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Good Morning!
Longwood Gardens, photo by © joanneleon
Why did that crisis of 1929 to 1933 pass without disaster?
The answer is found in the record of what we did. Early in the campaign of 1932 I said: "To meet by reaction that danger of radicalism is to invite disaster. Reaction is no barrier to the radical, it is a challenge, a provocation. The way to meet that danger is to offer a workable program of reconstruction, and the party to offer it is the party with clean hands." We met the emergency with emergency action. But far more important than that, we went to the roots of the problem, and attacked the cause of the crisis. We were against revolution. Therefore, we waged war against those conditions which make revolutions—against the inequalities and resentments which breed them. In America in 1933 the people did not attempt to remedy wrongs by overthrowing their institutions. Americans were made to realize that wrongs could and would be set right within their institutions. We proved that democracy can work.
-- Franklin D. Roosevelt
http://www.presidency.ucsb.edu/...
News
Trying to excerpt, but all of these articles need to be read in full...
Market Upheaval (Updated)
Since this will be trumped by the market opening in the US, I’ll be brief.
So far, this is playing out like I expected. Bad but not horrific. That does not mean we can’t see a moderately bad day in the US slide into nasty end of session erosion and then cascade into Asia overnight. But as much as the markets were psychologically rattled by the wild card of the US downgrade, the bigger deal is whether the ECB will stem the tide of the liquidity crisis underway in Europe. [ ... ]
The latest on the Euro interventions, courtesy Bloomberg:
European Central Bank President Jean- Claude Trichet started buying Italian and Spanish assets today in his riskiest attempt yet to tame the sovereign debt crisis.
Italian and Spanish bonds surged as the ECB entered the market, sending 10-year yields down more than 70 basis points. The euro rose to $1.4355 at 10:30 a.m. in Frankfurt from $1.4277 at the close of European trading on Friday.
With governments failing to act swiftly enough to stop contagion from Greece’s fiscal meltdown, it has fallen to the ECB to battle a crisis that’s now threatening the survival of the euro. Buying Italian and Spanish debt may require the ECB to massively expand its balance sheet and open it to accusations of bailing out profligate nations, breaching a key principle in the euro’s founding treaty and undermining its credibility. Germany’s Bundesbank opposes the move.
[ ... ]
The problem is we have no idea how much the ECB is prepared to commit or what its aims are [ ... ]
The bottom line is Euribor, the European answer to Libor, is locking up. If the ECB can’t intervene forcefully enough to reverse that, you will start to see banks fall over pronto.
[ ... ]
This goes back to multiple problems: the refusal to wipe out equity and force bondholders to take losses and partially convert to equity, and the obsession of the ECB (and the influential Bundesbank) with inflation, meaning they do not want the ECB balance sheet to get too large.
Europe Crisis Deepens
According to Bloomberg, The Euribor, the European equivalent of the Libor (remember that from 2008?) is locking up as banks decline to lend to each other. Those European banks that do have money are putting it in the ECB overnight in preference to lending it to the European banks that desperately need it - such as Santander in Spain and all the Italian Banks led by UniCredit.
Once the Euroibor starts to freeze that is the signal for non-European banks to stop lending to European banks altogether. Why should they trust European banks if fellow Europeans don't. Banks have to have overnight funding or they die.
I think we are now closer to the edge of then cliff than we have been at any time since AIG and Lehman's collapsed. Without short term and overnight funding Europe's banks will die within the week, so the ECB will now certainly step up its overnight lending to any and all not as a matter of prudent banking but of political panic. [ ... ]
But even before the Euribor crisis happened there was already a larger the problem which had, along with the US downgrade, caused a great part of last weeks massive sell-off and panic in Europe. Namely that the EFSF cannot, unless it is vastly increased - some are saying 2 trillion euros would be the sort of figure - bail out Italy and Spain.
[ ... ]
We are once again close to the edge and the crime of it is that the problems we have now are the same as we had three years ago only now made bigger and more painful by having had three years of yet more debt creation and transfer of public money to pay off private debts.
(Emphasis added)
Global financial crisis: five key stages 2007-2011
From sub-prime mortgages in 2007 to the newly downgraded US debt status, the latest crisis point is unlikely to be the last
9 August 2007. 15 September 2008. 2 April 2009. 9 May 2010. 5 August 2011. From sub-prime to downgrade, the five stages of the most serious crisis to hit the global economy since the Great Depression can be found in those dates.
Krugman with a more US centric perspective:
What If They Announced A Downgrade And Nobody Cared?
S&P has triggered another invisible attack by the invisible bond vigilantes:
[ Includes figure and chare re: 10 yr US Treasury yields ]
Meanwhile, via Mark Thoma, Economics of Contempt — who has dealt with S&P — confirms that they aren’t the sharpest tools in the drawer.
I’m fairly sure that if and when we get the whole story here, it will turn out that S&P was being political here, trying to do someone a favor [ ... ]
Matt Stoller: Standard & Poor’s Predatory Policy Agenda
While it’s useful to think of the ratings agencies as incompetent, or as greedy, it’s important to remember that they have an actual policy agenda. They weren’t just wrong in rating subprime tranches of toxic dreck AAA. They were also pivotal in actively creating the policies that led to the financial crisis.
In the early 2000s, several states attempted to rein in an increasingly obvious predatory mortgage lending wave. These laws, pushed by consumer advocates, would have threatened the highly profitable mortgage securitization pipeline.
S&P used its power to destroy this threat. Josh Rosner and Gretchen Morgenson told the story in Reckless Endangerment.
James Galbraith on How Fraud and Bad Economic Thinking Got Us in This Mess
[ Yves Smith ]
[ ... ] Galbraith is not exaggerating. The landmark 1994 paper on looting, or bankruptcy for profit, by George Akerlof and Paul Romer, was completely ignored from a policy standpoint even though it explained why the US had a savings and loan crisis.
Similarly, Galbraith refers to an incident at the most recent Institute for New Economic Thinking conference, in which he stood up and said, more or less, that he couldn’t believe he has just heard a panel discussion on the financial crisis and no one mentioned fraud. [ ... ]
[ ... ]
Two years ago, as you may recall, our profession enjoyed a moment of ferment. Economists who had built their careers on inflation targeting, rational expectations, representative agents, the efficient markets hypothesis, dynamic stochastic general equilibrium models, the virtues of deregulation and privatization and the Great Moderation were forced by events momentarily to shut up. The fact that they had been absurdly, conspicuously and even in some cases admittedly wrong imposed even a little humility on a few. One senior American legal policy intellectual, a fellow traveler of the Chicago School, announced his conversion to Keynesianism as though it were news.
The apogee of this moment was the publication in the New York Times Sunday Magazine of Paul Krugman’s essay, How The Economists Got It So Wrong.
UPDATE: Iraq Oil Ministry Qualifies 41 International Firms For New Bid Round
AMMAN (Dow Jones)--The Iraqi oil ministry has qualified some 41 international companies to compete for 12 exploration blocs in the next bidding round which is scheduled to be held in January, the ministry said in statement Monday.
Iraq, which sits on the world's third largest oil reserves, has estimated that the new blocs would add some 10 billion barrels of oil to Iraq's current reserves of 143 billion barrels, and some 29 trillion cubic feet of gas to its current reserves of 112.6 trillion cubic feet.
Among the companies qualified by the ministry for the licensing auction are some of the world's oil majors such as BP PLC (BP), Royal Dutch Shell PLC (RDSA), ExxonMobil Corp. (XOM), Lukoil Holdings (LUKOY, LKOH.RS), Total SA (TOT), China National Petroleum Corp., or CNPC, Eni SpA (ENI.MI), Occidental Petroleum Corp. (OXY) and Chevron Corp. (CVX).
The list also includes nine Japanese firms. [ ... ] Two Arab companies are listed by the ministry.
Second night of violence in London
Shops attacked, police car damaged and more than 100 people arrested in British capital's worst unrest in years.
There was looting in a number of boroughs in north, east and south London by small and mobile groups. And groups of youths continued to attack police officers, damaging a number of police vehicles.
[ ... ]
Police said officers were shocked at the level of violence directed against them.
At least nine officers were injured overnight in addition to the 26 injured on Saturday night, as rioters bombarded them with missiles and bottles, looted buildings including banks, shops and council offices, and torched three patrol cars near the Tottenham police station.
[ ... ]
Echoes of past violence
The riots that resulted came amid a British economy struggling through deep public spending cuts, tax hikes and rising unemployment.
[ ... ]
"We know we have been victimised by this government, we know we are being neglected by the government," said a middle-aged man who declined to give his name. "How can you make one million [people] unemployed and expect us to sit down?
A contagion of bad ideas
Financial distress isn't the only thing that moves easily across borders - so do misguided economic policies.
Joseph E Stiglitz
The Great Recession of 2008 has morphed into the North Atlantic Recession: it is mainly Europe and the United States, not the major emerging markets, that have become mired in slow growth and high unemployment. And it is Europe and the US that are marching, alone and together, to the denouement of a grand debacle. A busted bubble led to a massive Keynesian stimulus that averted a much deeper recession, but that also fueled substantial budget deficits. The response - massive spending cuts - ensures that unacceptably high levels of unemployment (a vast waste of resources and an oversupply of suffering) will continue, possibly for years.
[ ... ]
This episode serves as a reminder that central banks are political institutions, with a political agenda, and that independent central banks tend to be captured (at least "cognitively") by the banks that they are supposed to regulate.
Al Qaeda and the SEALs
Twenty-two Navy SEALs from Team Six, the secretive unit that killed Osama bin Laden in Abbottabad, Pakistan, on May 2nd, local time, are among the dead. None of the SEALs killed participated in the raid on bin Laden’s compound, but their deaths are a tremendous loss to both their families and the nation and, some argue, give the Taliban and Al Qaeda a symbolic victory if not quite on par with the SEALs’ killing of bin Laden.
So what happened? As far as we know now—though, as evidenced in the days following the bin Laden raid, first reports are prone to revision and reconsideration—a Chinook helicopter carrying twenty-two SEALs, three Air Force air controllers, eight Afghan soldiers, a dog and his handler, a civilian interpreter, and the helicopter crew had flown into the Tangi Valley, roughly sixty miles southwest of Kabul, to conduct a raid against a Taliban compound. The police chief of Wardak province, where Tangi is located, claims that the Americans and Taliban had been fighting for two hours when, at around 1 A.M., the Chinook fell. According to the Times, the Taliban brought the aircraft down with a rocket-propelled grenade. [ ... ]
One of the most important things I learned while reporting my story about the DEVGRU raid that killed bin Laden was the frequency of such raids. On the night of May 1st alone, there were thirteen helicopter-borne assaults conducted by special-operations units based in Afghanistan. [ ... ]