Ben! Say It Ain't So! America Could Be Like Greece?

us greeceToday Federal Reserve Chair Ben Bernanke testified before the House Budget Committee. The quote which implies America could become Greece is this:

Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy. Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point.

Greece?   Really?   Business Insider calls this plain annoying. The comparison is the wrong country. America really looks like Japan. The dire warning the United States could become like Greece is really about health care costs. Federal outlays for health care are already 5% of GDP and we have apocolyptic projections for meteoric health care costs increases. Here's Bernanke on those:

Of even greater concern is that longer-run projections, based on plausible assumptions about the evolution of the economy and budget under current policies, show the structural budget gap increasing significantly further over time and the ratio of outstanding federal debt to GDP rising rapidly. This dynamic is clearly unsustainable.

These structural fiscal imbalances did not emerge overnight. To a significant extent, they are the result of an aging population and, especially, fast-rising health-care costs, both of which have been predicted for decades. Notably, the Congressional Budget Office projects that net federal outlays for health-care entitlements--which were about 5 percent of GDP in fiscal 2011--could rise to more than 9 percent of GDP by 2035.3 Although we have been warned about such developments for many years, the time when projections become reality is coming closer.

elephant in roomBernanke is simply throwing meat to the lions, who want nothing better than to cut social safety nets, not reduce overall costs of health care. When it comes to health care costs, legislators are an experience in what people say, what dogs hear. Over and over it is amplified America pays the highest costs for health care. Yet when the elephant in the room comes out, Congress's only desire is to cut benefits to seniors and the poor, not reduce overall prices and efficiency.

One of the most irksome things is watching economically clueless House members try to play gotcha games with Bernanke instead of real questions. Perpetually House committee members try to get Bernanke to agree to their draconian attacks on U.S. social safety nets and other political agendas instead of what works.

Here's what Bernanke said on fixing unsustainable deficits:

To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. Attaining this goal should be a top priority.

Even as fiscal policymakers address the urgent issue of fiscal sustainability, they should take care not to unnecessarily impede the current economic recovery. Fortunately, the two goals of achieving long-term fiscal sustainability and avoiding additional fiscal headwinds for the current recovery are fully compatible--indeed, they are mutually reinforcing. On the one hand, a more robust recovery will lead to lower deficits and debt in coming years. On the other hand, a plan that clearly and credibly puts fiscal policy on a path to sustainability could help keep longer-term interest rates low and improve household and business confidence, thereby supporting improved economic performance today.

Fiscal policymakers can also promote stronger economic performance in the medium term through the careful design of tax policies and spending programs. To the fullest extent possible, our nation's tax and spending policies should increase incentives to work and save, encourage investments in the skills of our workforce, stimulate private capital formation, promote research and development, and provide necessary public infrastructure. Although we cannot expect our economy to grow its way out of our fiscal imbalances, a more productive economy will ease the tradeoffs that we face and increase the likelihood that we leave a healthy economy to our children and grandchildren.

Let's translate into blogger speak. Hey, idiots in Congress, you're not focusing in on what really needs to happen to reduce budget deficits. We need stimulative policies to grow the economy and most importantly, tie those incentives to U.S. citizen workers. Wow, considering the Federal Reserve uses foreign guest workers, maybe they should start with themselves to make sure they are creating jobs for Americans*.

Much of the Q&A is about Republicans trying to accuse the Federal Reserve of stepping into their fiscal policy turf. La de da, what a catch-22 for the Fed. They are blamed for everything it seems yet when they try to do something, gee, they are blamed for that too.

House Budget Committee Chair Paul Ryan was on his pulpit, accusing the Fed of destroying the U.S. dollar, destroying savings and causing overinflated asset prices by keeping interest rates low. Literally the committee accused Bernanke of designing fiscal policy. Gee wiz.

Check out the hearing video, embedded below.



* Some of the H-1B Visas issued to the Federal Reserve are for international economic talent and the salaries listed are reasonable. On the other hand, there are plenty of American web developers who are out of work right now, economists too!



Fed accused of designing fiscal policy

>Literally the committee accused Bernanke of designing fiscal policy. Gee wiz.<

Do you mean by that to say you think it's funny? Or find it so obvious it's, like, DUH? Or are oblivious to that reality?

To reiterate, yes, the international banksters are going to do to the US, which is to say, us, what they are now doing to Greece. Just as Greece's government is packed with traitors to Greeks, so is ours filled to overflowing with bipartisan traitors to America, who will sell us down the river to the glue factory to make sure they and their bankster buddies privatize everything public, put it on the market for sale to others of the international 1%, and reap the benefits of stolen goods they have no business selling while the American people had nothing to do with the fiscal policy set by the Fed, which is a private, not public, for-profit scam, in part composed of member banks that are foreign, as well as domestic banks that hate the people they steal from.

And i hope you don't think we aren't going to go down swinging, and take as many pigs as we can down with us, if it comes to that. You are forewarned, be prepared to duck.

I think next to the budget committee Bernanke looks like a saint

That's what I am saying. On the rest of your points, I sure as hell won't argue. But I'm sorry, yes I know and we're written many an article on the Fed's secret loans and on and on, but frankly when it comes to these bozo's in Congress, I'd rather have the Federal Reserve. I'm sorry but these people are just stuck on stupid when it comes to basic econ 101.

They want to destroy social safety nets, EOM, they do not care what the statistics say, what's the best path to provide plus reduce deficits, how the health care sector is a scam and ripping off America blind....

They just want their little philosophies and damn the facts. While the Fed may be in bed with the Banksters, giving secret loans to foreign banks, Jesus, at least they can calculate a spreadsheet!

Krugman on US and EU?

Paul Krugman in 2/6/12 article “America’s European Exposure” posits “it’s still very questionable whether Europe’s looming recession will actually have that much negative impact here” because “exports to Europe are just 2 percent of Europe.”

He seems to think manufacturing is the primary determinate of American wellbeing.

It seems to me that given the role of financial institutions (AKA Wall Street) in bringing on the recession, one should be analyzing what affects the EU will have on those type of institutions and in turn the overall economy.

For example, Credit Default Swaps. If Greece defaults what affect will that have on Banks that are obligated to reimburse to cover bondholder loses?

European exports, Krugman CDSes, exposure

Hmmmm, Europe is America's second largest trade deficit. See the trade report overview. I'll have to make up a pie chart on U.S. exports by region I guess because I don't have it, but glancing over the BEA trade report it looks like Europe is the third largest export market for the U.S. with a not seasonally adjusted $26 billion for November, which exports had declined significantly pushing Europe to the second largest trade deficit by region/country.

That said, I don't have an updated number for exposure to European banks or sovereign credit default swaps. We saw the Fed make it damn easy to swap out Euros, but this appears to be for Central banks (other Central banks).

Last time we looked into this the European sovereign debt exposure as well as European banking exposure was pretty damn high.

Please stop back if you see some updated data on this. I'm kind of waiting for a "real event" to look into another article on Europe. To me the story is never ending press releases and stories about how "negotiations are proceeding" and "discussions are ongoing" and "Germany wants Greece to give up control of their budget" and so on, without real concrete anything.

Superficially, it does seem like the CDS and Bank exposure is being dismissed.

CD Swaps Greece US Banks and Economy??

CD swaps Greece US Banks and Economy??

The financial news media represents the Greek Bond issue as purely a European event and keep saying ‘something like the Greek bond events can’t happen in US – i.e. US defaulting on its debt. However, US can’t default is not the issue. It MAY BE the case that the US banking system will suffer consequences from Greek default and in turn the US economy (as sub-prime mortgage issue cause bank issues which cause economic issues)

Specifically, if the Greek bonds are ‘insured’ (so to speak) by Credit Default Swaps – i.e. if Greece defaults, the seller of the ‘swap’ (insurer so to speak) will have to pay the face value of the bond to the buyer of the swap i.e. holder of the bonds (As I understand it).

The question is who are the ‘insurers’ (i.e. who sold the swap). I have read (can’t remember were) that the five largest US banks are the largest ‘insurers’ (sellers of CDS) and will have to cover Greek bondholder loses if Greece defaults.

In short, if the losses are greater than the bank equity then the Banks will either bankrupt or get bailed out – i.e. “too big to fail”.

Again, if the above is correct then the US economy may suffer if Greece defaults.

But, I’m just guessing. Because MSM is not dealing with the CDS aspect of the Greek bond issue.

EU protecting US banks? Greece and CDS

Today Mish’s headline seems ‘spot-on’ but he does not follow though in the article.
Headline;” New Merkowz Proposal...Scam to Prevent CDS Triggers”

CDS Triggers are ( I think) when a defalt is declared and the sellers of the CDS have to pay holders of CDS the face value of the defaulted bond.

Mish does not go into to this and the article he cites is in the subscribers only Financial Times so I can’t get more info.

The important point I believe is: if US Banks are large sellers of Credit Default Swaps (i.e. insureing the bondholders against deficet), then today’s Merkozy Proposal has more to do with protecting US Banks who don’t have enough money to cover such a large default, than with Greece and the EU.

Again, the risk to US economy is if US banks will again have to be determined “to big to fail” and the government has to go TARPing again. If someone knows how much exposure the US banks have in the form of CDS for Greek bonds, that would be very interesting. Main stream financial news is mute on the subject leaving the impression that the Greek bond issue is an EU problem not US. That may be the case. but we can't know unless we know how much exposure US banks have to the Greek bonds in the form of CDS

Europe, CDS, triggers, Mish, scam

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Ok, here is Mish's post:

The Merkel proposal for Greece to cede budget sovereignty to a European commissioner has finally been trashed. In its place is a Spaghetti-O loop proposal to give Greece money only if Greece earmarks the funds to immediately pay back bondholders.

So, the deal is Greece gets a bail out but if and only iff they pay the one's currently holding their debt first. That's ridiculous, those sovereign debt holders need a big fat haircut.

It should be only if the debt defaults will the CDS then be triggered for a payout.

Can you BELIEVE CDSes are in play after 2008? I was screaming hopping mad when the swiss cheese crap of "financial reform" passed AND the globe did nothing about these derivative time bombs of death.

So, what Mish is saying is the bail out doesn't go directly to Greece, to do with as they please. They are putting the bail out in escrow, saying Greece can only access the bail out funds if they behave and do what the European commission wants them to. But the idea of creating a bail out to simply pay off 100% of the Greek debt holders is positively disgusting. That's European citizens money!

The bail out is €130bn. and the proposal is coming from France and Germany, who I believe are the largest holders of Greek debt, but I also believe French banks have the largest exposure (don't quote me here).

Financial Times:

In addition to more bail-out funds in the short term, the IMF also calculates the October programme will not reduce Greek debt levels to 120 per cent of gross domestic product in the long term.

The private debt restructuring will shave about €100bn off Greece’s €350bn debt load. Some eurozone officials believe the ECB could give up the profits on its €40bn Greek debt holdings and contribute that towards Greek debt reduction instead; although the ECB bought its bonds for €40bn, they are believed to have a face value of about €55bn, meaning the ECB could cut €15bn off of Greece’s debt level without technically taking any losses.

So, on surface, I'd say Mish is right, it's all about the banks issuing CDSes on Greek debt plus the Greek bond holders and this is yet another proposal it appears to hold Greece by the short hairs...

does nothing to solve the problem and these stinking CDS time bombs are just unbelievable, they magnify a default causing contagion and further crisis 1000x. Beyond stupid and the damn things aren't even mathematically valid!

Finally, you can register at the financial times and they let you view a few articles for free, but you have to login.

This is a proposal, no agreement. There are so many press releases and claims and proposals, I cannot keep up, my fingers only can type 75wpm. ;) But when something is concrete you can get we'll be blasting it all to hell on this site. ;)

“big fat haircut” –careful what you wish for...

Thank you for your, as per usual, informative and detailed response. You type at 75 wpm and think at light speed. It turns out that I am registered and forgot login info.

If I may, just to emphasize and summarize my key point:

It may be that we the American taxpayers are as much at risk as the Greek people. If there is a default and American banks are large holders of CDS and they can’t ‘cover’ the obligations they are contracted for, then we may be in the same situation we were in when the sub-prime bubble popped – big banks can’t cover, therefore TARP and recession.

Even if there is a ‘haircut’, the question arises, do CDS cover partial defaults. If I hold a thousand dollar bond and purchased a CDS and the value of the bond is reduced to 700 dollars, does the seller of the CDS have to provide me with 300 dollars. Again, if American banks that issued the CDS can’t cover even a partial loss, then what are implications for the American taxpayers?

These are rhetorical questions in that I don’t think anyone knows the answer – outside of Wall Street boardrooms. But I do think we should be thinking about them. The media and eco-blogs largely seem oblivious to the risk that American’s are at by portraying the Greek issue as a European problem.

We (American working class) may be in the same boat as the Greeks. The internationalization of economies entails the internationalization of working class issues.

Thanks again – its been real!

well, ya have to log in to use it! - more Greek CDS

You can tell the difference if you're logged in. First, your comment will be immediately posted, you won't go into a moderation queue, then all sorts of little rating boxes will pop up. Don't see those, you're not logged in.

Well, please log in and leave some links on raw CDS holdings if you have any updated. I'm waiting for some "announcement' that actually says something on Greece at which point I can try to dig out the details of U.S. bank holdings.