Germany Bails in for the Bailout

Let the Ouzo Flow!

The latest on the Ouzo crisis is that ze Germans have given in to peer pressure. They have agreed to a rather substantial credit line for Greece. Angela Merkel thinks she has played a crafty hand, but our favourite head of state is mistaken. She thinks that the credit line’s existence will solve the problem, without even having to use it. Dan Denning thinks otherwise.

The availability of cheap funds from other countries essentially means that Greece won’t default any time soon. This makes their bonds less risky, thus making them cheaper to issue. Voila, problem solved and the Euro is off to the moon, right?

This sort of manipulation has a long history of falling flat on its face. But we only have to turn to recent times for a fill of the action.

Fannie and Freddie had an implicit government backing – heck, the entire US housing market had it. That ended well. Then there was the “lender of last resort” function of central banks and the bailout backing of the US Treasury for anything big enough. Bill Bonner put it best in Monday’s Markets and Money:

“As far as we can tell, the last successful government program was WWII. And that was only successful because the competitors’ programs were also run by government.”

The idea that just having a contingency plan means things won’t get out of hand in the first place is rubbish. The opposite is true, because the market adjusts to perceived risk. Taking the risk away is one sure fire way of inflating a bubble. And bubbles pop.

Then Merkel will find herself on the hook for Greek debts and the debts of whomever gate crashes the handout party in search of cheap ouzo. Most likely the rest of the PIIGS. That is if Angie survives the political backlash she is facing in Germany.

Why would you want to? That’s what is so baffling about the latest bunch of political races. Why on earth would you want to be in power now? As Dan put it in his speech to the Mannkal Foundation, why would any straight thinking person want to be institutionalised with the rest of those political nutters?

But maybe the bubble won’t inflate in the first place. So far, the Greek bailout hasn’t impressed bond traders much at all, let alone the Bank of International Settlements.

A friend in Hockey?

Opposition front-bencher Joe Hockey doesn’t seem to mind working in a hobbit house in Canberra. He gave a remarkable speech at the Eidos Institute in Brisbane. The Australian mentioned the following quotes in its coverage:

“A number of national leaders postulated that the financial crisis exposed fundamental failures in the free market system. I vehemently disagree with that view.

“I would argue that they key to the crisis was the market-interfering role that the United States government played in actively encouraging leaders to extend loans to people who were fundamentally unable to service their debts.”

This means that Mr Hockey has no excuse for poor policy from now on. His political career will be one to watch. Dan Denning reckons he has been reading the Markets and Money. Either that or Austrian Economic literature, which specifically discusses the same things as he did:

“Mr Hockey made clear, however, that he believed government did have an important role in managing the economy in protecting intellectual and real property rights and providing a legal framework to enforce contracts.”

Is there an Austrian Economist undercover in the Liberal Party? Probably not. If Joe can diagnose the problems of the past, he also knows what’s coming, and will keep well clear of any position where he might get the blame for it. Perhaps that is why he isn’t the Liberal Leader yet?

On the other side of the pacific, an Austrian Economics enthusiast is causing quite a stir:

“A new Rasmussen Reports national telephone survey of likely voters finds Obama with 42% support and [Ron] Paul with 41% of the vote. Eleven percent (11%) prefer some other candidate, and six percent (6%) are undecided.”

Here is the cracker:

“While 58% of Mainstream voters favour Paul, 95% of the Political Class vote for Obama.”

Whether that makes him more or less likely to win is unclear.

The Tea Party is also back to the streets on Thursday, gradually increasing its base, despite accusations of just about every wrongdoing possible.

“Twenty-four percent (24%) of voters now consider themselves a part of the Tea Party movement, an eight-point increase from a month ago.”

Tea Party protests against taxation are going to be met with some opposing protests, which are pro-taxation…

Keen on Property?

Steven Keen (Dr Doom) began his trip from Sydney to Mount Kosciuszko on Thursday … on foot. After losing the first half of his bet on house prices, Steven and his growing band of followers will have to wear a t-shirt stating the words, ”I was hopelessly wrong on house prices – ask me how”.

He has managed to turn the whole thing into a publicity stunt, detailing why the second half of his prediction will come true. “Home prices will sink by 40 per cent within 15 years.”

And things seem to be looking up for him. The article about his trip reports that “Homes loans slumped for the fifth consecutive month in February, dropping 1.8 per cent.”

How can Australia have had five months of “Homes loans” slumping and record prices at the same time? Dan looked into it on Monday. (No need to send us emails about the Chinese buying our houses again, please. Diggers and Drillers Editor Dr. Alex Cowie reported that Chinese loan growth was -28% in March!)

Steven reckons the momentum has run out for Aussie house prices:

“To me the irony is I’m marching uphill and house prices will start marching down because as you’ve seen in the lending figures the trend seems to be very strong”

Sadly, your editor is in an accommodation crisis at the moment, so there will be no joining Steven on his adventure. (No pun intended.)

Spot the irony

From the Australian: “Deputy Prime Minister Julia Gillard earlier announced the formation of the $14 million taskforce to ensure taxpayers are getting value for money out of the stimulus program.”

Let’s hope the $14 million gives us our money’s worth of ensuring we got our money’s worth, now that it’s too late to get our money’s worth.

Comparatively speaking, it didn’t cost us or the environment anything to get Tony Abbott to pass by one of the schools which proved that taxpayers aren’t getting their money’s worth.

If you’re thinking that it did cost the environment something to have Tony cycle around Australia, you may enjoy Dan’s Monday Markets and Money. It features the environmental costs of politicians in action.

Oh KRudd!

Obamacare really has turned into a huge farce. Even in terms of socialising healthcare, it has outperformed some impressive British revelations, which set the scene.

Up to 800,000 people had their organ donor preferences botched by Britain’s National Health Service (NHS), which is the third largest employer in the world after the Chinese army and Indian State Railways. Yes, this means British patients had organs removed without their permission.

But the Americans still take the cake in many respects. Their healthcare effort is ridiculous. After promising there will be no tax hikes on the middle class, there have been tax hikes on the middle class. After promising that premiums wouldn’t rise, some customers have seen increases between 25% and 39% on their premiums. Obamacare also reduces medical expense tax deductions, which are used heavily by the elderly and seriously ill. But best of all is that the healthcare provided to Senators, Representatives and their staff has been repealed without anything to replace it.

What a bunch of morons.

So now they decide to give that other loony bin, the Federal Reserve, consumer protection powers in the mortgage arena, just so it can stuff up the housing market more directly. Oh boy.

The only heartwarming story to come out of Washington recently is about a big mouth banker who got more than his share of action from borrowers.

The JPMorgan Chase & Co executive was at a congressional hearing in Washington when a lawmaker asked him who mortgage borrowers could turn to if they felt his bank’s employees were not helping them hold onto their homes.

“Come to me,” said David Lowman, chief executive for JPMorgan Chase & Co’s home mortgage business in response to the question from Massachusetts Democrat Barney Frank.

Minutes later, around 50 borrowers burst from the audience and presented Lowman with a 6-page document alleging his bank reneged on a pledge to help struggling homeowners.

“He ran. He ran like a dog with its tail between his legs,” said Bruce Marks of the Neighbourhood Assistance Corporation of America (NACA), which helps homeowners avoid foreclosure. “He was scared to death because he doesn’t really want to talk to homeowners.”

Now that is capitalism in action. Huzzah!


According to Bloomberg, “Obama Rallies Markets With Policies That Resemble Rubinomics“.

Ahh, so that is his little secret – Rubinomics.

What’s Rubinomics, you ask. “Rubinomics was a three-legged stool consisting of restrained government spending, lower budget deficits and open trade,…”

Oh. Righto. Whatever you say Bloomberg…

There is only one man who can pull off three legs and his policies wouldn’t resemble Rubinomics any less than Obama’s.

To the Boomer

The DR inbox received some comments from unimpressed Baby Boomers, who voiced their complaints about having been singled out in last week’s Week in Review. Most of the comments were well placed and well intentioned. But so was the article.

First of all, if you are a Baby Boomer Markets and Money reader, you aren’t likely to approve of the way things have gone during your lifetime, at least regarding things like debt levels and regulatory reform. That makes you different from the majority.

It’s fair to note that Australia’s public debt is pretty manageable, despite being unnecessary. Maybe singling out the Boomers was unfair, as subsequent generations had the same bad habits, or worse.

Nevertheless, global corporate and economic leadership has lately been of, for, and by the Boomers and it’s generated some real problems. At the individual level, people tend to be responsible. For example, we don’t doubt that our readers only ever make responsible financial decisions, like paying for their Markets and Money subscription.

But the rocketing levels of public debt around the world make it undeniable that responsible borrowing is not the norm. The Baby Boomers and their politicians were the first real generation promising each other free lunches, but forgetting, or not caring, that it would have to be paid for with debt. You can blame it on Keynes if you like.

How will all this play out? How amicable are intergenerational relations going to be when the young realise they have inherited a giant stack of bills (the kind you have to pay)?

It’s not likely that an “I told you so” attitude will be appreciated by “Change” and “Yes we can” chanting future taxpayers. Being a Markets and Money subscriber won’t save you from any political backlash that occurs. Even if that backlash is softened in Australia, it will still be felt.

One of our readers suggested that the expense of raising children was being left out of our analysis.

“Here’s the deal. The kids pay us back everything it cost to bring them up and then they, and your writers, can gripe about their boomer parents spending their inheritance.”

No doubt it is expensive to raise children, let alone the emotional cost. But it’s not about spending inheritance. It’s about going beyond that. The interest bills that will have to be paid on many countries federal debt might just amount to more than the cost of being raised.

More importantly, the “kids” were committed to paying for the debt by someone else. But who made the decision to incur the expenses of having kids?

Regardless of how irrational it may seem that previous generations will get the blame for the fiscal situation nations find themselves in, it still happened on their watch. It doesn’t take a skilled politician to capitalise on bad sentiment.

Have a great weekend.

Nickolai Hubble.
Markets and Money Week in Review

Nick Hubble
Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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