktator" and other forms of protest because they knew it was their constituents that were about to take a nasty hit. John Conyers, the US Representative from Detroit, wrote an article in the Detroit Free Press saying that it was an unconstitutional power grab. Jesse Jackson came to town and joined in a protest against Benton Harbor's emergency manager Joseph Harris.

Michigan's previous governor, Democrat Jennifer Granholm, started this process in actuality. The now infamous Joseph Harris of Benton Harbor was appointed under Granholm. But the powers granted by Granholm to these EM's was very limited. Indeed before the new laws passed by Gov.Snyder came into being, Benton Harbor's City Council constantly passed laws behind Harris's back, handcuffing his efforts to financially rescue the city. Benton Harbor was a mess to say the least.. the city had'nt filed audit reports in eight years. The public safety budget was more than the city's entire tax revenues. The city's pension system was severely underfunded, with accusations of corruption flying far and wide. City commissioner Duane Seats compared Harris to AIDS. When Snyder's new laws became law, Harris struck back.. and hard. He stripped the city's commissioners of all their powers. It was this action that motivated Jesse Jackson's visit. "Harris put them in the time out chair" said area's state legislator.

Whether or not one approves of Michigan's actions, it actually is a grand experiment in public finance crisis management as well as democracy. The voiding of union contracts, public layoffs and other budget slashing measures are going to be the norm in these communities. Indiana is also looking into doing something similar. As the economy continues downhill, many other states will be watching to see how this bold experiment plays out. The alternative-- municipal bankruptcy-- is looking more and more like a mess. One community that took this option.. Vallejo,CA-- has been sued by so many groups that it's legal fees are forcing even more layoffs and cuts-- hardly the result envisioned when they took this path. One thing is certain-- something has to be done. The promises made to public employees and their retirees in the form of health care and retirement pensions are crushing many local governments financially. Borrowing yet more money isn't the answer. In Michigan, the nation's largest producer of automobiles, the rubber is meeting the road.

In other news, President Obama late last nite announced that Osama Bin Laden had been killed in Pakistan. There were spontaneous celebrations all over the nation.. in Philadelphia, the Phillies game was interrupted by the crowd chanting "USA USA USA". But as I read onwards this morning, some curious factoids came to light. First was the astonishing speed at which OBL was buried at sea. The second was that while there were pictures of the place this raid took place, there were none of the dead guy. Lets contrast this with what we did in Iraq.. when Saddam's sons were bombed, we publicly displayed their bodies for all to see. When Saddam himself was captured, videotape of his capture was immediately available. It reminds me of my own personal favorite conspiracy theory-- that of Pope John Paul I, who was Pope for only thirty days and who was cremated immediately and without any autopsy. Later we found out that he had initiated an investigation into the Curia's finances. Whoops. In the case of OBL, it was widely known that even as far back as 2000 he was severely ill with kidney failure. I myself remember numerous articles stating that he was very probably dead long ago from this ailment. Guys with kidney failure are unlikely candidates to grab the nearest AK47 and swap hails of bullets with Navy Seals. While I'm not much on conspiracy theories-- Elvis is indeed dead, 9/11 was indeed a terrorist act, and the Queen of England does not run the world through her alliance of Freemasons-- this one smells somewhat. They said that a picture is forthcoming.. for now, color me skeptical.