Monday, October 31, 2011

More Darwinism in capitalism (against „corporate communism“)

More Darwinism in capitalism (against „corporate communism“)
- draft - to be continued later
Dear reader,

just by reading the headline you might get initially shocked because of reading the word Darwinism. It has a negative conjunction in connection with human society and even was considered for extremist behavior which even resulted in mass killings because of ideology based on Darwinism to be implemented as guideline for how society should work. Resulting in segregation even racism. Well the author most vigorously condemns such a society based on inhuman pseudo scientific „natural“ behavior. But on the other hand such a vigorous selection of the fittest should reapply for the financial world again where there are two sides once connected and where artificial procedures lead the way to massive wrongdoings.

These two principles are:

The higher the risk the higher the possible yield

And there is (financial) reward for successful business vs punishment for unsuccessful business models.

Compare those „old fashioned“ rules of capitalism to the current events taking place in the financial world where massive risks are being chopped up, bundled and diluted and when such a business model runs out of idiots willing to buy such risks it is not collapsing or those who responsible are punished in whatever ways .. no declares the volume of such bad business as „vital“ for financial system to work as a whole .. and punishment of it would lead to inevitable collapse of the whole system (meltdown). And on top of this blackmail practices it is demanded that the losses have to be compensated for by the state as representative for all citizens and the states should not dare to think of abolishment of this system after coming to the rescue.

Sunday, October 30, 2011

The takeover of monetary policy by politicians

The takeover of monetary policy by politicians (draft ! To be continued)

Dear reader,

now the time has come to reflect once again on the beginning of the eurozone , the loss of control during the many breaches of Maastricht treaty and the final look into the abyss of global meltdown at our doorstep most recently.

First i have to describe what i have in mind concerning takeover by monetary policies by politicians.

It simply means the bypassing of the role of the national central bank essential for solid & stable european countries like the Netherlands and particularly Germany which has established its central bank not only short after the lost war , but also found its role to be an institution deeply rooted in their new constitution which is itself a lesson of dark times emerged on German ground before because of faulty construction of what the Germans call „Weimarer Republik“ .. the short period after the lost WW I and the rise of the Nazi power albeit initially under the constitutional frame of „Weimarer Republik“. The Germans established 1948 a constitutional council of honorable men & women to hammer out a new frame for a new Germany with democratic rules and the rule of law. On the issue of the central bank they initially founded the „Bank deutscher Länder“ which issued the first coins & banknotes of the new currency of the three western Zones (even before West- or Eastgermany was established) which was already bearing the later famous brand Deutsche Mark or D-Mark.

The new founders of Germany tried back then to also put some important lessons of former failure of „Weimar“ (short for Weimarer Republik) into its newly forged central bank which was assigned prominently with the one objective of controlling inflation. Not just in order to protect its citizens and companies from the pains of slower or faster devaluation but the protect the newly build state itself and therefore its democratic character & its institutions in order not to fall back in total (also financial) chaos possibly enabling another takeover of power by evil forces like those of the infamous Nazi party. This fixation on preventing of inflation ever to get grips on German economy and society again came only some 25 years after 1923 ...the year of German hyperinflation therefore still in vivid memory of most of the members of the „Parlamentarischer Rat“ ..the name assigned to the constitutional council 1948 located in Bonn. This hyperinflation 1923 was only one extreme contributing to the later rise of the nazi party on the one side of thee political spectrum and also (mostly forgotten) similar to the rapid growth of the communist party in the economically weakened young republic. Another lesser known fact is that because of the combination of massive poverty on the one hand and extreme devaluation of the Rentenmark to the Dollar or other foreign currencies many Germans turned to prostitution at least in the bigger cities and attracted clients from all over the world just like Phuket/Thailand nowadays. And all that just 10-15 years after the fall of the Kaierreich with its moral high grounds and strict rules for a class divided society. So Germans then also experienced moral demise and humiliation as a people and therefor e conceived the Nazi party also as opportunity to straighten out these effects of hyperinflation and widespread poverty. People in those times from 1924 to 1929 lived through a short period of economic progress and reduction of former widespread poverty resulted from lost war (& then worthless war bonds), many dead & wounded and huge demand for reparations inflicted mostly by western European members of the entente. The Germans in charge of putting together a new democratic state after WW II realized that not only political measures had to be taken to prevent another catastrophe such as the demise of the rule of law and even the provocation of a worldwide war by those nazi members but also such measures to ensure long lasting economic stability.

As if this obligation from those years of hyperinflation beginning of the 1920s and the starting of the big depression after the collapse of stock markets and banking around the globe starting on black Monday weren't reason enough for putting so much emphasis on price stability (sometimes joked about in anglosaxon countries nowadays) the misfortunes after the loss of WW II in western part of Germany did even more to cement that will.

So the Bundesbank and its monetary policy must not only be looked upon with pure economic eyes but also from a political perspective of its role as anchor of stability for the functioning state itself. And in order not to be subject of political influence such as being obliged to print new money whenever the government is in need for it for whatever reason it was granted to role of complete independence from the government. As a matter of fact the short lived predecessor of the Bundesbank the Bank deutscher Länder existed even before a new state was voted on and therefore a government was put in place by the electorate. Even this independence from governmental rule was again a consequence out of bad experiences from e.g. 1923 when the German government tried to get rid of their huge debt resulting from reparations by printing ever larger sums of money. This of course fueled hyperinflation and the consequences of that were described above.

1948 was a new area for Germany or better the western part of it when they once again had some inflation to cope with by still using the old Reichsmark but without large impact on purchasing any goods. In fact it was so weak and stricken by inflation that for goods some trading articles like cigarettes or nylons were used to obtain other goods. This all ended at once when Bank Deutscher Länder inserted a new currency into the 3 western zones of occupation and since then the D-Mark gained more and more strength. This could also be seen in the exchange rate to e.g. the greenback.
After 1948 the Germans had only this one currency enabling them not only the rise of there economy („Wirtschaftswunder“) but also never had to switch their currency again due to failure by lost wars and inflation which happened three times during 1917 -1948 and the destruction of monetary assets by their middle class with catastrophic results for society described above. So after 50 years of constant rise of value and inner stability 1989 was another dramatic year for German history and 1990 Bundesbank was forced to react on plans of German unification and making plans for smooth transition of GDRs DDR-Mark to D-Mark. There was pressure building on Bundesbank during first half of 1990 because it became clear that Eastgermans would leave their territory once they weren't convinced by Westgerman politicians to get soon their D-Mark with for them acceptable exchange rates to their old & rather worthless currency.

So at this point of history the trouble being referred to in the headline begun for the first time and delivered a precedent for later misjudgment by politicians who overruled the expertise of the very people in charge of monetary policy .. the leading members of the central bank. Back in these days Karl-Otto Pöhl was President of the Bundesbank and therefore primarily in charge of monetary policy also for recommendations on how to forge  future single currency on the basis of the already existing D-Mark. But since public pressure especially from the Eastgermans made Chancellor Kohl to lay Pöhls recommendations aside concerning of to what exchange rate should be applied for abolishing of the GDR-Mark and what was therefore economically viable. Chancellor Kohl on the other hand had to watch out for public support of his newly to be gained electorate (monetary union was commenced before "political union" on July 1st 1990 whereas the two states were (re)unified on Oct. 3rd 1990) and already a formally independent CDU was established on the territory of the still existing GDR where Lothar de Maizière as chairman of eastern CDU should win the elections in the GDR in order not only to promise the realization of unification (as wished by large majority of GDR citizens) but also after being elected to office of prime minister of GDR making things much easier for Kohl who supported his "mirror Chancellor" in the eastern part of the country. The new elections in the GDR brought de Maizière to office in March 1990 and Kohl decided to offer Eastgermans a much higher exchange rate to their later to be abolished GDR Mark than Pöhl from Bundesbank recommended. Since legislation is out of reach for the Bundesbank as is monetary policy by the Chancellor there was a grey zone existing where legislation  on the introduction of an new currency for a later to be added country and its details had significant effect LATER on the monetary policy to be watch over by the Bundesbank. In consequence of being walked over Pöhl later resigned as president of Bundesbank 1991.

Why do I mention the process of unification of the two Germanies ? Because it has set an example of what could go wrong when a new currency is to be created by politics (government and parliament alike) and the nitty gritty of handling such a newly created currency is then left over to the formally still independent central bank. So if politics builds in a (later to be discovered as such) construction fault it is the central bank which is forced to cope with it as good as it is powerful enough to do so.  So if one would look exclusively on the territory of former GDR the warnings of Pöhl were later proven right by the immediate collapse of GDR economy after July 1st 1990. The politically wanted exchange rate of 1:1 had taken its effect on industrial production right away by exposing the low productivity of the GDR firms. On the other hand consumer spending peaked but also the numbers of imported good from the est which were mostly out of reach before because of the former very bad exchange rate of 1:8 or perhaps 1:10 to the D-Mark while communist regime was still in power. So companies made goods of bad quality, with out of date machinery, with high wages and therefore as a result very low chances compared to westgerman based companies who had the same currency base but opportunity to boost up productivity 20-40 years earlier. So from July 1st 1990 there was a ever faster downturn of economic activity to be seen on the territory of the GDR combined with high consumer spending on imported goods because bank accounts had massive formerly rather worthless GDR Marks beeings seen converted into D-Marks .. a currency already proven one of the hardest on the globe.

Does this story of the demise of the GDR after introduction of one currency somehow sound familiar to you ? Well .. compare it to the situation of Greece in these days where the effects of introduction of the Euro currency become clearly visible after being embezzled for nearly a decade by ever more lending of new money for low interest rates. So Greece had/has also massive problems in respect of their ability to produce and export goods in order to produce income and work. But instead of using the model of the GDR being integrated into the bigger FRG with a refinancing model based on extra taxes on income for every German Greece uphold a ponzi scheme like financing scheme by taking ever more debt with the convenience of low interest rates as member of the newly founded eurozone. Like GDR territory it used the privileges of a cheaply obtained hard currency to blow up consumer spending instead of investing in modern productive industries for producing wealth this way. The money the Greek government took from state bonds were distributed down the chain by a state employment blown out of proportion also to satisfy their electorate. Since both significant Greek parties (PASOK & Nea demokratia) handled this system problems grew on until 2009 where climbing figures of unemployment and more benefit claims created such a deficit which even massive lending couldn't compensate.

So what on earth made politicians to allow Greece into the to established eurozone in 2001? What were the economic circumstances in the years even decades before this (as it now turns out to be) fatal decision to let that happen. And more important what role had central bankers in this process back then ? To give the answer in advance:  Same procedure as with German unification . Central bankers warn or better recommend other measures to be taken and politicians following their own agenda putting aside the judgment of economic wisdom by the experts and therefore producing chaos in the end. Problem of all politicians is that they have to think short term or in other words follow their electorate and or their personal goals often not rooted in reality but in wishful thinking (dreams)

One ancient old myth on the very beginning of the idea to form a common currency in Europe is that chancellor Kohl was somehow forced to work on the future to be introduced common currency by president Mitterand of France. Well according to latest statements on that issue by then German finance minister Theo Waigel last week on German tv show "Beckmann" indicates that no pressure was on German government to adapt the French idea in exchange for letting the German reunification process to go through. Mr. Waigel said that no one could then seriously block German wishes to progress but Kohl also felt his European responsibility and so it was a project of mutual understanding not cohersion.

In response to chancellor Merkels but also to ECB policies on Greece and other states now known as PIIGS the Bundesbank saw its president Axel Weber to quit in 2011 and more recently board member of ECB Jürgen Stark both resigning in what is widely regarded protest against to those policies.
The ECB led by Mr. Trichet was lured into buying bonds from those PIIGS states by the markets refusing to accept those bonds any longer and therefore had to help out the government of those states to stay liquid against ever more less trust in their fiscal policies. So ECB was although maintaining its stance on independence of European governments in reality transformed into the money provider of last resort for those countries. As by end of October 2011 the total amount of these bonds reached some 165 bn € while it is still  well kept secret what are the individual portions for each country helped out this way.
And even more secretly happening was the Bundesbank transformed into providing cash for other ECB attached central banks amounting to 326bn € according to Prof. Hans-Werner Sinn. To see more details of those Target-2 look for the attached link where Mr. Sinn explains it.

So while maintaining officially the success of his bank Mr. Trichet trumpeted out the stability of the Euro as inflation remained low at +-2 pct for whole Eurozone and therefore his presidency was a success and most logically the ECB therefore as well.  Shure when leaving out half the truth most things become totally shiny even sacred is what i have to comment on that. And to make things even worse not only was the ECB somehow "obliged" to accept bonds for maintaining liquidity of some (mostly southern) countries but politics (govts & parliaments) made in effect monetary policies by constructing so called "rescue umbrellas" for those countries of Eurozone on the brink of fiscal collapse. Politics failed to keep an eye on some economies of Eurozone partners and even more on the in part catastrophic numbers concerning deficit rate well above max allowed 3 pct and national budget 60 pct in total of GDP. (As agreed on in treaty of Masstricht) So the lack of control of individual fiscal policy not only by "trespassing" member states but also their role models ended up in measures well effecting the working mechanisms of the ECB to control inflation, interest rates, M3 volume etc etc. So measures were taken by member states to keep interest rates artificially low for those failing states by giving guarantees for EFSF bonds to give failing states access again to markets with for them acceptable (low) rates. While forcing ECB to keep lowest possible base rates in order not to dry up credit markets and therefore stalling economies also of those rule obedient states. So far so bad for independence for ECB !

Decision process of politicians:
On those hasty measures being taken during 2010 and then as result of failure 2011 saw even more of those hasty emergency measures taking place. Be it in form of parliamentary votes on help packages or hastily organized summits before or after such votes (who keeps track of that ?) And due to that haste this much to the overload of german MP by forcing them to read dozens of pages worked out by finance ministry with very complex language and figures while being a bit simplistic minded mostly. So the MP were mostly relying on their leaders of their party or the explanations of their members sitting in the budget committee (“Haushaltsausschuss”) before going to vote mostly overwhelmed and perhaps with some doubts in their mind or even some pain in their belly. Only on last vote on the last rescue effort for Greece and whoever else is in need of cricked up EFSF fund they revolted a bit for getting only 7 hours to read the latest version by finance ministry not even in German language but most likely in English. So they just threatened to boycott the later parliamentary hearing and vote. To make things worse it was exposed to german TV viewers that during this all important vote some journalists with TV cameras asked the MP hanging around in the lobby some basic questions like if they know the basic figures they are voting on or the working of the EFSF in basic version or the leveraged version. It was a random poll but with devestating results shown later that evening on TV where members of (almost) all parties didn't know exactly what they were voting on. Well it was “just” about a volume of 211 bn € which comes to roundabout 2/3 of the total federal budget. No wonder when many of MP are not connect to the financial sector but usually have been state employees (such as teachers) before or lawyers. And to make things even much worse some of them have been “caught in the act” by insulting fellow colleagues (“rebels”) which were only a few but gained much public attention by being the victim of harassment in order to vote as block without any diverting views on matters. Even a hint of this behavior of putting pressure on other MP might be in fact against the constitution may in fact not concern those who committed these insults. And in other parliaments such as Italy there have been reports of fist fights over austerity measures to be taken or better to be announced by their prime minister before going for Brussels summit may also be compared to decision finding process within the central banks where are no amateurs employed who are not exactly knowing what they are doing.


So anyone still convinced on the background of all this recent mess that ECB ALONE is making monetary policy and Euro currency is as stable,hard and long lasting as former D-Mark (DEM) or dutch guilder (HFL) ? Judge for yourself if the ECB is the twin sister of Bundesbank or de Nederlandsche Bank or were politicians on these matters again successful to fool their electorate in believing so in order to give up monetary systems working perfectly for 50+ years with the prospect of even working further in that way in the future. This possible "boring" future was taken away from those countries and the turbulences occurring in Italy or Greece earlier have even been surpassed by recent cracks in European monetary system to the point the whole system was at the brink of collapse and even now this danger remains.

        • Draft – part I to be continued 
References: (ger/eng)

Germany able to reduce its debt by miracle

Dear readers,

believe or not ... Germanys public is astonished to find its national debt reduced since last friday (when newspaper broke the story) by 55,5 bn € which also means its debt to gdp ratio has declined from 83,7 % to 81,1 %  now. (quarter of EFSF guarantees just passed by Bundestag or about 1/6 of german budget)

What happened ? Was it a financial wizard lured to come rescuing the eurozone by enhancing Germanys public finances ? Trolls perhaps ?

No much simpler than that ! Although not less mysterious then trolls from polar circle. Rather just discovered mistakes in accounting (balance sheet) of FMS Wertmanagement which is euphemestic new german description of HRE (Hypo Real Estate) bad bank or in colloqial language named just Schrottbank (=junk/scrapbank)
Since german weekly "Der Stern" broke the story of maybe just incompetent creative accounting or just book cooking by the "experts" of FMS Wertmanagement and its external accounting "experts" doing their job and also testifying the results to be correct.

Well such a judgement came premature since it now emerged that this bad bank of former HRE did hold much less junk in its books than previously though of and also was reported to Eurostat. The total amount of reduction is so huge that the german debt pct ratio was able to make a dip and also the needs of future restraints on german budget spending or the need for rises in taxation. Whoever transferred the balance sheets of defaulted HRE bank into FMS Wertmanagement did not deduct one figure from another ut insteaded added them .. So instead of  the sum resulting to ZERO it blew up the balance sheet by 55,5 bn € ! Mr. Schäuble already quitely reported corrected numbers to Eurostat days ago.

Since Stern reported on the story during the weekend many if not all eyes of german press is focussing on this biggest blunder ever in german finances (to my recollection) EVER.  Now over the weekend the witchhunt for those guilty of the outrageous blunder went on its way ... perhaps is already taking place for weeks now because it is rumoured events are known to FM Schäuble since +-4 weeks now. Opposition parties have their field day and further grilling of Schäuble and his experts of his ministry seems likely to happen in the forthcoming working week. Schäuble himself has just announced to invite HRE boardmembers to make their explanations to him how this could happen in the next days.

Although many members of german coalition goverment are delighted to have debts reduced so easily embarrassment remains over how this could happen.

Some bloggers in german political blogs already speculate on greek debts to be nonexistant in reality but be only results of unwitting greek accountants and lack of thorough investigation in this matter ;-)

So it turns out once again that fiscal policy or reporting on it rather can also be some kind of amusement although matters themselves are most serious.

HRE Die 56-Milliarden-Euro-Panne (ger)
Finanzausschuss will gegen Bankmanager vorgehen (ger)
Fehlbuchung von 55,5 Milliarden Euro hat Nachspiel (ger)

The aftermath of the great euro summit

Dear reader,

it is not the intention of the author to spoil the joy of those who considered the summit last Wednesday as THE solution of the crisis of the eurozone. That is what the politicians involved would like us to believe in order to show a capacity they don't have in reality.

It was a big show for their electorate much more than for the international markets or better those who are familiar or even in charge of those like the guardsmen of state funds of Norway, Brazil ,China, Russia , the gulf states or any individuals who they considered to be saviors from outside the eurozone to inject the much needed cash to go on "stabilizing" the eurozone. I must admit to have omitted India because so far i haven't found any article of the world press what had any information of whether Europe was intending to "take" from them or they are are willing to "contribute" something to the European rescue effort.

As to the approach of the summit on Wednesday it was only a scarcely reported item THEN that Klaus Regling, CEO of the EFSF located in Luxembourg was about to be on his way to seek physical contact to leading Chinese statesmen on Friday in order to "offer" the latest European "bazooka" decided on along with the expansion of the EFSF by giving it a (4-5 times?) leveraged insurance model which was named special purpose investment vehicle or SPIV short. Basically it was thought to be an especially attractive offer for investment of large institutions such as the state run funds mentioned above.   Giving them priority in security (all risk insurance) should attract more big spenders outside the zone looking for a safe haven for their large quantities of NOK, CNY ,RUB , USD or whatever. At least so they (politicians) thought it would contribute to their big plan on the solution of their (yes their politicians !) crisis.
Well today Sunday Oct 30th it looks rather bleak with their would be enhanced EFSF and SPIV which both couldn't work so far to calm investors sorrows over the all out prospects of declining industry production, inflation, jobless figures and long term prospects of pensions and loss of working population because of declining population figures (due to low birthrates of 1,3 children per couple in some countries)
Another "fear factor" could have been the very event also to be solved at this last summit which is the so called haircut on Greek debt , on which several different stories are circulating ... stating that only those debts are to be cut in half of the private banking sector whereas German newspaper sources also claim that e.g. FMS Wertmanagement (former Hypo Real Estate or HRE, now 100% bad bank owned by German finance ministry) would also take a hit by those haircuts decided on. Such a haircut on Greek debts which was 2010 considered out of the question (for some at least) and just on July 21st this year a 21 pct cut was negotiated with the banks and the very same politicians in charge (or what is left of it) of the eurozone. Well this deal lasted some 3 month and ever faster declining of Greek economy makes all projections of sustainability of remain debt vs payments from Greece on the background of no concrete plans for economic stimulus for Greece (although some consideration is given to this there is lack of sums, methods and means to implement them) So when the last deal had a life span of 3 month so what good is a leveraged EFSF for bonds with nominal 5 or 10 years ? Who would guarantee this investment then when prospects of European economy aren't looking rosy and some of the problems haven't even started to materialize by now ... One of them the shift of industrial production to BRIC and other countries .. another is the constant rise in energy costs ...and then the one future strain on public finances  which is called pensions ...not only a problem for just Greece or Italy but also for Germany (the lender of last resort in eurozone) and also Britain. So the SPIV could turn out to be a gigantic wheelchair in the end, when no change of mind of wealthy states is due to take place. Another game changer is the general reluctance also in purchase of normal state bonds to be seen in ever rising spreads from PIIGS state bonds to e.g. those of the core of eurozone. Or even a complete failure of bond auctions while investors are not being tempted to get those recently "polished" papers. Another disappointment might result from the prospects that even the much advertised great debt reduction scheme (haircut) might after all be nothing than a well advertised balloon by European politicians in order to put some sand into the eyes of there electorate as it is indicted by a recent article by the daily mail citing WSJ on watching Mr. Dallara in good spirits when he jetted off Brussels after being forced to "hard compromises". We shall see ..I recommend to everyone to sit back and watch for more details coming out next days/weeks on real write offs of major creditors to Greece.

Another  constraint of last Wednesdays decisions might arise from the elevated requirements on equity of banks to 9% by June 2012 ... Some analysts suspect that some banks could reduce their willingness or capacity to give loans to industrial needs thereby reducing outlooks on economic growth even further. Of course another novum is that bonds from member states are no longer considered entirely save from default and that's why banks across the board complain, that it is not their fault when states are in risk of default and therefore put strains on banks equity. Whoever is primarily responsible for the lack of equity to prevent to risky lending or selling whatever creative derivatives this step reduces risk of collapsing of banks and therefore domino into the final abyss on the one hand but will contribute to some points of economic shrinkage that will put much more strains on individual member states and their ability to reduce debt overloaded budgets.

All in all the aspect of economic GROWTH (in contrast to austerity which was the inflated term around summit days) was very much understated since it is the other side of the coin leading to reduced levels of debt for all member states of the monetary union not only the ones with worst figures to be of the others main cause for severe headaches. While growth in Greece remains extra problematic because of historic low tendency to convert low interest rates in other "useful" things rather then to consumer spending and perhaps filling pockets of some politicians and their friends. A protected climate of investment has to be created there without the prospect of politicians or whatever corrupt local bureaucrats blocking or delaying such (foreign) investments. To my knowledge confidence in Greek politicians and institutions is shattered not only in other countries dealing with the mess there but also with common Greeks whose daily life is effected by ever growing numbers of unemployment and foreclosures of homes & businesses.

The agenda for follow up action of those mostly talking & acting (in the sense of being actors) is already set and depends on the welcoming of last weeks decisions by the markets and its players. So far some improvements have been seen but that short term effect was also to be observed on earlier occasions.
Productivity and growth however remain the big problem solvers which are in short supply. If no economic step forward is taken in Europe it will become a union of distributed OLD wealth only (from north to south) and can not arise to its claims to be one of the worlds economic superpowers.

More on that story: (eng/ger)