Coyote Blog

Several sites have reposted this Craigslist ad, gasping in shock at it as evidence of massive foreclosure fraud

We are a collection agency/debt buyer. What we are looking for is a part time attorney to work for us as our corporate counsel, on our payroll, about 5 to 6 hours a week. This is a short term employment arrangement, no longer than 90 to 120 days.

Your job will be to sign pleadings, praecipe for entry of appearances, praecipe for writ of execution, and garnishment orders. Our paralegal will prepare all paperwork for your signature. This is very standard stuff for us.

If you are an attorney looking for challenging legal work, this is not for you. WE DO NOT NEED F LEE BAILEY- we are fee shopping. If you passed your boards with a D+, and you can sign your name, you possess all the credentials required for this job. If this opportunity interests you, please feel free to reply to this email with a brief description of who you are, when you got your law license, and what you will be needing from us in the way of compensation.

I would instead offer it as a lesson in the stupidity of state-enforced professional licensing arrangements.  Let me rewrite it:

We have all the legal knowlege we need.  We know exactly what the forms look like and mean.  We have written all the documents and tested them over time during our long presence in this business and we know them to meet our legal needs.   We have no need, in other words, for legal help.

However, attorneys have gotten together and created an attorneys guild, and, what's more, have convinced the government to pass laws that require membership in the guild to perform certain gate-keeping functions.  In our case, we need a member of the guild to sign some forms to make them legal, both because the guild has strong influence and because certain folks have convinced everyone that all mortgage pain in this country came from having a machine perform this signature function rather than a flesh and blood hand.  So we need a flesh and blood hand rather than a machine to sign foreclosure documents.  Unfortunately, that hand has to be attached to a brain that has passed the bar exam, and because the guild is pretty good at limiting its membership, we expect to have to pay an absurd amount of money for this trivial function that could be duplicated by a six-year-old (and used to be performed by a simple $100 machine).

Don't get us wrong -- if we were on trial for our lives or facing a nasty, complicated lawsuit or wanted to draft a custom contract to protect our interests, we would be very happy to consider the opinion of third party licensing groups as to the merit of a particular attorney.  Ironically, though, even then current licensing would be absurd, for in this case it would not greatly exceed our quality requirements (as it does for signing our foreclosure paperwork) but it would vastly undershoot our need due diligence needs.   Perhaps there is some legal function for which attending an ABA-accredited school and passing the bar exam is the perfect level of quality assurance, but we have not found it yet.

For a while I have advocated for the idea that we eliminate the corporate income tax and simply tax capital gains and dividends as regular individual income.  Corporate profits eventually flow to one or the other.  Out would go a whole expensive class of taxation that has all kinds of distorting effects (and really does not raise that much money).  Out would go the tax preferences for corporate debt over equity financing.  Out would go double taxation of investment income.  Out would go the disincentive to repatriate corporate profits and relocate headquarters to foreign countries.  And out would go the perceived need for the goofy "Buffett Rule."

At least some on the Left might be open to the idea.

Mike Rizzo writes:

A typical sovereign government can secure funds from three “legitimate” places.*What are these sources?

1. Taxes today.
2. Taxes tomorrow. In other words we can borrow money today in order to build our bridge and then use future tax revenues to pay for the debt tomorrow. By the way, if the government is in the business of actually producing valuable “public goods” then you can easily think of this as value enhancing.
3. Printing money. It’s not generally done this way, but in effect the monetary authorities can monetize the borrowing of a sovereign entity (how they do it is beyond the scope of this post). For simplicity, imagine instead that a central bank prints new bank notes from scratch, hands them to the Treasury, and then the Treasury spends them on goods and services. This is just another form of a tax, again beyond the scope of this post.

So, this is what the government budget identity looks like for “normal” countries:

G = T + the change in debt + the change in base money

I think this is a useful simplification, but I wanted to add a couple other refinements  (refinements by the way he did not neglect in his text, just did not put in the formula).  One other source of funds we have seen in Greece is what I would call Aid, which used to be humanitarian aid (think India in the 1970s) but today tends to be bailout money and debt forgiveness.  So we will write the equation

G = Taxes + ΔDebt  + Money Printing + Aid

But due to the Keynesian orientation of many commenters on the Greek and European situation, it becomes useful to expand the "taxes" term into some sort of base income, which I will just call GDP for simplicity, and some sort of tax rate t.  So then we get:

G = GDP x t + ΔDebt  + Money Printing + Aid

The Greeks can't print money (unless the EU does it for them) and at the moment no one in their right mind will lend to them without guarantees from stronger European countries (e.g. Germany).  If we call EU money printing for Greece or EU loan guarantee programs Aid, we get

G = GDP x t + Aid

As Rizzo noted, aid is drying up and Greek tax revenues are going down rather than up, so basically they are screwed.  The only out seems to be for Greece to exit the Euro and then, once on the drachma again, print money like crazy and inflate their way out of the debt.

But expanding the tax term reveals one more policy alternative that is being suggested.   Keynesians seem to believe there is a path out of this situation in Greece (or if Greece is too far gone, certainly in Italy and Spain) where money from some source  (aid, borrowing, whatever) is spent in the economy by the government in some way that is stimulative, thus increasing GDP and therefore taxes and allowing Greece to increase the money available to the government.  Since Aid is currently only be granted tied to "austerity" programs rather than stimulative spending, they feel Germany et al are following exactly the wrong course.

I am incredibly skeptical of this for two reasons, beyond just my general skepticism of Keynesian stimulus.  First, I have heard something akin to this in my personal experience.  For a short time in my life, during the Internet crazy period, I was brought in by some investors to look at their portfolio of languishing Internet plays (e.g. discountshoelaces.com)* and decide if they should keep pouring money in or shut down.  The plan I got from management was always - always - this stimulus approach.  They suggested that rather than cut back, the investors should give them a bunch of new money to really blow out the marketing effort, which would kick start their growth, etc. etc.

The problem was that they never, ever had a lick of evidence beyond just hope that the next $1 million would suddenly do what the last $10 million failed to do.  So we shut most of these efforts down.  Your first loss is your best loss, as they say.

Similarly, I don't think Keynesians can point to any example in history where this actually worked.   A country is drowning in debt, but suddenly a Hail Mary play of adding a huge chunk more to the debt and spending it on civil service worker salaries suddenly turned the tide.  Seriously, do people honestly think this will work?  Or are they just frustrated because they grew up with an assumption that there is always a public policy answer for everything and there just does not seem to be one here.

I have an emerging hypothesis, not backed by any evidence at this point, that the value of the Keynesian multiplier shifts as debt to total GDP increases.  I am not sure in actual practice it is ever above one, but if it were to be above 1 at 20% debt to GDP, it certainly is not going to be the same at, say, 150%.

via here

The UK line is particularly interesting, since that is the country that Krugman has declared is austerity-izing itself into a depression. As I have pointed out before, real government spending in UK has been and is still rising.  The percent of GDP of this spending has fallen a bit, but there is nothing about Keynesian stimulus theory that says changes in the percentage of government spending is stimulative, only its absolute value.

Here is one thing I would love to here Krugman et. al. opine on -- at what percentage of government debt to GDP does additional deficit spending become counter-stimulative.   I imagine there is an inverse relationship for deficit-funded stimulus, such that it has a larger effect at lower debt levels with a zero to negative effect at higher interest levels.

Update:  From another source, here is the UK in real $

The Left continues to push the myth that government "austerity"  (defined as still running a massive deficit but running a slightly smaller massive deficit) is somehow pushing Europe into a depression.  Well, this myth-making worked with Hoover, who is generally thought to have worsened the Depression through austerity despite the reality that he substantially increased government spending.

It is almost impossible to spot this mythical austerity beast in action in these European countries.  Sure, they talk about austerity, and deficit reduction, and spending increases, but if such talk were reality we would have a balanced budget in this country.  If one looks at actual government spending in European nations, its impossible to find a substantial decline.  Perhaps they are talking about tax increases, which I would oppose and have been occurring, but I doubt the Left is complaining about tax increases.

Seriously, I would post the chart showing the spending declines but I can't because I keep following links and have yet to find one.  I keep seeing quotes about "commitment" to austerity, but no actual evidence of such.

Let's take Britain.  Paul Krugman specifically lashed out at "austerity" programs there are undermining the British and European economy.  So, from this source, here is actual and budgeted British government spending by year, in billions of pounds:

2007: 544.0

2008: 575.7

2009: 621.5

2010:  660.6

2011:  683.4

2012:  703.4

2013: 722.2

Seriously, I will believe the so-called austerity when someone shows it to me.  And this is not even to mention the irresponsibility of demanding more deficit spending without even acknowledging the fact that whole countries already have so much debt they are teetering on the edge of bankruptcy.

Here is the European problem -- they are pouring hundreds of billions of Euro into bailing out failed banks and governments.  They are effectively taking massive amounts of available resources out of productive hands and pouring it into failed institutions.   Had they (or we) let these institutions crash four years ago, Europe would be seeing a recovery today.  The hundreds of billions of Euros used to keep banks on life support could have instead been used to mitigate the short term effects of bigger financial crash.

Proponents of higher taxes and larger government often criticize small government folks in Congress for being "obstructionist" and "not willing to compromise."

But here is the problem:  Coyote's first rule of budget politics is to never trade current tax increases or "temporary" spending increases for future spending cuts, because the future spending cuts never happen.  Ever.  Not once.  In fact, I would not agree to trading current tax increases for current spending cuts, because taxes will stay forever but spending cuts will just be over-ridden in a few months.

Here is a recent example:

Last summer, Republicans in Congress agreed to increase the federal debt limit in exchange for the Democrats’ pledge to cap future spending at agreed-upon levels. The compromise was embodied in the Budget Control Act; discretionary spending was to increase by no more than $7 billion in the current fiscal year. I wrote yesterday about the fact that the Democrats intended to violate the Budget Control Act by increasing deficit spending on the Post Office by $34 billion. The measure probably would have glided through the Senate without notice had Jeff Sessions not challenged it. Sessions insisted on a point of order, based on the fact that the spending bill violated the Budget Control Act. It required 60 votes to waive Sessions’ point of order and toss the BCA on the trash heap.

Today the Senate voted 62-37 to do exactly that. This means that the consideration that Republicans obtained in exchange for increasing the debt limit is gone. Moreover, some Republicans–I haven’t yet seen the list–voted with the Democrats today.

One principal lesson can be drawn from this experience. It happens all the time that Congressional leaders will trumpet a budget agreement that allegedly saves the taxpayers trillions of dollars–not now, of course, but in the “out years.” But the out years never come. Tax increases are rarely deferred to the out years; they take place now, when it counts. But spending cuts? Never today, always tomorrow.

Purported agreements about what federal spending will be years from now are utterly meaningless. Congressmen will make a deal, brag about the ostensible savings in the press, and then walk away from it the moment our backs are turned, as the Democrats (and a handful of Republicans) did today.

When folks say, "we just want a compromise" on budget issues, what they are really saying is "we want to roll you.  We are hoping you are stupid enough to trade for future cost reductions that will never happen.  We can get away with this because we have an ally in the press, who always treats promises of future cost reductions as entirely credible and believable and thus paint those who are skeptical of them as radical obstructionists."

For years now I have lampooned the crazy money Glendale, AZ has thrown at the Phoenix ice hockey team in a desperate attempt to trade taxpayer money for prestige.  Let me bring you up to date:

Years ago a town of about 250,000 people committed about $200 million in taxpayer money to build a stadium for a professional ice hockey team, to attract it away from Scottsdale or downtown Phoenix to what is frankly the ass-end of the metropolitan area  (I have no problems with the west side of town, but from a geographic, demographic, and economic logic standpoint this was roughly equivalent to moving the LA Lakers to Riverside or San Bernardino).

For some weird reason, moving an ice hockey team to the desert with no base of hockey fans and locating it a good 45 minutes from the wealthier parts of town caused the team to go bankrupt.  Lots of people were willing to pay good money to haul the team back to Canada where there are, you know, ice hockey fans, but few wanted to pay good money to keep it on the west side of Phoenix.

So enter the NHL, which took the team over.  The NHL commissioner promised the other owners that it would not lose money on the deal, so it set the price of the team not at the market price (which appears to be around $100 million based on the Atlanta sale) but based on its costs, which were about $200 million.   It has agreed to try to keep the team in Glendale, but only if the city covers its operating losses of $25 million each year, which incredibly, the city has done for two years (note this is $100 a year for every man, woman, and child in the city to subsidize a hockey team).

The team may be worth $200 million in Canada, but it is only worth $100 million in Glendale (at most) so it does not sell.  The city agreed to make up the $100 million difference  with a bond issue (and throw another $90+ million in to boot), which almost closed the deal with one buyer until the Goldwater Institute pointed out that this kind of subsidy was illegal under the AZ constitution.  And so the situation sits.  The asking price is still $200 million, which no one will pay if they have to keep the team in Glendale.  And the city keeps forking over $25 million a year to the NHL to keep the team running.

OK, so that is the background.  Here is the new news.

The league, which purchased the Phoenix Coyotes at a bankruptcy court auction in 2009, has been managing the team and city-owned arena until an owner willing to keep the team in Glendale can be found. The city paid $25 million to the NHL during the 2010-11 season and pledged another $25 million for the current season, which is expected to come due in May.

To fulfill that pledge, the city put $20 million in escrow and still needs to come up with $5 million.

The hefty payouts have nearly drained the city's reserves, leading to a recent drop in the city's bond rating.

And the city is looking at a deficit next fiscal year that one councilwoman has estimated could reach $30 million. A possible sales-tax hike, furloughs and program cuts are on the table to close the spending gap....

During Tuesday's budget talks, [Glendale Mayor] Scruggs asked council members to join her in signing a letter to NHL Commissioner Gary Bettman to "release us from that $20 million in escrow and let us pay over time."

None of the councilmembers responded to her request. Councilman Manny Martinez later told The Republic he would "have to think about it in light of what is going on."

Scruggs said if the city can get back the $20 million from escrow and pay the NHL an initial $5 million, "our problems and everything our employees are fearful of would pretty much go away."

Translation:  Dear NHL, we are idiots and committed a bunch of money to a stupid purpose that we can't really afford.  Would you pretty please let us out of our commitment?  Hilarious and pathetic.  The chickens are coming home to roost by the millions.

Even funnier, the Glendale mayor is trying to blame the NHL for bad faith

The mayor said she and four others councilmembers pledged the second payout last May because city staff and NHL Deputy Commissioner Bill Daly said a deal with a team owner was nearly complete and that "we should never have to pay that $25 million."

Scruggs said the city was told the money was just a place holder so that the NHL wouldn't move the team out of Glendale.

"Given the stress that our budget is under, there should be a payment plan developed," Scruggs said. "They have no right to that money. They held us hostage for a year."

She said the NHL never intended to do business with Chicago businessman Matt Hulsizer, who wanted to buy the team but walked away from the negotiation table in frustration just weeks after the council pledged the second payment to the NHL....

Scruggs said the NHL last spring "misled us and they can't do this to our city."

In fact, the NHL was totally serious about the Hulsizer deal.  That deal fell through not because the NHL screwed up, but because Glendale did.  The deal fell through because Glendale had committed to a subsidy of the deal which may not have been Constitutional, and even if it had proved legal, became impossible when Glendale's bond ratings started tanking and they realized they could not move the paper.  Glendale officials have been amateurish and dishonest through this entire process.

By the way, several years ago, Jim Balsillie offered a deal worth over $200 million for the team, PLUS he offered to pay off something like $150 million of Glendale's stadium debt.  Glendale opposed the deal, because they would have been left with an empty stadium and tens of millions in debt (given the crash in RIM's fortunes, the offer is unlikely to be renewed).

Glendale is likely going to wish they had taken the first offer.  There is a very good chance that Glendale will lose the team without any sort of payment on their debt and after paying $25 million a year to the NHL.  Glendale will end up with hundreds of millions in debt, an empty stadium, a junk-level bond rating and a busted budget.

There is a saying in the investment world - your first loss is your best loss.  Glendale is about to learn this very expensive lesson.

1.  Set corporate tax rate to 0%.

2.  Tax all dividends and capital gains on individual returns as regular income  (ie no preferred lower rates).

All corporate profits eventually show up on individual tax returns one way or another.  There is absolutely no logical reason to tax corporations except out of some kind of progressive hatred of, and need to count coup on, corporations.

My plan eliminates corporate tax preference for debt.  Eliminates numerous distortions from political meddling in corporate tax structure.  Eliminates double-taxation problems.  Eliminates double taxation of foreign corporate income.  Levels the playing field between C and S corps.  Eliminates the practice of corporations keeping two sets of books (one for tax authorities, one for investors) which is a common practice.  Saves a ton of money on tax preparation and compliance, essentially eliminating a whole class of taxes.

Once this is done, then we can start working on simplifying and taking out all the distortions in the individual tax code.

Update:  One could go on a length discussing the hypocrisy of the current corporate tax system.  Basically it has become a vehicle for each party to reward its favored constituents and punish its enemies.  The Obama administration's current tax plan is a great example.  Obama wants to reward manufacturers, and manufacturers only, with special lower rates because they are, err, much cooler somehow than other businesses.  But it turns out that most of those supposed tax subsidies that Obama proposed ending for oil companies are just the same breaks all manufacturers currently get and he wants to increase.  So is he now going to say we need to favor all manufacturers except oil companies with special tax breaks?   And he wants to encourage investment and R&D, except in the oil industry (which happens to be one of the larger sources of capital investment and R&D spending).  And what ever happened to the notion of equal treatment under the law?

It is an open question how long this bailout will plug the dam.  I continue to maintain the position that Greece is going to have to be let out of the Euro. Pulling this Band-Aid off a millimeter at a time is delaying any possible recovery of the Greek economy, and really the European economy, indefinitely.  All to protect the solvency of a number of private banks (or perhaps more accurately, to protect the solvency of the counter-parties who wrote the CDO's on all that debt).

Anyway, the interesting part for me is that with this bailout, the total cumulative charity sent the Greek's way by other European countries now exceeds Greek GDP, by a lot.

Investors have a saying - your first loss is your best loss.  In other words, if you think an investment sucks, swallow your pride, take your lumps, and get out entirely now.

This is NOT how we have dealt with the financial crisis.  Through a series of bailouts, we have tried to keep failing financial institutions and countries on life support.   We have dragged out the reckoning on mortgages, so we still have not had a real clearing in the real estate market.  Worse, we have postponed, even entirely interrupted, financial accountability for those who made bad investments or took on too much debt.

Here is an interesting counter-example - Iceland, which basically went entirely bankrupt along with pretty much all their banks, is on the road to recovery.

One of the amazing aspects of our new post-modern outlook on personal responsibility and obligations is that folks who are profligate and take on too much debt are increasingly considered victims to which other people owe something (generally a bailout).

We see this no only among US mortgage holders but in Greece as well

Greek Prime Minister Lucas Papademos told lawmakers to back a deeply unpopular EU/IMF rescue in a vote on Sunday or condemn the country to a "vortex" of recession.

He spoke in a televised address to the nation, ahead of Sunday's vote on 3.3 billion euros ($4.35 billions) in wage, pension and job cuts as the price of a 130-billion-euro bailout from the European Union and International Monetary Fund.

The effort to ease Greece's huge debt burden has brought thousands into the streets in protest, and there were signs on Saturday of a small rebellion among lawmakers uneasy with the extent of the cuts.

So outsiders generously agree to pay for 130 billion Euros of past Greek spending if only the Greeks will cut their current spending by 3.3 billion Euros (at which spending level the country would still be running large deficits).  And people riot as if they have been gang-raped.  Incredible.

Let the Greeks go.  Of course, this is not actually about bailing out Greece, but about bailing out, indirectly, European banks that invested in Greek bonds.  The banks seem to run public policy in Europe, even more so than in the US.

Via the WSJ

Glendale, Ariz., is selling about $136 million in debt in the municipal-bond market this week, just days after Moody's Investors Service cut its bond rating because of the desert city's obligations to cover losses on a National Hockey League franchise.

In exchange for the NHL's promise to manage team operations and keep the team in Glendale until a new owner is found, the city agreed to compensate the league, the city's executive communications director, Julie Frisoni, said.

The Coyotes filed for bankruptcy protection in 2009, and that spring, the NHL became the owner of the team. In exchange for keeping the team, the city signed an agreement to absorb up to $25 million of the team's losses in both 2011 and 2012, in anticipation of finding a new owner, Moody's analysts said.

Glendale is slowly sinking itself in a mountain of debt to pursue its insane strategy to subsidize every billionaire sports owner in Arizona.  The town of 225,000 people is spending $25,000,000 to fund the operating losses of a freaking hockey team -- that's nearly $500 a year for every 4-person family in the city.  Nuts.  And this is just their operating subsidy, it does not include debt service on the $300 million stadium it built for the team.

The problem is that the team is worth less than $100 million in Arizona (based on recent sales comps of other NHL franchises in warm cities like Atlanta) but might be worth $300-$400 million if moved to Canada (Jim Balsillie made an offer in this range, including an offer to pay down $150 million or so of the city's debt, before RIM stock started to crash).  The NHL, which owns the team now, has promised owners that they will not take a penny less than $200 million for the team, and that they will not suffer any operating losses.

So, because they simply cannot admit they were wrong to subsidize the team the first time around, to keep the team in Glendale the city must either fund $25 million a year in team operating losses or it must pony up $100 million or so to bridge the team's $100 million value in Arizona and the league's $200 million price tag (something they tried and failed to do last year when the Goldwater Institute pointed out that such a subsidy was unconstitutional in AZ.

I repeat, what a big freaking mess.  How do you avoid it?  The only way is the Wargames strategy, ie the only winning move is not to lay the sports team subsidy game in the first place.

Just six months ago, governments were criticizing ratings agencies for letting threats by debt security issuers cow them into keeping ratings for bad debt higher than they should be (emphasis added)

Moody’s and Standard & Poor’s, Wall Street’s two largest credit rating agencies, were roundly criticized in the Levin-Coburn Senate reportfor betraying investors’ trust and triggering the massive mortgage-backed securities sell-offs that caused the 2008 financial crisis.

Credit rating agencies are supposed to provide independent, third-party credit assessments to help investors understand the risks in buying particular securities, debts and other investment offerings. For example, securities that have earned the highest ‘AAA’ rating from Standard & Poor’s (S&P) should have an “extremely strong capacity to meet financial commitments” or have “a less than 1% probability of incurring defaults.” Investors would use the ratings to help evaluate the securities they’re seeking to buy.

However, the standard practice on Wall Street is fraught with conflicts of interest. In reality, the credit rating agencies have long relied on fees paid by the Wall Street firms seeking ratings for their mortgage-backed securities, collateralized debt obligations (CDOs), or other investment offerings. The Levin-Coburn report found the credit agencies “were vulnerable to threats that the firms would take their business elsewhere if they did not get the ratings they wanted. The ratings agencies weakened their standards as each competed to provide the most favorable rating to win business and greater market share. The result was a race to the bottom.” Between 2004 and 2007, the “issuer pay” business model fostered conflicts of interest that have proven disastrous for investors.

I have no problem with this analysis.  But it's ironic in contrast to the very same governments' reactions to their own downgrades over the last 6 months.  In fact, the general government reaction from Washington to Paris has to be to ... wait for it ... threaten the agencies in order to keep their ratings up.  And these threats go farther than just loss of business - when the government issues threats, they are existential.  It's hard to see how the US or French government's behavior vis a vis downgrades has been any different than that of banks or bond issuers that have faced downgrades.

In general, the tone of government officials has been "what gives them the right to do this to us?"  The answer to that question is ... the government.  These self-same governments were generally responsible for mandating that certain investors could only buy certain securities if they are rated.  And not just rated by anyone, but rated by a handful of companies that have been given a quasi-monopoly by the government on this rating business.

As I predicted, the various highly touted European debt and currency interventions last month did squat.  This is no surprise.  The basic plan currently is to have the ECB give essentially 0% loans to banks with the implied provision that they use the money to buy sovereign debt.  Eventually there are provisions for austerity, but I wrote that I don't think it's possible these will be effective.   It's a bit unclear where this magic money of the ECB is coming from - either they are printing money (which they refuse to own up to because the Germans fear money printing even more than Soviet tanks in the Fulda Gap) or there is some kind of leverage circle-jerk game going where the ECB is effectively leveraging deposits and a few scraps of funding to the moon.

At this point, short of some fiscal austerity which simply is not going to happen, I can't see how the answer is anything but printing and devaluation.  Either the ECB prints, spreading the cost of inflation to all counties on the Euro, or Greece/Spain/Italy exit the Euro and then print for themselves.

The exercise last month, as well as the months before that, are essentially mass hypnosis spectacles, engineered to try to get the markets to forget the underlying fundamentals.  And the amazing part is it sort of works, from two days to two weeks.  It reminds me of nothing so much as the final chapters of Atlas Shrugged where officials do crazy stuff to put off the reckoning even one more day.

Disclosure:  I have never, ever been successful at market timing investments or playing individual stocks, so I generally don't.  But the last few months I have had fun shorting European banks and financial assets on the happy-hypnosis news days and covering once everyone wakes up.  About the only time in my life I have made actual trading profits.

Thought problem:  I wish I understood the incentives facing European banks.  It seems like right now to be almost a reverse cartel, where the cartel holds tightly because there is a large punishment for cheating.  Specifically, any large bank that jumps off the merry-go-round described above likely starts the whole thing collapsing and does in its own balance sheet (along with everyone else's).  The problem is that every day they hang on, the stakes get higher and their balance sheets get stuffed with more of this crap.  Ironically, everyone would have been better getting off a year ago and taking the reckoning then, and certainly everyone would be better taking the hit now rather than later, but no one is willing to jump off.  One added element that makes the game interesting is that the first bank to jump off likely earns the ire of the central bankers, perhaps making that bank the one bank that is not bailed out when everything crashes.  It's a little like the bidding game where the highest bidder wins but the two highest bidders have to pay.  Anyone want to equate this with a defined economics game please do so in the comments.

US government debt now larger than the GDP.

Nice tax refund you have coming .... we think we'll keep it

The [Greek] government has decided to stop tax returns and other obligation payments to enterprises, salary workers and pensioners as it sees the budget deficit soaring to over 10 percent of gross domestic product for 2011.

For all the supposed austerity, the budget situation is worse in Greece.  Germany and other countries will soon have to accept they have poured tens of billions of euros down a rathole, and that they will have to do what they should have done over a year ago - let Greece move out of the Euro.

Government workers and pensioners simply will not accept any cuts without rioting in the street.  And the banks will all go under with a default on government debt.  And no one will pay any more taxes.  And Germany is not going to keep funding a 10% of GDP deficit.  The only way out seems to be to print money (to pay the debt) and devalue the currency (to effectively reduce fixed pensions and salaries).  And the only way to do all that is outside of the Euro.  From an economic standpoint, the inflation approach is probably not the best, but it is the politically easiest to implement.

For a while now, a few authors have been quipping at Zero Hedge that the best investment strategy is to do the opposite of what Goldman Sachs is telling is retail customers.  The theory is that if Goldman tells the public to buy, it means that they are selling like crazy for their own account.

This seemed a bit cynical, but on Friday Zero Hedge observed that Goldman was telling its retail customers to buy European banks.  This advice seemed so crazy -- the European agreement last weekly explicitly did not contain anything to help banks in the near term with over-leveraged bets on shaky sovereign debt -- that for the fun of it I played along.  I shorted a couple hundred shares of EUFN, a US traded fund of European financial firms (took a bit of work to find the shares to borrow).

Made 6% in one day.  Thanks Goldman.

Investors everywhere were shocked to see that MF Global seems to have lost over a billion dollars of their customers capital.  In most cases, this capital was cash customers thought was sequestered as collateral for their trading accounts.  MF Global took its customers money and used that money as collateral in making risky, leveraged bets on European sovereign debt, bets that fell apart as debt prices fell and MF Global faced margin calls on its bets that it did not have the liquidity to cover.

Certainly it strikes most folks as unethical to lose the assets in your customers' brokerage accounts making bets for the house.  But it turns out, it may have been entirely legal.  This article is quite good, and helps explain what was going on, what this "hypothecation" thing is (basically a fancy term for leveraging up assets by using them as collateral on loans), and why it may have been legal.

In short, the article discusses two regulatory changes that seemed to be important.  The first was a 2000 (ie Clinton era, for those who still think these regulatory screwups are attributable to a single Party) relaxation in how brokerages could invest customers' collateral in their trading accounts.  The second was a loophole where brokerages created subsidiaries in countries with no controls on how client money was re-used (in this case mostly the UK) and used those subsidiaries to reinvest money even in US brokerage accounts.

The increase in leverage was staggering.  Already, cash in most commodities trading accounts is leveraged - customers might have only 30% of the value of their trading positions as collateral on their margin account.  Then the brokerage houses took this collateral and used it as collateral on new loans.  Those receiving the collateral on the other end often did the same.

MF Global would be bad if it were fraud.  But it is even worse if MF Global is doing legally what every other brokerage house is still doing.

Here is the minimum one should do:  Diversify brokerage accounts.  We diversify between bonds and stocks and other investments, but many people have everything in one account with one company.  I am not sure anyone can be trusted any more.  My mutual funds are now spread across three firms and, if I grow my brokerage account for individual stocks and investments (right now it is tiny) I will split that as well.

Arnold Kling has one of the best statements on modern political incentives I have seen lately

Salmon complains that as far as the latest [European debt] plan is concerned, "the commitment is still vague." What I want to suggest is that for the politicians, vagueness is a feature rather than a bug. This reflects a fundamental misalignment between political incentives and economic requirements.

What markets and the economy need are policies that resolve uncertainty. That way, people know who is going to take a hit. Most important, they know where they can invest with confidence going forward.

What politicians need are vagueness and opacity. Having a clear, well-defined policy exposes the politician to the people who are hurt by that policy. Thus, instead of producing a balanced budget today, you produce a plan to produce a plan to balance the budget down the road. Instead of restructuring sovereign debt, you make a commitment that everyone will be made whole, without explaining how that commitment will be honored.

Apparently European leaders are close to an agreement that countries cannot run budget deficits higher than 3% of GDP.  If you are left to wonder, "hey, didn't they already have that rule before" the answer is yes.  Everyone had to promise a really, really stern oath not to run higher deficits before joining in the Euro group.

Of course, these promises meant nothing as there was no penalty for breaking the promise, and so the EU is proposing a new enforcement mechanism

Governments whose debts exceeded three percent of their GDP would be cited by the European Court of Justice, after which a super-majority of 85 percent of European governments would have to agree to impose some sort of sanction against the offending country.

I am not clear if the 85% is of the whole EU  (which would require a vote of 23 of the 27 members) or of just the Euro zone (which would require 15 of the 17 countries that use the Euro as currency).  Either way, I disagree with Drum and can't see how there is any hope at all here.  I am left with a number of questions

• What is the likelihood that European countries will adopt this Constitutional provision and precedent for reduced sovereignty?  Don't treaty changes have to be unanimous?
• Even if ratified, does anyone imagine the penalties will be high?  Imagine Greece today if such penalties exist.  How much are they going to worry about fines when they are already bankrupt?  And what will be the optics of the EU adding new costs to countries that are in financial crisis?  If a country in the future is doing things to endanger the euro from too much debt, the last thing the EU is going to be able to do is add to that country's burdens -- in fact, it is doing the opposite now, sending huge checks to all these countries
• How are they every going to get the votes when this comes up?  Again, think about today.  Would Italy, Belgium, Spain, Ireland, etc. vote to sanction Greece, when they know they are next?

I just can't see this going anywhere.  And I would be surprised if the folks involved do either.  My guess is that they hope this will settle the bond markets so they can kick the can down the road.  Sure, we will have to deal with this all over again the first, inevitable time a country breaches the 3%, but that is later and right now they will accept a few years, even a few months, of survival.

Today, US markets are rallying strongly (Dow up 400 points or so at the moment) on news of coordinated central bank action that, that .... that what?  It looks to me like the US and European banks are merely building up liquidity in preparation for potential bank runs.  I would have considered this bad news, kind of like news we just went to DEFCON 2, but for some reason the market is rallying (though there was also an ADP report saying hiring was way up last month, which is certainly good news).

As I wrote yesterday, there only appear to be 3 solutions to the European debt crisis and this is not one of them.  If I am right and patterns hold, the markets will wake up in a day or two and say, "wait, there is still trillions of Euros of deteriorating sovereign debt sitting on bank balance sheets with 40:1 leverage ratios" and fall back.  I am thrilled that our economy shows signs of life and I know that corporate profits have been good, but I don't see any way a European debt crash won't have substantial negative effects on the US.   If I am wrong, the market will continue up, up and away and you should stop ever listening to me because I clearly don't understand squat.

Update:  Yesterday I posited that real solutions were going to be a combination of 1) default/haircut 2) Make someone else pay back the debt and 3) print money.  I have heard it argued this morning that today's announcement may be evidence of #2 (ie, US taxpayers will bail them out) or more likely #3 (since the ECB can't print money, but the Fed seems to be doing a lot of it, lets get the Fed to print more money for the Europeans .... I don't understand the mechanics well enough to pinpoint who would bear the inflationary consequences of this, but betting on the US to be the world's patsy is never a bad bet).

My new column is up at Forbes, and discusses solutions to the European debt crisis.  The problem is that there are really only three, and all are bad, so most solutions being proposed either attempt to disguise that they are bad or to disguise that they are not really doing anything.  An excerpt:

The default option will almost certainly wipe out a lot of powerful banking and financial interests as well as make it very hard for governments to keep spending money at their historic pace.  This will certainly have a bad effect on the larger economy, but we should be careful accepting forecasts of economic catastrophe as most of these come from these same powerful bankers and politicians.   Every group, down to the local dog catchers, argue that the world will suffer a calamity if their particular profession is harmed.  What we do know is that large banks and financial companies are even more intertwined with the political elite in Europe than they are in the US.   We can be pretty certain that, push come to shove, a solution that saves the banks and allows politicians to keep spending will be preferred.

That is why the Europeans will likely end up printing money to pay off the debt.  They almost certainly would be doing so already,were it not for Germany’s strong memories of its Weimar inflation years, when exactly this kind of money printing to pay down government debt led to hyperinflation and political instability.  But the appeal to politicians of shifting the costs from themselves and banks to the average consumer is simply too great to pass up.  If Germany can be convinced, then the European Central Bank will print Euros.  If Germany cannot be convinced, then countries will leave the Euro and print Lira and Drachma.

I found this 2009 graph and comment by Paul Krugman (dredged up by Megan McArdle) to be a hilarious call to arms for all his fellow lemmings to follow him over the cliff

[from November 2009]:  Why, people ask, would I want to compare us to Belgium and Italy? Both countries are a mess!

Um, guys, that's the point. Belgium is politically weak because of the linguistic divide; Italy is politically weak because it's Italy. If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.

Today I spent time arguing with a group of folks about global warming and the precautionary principle.  The others all argued that a slim chance of a catastrophe justified immediate action.  I argued, of course, that they were understating the cost of the intervention, but that is another story.

Its amazing to me that so many on the Left squawk about the precautionary principle in the case of climate, but are ready to continue running up government spending and deficits despite the fact that the disaster of this approach, given the experience in Europe, is no longer even debatable.  Its simply math.

Our problem will play out differently than in Europe.  Long before interest rates on US securities run up to the 6% or so tipping point, the Fed will be running the printing presses.  Don't believe me, well, they already have been.

Savers beware, our path will be devaluation and inflation.

By the way, the speed with which hyperinflation can take hold is astounding.  Here is the inflation rate in the Weimar Republic.  As with the Fed today, the central bank of the Weimar Republic was buying up government debt with printed currency.  Look how fast the inflation took hold:

(source)  Imagine a quarterly meeting of the Fed in August of '22.  They are probably looking at month-old data, and in July it looks like everything is under control.  Boom, three months later, by the next schedule quarterly meeting, inflation is already out of control.  Krugman would say not to worry about inflation, they will have plenty of time to act.  Coincidently, this is exactly what Italy and France and Spain said about their sovereign debt, but in a flash, the crisis was upon them and so far out of control there is nothing they can do.

via here, which has a lot of good data on California job losses.

If you have a service business, I can understand the desire to get access to the large and wealthy populations in these areas.  I even started a service operation in the LA area about 4 years ago, though I regret it intensely (other operations we have in rural CA are difficult but much easier than in LA).  But even so, why would anyone ever, ever start a manufacturing or any other business in these locations if it could be located anywhere else?

I was at a cocktail party the other night lamenting to a number of business owners (more successful folks than I) about problems I am having in CA.  Usually I get sympathy, but there was none to be had.  They looked at me like I was a moron, like I was the guy who went $30,000 in debt for a puppetry degree.  They said they had gotten out of CA years ago, would never go back, and (essentially) if I was stupid enough to be there, it was my own damn fault.

Unfortunately, a lot of the recreation is there, and for better or for worse, we have found that we are better and more efficient at dealing with a lot of the CA-induced mess than other companies.  But I often wonder if I am crazy to be there.

PS- as an example, it took us 4-1/2 years to get a permit for a 1000 gallon double wall gas tank at a marina in Ventura County.  We just got it approved last month, so at last we can stop hauling truckloads of 5-gallon fuel tanks from the gas station.  We are in the third year of trying to get permitting approval to replace (in kind, same size and features) a bathroom building in a campground.

Update:  All the job gains are in industries, like health care and construction, where the jobs have to be near the population served.  Compare that to manufacturing and tech.

via

Its amazing how many people can shake their heads in despair at the European debt crisis and then continue urging the US to do exactly the same things that got the Europeans into this mess.