The US Department of Justice has put an end to online gambling in the US.
Meanwhile, the US Department of Justice has yet to file an indictment against any of the players from the major financial institutions who caused the 2008 financial crisis. No one from Lehman Bros, Bear Stearns, JP Morgan, Goldman, AIG, or Countrywide has seen the inside of a criminal courtroom because of their actions. And while I don't have inside information on any of these firms, I find it difficult to fathom, given the hundreds of billions that were lost, that there wasn't a single person who made false representations at those firms to try to earn a little coin.
But at least we know people can't play online poker anymore. Way to go after the low-hanging fruit, DOJ! Very impressive.
Thursday, April 21, 2011
Monday, April 11, 2011
Default: US vs. Ireland
I am a citizen of two countries: the United States and Ireland. For both countries, issues related to budgets have plopped themselves down at the front doorstep of the political debate. Ultimately, the debates have little in common. The Irish debate is largely involuntary, whereas the US has voluntarily chosen to make great political theater over a debate that, for now, only depends on itself. But the differences between the two are illustrative of when these debates are meaningful, how they evolve, and what each can expect from each. I'm not working today, so I will discuss each.
Sadly, I have no constructive solutions for either. Both countries will default, just as the sun will burn out one day. But, much as with the sun, I make no prediction of when it will happen. I just hope I'm somewhere else when these things go bad.
First, Ireland and the US got into trouble with their budgets in very different ways. In Ireland, it was really one bad decision that led the whole thing: Irish PM Brian Cowen's 2008 announcement that Ireland would guarantee all of its bank liabilities, regardless of size, seniority, and the nature of the creditor. This was dumb and foolish, but his critics fail to respect that there was a reason he did it. If he hadn't, Irish banks would have collapsed in weeks if not days, capital would have fled Ireland immediately, and the country would have sunk into depression that dwarfs what it is suffering now. The closest analogy to what it would have experienced would be what happened Iceland. The only problem is that Ireland is a part of a monetary union and Iceland was not. Ireland cannot let its currently go semi-worthless in an effort to quickly pay off debt. To Ireland's chagrin, its currency, the Euro, has grown stronger over the past few months. This makes Ireland's impossible-to-pay-off debt even more impossibler to pay off. Bummer.
The United States has not made one bad decision or even many bad decisions to get where it is today. Its entire existence is now, and has been for a long time, incompatible with a healthy fiscal equilibrium. But the root cause of this, its position as the only legitimate world super power, will prevent these problems from haunting it any time soon. This is because the United States still maintains a disproportionate share of net world demand (approximately one quarter). Its creditors (local treasury holders, Japan, China, international banks) would all suffer as much if not more than the US would if it were to stop funding American excess. So they keep funding it to keep their own economies humming.
Ireland has promised to fund bank liabilities so large that it would required to allocate all of its tax revenue for the next three to four years, at a minimum, to pull off the job. Fortunately for the Irish, firing every teacher, police officer, public servant, disbanding the armed services and reneging on every other government obligation from pensions to public services is not politically feasible. So Ireland is making small accommodations to its creditors and should be able to pay off the interest on its debt, at least for now. But this is akin to someone with 30,000 euro in annual income and 100,000 euro in debt making the minimum payments on its credit cards: It only delays the day of execution. Ireland will never pay off the principal. Default is the only option. The only question is when, the terms, and the time it will take to restore the faith of the bond markets after the fact. Ireland will get booted from the EU, return to the Punt, and eventually become healthy once again (though it may take time).
For the US, the question is more complicated, as the dollar is the world's reserve currency, and so any slight movement in the value of its debt (the dollar) has an enormous impact on the world economy. Default, which typically creates some of the biggest foreign currency movements that can happen, would be cataclysmic if it happened in the US.
Also, the US has the ability and the desire to devalue its currency. By devaluing its currency, the US can do what Ireland cannot do as of yet: make the debt easier to pay off in real terms. If the dollar is worth less in real terms (the dollar has lost 20% of its value relative to the Euro in the last 8 months, and as much 50% of its value relative to some commodities, such as silver.
For now, the choice about which items to cut from the federal budget are simply that: choices. Democrats prefer to cut less and Republicans prefer to cut slightly more, opting to trim the ever-shrinking discretionary spending budget, specifically those related to programs it finds ill-conceived or undesirable (health care and planned parenthood). But even if Republicans were to cut the entire discretionary spending budget, dumping everything from parks to federal funding of education to guarantees for home loans, the US still wouldn't be close to balancing the budget.
At the moment, neither party has proposed a significant reduction in defense spending. But, unfortunately, it's such a large percentage of the budget (approximately 60%, depending on how you define these things) that it's not possible to get there any other way. And not all the other stuff is optional. For example, approximately 5% of our budget goes to the judicial branch. Firing all judges and staff means no system of law, which means chaos? Think the SEC is bad now and that corporate types already can rob and steal with impunity? Cut their budget in half, and it will only get worse.
There's just not that much slack in the budget, and the only way to make the math work is to make the quality of every type of public service fall off a cliff. That means little to no unemployment insurance, drastically worse medicaid (and it's already pretty bad), worse conditions and equipment for the military, compensating our teachers even more poorly while making conditions much worse, to name just a few. These things are all, also, untenable politically.
These things will not happen by choice. They will only happen when our creditors refuse to fund our debt. And when that happens, cutting all branches of the government will be mandatory, rather than discretionary.
But this will probably not happen all at once. Japan's debt is more than twice as large as ours, as a percentage of GDP. And yet they still issue more debt.
History tells us that reality will set in sooner or later, just as the sun will some day die. Unlike the sun, however, I've got a feeling I'm going to have a front-row seat for this disaster. And it ain't gonna be pretty.
Sadly, I have no constructive solutions for either. Both countries will default, just as the sun will burn out one day. But, much as with the sun, I make no prediction of when it will happen. I just hope I'm somewhere else when these things go bad.
First, Ireland and the US got into trouble with their budgets in very different ways. In Ireland, it was really one bad decision that led the whole thing: Irish PM Brian Cowen's 2008 announcement that Ireland would guarantee all of its bank liabilities, regardless of size, seniority, and the nature of the creditor. This was dumb and foolish, but his critics fail to respect that there was a reason he did it. If he hadn't, Irish banks would have collapsed in weeks if not days, capital would have fled Ireland immediately, and the country would have sunk into depression that dwarfs what it is suffering now. The closest analogy to what it would have experienced would be what happened Iceland. The only problem is that Ireland is a part of a monetary union and Iceland was not. Ireland cannot let its currently go semi-worthless in an effort to quickly pay off debt. To Ireland's chagrin, its currency, the Euro, has grown stronger over the past few months. This makes Ireland's impossible-to-pay-off debt even more impossibler to pay off. Bummer.
The United States has not made one bad decision or even many bad decisions to get where it is today. Its entire existence is now, and has been for a long time, incompatible with a healthy fiscal equilibrium. But the root cause of this, its position as the only legitimate world super power, will prevent these problems from haunting it any time soon. This is because the United States still maintains a disproportionate share of net world demand (approximately one quarter). Its creditors (local treasury holders, Japan, China, international banks) would all suffer as much if not more than the US would if it were to stop funding American excess. So they keep funding it to keep their own economies humming.
Ireland has promised to fund bank liabilities so large that it would required to allocate all of its tax revenue for the next three to four years, at a minimum, to pull off the job. Fortunately for the Irish, firing every teacher, police officer, public servant, disbanding the armed services and reneging on every other government obligation from pensions to public services is not politically feasible. So Ireland is making small accommodations to its creditors and should be able to pay off the interest on its debt, at least for now. But this is akin to someone with 30,000 euro in annual income and 100,000 euro in debt making the minimum payments on its credit cards: It only delays the day of execution. Ireland will never pay off the principal. Default is the only option. The only question is when, the terms, and the time it will take to restore the faith of the bond markets after the fact. Ireland will get booted from the EU, return to the Punt, and eventually become healthy once again (though it may take time).
For the US, the question is more complicated, as the dollar is the world's reserve currency, and so any slight movement in the value of its debt (the dollar) has an enormous impact on the world economy. Default, which typically creates some of the biggest foreign currency movements that can happen, would be cataclysmic if it happened in the US.
Also, the US has the ability and the desire to devalue its currency. By devaluing its currency, the US can do what Ireland cannot do as of yet: make the debt easier to pay off in real terms. If the dollar is worth less in real terms (the dollar has lost 20% of its value relative to the Euro in the last 8 months, and as much 50% of its value relative to some commodities, such as silver.
For now, the choice about which items to cut from the federal budget are simply that: choices. Democrats prefer to cut less and Republicans prefer to cut slightly more, opting to trim the ever-shrinking discretionary spending budget, specifically those related to programs it finds ill-conceived or undesirable (health care and planned parenthood). But even if Republicans were to cut the entire discretionary spending budget, dumping everything from parks to federal funding of education to guarantees for home loans, the US still wouldn't be close to balancing the budget.
At the moment, neither party has proposed a significant reduction in defense spending. But, unfortunately, it's such a large percentage of the budget (approximately 60%, depending on how you define these things) that it's not possible to get there any other way. And not all the other stuff is optional. For example, approximately 5% of our budget goes to the judicial branch. Firing all judges and staff means no system of law, which means chaos? Think the SEC is bad now and that corporate types already can rob and steal with impunity? Cut their budget in half, and it will only get worse.
There's just not that much slack in the budget, and the only way to make the math work is to make the quality of every type of public service fall off a cliff. That means little to no unemployment insurance, drastically worse medicaid (and it's already pretty bad), worse conditions and equipment for the military, compensating our teachers even more poorly while making conditions much worse, to name just a few. These things are all, also, untenable politically.
These things will not happen by choice. They will only happen when our creditors refuse to fund our debt. And when that happens, cutting all branches of the government will be mandatory, rather than discretionary.
But this will probably not happen all at once. Japan's debt is more than twice as large as ours, as a percentage of GDP. And yet they still issue more debt.
History tells us that reality will set in sooner or later, just as the sun will some day die. Unlike the sun, however, I've got a feeling I'm going to have a front-row seat for this disaster. And it ain't gonna be pretty.
The Budget Debate, Illustrated
http://www.ritholtz.com/blog/wp-content/uploads/2011/04/Michael-Ramirez-040511-pie.png
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