Modern Day Mutually Assured Destruction

Before the most recent report on Lehman Brothers’ use of Enron-like methods to hide debt from its balance sheet, Greece had recently been accused of similar shenangians.  The sovereign was under scrutiny for swaps it had set up with Goldman Sachs that allowed the nation to mask its real debt load, effectively cooking its books in order to meet the fiscal standards required for admittance into the Eurozone in 2001.  This was not the first time this type of deceptive transaction had been consummated.

The joyfully iconoclastic financial blog Zero Hedge had uncovered a little-known 2001 report by a little-known Italian Economist named Gustavo Piga which showed that Italy had used almost the exact same transactions as those used by the Greeks to mask their finances and gain entrance to the Eurozone in 1997.  For his courageous exposé, most disturbingly Piga’s life was threatened.  Why was this the case?

Piga had been the first to find “…a real-world example of how sovereign borrowers can use derivatives to window-dress public accounts as a means of achieving short-term political goals.”  As the Council on Foreign Relations which collaborated with Piga on the report noted, Italy was able to do this by “taking a cash advance in 1997 against an expected foreign exchange profit in 1998.  Under accounting rules, this is simply impermissible.  Borrowers cannot use loans to anticipate capital gains on a bond.”  The transactions allowed Italy to artifically reduce their deficit in 1997 by increasing their deficit in 1998.

And according to the CFR, what was the significance of this Enron-like Italian book-cooking?

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Tags: alexander hamilton, Andrew Jackson, bailouts, banking, debt
Posted Mar 17th 2010 at 5:31 am in Congress, Economics, News, Obama, Politics, federal spending | 9025047 Commentshttp://biggovernment.com/amellon/2010/03/17/modern-day-mutually-assured-destruction/Modern+Day+Mutually+Assured+Destruction2010-03-17+12%3A31%3A31Andrew+Mellon

The Greek Tragedy…and America’s Future?

The fiscal crisis in Greece is fascinating political theater, in part because the Balkan nation is a leading indicator for what will probably happen in many other countries. The most puzzling feature of the crisis is the assumption in other European capitals, discussed in the BBC article below, that a Greek default is the worst possible result. It certainly would not be good news, especially for investors who thought it was safe to lend money to the government, but there are several reasons why the long-term pain resulting from a bailout would be even worse.

1. Bailing out Greece will reward over-spending politicians and make future fiscal crises more likely. In a four-year period between 2005 and 2009, Greek politicians expanded the burden of government spending from an already excessive level of 43.8 percent of GDP to an even more excessive level of 51.3 percent of GDP. Subsidies are rampant, the public sector is bloated, civil service pay is way too high, and entitlements are wildly unsustainable. A fiscal crisis – with no escape options – is probably the only hope of reversing these disastrous policies. So why, then, would it make sense for Germany and other nations to provide an escape option?

2. Bailing out Greece will reward greedy and short-sighted interest groups, particularly overpaid government workers. Greece is in trouble because the the people riding in society’s wagon assumed that there would always be enough chumps to pull the wagon. In reality, Greece is turning into a real-world version of Atlas Shrugged. Government has become such a burden that the job creators and wealth generators have given up and/or moved their money out of the country. Should taxpayers in other nations reward the greed and narcissism of Greece’s interest groups by being forced to pull the wagon instead?

3. Bailing out Greece will encourage profligacy in Spain, Italy, and other nations. The hot acronym in public finance circles is PIIGS, which is shorthand for Portugal, Ireland, Italy, Greece, and Spain. Greece is getting all the attention now, but these other countries have the same problems of excessive spending, bloated and dysfunctional public sectors, and unsustainable finances. What happens in Greece will send a very clear signal to the politicians in these nations, much as a parent who lets the oldest child run rampant is sending signals the younger siblings. Does anybody doubt that a bailout of Greece will discourage the other PIIGS from undertaking needed reforms?

4. Bailing out Greece is not necessary to save the euro. This is the most puzzling feature of this Greek tragedy (sorry, I couldn’t resist). There is a pervasive assumption that a default somehow would cripple the common currency of most European Union nations. But why would a default in Greece undermine the euro? If California went under, after all, that would not cripple the US dollar. There are unpleasant things that would probably happen following a Greek default, but the stability and strength of a currency is a function of central bank behavior. And so long as the European Central Bank does not crank up the proverbial printing press to monetize Greece’s debt, the euro should be fine.

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Tags: bankruptcy, Big Government, debt, default, Deficit
Posted Feb 10th 2010 at 12:59 pm in Economics, News, Politics | 7328656 Commentshttp://biggovernment.com/dmitchell/2010/02/10/the-greek-tragedy-and-americas-future/The+Greek+Tragedy...and+America%27s+Future%3F2010-02-10+20%3A59%3A18Dan+Mitchell

Inspector General: TARP Has Created a Looming Disaster

For all the phony talk coming out of the White House this past year about transparency and accountability, there actually is an institution outside of the executive branch which does a pretty darn good job at this most of the time: the Inspector General system. In fact, IG’s may do too good of a job by producing lengthy and meticulously detailed reports, difficult even for politically-attuned readers to digest, and which usually do not contain the types of partisan zingers that attract a lot of media attention.

Yesterday the Inspector General for the Troubled Asset Relief Program (SIGTARP) released their Quarterly Report to Congress for the period ending 12/31/2009. The executive summary tells us all we need to know about their assessment of the TARP initiatives over the past year. This whole segment is a MUST READ (it’s not a pretty picture):

The substantial costs of TARP — in money, moral hazard effects on the market, and Government credibility — will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time. It is hard to see how any of the fundamental problems in the system have been addressed to date.

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Tags: bailout, debt, Financial Crisis, TARP, White House
Posted Feb 2nd 2010 at 1:56 pm in federal spending | 6877452 Commentshttp://biggovernment.com/mrichmond/2010/02/02/inspector-general-tarp-has-created-a-looming-disaster/Inspector+General%3A+TARP+Has+Created+a+Looming+Disaster2010-02-02+21%3A56%3A32Morgen++Richmond

There Is some Budget Good News, but It Is Actually Really Bad News

The  Office of Management and Budget has released the President’s FY2011 budget and the Congressional Budget Office has released its semi-annual Budget and Economic Outlook. Much of the coverage of these documents has focused on deficit numbers. This is not a trivial concern, particularly since the Bush-Obama policies of bigger government have dramatically boosted red ink.

But the most important numbers in the budget documents are the estimates of what is happening to government spending. The good news is that burden of government spending is projected to decline over the next few years from about 25 percent of GDP to less than 23 percent of GDP.

That’s the good news.

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Tags: Big Government, budget, Bush, debt, Deficit
Posted Feb 1st 2010 at 10:11 am in Economics, Obama, Politics, federal spending | 6809869 Commentshttp://biggovernment.com/dmitchell/2010/02/01/there-is-some-budget-good-news-but-it-is-actually-really-bad-news/There+Is+some+Budget+Good+News%2C+but+It+Is+Actually+Really+Bad+News2010-02-01+18%3A11%3A42Dan+Mitchell

McCOTTER: Putting ‘Limited’ Back In Government

From today’s Washington Times:

If your finances looked like the federal budget, you wouldn’t get elected. You’d get arrested. Under the Democrats’ iron-fisted, one-party rule of Washington, family budgets shrink and the federal budget bloats: The deficit, the debt and spending are at record levels; massive tax increases impend in the days ahead; and widespread unemployment persists and pains working families. Compounding this crisis, the Democrats’ spending spree imperils our national security by creating a “debt threat” whereby antagonistic nations to which we owe hundreds of billions of dollars practice economic statecraft against America to influence our foreign and domestic policies and/or actively undermine our strategic interests. In sum, government exacerbates rather than ameliorates the economic chaos around us.

Amidst the economic, social and political challenges of globalization, the injurious inequity of Democrats’ fiscal irresponsibility is not lost upon Americans. We know the government’s morally bankrupt boondoggle, committed with our hard-earned money, squanders our prosperity, weakens our security and constitutes an immoral usurpation of our liberty and sovereignty. (more…)

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Tags: debt, federal budget, limited government, McCotter, Obama
Posted Jan 21st 2010 at 1:22 pm in Congress, Economics, Obama, Politics | 6365495 Commentshttp://biggovernment.com/publius/2010/01/21/mccotter-putting-limited-back-in-government/McCOTTER%3A+Putting+%27Limited%27+Back+In+Government2010-01-21+21%3A22%3A48Publius

Better Living Through Defaulting: Everyone’s Ditching Their Mortgage

So let’s say you’re stuck in a house that the bank says is worth half a million, but the market says it’s worth only a quarter of that. What if it turned out you could walk away from it and rent not just another house, but a bigger house, for less money? What if four million of your friends figured this was a good idea, too? We’ll discuss this and more on today’s edition of Coffee and Markets, a daily podcast from The New Ledger on politics, policy and the marketplace with Francis Cianfrocca, brought to you by BigGovernment.com.

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Related Links:

WSJ: Rethinking the American Dream
Bond Buyer Update
Dow Jones: Downgrades on Illinois Debt

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Tags: bailout, debt, defaulting, homeownership, mortgage
Posted Dec 11th 2009 at 8:25 am in Coffee and Markets, Economics | 4468224 Commentshttp://biggovernment.com/newledger/2009/12/11/better-living-through-defaulting-everyones-ditching-their-mortgage/Better+Living+Through+Defaulting%3A+Everyone%27s+Ditching+Their+Mortgage2009-12-11+16%3A25%3A38The+New+Ledger