October, Wednesday 26, 2011

Euro Grand Plan and Catholics Occupying Wall Street

DOW + 162 = 11869
SPX + 12 = 1242
NAS + 12 = 1650
10 YR YLD += 2.20%

OIL +.75 = 90.95

GOLD + 20.90 = 1726.50
SILV +.10 = 33.47
PLAT + 29.00 = 1599.00

Today was the deadline – this was the day when the Europeans would announce the Grand Plan to solve the European Sovereign Debt Crisis. It was a day straight out of central casting. The Germans were stern and unyielding. The French were disdainful. The Greeks were tragic, and the Italians were confused and dramatic.

Italian Prime Minister Silvio Berlusconi whipped up a last minute “letter of intent” promising to cut Italy’s huge public debt and promising to take action to boost growth in Italy and promising to balance the Italian budget by 2013 and promising to have all the details by November 15^th.

The German parliament voted to allow the EFSF, the rescue fund to leverage bailout funds. Chancellor Angela Merkel warned against complacency, saying: "No one should take for it for granted that there will be peace and affluence in Europe in the next half century. The world is watching Germany and Europe to see if we are ready and able to take responsibility. If the euro fails, Europe fails."

And so it appears the Eurozone will leverage its 440-euro bailout fund several times over, btu details are not expected until sometime in November.

French President Sarkozy said he would speak with the Chinese about helping out with the bailout fund.

Euro banks were ordered to recapitalize, and told to due so no later than next summer, give or take, before everybody goes on vacation.

The European Central bank promised to continue buying sovereign bonds of the various troubled countries, even if a deal hasn’t been finalized.

If it sounds like so much smoke and mirrors; if it sounds like a contrived script – it was, but it was good enough to lift stock markets around the world because – quite simply, it promised FREE MONEY to the bankers and showed the fortitude of the Euroleaders to play a game of extend and pretend despite the ridiculousness of the circumstances.

The grand solution, the comprehensive policy response we were promised today, doesn’t really exist. Instead we got loose promises of more promises for greater details at a future date along with reassurances that the parties are sufficiently cognizant of the gravitas of the moment. 

Really it is not too complicated; the European Central Bank and the Bank of England and the Federal Reserve will continue their quantitative easing or stimulus plans. They will treat the debt problem by issuing more credit and printing more money. It is like trying to douse a fire with gasoline, but that’s the plan – and there’s no end in sight. They will leverage the EFSF through a type of bond insurance plan. The lending would be similar to Eurobonds. Germany had a failed bond auction last week. If Germany can’t sell bonds how can the EFSF expect investors to buy their bonds? Italy’s debt to GDP ratio is 120% - and that means that it is irreversible. Who will buy the bonds?

And so the next step is to split the banks into good parts and bad parts. The bad parts would get loaded down with toxic assets, those problem assets would get government guarantees. The banks are off the hook. The citizens get stuck with paying for the bad assets. The good part of the bank gets loaded up with profitable assets – this is called recapitalization. We’ve seen this story before – privatized profits and socialized losses.

Underlying the problems: The European economy is slowing down and austerity could bring it to a halt as tax revenues fall and the ability to service debt is lessened. Central banks will make loans and then demand concessions. Eventually the loans cannot be serviced and the push for privatization takes place. It is a fairly common occurrence; the most recent example is Greece. The Greeks privatized their airports and their lottery games and their future revenues from their airports.

Europeans are going to be lucky to buy a couple of years and even if they do that they haven’t solved the problems. We are looking at an insolvable problem that bankers and politicians do not want to contemplate, because it will deprive them of all their power and that is what all this is all about. They either purge the system now, or it will purge itself later and it will be far worse.

But for now, they pretend that they can solve the unsolvable problems. The Federal Reserve will eventually step in with more stimulus – a QE3. There will likely be large scale purchases of MBS, mortgage backed securities; that, in turn, allows speculators to buy long-term Treasuries and other bonds and equities, and the public picks up the losses form the banks Large scale purchases of MBS provide liquidity for foreign sellers of Treasuries; They reduce their dollar-denominated exposure without disrupting the market. The idea is to get all the toxic debt off the banks’ books, to get rid of all the unsellable liabilities and increase the liquidity – in other words, recapitalize the banks, so they buy more Treasuries. To pull this off, the Fed would have to crank up the printing press, create more money out of thin air – which is then used to speculate – which pushes up the stock and bond markets. It is a perpetual bailout.

Look back three years; the collapse of Lehman; the near collapse of AIG; the almost implosion of the global financial system. What happened? Lehman was the sacrificial lamb but the other banks were eventually showered with money created out of thin air, and they rallied, and the bank executives were rewarded with big bonuses, and nothing has changed.

So, what lesson have you learned? The President and Congress have come together to reinstate the Glass-Steagall Act, reigning in the abuses of the Too Big to Fail Banks, and chopping them into small digestible pieces – wait, sorry, that’s not it.

Seriously; What have we learned? The stock market loves when the central banks create money out of thin air and the central banks have committed to creating money out of thin air. Expect a rally in financials, a scary, dangerous ride. Plus a very strong tendency for inflation.

Total outstanding student debt has passed $1 trillion, more than the nation's credit card debt, and average indebtedness for students is rising. The College Board said Wednesday that the average in-state tuition and fees at four-year public colleges rose an additional $631 this fall, or about 8 percent, compared with a year ago. The cost of a full credit load has passed $8,000 — an all-time high. The board said about 56 percent of bachelor's degree recipients at public schools graduated with debt averaging about $22,000. From private nonprofit universities, 65 percent graduated with debt averaging about $28,000.

Obama will accelerate a law passed by Congress last year that lowers the maximum required payment on student loans from 15 percent of discretionary income annually to 10 percent for eligible borrowers. It goes into effect next year, instead of 2014. Also, the remaining debt would be forgiven after 20 years, instead of 25. The White House said about 1.6 million borrowers could be affected.

Obama also will allow borrowers who have a loan from the Federal Family Education Loan Program and a direct loan from the government to consolidate them at an interest rate of up to a half percentage point less. This could affect 5.8 million borrowers. For some students, the difference could amount to a couple of hundred dollars a month in payments.

A new CBS poll shows 43% of Americans agree with the Occupy Wall Street movement. When the poll went into several of the issues behind the movement – ideas like inequality, Wall Street corruption and such, the agreement was much stronger.

We may have seen an important development in the Occupy Wall Street protests.

The movement has received a big endorsement – the Catholic Church. The Vatican has issued a press release saying Catholic social teaching and the Occupy Wall Street movement agree that the economy should be at the service of the human person and that strong action must be taken to reduce the growing gap between rich and poor, Vatican officials said.

"The basic sentiment" behind the protests is in line with Catholic social teaching and the new document on global finance issued Oct. 24 by Pontifical Council for Justice and Peace. Bishop Mario Toso, secretary of the justice and peace council, told reporters the Vatican's new document "appears to be in line with the slogans" of Occupy Wall Street and other protest movements around the globe, but "even more it is in line with the previous teaching of the church," including Pope Benedict XVI's 2009 encyclical, "Charity in Truth", which denounced a profit-at-all-costs mentality.

Actually there have been several recent examples of Catholic authorities coming down on the side of the protesters challenging a culture that has come to worship money, deferring to the rich and mistaking wealth for moral authority.

There is still some debate about whether the recent pronouncements constitute a requirement for Catholics to support the document of Global Finance, much less support the Occupy Wall Street movement. But it is fairly clear that Vatican pronouncements on the economy are meant to guide world leaders as well as the global church. United States Roman Catholic bishops, for example, have released a voter guide for the 2012 election that highlights social concerns such as ending poverty.

The document says: “It is an exercise of responsibility not only toward the current but above all toward future generations, so that hope for a better future and confidence in human dignity and capacity for good may never be extinguished.”

Today, CNN ran an informal poll, asking viewers: Would Jesus occupy Wall Street? 

I make no claim to be a theologian, but in my meager knowledge of the Bible, I recall only one instance where Jesus acted in a violent manner. There are many instances where he showed compassion and mercy even for prostitutes and thieves; he even asked forgiveness for the soldiers that presided over his crucifixion, but only one instance where he overturned tables and took a whip to someone.

Would Jesus occupy Wall Street? It is of course a hypothetical question, but it raises a more important question? Why aren’t more churches speaking out against greed, inequality, selfishness, and poverty. When was the last time you heard a sermon on idolatry or usury? I think any priest or pastor or rabbi would be quick to denounce violence and cruelty but many are reticent to deal with financial and economic issues.  And yet, I think Gandhi was right when he said poverty is the worst form of violence.

I don’t know if Occupy Wall Street protests are the best way to address these issues. I don’t know of any church that demands support for the protests. It will be interesting to see if the Catholic Church has opened a new dialogue and if others will join in the discourse.