Bailout Breakdown

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Bailout Breakdown

Ireland's plight is like Greece all over again: the EU threw a bailout party, but all the guests left before the band started playing. Eighty-five billion euros ... and Ms. Market hisses, 'Not enough!':

Nov. 23 (Bloomberg) -- Irish bonds led a slump in debt issued by the euro area’s high-deficit nations amid speculation that rescue talks won’t damp the region’s escalating crisis.

Irish 10-year bond yields surged 31 basis points to 8.61 percent at 4:54 p.m. in London. The extra yield investors demand to hold the securities instead of German bunds widened 45 basis points to 589 basis points. The cost of insuring Irish debt rose for a third day, climbing 49 basis points to 575, according to data provider CMA.

Greek 10-year bonds were set to close with the yield over 12 percent for the first time since May 7, just before the creation of a euro-area rescue facility.

Spanish 10-year bonds dropped a sixth day, with the yield 18 basis points higher at 4.93 percent. The yield spread to benchmark German 10-year bonds widened to a euro-era record. Portugal’s 10-year yield rose 25 basis points to 7.06 percent.

http://noir.bloomberg.com/apps/news?pid=20601085&sid=aga_P5g0tbas

Europe's Stoxx 50 index took a nasty 2.56% tumble today. From a trader's point of view, this is all wrong. When a huge bailout is announced, one expects a big pop, the way the US market went up on the QE2 announcement. 

Last weekend blogs were full of speculation about a big rally in Europe this week. Now it has already fizzled and turned ugly, as signs of distress increase in Portugal and Spain.

German Chancellor Angela Merkel said the prospect of serial European bailouts was 'exceptionally serious.' Irish banks, the intended beneficiaries of the bailout, seem to be going from bad to worse:

Unless European officials act quickly enough to calm the crisis, Ireland risks a “major bank run,” Pacific Investment Management Co. Co-Chief Investment Officer Mohamed A. El-Erian said today. Allied Irish Banks Plc, the country’s second-largest bank, said Nov. 19 that its deposits dropped by about 13 billion euros -- or 17 percent -- since the start of the year.

“The numbers so far have shown that the Irish banking system has been bleeding deposits,” El-Erian said in a Bloomberg Radio interview on “Bloomberg Surveillance” with Tom Keene. “It will seriously undermine the prosperity of this country for a generation.”

http://noir.bloomberg.com/apps/news?pid=20601085&sid=ajpEIBgUYQto

According to Bloomberg, Bank of Ireland Plc tumbled 23 percent, extending yesterday’s 19 percent slump. Hello -- anyone think a bank run might be underway there? How much equity do you reckon is left in that bank -- if any?

Fear is rampant; stock prices are elevated; yet sentiment, as recently as last week, was wildly bullish. This is a formula for a repricing of risk, which could be quite violent. Events will march on in Europe on Thursday and Friday, while most Americans take a 4-day holiday. Traders' instinct, I reckon, will be to lighten up on longs, rather than spend a nail-biting Thanksgiving watching Europe's hair-raising flirtation with the abyss.

As before, the bottom line is that Europe's formula of bailouts + austerity is fatally flawed. It didn't work for Greece, which now faces the same crushing interest rate as before its rescue. Now we have go-round No. 2 with Ireland, already producing the escalating distress symptoms discussed above. 

What's the solution? Restructuring! The big countries in Europe -- France and Germany -- are loath to face the fact that their banks would be rendered insolvent by a restructuring, thanks to their large holdings of peripheral European debt. Ms. Market counters that they can face the facts now in an orderly way, or traders can crash the markets to impose a point of recognition in a disorderly way. Dreams come due ...

 

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Re: Bailout Breakdown

Thanks for the continuing series of updates on the European situation Machinehead.  I have followed your posts with interest.  Do you think they can pretend and extend like the last time, or is this likely to be the tipping point over there?  Even if they whistle past the graveyard again it looks like the walls are closing in on them. 

Travlin 

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Hugh Hendry Speaks on Austerity

The always entertaining Hugh Hendry participants in a UK Townhall meeting...

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Re: Bailout Breakdown
Travlin wrote:

Thanks for the continuing series of updates on the European situation Machinehead.  I have followed your posts with interest.  Do you think they can pretend and extend like the last time, or is this likely to be the tipping point over there?  Even if they whistle past the graveyard again it looks like the walls are closing in on them. 

Travlin 

Governments can 'extend and pretend' for awhile -- after all, they're financed with 'free money.' But the high interest rates on peripheral European sovereign bonds say that the bailout is not working. Its term is only for three years. Markets think that a restructuring must occur when the three years expire, if not sooner.

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Re: Bailout Breakdown

High interest rates reflecting high risk, Machinehead?

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Re: Bailout Breakdown
agitating prop wrote:

High interest rates reflecting high risk, Machinehead?

For sure. The bailout is supposed to be in effect for three years. But if Ireland 'pulls an Argentina,' and announces over the weekend that they are leaving the euro, restoring the Irish punt, and offering 60 cents on the euro (payable in punts) with an extended repayment schedule on their outstanding debt, what is the EC going to do? Send in the tanks? I reckon not! 

Here are some thoughts along the same lines from David Rosenberg, which I endorse:

I think the dramatic fiscal tightening we are seeing in Ireland and others is insane and I wonder how a new government in early 2011 is going to react. Spanish bond spreads are behaving like Ireland did precisely six months ago when Greece was getting bailed out (it’s not really a bailout — the stringent strings attached are like a hangman’s rope).

Everybody seems to believe the euro is sacrosanct but this was also the view around the Argentina currency board nearly a decade ago, the country ultimately devalued in order to reflate its economy and pay off its debts in debased currency. After the 10-year currency convertibility plan was abandoned in early 2002, the Argentinean peso depreciated 80%, which in turn paved the way for massive trade surpluses, and from 2003 to 2007, real GDP expanded at a 9% annual rate, and real wages rose by nearly 5% per year. Growth ensued. Memories faded.

Sweden, in the early 90s, is another example, and the reason Iceland no longer makes the news is because the krona has been devalued 60%.

The end-game as I see it is that some of these peripheral EMU countries leave the union, go back to their own currency so they can reclaim control over their monetary policy and pay their debts in devalued punts, drachmas and pesetas. These peripheral EMU countries need to reflate but are being forced to do the exact opposite by being linked to a currency union.

Other countries, such as Germany and the UK, that have big banks that own a ton of these peripheral European bonds will simply see their governments issue debt to cover the losses, either in part or whole (Merkel will see to it that in Germany’s case, it will be the former) in their financial sector. We’ll look back at this like we did Argentina and Russia ... with faded memories.

http://www.zerohedge.com/article/rosenberg-i-think-dramatic-fiscal-tightening-we-are-seeing-ireland-and-others-insane

Ireland's attempt to slash government spending by 20% is gonna be like "Black '47" (the 1847 potato famine) all over again. Grind the faces of the poor! Some combination of emigration and popular revolt probably will force the Irish government to leave the euro and restructure the unpayable debt before too many starved corpses litter the streets.

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Re: Bailout Breakdown

Cue the Wagnermusik for the next spine-tingling act of the tragic opera Eurodämmerrüng:

The Nov. 22 relief rally after Irish Prime Minister Brian Cowen conceded that the nation needed financial support proved transient. Irish 10-year bond yields fell 4 basis points, before jumping 100 basis points as of 11 a.m. today, exceeding 9 percent for the first time since 1995.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aZc7NrenNqWk&pos=2

Nine percent? Hell, that's nothin' -- Greek bonds busted 12 percent! A race to the bottom is no game for amateurs. It takes seasoned pros to create asset destruction on this scale. And they're just getting started:

The average yield investors demand to hold 10-year debt from Greece, Ireland, Portugal, Spain and Italy reached 7.56 percent today, a euro-era record. The average premium investors demand to hold those securities instead of German bunds widened to 488 basis points, the highest level of 2010. The average cost of insuring against default by the five nations using credit- default swaps reached a record 517 basis points on Nov. 23.

The probability of default depends on assumptions about the recovery rate after default, which is unknown -- sovereign defaults usually produce a haircut for creditors, but not a total loss. But in any case, a CDS spread of 517 bips represents a significant likelihood of default, probably in the 20 to 30% range ... and rising.

Anyone up for a bank run?

Nov. 26 (Bloomberg) -- Standard & Poor’s Ratings Services said it lowered the counterparty credit ratings on Anglo Irish Bank Corp. Ltd. six levels to B, or below investment grade, from BBB. The ratings remain on CreditWatch with negative implications, S&P said.

http://noir.bloomberg.com/apps/news?pid=20601085&sid=akIwEw9H8_iI

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Re: Bailout Breakdown

Some horrifying observations from Michael Pettis, who literally wrote the book on emerging market sovereign defaults -- excerpts:

1. Greece will be forced to default and restructure its debt, and the restructuring will come with a significant amount of debt forgiveness.  The idea that it can grow its way out of the current debt burden is a fantasy.

2. Greece will not be the only defaulter.  Spain, Portugal, Ireland, Italy, Belgium and much of Eastern Europe will also face severe financial distress and possible default.  History suggests that when a country is experiencing a solvency crisis, growth comes only after debt forgiveness, and many or most of those countries will also be forced into debt forgiveness.

3. Political radicalism in these countries will rise inexorably as a consequence of rising class conflict.

4. So why not bite the bullet and just get it over with? Because the European banking system would not survive even the best-case restructuring scenario.

5. As an aside the European junk-bond market might take off.

6. Several countries, most notably Spain, will be forced to choose between giving up sovereignty to Germany, suffering extremely high rates of unemployment for several years, or giving up the euro. They will almost certainly choose the third option. There are still a lot of people who say giving up the euro is “unimaginable”, but that just shows a weak imagination.

This has been said before, but in a way this crisis is the European equivalent of the American Civil War. Once the dust finally settles Europe will either be a unified country with fiscal sovereignty firmly established in Berlin or Brussels, or it will be fragmented with little chance of reunion.

Crrr-r-r-r-r-r-r-r-ikey! This calls for two Guinnesses for breakfast! Argghhh!

It's the old King Midas fable all over again -- which we now understand to be an allegory for the unforeseen destruction wreaked by a magic printing press!

How did they know that, anyway? Surprised

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Re: Bailout Breakdown

When you are getting spammed by WoW, I suppose that is a mark of success in some weird way?

Noting the massive unhappiness in the euro, dollar-based risk assets, and the incredibly strange positive correlation between the dollar and bond prices, I can only think that this is the very best confusion that massive, repetitive intervention can purchase.

Oh well, if central planning and economic intervention won't work we can at least look forward to body scanners and overly intrusive searches moving into the bus and train terminals if the head of the DHS has her way.  

*sigh*

 

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Re: Bailout Breakdown

Does anyone have a feel for how much effect the proposed bank run advocated by French soccer star Eric Cantona on Dec. 7 is going to have?  Articles I've seen say that it has spread beyond France to other Euro countries and to the tea party types in the US.  If "successful", couldn't in prompt a bank holiday?

http://www.guardian.co.uk/world/2010/nov/20/eric-cantona-bank-protest-campaign

Doug

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Re: Bailout Breakdown

I kind of like Krugmans’ rather simple and elegant breakdown of Ireland’s issues and causation in today’s NY Times. For me anyway, it helps keep focus on exactly how this got started in the first place.

Eating the Irish - Paul Krugman

The Irish story began with a genuine economic miracle. But eventually this gave way to a speculative frenzy driven by runaway banks and real estate developers, all in a cozy relationship with leading politicians. The frenzy was financed with huge borrowing on the part of Irish banks, largely from banks in other European nations.

Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. After all, they were consenting adults, and if they failed to understand the risks they were taking that was nobody’s fault but their own. But, no, the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations.

Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses, even as revenues plunged, the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts.

Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.

Or to be more accurate, they’re bearing a burden much larger than the debt — because those spending cuts have caused a severe recession so that in addition to taking on the banks’ debts, the Irish are suffering from plunging incomes and high unemployment.

So how about that economic miracle that he refers to? You know the one wherein US multi-nationals opened up large scale factories and facilities in a country with a stable, highly educated work force, and featuring, last but not least, shall we say, favorable corporate tax rates. No doubt all this lack of confidence and draconian austerity measures will weigh heavily on this sector as well – right?

Apparently not.

 In Ireland, Low Corporate Tax Rates Untouched

Cut Ireland’s minimum wage? Check. Collect more in property taxes from beleaguered homeowners? Check. Raise the corporate tax rate, which could plug the gaping hole in Ireland’s tattered balance sheets even faster? Well, no.

The austerity plan Ireland unveiled on Wednesday to secure a bailout from its international partners makes one thing clear: much of the 15 billion euros (or $20 billion) in savings the government has pledged to find over the next four years will come from the welfare state and the working class. But the measures will not touch large businesses like Microsoft, Intel and Pfizer, which have created thousands of jobs and fueled exports in Ireland for years, thanks to one of the lowest corporate tax rates in Europe.

Snip…

“The corporate tax is one of the pillars of Ireland’s economy, because it drives exports and jobs, and creates tax revenues for the government,” said Paul Duffy, a vice president at Pfizer in Ireland, one of the biggest multinational employers here. Raising the tax could scare away companies and “would damage a recovery and our ability to repay the massive debts we’ve taken on,” he said.

Critics, however, say that in addition to siphoning business from countries with higher corporate tax rates, some multinationals operating under Ireland’s tax rules use complicated schemes to move profits in and out of subsidiaries there. In some cases, that allows them to lower their effective tax rate, they say.

Snip….

Multinational corporations employ more than a quarter of a million people in Ireland. Goggle, for instance, established its European beachhead in Ireland in 2003 and has been reinvesting and expanding operations. This summer, the company announced it would hire 200 people to run a new operations center on top of the 1,500 staff members already there..

About 70 percent of the nation’s exports, and 70 percent of business spending on research and development here, comes from foreign direct investment, according to the country’s Industrial Development Agency, or I.D.A. Ireland, the body responsible for luring foreign investment to Ireland.

Foreign-owned firms that are members of I.D.A. Ireland pay workers about $7.1 billion each year and provide one in seven of the country’s jobs, either directly or indirectly. All told, multinationals paid about 5 billion euros in corporate tax to Ireland last year, more than 50 percent of all corporate tax receipts, according to the group’s figures

It is widely reported that Goggle has an effective US corporate tax rate of 2.4%, using a shell game tax avoidance/deferral scheme know as the double Irish, wherein profits are funneled through Ireland entities and operational costs are funneled through the US entities. Business Week estimated that as much as $100 per share of Googles’ stock price can be attributed to this taxation strategy.

So perhaps another acronym we can add to the “insiders list” of blogger shorthand, right next to TBTF, is TBTT, or - Too Big To Tax.

And if one were a cynic (certainly not me) an observation might be made that Naomi Klein may well have an opportunity to add a few more chapters to a second edition of 'Shock Doctrine" - a thesis that seems to be still unfolding......

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Re: Bailout Breakdown

Krugman asserts, 'The Irish story began with a genuine economic miracle.' But is that really so? Looking at the larger story of peripheral Europe, I'm not so sure.

A huge investment theme in the run-up to the euro currency in the mid-1990s was the 'euro convergence trade.' Back in the era of drachmas, punts, pesetas, escudos and lire, the bonds of these countries offered higher yields than the 'hard currency' countries of Europe, thanks to their weaker credit ratings, higher inflation, and history of depreciation.

But as these shakier currencies were merged into the euro, their sovereign yield premiums were set to nearly disappear, as they would all be denominated in solid, bulletproof euros. So arbitrageurs bought PIIGS bonds and shorted bunds in vast leveraged quantities, and waited for the guaranteed payout as their yields converged.

In retrospect, convergence was a seductive, unsustainable illusion. The peripheral countries actually WERE riskier. But for the past twelve years, they've enjoyed German 'hard currency' purchasing power, coupled with German 'AAA credit' borrowing rates. Naturally, this illusory regime of cheap borrowing and strong purchasing power led to a fantastic Bubble in peripheral European economies which did not merit either the easy money or the strong currency purchasing power.

Spain's manufacturing sector shriveled, as its workers shifted to the construction trades to supply a monster real estate bubble. Cottages in remote villages on Ireland's west coast sold for 500,000 euros, many multiples of local incomes. And so forth.

Very little of this was a 'genuine economic miracle,' I would claim. It was a Bubble produced by artificially cheap (and unsustainable) borrowing costs, conferred by a fiat currency erected on a foundation of quicksand. Now, working off the post-Bubble malinvestment means a couple of decades of depression.

Unlike the euro currency, low corporate tax rates aren't necessarily unsustainable. Countries, states and provinces that offer lower taxes historically outgrow their neighbors. California's top marginal rate of state income tax is 10.3%, while Florida's is zero. Yet there is no demonstrable difference in the quality of life and public services between the two states.

For Ireland to sacrifice its tax haven status at this stage would just amplify the shedding of jobs, even if those jobs were originally based on tax arbitrage. Low taxes are inherently a good thing, not a bad thing. But the envy felt by high-tax regimes which offer no added value for the taxpayers' sacrifices leads them to claim otherwise.

In the case of the US, trillions are flushed down the drain in hellholes like Iraq and Afghanistan, which in turn requires TSA goons to suppress terrorist blowback. High taxes are a statist fraud on the people, pure and simple.

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Re: Bailout Breakdown
machinehead wrote:

Very little of this was a 'genuine economic miracle,' I would claim. It was a Bubble produced by artificially cheap (and unsustainable) borrowing costs, conferred by a fiat currency erected on a foundation of quicksand. Now, working off the post-Bubble malinvestment means a couple of decades of depression.

For Ireland to sacrifice its tax haven status at this stage would just amplify the shedding of jobs, even if those jobs were originally based on tax arbitrage. Low taxes are inherently a good thing, not a bad thing. But the envy felt by high-tax regimes which offer no added value for the taxpayers' sacrifices leads them to claim otherwise.

High taxes are a statist fraud on the people, pure and simple.

Great points, your posts are always an education. I have little visibility or awareness of bond structures and Eurocurrency convergence.

But I do have some direct experience with the demand side, and I believe Krugmans’ reference to economic miracles had more to do with US multi-nationals (Big Pharma in particular) setting up shop in Ireland, with highly skilled “clean room” jobs. Attracted by the promise of stability and the low corporate tax rates, these jobs are coveted by nations such as Ireland as much for the technology knowledge base they bring as for the simple employment numbers.

The miracle was the surprise by how effective the Irish workforce was in rising to the call of these highly complex job skills- they quickly rose to provide not only equivalent productivity and demonstration of skill to as compared their American bosses, but in many cases exceeded them.  Innovation was the rule, not the exception.

What we are discussing is the demand side of the Irish story, not the (financial) supply side. These new jobs were high paying, and the financial industry was quick to move in to provide loans for real estate and American style consumerism. And we all know where this eventually ends up in an unregulated “free” market.

In this particular “free” market, as in ours, the people that caused the disaster are not the people paying for it. And it does seem that attempting to extract a pound of flesh from the US multinationals by way of raising Irish corporate taxes is not going to be particularly helpful for the Irish economy, as the multinationals will simply pull out and go to a non EU country such as Hungary, etc. I’m not sure that punitive taxation is appropriate as it can be argued that these players had little to do with the financial collapse, other than luring them in with the siren song of high earning consumers entering a era of prosperity.

Unlike the euro currency, low corporate tax rates aren't necessarily unsustainable. Countries, states and provinces that offer lower taxes historically outgrow their neighbors. California's top marginal rate of state income tax is 10.3%, while Florida's is zero. Yet there is no demonstrable difference in the quality of life and public services between the two states.

Low taxes are inherently a good thing, not a bad thing. But the envy felt by high-tax regimes which offer no added value for the taxpayers' sacrifices leads them to claim otherwise.

Boy, this is a minefield. I barely dare comment as anyone taking issue with this remark is likely to be tarred and feathered as a tax and spend liberal, which I am not. But hold on there, let’s take a look at an infrastructure comparison between Florida and California. For starters,  how about a state GDP of more than 2X (in favor of CA). Any chance at all that some of those taxes went towards an R&D friendly high tech infrastructure? How many technology startups come from Mountain View as compared to what, Orlando? Ironically, Sergey Brin, co-founder of Goggle studied (PhD program) at Stanford under tax payer funded scholarship, where he and Larry Page left and started Goggle. This same high tech incubator culture helped launch Goggle to what it is today, and I’ll go out on a limb and argue that none of this would have happened in Florida. Further, today any (successful) start up companies incubated in Silicon Valley are almost immediately outsourced to China for manufacturing, instantaneously assuring that no US job growth will ever come from these innovative endeavors. Some of these companies eventually have market caps in the billions, yet, net only a few hundred American jobs.

So now we have the kick down the ladders mentality wherein Goggle, and many, many others, spend millions on tax avoidance strategies and send US jobs to Ireland, then concoct complex schemes to avoid paying taxes in the US, under the guise of some type of distorted fairness doctrine, claiming that they are simply (and legally I’ll concede) operating in a world where it is somehow necessary to avoid the evil statist regime. You buying that MH?

To this layman, using words like statist fraud obscures the real crime here, and that is that this is less than a zero sum game, and has little to do at all with the financial sector. The so called “flight of capital” is a myth. This is companies externalizing their costs, sending jobs offshore, and simultaneously lowering their tax burden, raising profits, and cannibalizing the communities they are leaving who no longer have the jobs (and now a declining tax base left in their wake) to support the necessary infrastructure. So we have austerity as the solution?

While I do not condone punitive taxation, or “high” taxes (all taxes are unnecessarily high to the person paying them) I condemn those that engage in legal cheating to defraud the American public out of tax income to replenish the infrastructure that they used in the first place to build their businesses-without which they could not have succeeded. I condemn multinationals sending jobs overseas (often with tax incentives to do so) and claiming that this is solely to remain competitive (it is to increase profit margins, no other reason). This tactic is effectively asphyxiating the infrastructure of the community where the jobs are removed, as the tax base declines accordingly. And of course the only logical response is to implement austerity, and to reduce costs, because, hey, we can’t afford it anymore.

A guy on ZH had it about right. First you start a fire, break all the fire hydrants, call the firefighters incompetent, and lay them off as we can no longer afford them.

I am not trying to be argumentative, I just think another point of view (other than the financial supply side)  is useful in this discussion.

 Laughing

DK

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Re: Bailout Breakdown

 

I think I detect some contradictions in your assertions:

darbikrash wrote:

 And we all know where this eventually ends up in an unregulated “free” market.

In this particular “free” market, as in ours, the people that caused the disaster are not the people paying for it.  But hold on there, let’s take a look at an infrastructure comparison between Florida and California.

How do the people who caused the disaster end up not paying for it in a free market? A free market would have let these entities fail, not bailed them out. This is anything but a free market which I think you yourself acknowledge here:

darbikrash wrote:

For starters,  how about a state GDP of more than 2X (in favor of CA). Any chance at all that some of those taxes went towards an R&D friendly high tech infrastructure? How many technology startups come from Mountain View as compared to what, Orlando?

What you suggest here are government inducements, quite the opposite of a free market.

darbikrash wrote:

To this layman, using words like statist fraud obscures the real crime here, and that is that this is less than a zero sum game, and has little to do at all with the financial sector. The so called “flight of capital” is a myth. This is companies externalizing their costs,

How do companies "externalize their costs" without the accompaniment of statist fraud. They cant. It requires a complicit political tax and spend cohort with concurrent tax breaks for these companies, a type of soft facism which is statist by definition.

darbikrash wrote:

......... legal cheating to defraud the American public out of tax income to replenish the infrastructure that they used in the first place to build their businesses-without which they could not have succeeded.

I'm confused. If it's legal, how can it be cheating. If they committed tax fraud then they can and should be prosecuted. If the law was followed, however, then they did not "defraud the American public out of tax income". If you are refering to a corrupt system with complicit politicians and corporations ( a view I would agree with) then that is not a free market and is indeed statist fraud.

 

 

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Re: Bailout Breakdown
darbikrash wrote:

But hold on there, let’s take a look at an infrastructure comparison between Florida and California. For starters,  how about a state GDP of more than 2X (in favor of CA). Any chance at all that some of those taxes went towards an R&D friendly high tech infrastructure? How many technology startups come from Mountain View as compared to what, Orlando? Ironically, Sergey Brin, co-founder of Goggle studied (PhD program) at Stanford under tax payer funded scholarship, where he and Larry Page left and started Goggle. This same high tech incubator culture helped launch Goggle to what it is today, and I’ll go out on a limb and argue that none of this would have happened in Florida. 

You raise some interesting points, DK, which I can only partially address for now. 

Cali's GDP is larger than Florida's, but so is its population. GDP per capita is a more relevant measure, and it's pretty similar for the two states.

The phenomenon you describe of industrial clustering happens all over the world, from Italian towns that specialize in textiles and light fixtures to Silicon Valley in California. The confluence of Stanford University; the 50-year-old legacy of Hewlett Packard, Fairchild Semiconductor, et al; and an interlinked community of experienced venture capitalists probably could not be replicated elsewhere at any cost.

A Floridian example might be the way Miami has become a global banking center for Latin America. It has the multinational population from every country in Central and South America, the capital, and the transport and communication infrastructure to serve this function. (Miami also has the fiercely capitalist Miami Cubans, but let's not get into that!) Los Angeles could have been a competitor for this role. But now that Miami has established itself as LatAm's premier international banking center, it's probably too late for Los Angeles or San Antonio to try to horn in.

An unfortunate phenomenon in California is that the state became heavily dependent on capital gains revenues from Silicon Valley millionaires. These revenues turned out to be very cyclical. As a result, California is now slashing public spending in ways that will cause serious long-term damage. I'd argue that Cali would have been better off not being so tax-hungry in the first place. They would now have the capacity to maintain state spending, rather than cutting the budget in procyclical fashion, which only amplifies the slump.

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Re: Bailout Breakdown
earthwise wrote:

I think I detect some contradictions in your assertions:

 

Earthwise thanks for your response, however I don’t see any contradictions from my side. What I detect is an attempt to position my response in the framework and vernacular of Libertarianism, a conflation which will not work.

The quotes around the “free” market notations in my post indicate that I do not really believe that we have a free market, it’s tongue in cheek. There is no such thing as a free market in our current political and economic reality.

Using tax dollars to invest in state infrastructure for the purposes of business “inducement” is a reality of all states and most countries, in one form or another. The reason this is done is because it has to be done, leaving certain (actually many)  critical investments to the “free market” is just a euphemism for saying it will never get done. A road, highway, or university system may be considered such an infrastructure. In many cases, the ROI of such a road for a singular investment actor has insufficient payback crossover to properly allocate capital. Additionally, the road may be used by competitors who do not have to make the investment, further disadvantaging the initial investor. The investment criteria for “free market” capitalism is very narrow indeed, and unless singular cost/benefit can be established, (meaning the investment cannot be used by competitors) than the investment is unlikely.  A state investment in infrastructure may be used by many actors, and if properly identified and implemented, uses the concept of a “rising tide floats all boats”. The benefits are spread to the citizens in the form not only of increased prosperity (increased GDP), but as an asset that has intrinsic value.

Such investments are to be encouraged by a properly performing society, not discouraged by a narrowly confining ideology

How do companies "externalize their costs" without the accompaniment of statist fraud. They cant. It requires a complicit political tax and spend cohort with concurrent tax breaks for these companies, a type of soft fascism which is statist by definition.

Companies externalize their costs all the time, and do so without government knowledge, oversight or approval. In fact they prefer it that way. Moving jobs to China (or Ireland) externalizes costs back into to the community from which the jobs were extracted. No government oversight or approval is needed to outsource jobs, yet the cost impact to the local community is devastating. The community has no legal or political redress to recover these lost dollars.

The breakdown here is that multinationals are (often) in and of themselves statist, so the issue becomes recognizing that government complicity is not required or necessary for this to occur. Corporations can and do act in ways that are in their best interests, but which run counter to the interests of the commons – in fact damaging society as a whole. Unregulated free markets, by definition, cannot respond to these initiatives, and regulated free markets are often captured by the corporatists, allowing, even encouraging such behavior. Such is the case in the US currently.

I'm confused. If it's legal, how can it be cheating. If they committed tax fraud then they can and should be prosecuted. If the law was followed, however, then they did not "defraud the American public out of tax income". If you are referring to a corrupt system with complicit politicians and corporations ( a view I would agree with) then that is not a free market and is indeed statist fraud.

There is a difference between which is legal and unethical, and illegal. One has punitive ramifications, the other has moral implications. It is possible to behave in a manner both legally compliant and morally reprehensible. I use the terms cheating and fraud in this example interchangeably. Conflating statist fraud with these conditions is neither accurate nor appropriate.

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goes211
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Re: Bailout Breakdown
darbikrash wrote:

Moving jobs to China (or Ireland) externalizes costs back into to the community from which the jobs were extracted. No government oversight or approval is needed to outsource jobs, yet the cost impact to the local community is devastating. The community has no legal or political redress to recover these lost dollars.

Maybe the "community has no legal or political redress" because the community does not OWN them!

If a person/company creates jobs in a community, who do you believe owns them?  My understanding is that the person/company that creates the jobs actually is the owner but somehow you seem to think that it is the community that owns them.  At what point did ownership of these jobs transfer from the person/company that created them to the community?  I know if I was going to create something but afterward I would no longer own it, I would be far less likely to create it in the first place. I will bet that jurisdiction's that transfer ownership of jobs away from their creators will find that their are very few people/companies that are willing to create jobs there.

Why do so many people speak of jobs as something that can be owned by someone other than the employer?  Communist do this all the time and I never understood it.

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SteveW
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Re: Bailout Breakdown
darbikrash wrote:

I kind of like Krugmans’ rather simple and elegant breakdown of Ireland’s issues and causation in today’s NY Times.

Eating the Irish - Paul Krugman

Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. After all, they were consenting adults, and if they failed to understand the risks they were taking that was nobody’s fault but their own. But, no, the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations.

Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.

Turning private losses into public obligations. a fine tradition established in 2008 under US leadership in their TARP program.Yell

 

 

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darbikrash
Status: Platinum Member (Offline)
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Posts: 573
Re: Bailout Breakdown
goes211 wrote:

Maybe the "community has no legal or political redress" because the community does not OWN them!

We agree 100% on this. I’d extend it to say the employer does not own the jobs either. Jobs cannot be owned by anyone, investor, employer, or community. It takes a confluence of all to result in a job.

However, this misses several transparent and costly transactions (investments and expenditures) between the employer and the community. When an employer “creates” jobs they aggregate and mobilize people into (usually) a central location of convenience to the employer, and coincident to a community. In many cases, these workers may be from another area, they may raise families, bring in relatives, and any and all manner of means of bringing people together for the advancement of the financial objectives of the employer.

These people create a cost drag on the community. They require police, fire, schools and all manner of governmental services. The community government, in the case of incremental adds to the community, expands the infrastructure to support these workers at significant cost. In many cases, these costs are long term infrastructure expenditures that cannot easily be shed if a sudden downturn comes about.

Further, often specific infrastructure investments are made to the benefit of the employer, sometimes to entice an employer, both directly and indirectly, to “set up shop” in a particular community.

If one large (please understand I am not talking about small business) employer in a community sends all its jobs overseas, most often the displaced local employees can be absorbed back into the work force through other employers, especially in an ever expanding economy. If all the employers in a given community outsource all the jobs, what happens now?

Some displaced employees will move and attempt to find a community that has not outsourced jobs, and relocate. Many will not. Many will stay, due to economic conditions, family ties, etc. Those that stay are now a net drain on the local economy, consuming as many or more government services with reduced tax revenue to put back into the economy. While local governments can respond to these types of conditions, the responses are limited to labor based cutbacks, the longer term expenditures and infrastructure investment must still be paid.

So the employer has broken a social contract between the community and itself. Whether this social contract is implied or overt is academic, someone has to pay the bill. The costs are real, and the jobs are gone, and the profit margins of the employer are enhanced as a result of this exchange. They have in fact externalized the costs of community to some other country, for a lower labor burden. The notion of job ownership is immaterial.

If the business had been started in a foreign country, fine than there is no net cost to US community infrastructure. However, there still is a matter of ownership, and the real issue of ownership is the market. Who owns the market in the US? We do. This is the ultimate leverage, we can decide to deny access to OUR market to those who choose not to produce in our country or refuse to pay tax (or contrive to avoid tax) in our country.

This is the discussion we should be having.

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darbikrash
Status: Platinum Member (Offline)
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Posts: 573
Re: Bailout Breakdown
machinehead wrote:

A Floridian example might be the way Miami has become a global banking center for Latin America. It has the multinational population from every country in Central and South America, the capital, and the transport and communication infrastructure to serve this function. (Miami also has the fiercely capitalist Miami Cubans, but let's not get into that!) Los Angeles could have been a competitor for this role. But now that Miami has established itself as LatAm's premier international banking center, it's probably too late for Los Angeles or San Antonio to try to horn in.

Your right about that, good point.

Miami got a little infrastructure investment as well during the ‘80’s, effectively kicking it off from a backwater retirement community to a real estate and global financial powerhouse.

This “seed capital” did not come from the state however, but it did come, by the millions, usually in black Hefty trash bags floated in off one of Don Aronow’s needle nose go-fasts- courtesy of Pablo Escobar and the Medellin cartel.

Miami insiders from back in the day say that the condo and banking boom never would have happened without the Columbians.

Got your pastel sport coat Crockett?

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