Guest post by Hussman of Hussman Funds.
Just weeks after the enthusiasm over Europe’s plan to plan for the possibility of using the European Stability Mechanism to bail out Spanish banks, the subtle technicality – that direct bailouts would make all of Europe’s citizens subordinate to even the unsecured bondholders of Spain’s banks – has predictably deflated that enthusiasm. On the growing recognition that addressing Spain’s banking problem will mean taking those banks into receivership, wiping out unsecured debt (much of which unfortunately was sold to unknowing Spanish savers as secure “savings” vehicles), and having the Spanish government sort out the damage, Spanish 10-year debt plunged to new lows last week (see chart below), and Spanish yields hit fresh Euro-crisis highs. At the same time, interest rates in Germany, Finland, Holland, Denmark and Switzerland all moved to negative levels looking 2-5 years out. The world is paying these governments to lend money to them, because the only way to acquire other default-free, non-commodity assets is to hire armored trucks and secure vaults to take delivery of physical currency. This set of conditions is not normal or sustainable, and indicates extreme credit market strains in Europe.
The parallels between Europe in the 1930s and Europe today are stark, striking, and increasingly frightening. We see unemployment, youth unemployment especially, soaring to unprecedented heights. Financial instability and distress are widespread. There is growing political support for extremist parties of the far left and right.
Both the existence of these parallels and their tragic nature would not have escaped Charles Kindleberger, whose World in Depression, 1929-1939 was published exactly 40 years ago, in 1973.1 Where Kindleberger’s canvas was the world, his focus was Europe. While much of the earlier literature, often authored by Americans, focused on the Great Depression in the US, Kindleberger emphasised that the Depression had a prominent international and, in particular, European dimension. It was in Europe where many of the Depression’s worst effects, political as well as economic, played out. And it was in Europe where the absence of a public policy authority at the level of the continent and the inability of any individual national government or central bank to exercise adequate leadership had the most calamitous economic and financial effects.
The man ruling the markets, gave a speech at George Washington university some days ago. Fed, the great depression, gold, the crisis and much more by Ben Bernanke below. Bernanke, that still has not had a “real” job, seems to enjoy being back lecturing. Full must see video below .
Much has been said and written about Bernanke. The central bank chief, hated by both the left, and the right, has led the Fed down a new and innovative path. So far, he has managed averting the big implosion, but many critiques see him taking us down the abyss. Whatever one thinks, below is a good piece on the man running the economy, that has never had a real job. By Roger Lowenstein via the Atlantic.
THE U.S. FEDERAL RESERVE was founded 99 years ago, as a bulwark to the banking system and an antidote to its frequent runs and panics. Strictly speaking, it was America’s third attempt at a central bank. The first, organized by Congress in 1791, was allowed to expire after 20 years, leaving the young republic with only a patchwork system of weaker state banks. During the War of 1812, Congress realized its error (in the absence of a central bank, inflation had run rampant), and in 1816, it chartered a second bank, again for 20 years. The Second Bank of the United States was, in the main, a success. Its notes were circulated as currency, and it astutely managed their supply so as to keep the economy humming. Alas, President Andrew Jackson, a fierce opponent of both paper money and national banks, campaigned in 1832 against renewal of the charter, and indirectly against the bank’s brilliant but impetuous head, Nicholas Biddle. Resentment against financiers was running high, and the election became a referendum on the genteel Philadelphia banker versus the rough-hewn war hero—and a referendum on the bank itself. Jackson won, and the Second Bank was, per his promise, destroyed. The U.S. economy promptly plunged into a severe depression. Biddle died not long after, in semi-disgrace, but the battle between bankers and populists never went away.
Greece news still dominating the screens. So many flashes, but still no clarification of how Greece is to be fixed. According to the latest, Troika is to be permanently based in Greece. As we suggested some weeks ago, Greece is soon a German colony. At least they can drop the heavy army budget then.
While the Greek people slowly realize Venizelos sold them out, it is time to move on and start reading of other economic issues. Some insight from Krugman via Playboy;
It has now been almost five years since the bursting of the housing bubble, and four years since the onset of the recession. There are 6.6 million fewer jobs in the United States than there were four years ago. Some 23 million Americans who would like to work full-time cannot get a job. Almost half of those who are unemployed have been unemployed long-term. Wages are falling—the real income of a typical American household is now below the level it was in 1997.