peterbirks (
peterbirks) wrote2012-07-02 02:46 pm
![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
Spain
I bottled it on the euro. I got the timing wrong on three trades on the trot, which is the signal to me that I have lost my feel for market sentiment. Closed out with a £700 gain (it had been £1600). I fully expect the euro to drop back, thus making it getting the timing wrong on four trades on the trot!
So, no position at all at the moment. I'm just a little bit out of my comfort zone at £300 a cent (I find myself checking the rate rather more often than I ought), but £200 is no bother. Perhaps I should have kept £150 a cent open, but I was a bit dispirited about my ability to get any decision right.
Fundamentally, in the long term, my feelings are unchanged (although the Merkel compromise acceptance caught me a bit by surprise). But in the long run we are all dead, and you can go very broke waiting for the markets to see things from your point of view.
Once again, but it bears repeating, there is not one crisis at work here (well, there kind of is a "meta" problem, that being the fundamental disequilibrium between the net exporters and the net importers, without exchange rate or interest rate weapons to alleviate them on one side, and without financial transfers from country to country on the other, but this is not the problem causing the current crisis and it's effectively, if not theoretically, unsolvable) but several. The question is, what crisis is likely to cause the big euro problem?
Looked at this way, the time that has been wasted on Greece is almost criminal. As Aardvark points out, Germany could have solved the Greek problem, probably without anyone noticing, if it had got in there before it became a political issue in both Athens and Greece.
However, even if this had been done, it would not have solved the Irish and Spanish problem (property bubble, bust banks) or the Italian problem (sclerotic growth, a long-term Ponzi scheme), or the Portuguese problem (the Greek problem, but a bit bigger).
So, the Irish problem would still have erupted, and so would the Spanish problem. The Italian problem was always there. It's no more of a "real" problem than the "pensions time bomb". Provided confidence remained, the Italian situation would not blow up for 30 years or more. It will still blow up eventually, but the only reason for it to blow up now is one of lack of confidence.
Spain is different. There have been many analyses of how the Caja/Caixa system went wrong. The technicalities abound. Spain has many layers of government. The cajas/caixas were mutuals. But the root cause was simply interest rates that were too low and credit that was too easy. If the management of a caja could pay themselves more if they lent more and had a larger book of loans, it would take a very experienced, tough and ascetic man at the top to say "sorry chaps, I know that you want to earn more money by lending more money, but I think that it will all blow up in our faces eventually". meanwhile, those caja senior managers look at the other caja guys living in bigger houses and buying bigger cars and sending their children to nicer universities. Their wives are telling them that they and the kids DESERVE a better way of life, that the manager himself deserves a better life. Indeed, how could he live with himself if his child turned into a failure just because someone says that lending money on a property might, not even "will", for christ's sake, but just MIGHT, turn out to be a bad idea?
And so the money got lent, and it did blow up, and the manager lost his job, and his wife left him anyway. Damned if he did, damned if he didn't.
Today, most of the cajas have gone. Those that remain are not mutuals, but banks. All that largesse handed out to museums and other stuff for the benefit of the region in which the caja operated. That's gone. It was false money anyway. "Profit" built on loans to developers who can't repay, with collateral that is unsaleable.
Or is it? Now, here's an interesting thing. Many of these developments have now moved into the ownership of the banks. You might think that there is a credit crunch. But there isn't if you want to buy one of these properties. These properties, perhaps sold for €200,000 before the collapse, are on sale at €150,000, with a 100% mortgage attached. How about that?
But the funny thing is, as Iain Adams pointed out to me, there might be a privately owned property just down the road, of a higher spec, up for sale for €130,000. Suppose you had €30,000 in cash, so you only want a €100,000 mortgage. Well, try getting a loan for that from the self-same bank. Not a hope. So, what's going on?
Well, if the bank can lend you €150,000 to buy one of their properties, two things happen. The first is that it turns a non-performing loan (in the sense of a dead piece of property that's sitting on its books, seized as collateral from a bankrupt developer) into a performing loan. That does wonders for the bank's capital requirements.
Secondly, if anyone questions whether all of those 195 flats in that development that remain on the bank's books are "really" worth €150,000 each, the bank can point out that, say, five of them have been sold for €150,000, which is surely indicative that they really are worth that amount. So not only does the bank turn a non-performing loan into a performing loan for five of the flats; it also gets the regulator and accountant off its back when it comes to a valuation of its property portfolio.
This, of course, is smoke and mirrors. The banks are using small losses to avoid the writing to book of larger losses. The losers are the people who own houses/apartments that they want to sell (because no-one apart from a cash buyer will be able to play in that market) and the people who are slightly cash-rich, but not quite rich enough to pay all cash. Because these people would get a much better bargain buying privately with a 70% mortgage.
I'll be honest, I've been slightly tempted by this, in that there's nearly always a way to make money out of such market disconnects. Walk in there. Borrow the €150,000 and buy the apartment on the 100% mortgage. Rent out flat in London. Live in Spain in one of these new exurbs, walking through the liquidity crisis in the mortgage market, and enjoy a happy retirement.
The downside is that I don't want to live in Spain, although some of these apartments (one development is outside of Madrid) do look remarkably good quality and, if you ARE a cash buyer, can be picked up for about half the price that the banks "pretend" they are worth.
Will this smoke and mirrors trick for the banks work? Well, it kind of depends. I've seen multi-billion dollar reinsurers set up with capital that turned out to be Weimar bonds. But everything went fine until there was a bad year for catastrophes. If everyone pretends stuff is worth twice what people will pay for it, effectively the Capital requirements are halved. That's fine, until the banks actually need 70% of their capital requirement. At that point, they turn out to be insolvent, and crisis (real crisis, not this half-assed "crisis" that we have at the moment (unless you happen to be in Greece, or some of the unlucky individuals in Ireland and Spain)) ensues.
So, no position at all at the moment. I'm just a little bit out of my comfort zone at £300 a cent (I find myself checking the rate rather more often than I ought), but £200 is no bother. Perhaps I should have kept £150 a cent open, but I was a bit dispirited about my ability to get any decision right.
Fundamentally, in the long term, my feelings are unchanged (although the Merkel compromise acceptance caught me a bit by surprise). But in the long run we are all dead, and you can go very broke waiting for the markets to see things from your point of view.
Once again, but it bears repeating, there is not one crisis at work here (well, there kind of is a "meta" problem, that being the fundamental disequilibrium between the net exporters and the net importers, without exchange rate or interest rate weapons to alleviate them on one side, and without financial transfers from country to country on the other, but this is not the problem causing the current crisis and it's effectively, if not theoretically, unsolvable) but several. The question is, what crisis is likely to cause the big euro problem?
Looked at this way, the time that has been wasted on Greece is almost criminal. As Aardvark points out, Germany could have solved the Greek problem, probably without anyone noticing, if it had got in there before it became a political issue in both Athens and Greece.
However, even if this had been done, it would not have solved the Irish and Spanish problem (property bubble, bust banks) or the Italian problem (sclerotic growth, a long-term Ponzi scheme), or the Portuguese problem (the Greek problem, but a bit bigger).
So, the Irish problem would still have erupted, and so would the Spanish problem. The Italian problem was always there. It's no more of a "real" problem than the "pensions time bomb". Provided confidence remained, the Italian situation would not blow up for 30 years or more. It will still blow up eventually, but the only reason for it to blow up now is one of lack of confidence.
Spain is different. There have been many analyses of how the Caja/Caixa system went wrong. The technicalities abound. Spain has many layers of government. The cajas/caixas were mutuals. But the root cause was simply interest rates that were too low and credit that was too easy. If the management of a caja could pay themselves more if they lent more and had a larger book of loans, it would take a very experienced, tough and ascetic man at the top to say "sorry chaps, I know that you want to earn more money by lending more money, but I think that it will all blow up in our faces eventually". meanwhile, those caja senior managers look at the other caja guys living in bigger houses and buying bigger cars and sending their children to nicer universities. Their wives are telling them that they and the kids DESERVE a better way of life, that the manager himself deserves a better life. Indeed, how could he live with himself if his child turned into a failure just because someone says that lending money on a property might, not even "will", for christ's sake, but just MIGHT, turn out to be a bad idea?
And so the money got lent, and it did blow up, and the manager lost his job, and his wife left him anyway. Damned if he did, damned if he didn't.
Today, most of the cajas have gone. Those that remain are not mutuals, but banks. All that largesse handed out to museums and other stuff for the benefit of the region in which the caja operated. That's gone. It was false money anyway. "Profit" built on loans to developers who can't repay, with collateral that is unsaleable.
Or is it? Now, here's an interesting thing. Many of these developments have now moved into the ownership of the banks. You might think that there is a credit crunch. But there isn't if you want to buy one of these properties. These properties, perhaps sold for €200,000 before the collapse, are on sale at €150,000, with a 100% mortgage attached. How about that?
But the funny thing is, as Iain Adams pointed out to me, there might be a privately owned property just down the road, of a higher spec, up for sale for €130,000. Suppose you had €30,000 in cash, so you only want a €100,000 mortgage. Well, try getting a loan for that from the self-same bank. Not a hope. So, what's going on?
Well, if the bank can lend you €150,000 to buy one of their properties, two things happen. The first is that it turns a non-performing loan (in the sense of a dead piece of property that's sitting on its books, seized as collateral from a bankrupt developer) into a performing loan. That does wonders for the bank's capital requirements.
Secondly, if anyone questions whether all of those 195 flats in that development that remain on the bank's books are "really" worth €150,000 each, the bank can point out that, say, five of them have been sold for €150,000, which is surely indicative that they really are worth that amount. So not only does the bank turn a non-performing loan into a performing loan for five of the flats; it also gets the regulator and accountant off its back when it comes to a valuation of its property portfolio.
This, of course, is smoke and mirrors. The banks are using small losses to avoid the writing to book of larger losses. The losers are the people who own houses/apartments that they want to sell (because no-one apart from a cash buyer will be able to play in that market) and the people who are slightly cash-rich, but not quite rich enough to pay all cash. Because these people would get a much better bargain buying privately with a 70% mortgage.
I'll be honest, I've been slightly tempted by this, in that there's nearly always a way to make money out of such market disconnects. Walk in there. Borrow the €150,000 and buy the apartment on the 100% mortgage. Rent out flat in London. Live in Spain in one of these new exurbs, walking through the liquidity crisis in the mortgage market, and enjoy a happy retirement.
The downside is that I don't want to live in Spain, although some of these apartments (one development is outside of Madrid) do look remarkably good quality and, if you ARE a cash buyer, can be picked up for about half the price that the banks "pretend" they are worth.
Will this smoke and mirrors trick for the banks work? Well, it kind of depends. I've seen multi-billion dollar reinsurers set up with capital that turned out to be Weimar bonds. But everything went fine until there was a bad year for catastrophes. If everyone pretends stuff is worth twice what people will pay for it, effectively the Capital requirements are halved. That's fine, until the banks actually need 70% of their capital requirement. At that point, they turn out to be insolvent, and crisis (real crisis, not this half-assed "crisis" that we have at the moment (unless you happen to be in Greece, or some of the unlucky individuals in Ireland and Spain)) ensues.
no subject
On the meat of the post: I've been (drunkenly) thinking about this, and there are two things that stand out as "not worth the notice" of hoi en telei.
The one is a simple matter of language. Now, I know that you were put down by Mr Hopkins on the matter of guilt, which is perhaps fifty-fifty. Far be it from me to bring up the German word for poison. But, on a more general level, it does seem that the EU suffers, not so much from a culture clash (which it does) and a north-south divide (which it does), but the simple matter of not having a common language (like the USA).
I think this is an underrated advantage when it comes to considering continent-wide fiscal quasi-unions. Look at the original thirteen states, post 1783: they were in a horrible position, facing both bankruptcy and massive inflation at the same time. Yet, ten years later (possibly thanks to Madison, and even Aaron Burr if you want to throw him in), they'd got the whole debt thing sorted out. I suspect that a common language had a lot to do with that.
The second thing is "rent" in the purely economic sense. Now, this is interesting to me. Rent in the economic sense doesn't actually refer to the real world concept of "rent." As far as I can see, it's defined as "monies extracted above the fair market price for a particular good."
That seems to have characterised the last twenty years or so of Western (Free Market! Lightly Regulated! Even More Watchable Than The Chicago Musical!) Capitalism.
Not helped by ludicrous amounts of leverage, obviously (see your previous analyses of, I think, CDOs; or was it CDSes?)
But a lot of this comes down to Rent. (Or rentiers, as you say.)
And, since there's only so much blood you can extract from a stone, at some point there's going to be an inversion of Rent. Which, I'm sorry to say (not being an ex-Marxist or whatever), is going to be a popular -- yet particular -- revolution across the EU states.
As an historian, I'm sort of looking forwards to this...
no subject
It beggars the mind that all the troikas and quartets and fuggin' regulators haven't noticed this minor discrepant detail in the basic capital requirements for a Spanish bank, whether it be a mutual Casa or a state-backed monstrosity.
Does anybody in Brussells own an abacus? Seriously.
I remember weird articles in the Telegraph and possibly other papers in the early 2000's, celebrating a new sort of banker. Suddenly, Spain was filled with sexually desirable young men in leathers on Harley Davisons, and they were in charge of €billions!
It was as though the entire Spanish banking system had been put in the hands of a combination of Malcolm McLaren and Peter Stringfellow.
What could possibly go wrong?
(I didn't ask myself.)
no subject
As I pointed out, rentiers have made significant amounts over the past 20 years, but this has been exaggerated by the opportunity for leverage. This has greatly expanded the money that has been "taken out in excess of cost of extraction" and, I fear, it has not led to an increase in the public good (it COULD have, if it had been used properly, but it wasn't). Put bluntly, the worker, over the past 40 years, has been screwed, whle the rentier has made all the gains.
We must distinguish here between an entrepreneur, who rightfully makes a margin either from the risk he takes or the skills he brings, and the rentier over the past 40 years, who usually takes virtually no risk (his biggest downside is break-even) and so gears up as much as possible to maximize the resultant gains. Jim Slater the asset stripper was a rentier, as were nearly all of the private equity buy-outs of the 1980s onwards. Sure, some failed, but, if they did, the private equity firm's bosses just broke even (it was the investors such as the pension funds who lost). If the buy-outs succeeded (and the dice were loaded in their failure, because money was often stripped out as quickly as possible before reflotation) then the private equity firms's bosses could make billions. Where did that come from? Just ask the staff at Kwik-Fit, or any other company overburdened with debts despite being operationally profitable. These companies were, in essence, plundered.
PJ
no subject
Thing is, it would be nice if politicians (and influential economists, and central bankers, and basically anybody in charge of hauling us out of the mire) would pay more attention to the little matter of Rent, as she is spoke by Adam Smith, David Ricardo, and that other bloke whose name I forget. Oh yes, Karl Marx.
It's all very well banging on about reform of the banking system, and capital requirements, and reducing red tape, and so on, but all this crap misses the point.
I am, at this point, fairly desperate for one of the silly bastards to stand up and say, well guv, we have to deal with the Rent problem here. If we don't, we're not "reforming the free market." We're just diddling around the edges.
I might disagree with your timescacle (I think 40 years seems a bit long, although I guess if you posit pension funds and the like as proxies for rentiers, it begins to sound reasonable). I don't disagree with the central argument.
It's one of those cases where everbody jumps on trendy bandwaggons that suit their personal belief system, isn't it? The ninety-niners will blame the banks (irrespective of the fact that the ninety-niners were largely the people who borrowed the money in the first place -- or have they forgotten where mortgages come from, and what the proximate cause of the Lehman meltdown was?). The Little Englanders will blame the Europeans. The Europeans will blame the Ango-Saxons. Republicans will blame Democrats, and vice versa, and no doubt somewhere in the financial ante-chamber to Purgatory, Satan is having a go at Saint Jude, who is bleating that Saint Christopher told him to do it and it wasn't his fault.
no subject
It's all bollocks. It's all too late.
The G8 can't cope with another ten years of this, let alone forty. It's time to get down to the mat with the bastards. Unstable politics and piecemeal revolution is all very well, but there have to be other ways to deal with the problem at a global level. Oddly, I think they're probably localised, so it's the sort of trade-off that these relentless brain-eating "summits" might actually be able to work with.
In the UK, it's high time we rebalanced the corporate tax code so that "financial engineering," aka "an efficient balance sheet," aka loading a perfectly dececnt company whose cash flow is sound with a crippling level of debt at any price, because you can charge it against tax. It beggars my mind that this is not priority number one for the coalition.
We could also do with an international agreement to close down each and every tax haven, right now. God knows, the UK can offer a lead here. We appear to own about fifty per cent of the fuckers.
In America, it's high time that everybody, and particularly the individual states, and particularly my beloved California, stopped pretending that freezing property taxes at 1970 levels was a good idea. It wasn't. It was a freaking disaster.
In China, the solution is obvious. Take every single miserable offspring of the Long March survivors out back and shoot the dingy little bastards in the back of the head.
I'm at a loss to suggest remedies for the likes of Greece and Italy, but it might be a good idea to nationalise all assets belonging to anybody (and any shell company) with a cash flow of say €200,000 a year, on a lease-back basis. That is, we now own it, mate. We will deduct the tax at the published rates (we undertake not to change those rates for the duration of this arrangement; in fact, we'll even give you a ten per cent discount for being nice enough not to kick up a fuss. And we'll confiscate the fucking lot if you do), and we'll deposit the rest in your usual bank account, as per normal. In other words, we don't trust you.
'Course, I don't trust the freaking governments of these countries, either. But this sort of thing is at least the basis for the start of negotiations between we, the people, and the scumbags who have been using asymmetric information and inbuilt taxation biases and insane regulatory systems to rip us off for the last 10 ,,, 20 ,,, 30 ,,, 40 years.
I would have tweeted this, but I lack both the followers and the ability to condense it into 140 characters. Facebook would have been even sillier.