What If I Am Wrong About Europe?

I have long stated the eurozone will breakup. Historically speaking, no currency union has ever survived in the absence of a political union.

Moreover, in It's Just Impossible I noted

1. The Bundesbank said there should be no banking union until there is a fiscal union.
2. Angela Merkel said that there should be no fiscal union until there is political union.
3. François Hollande said that there should be no political union until there is a banking union.
4. The German supreme court will not allow a political union nor a fiscal union, nor a banking union without a German referendum.

Mathematically Speaking

Mathematically speaking, I also fail to see how the eurozone can stay intact.

Specifically, please consider point number nine of Michael Pettis: Long-Term Outlook for China, Europe, and the World; 12 Global Predictions

9. Disruptive European Politics

European politics will become much more difficult and disruptive. The historical precedents are clear. During a debt crisis the political system becomes fragmented and contentious. If the major parties don’t become radicalized, smaller radical parties will take away their votes.

Remember that the process of adjustment is a political one. We all know someone has to pay for the massive adjustment countries like Spain must make. The only interesting question is about who will be forced to take the brunt of the payment – workers in the form of unemployment, the middle classes in the form of confiscated savings, small businesses in the form of taxes, large businesses in the form of taxes and nationalization, foreigners, or creditors.

Deciding who pays is a political process, and because the stakes are so high it will be a very bitter process. This means, among other things, that politics will degenerate quickly, and of course if Europe doesn’t arrive at fiscal union in the next year or two, it probably never will. This conclusion is also the reason for my next prediction.

That prediction was made by Michael Pettis, and I am in complete agreement.

But what if I am wrong?

Can Politics Triumph Over Math and History?

What if the eurozone in spite of all obstacles stays intact? Daniel Hannan is a writer and journalist, and Conservative MEP for South East England since 1999 offers an interesting viewpoint for The Telegraph in Spain teeters on the brink

All of a sudden, the talk is of the breakdown, not just of the single currency, but of the parliamentary system on which it rests. Commentators across Europe fret that Spain, which emerged from dictatorship less than 40 years ago, might give up on multi-party politics.

Every round of economic figures is worse than the last. The deficit is massively larger than forecast. A bailout of unprecedented size is becoming inevitable, even as the prime minister gives his countrymen a ‘one hundred per cent assurance’ that he won’t apply for one. (He said much the same thing a few days before applying for the last one.)

Hundreds of thousands of people are protesting, some violently.  ....

The real tragedy of the euro is not that it will come crashing down upon the financial system, as Smaug upon Esgaroth, splintering it to sparks and gledes. The tragedy, rather, is that the monetary union will limp on, condemning hundreds of millions to gradual immiseration.

I am still trying, as gently as I can, to suggest that there is an alternative to the euro-imposed bailout racket. I did so again in our most recent parliamentary session, as you can hear in the clip above.

The trouble is that, while Spaniards recognise the folly of imposing cuts while at the same time bailing out banks, they shy away from the logical conclusion: that leaving the euro is now the least bad option.

The real threat to Spanish democracy is not internal but external; not a pronunciamiento but a Brussels-imposed civilian junta, as happened in Italy.  Mario Monti, the EU’s proconsul in Rome, indicated yesterday that he ‘might seek a second term’. Oddly, I don’t remember him seeking the first.

Sad Reality

The sad reality is Spain and Italy may linger on just as Greece did, destroying their countries in the process.

Consider once again what I said on September 26, in Firebombs, Teargas, Riots Near Greek Parliament; 57% Say Greece Should Abandon Pledges Made to Troika

Sentiment Has Turned

Sentiment in Greece has turned, and likely turned for good. 57% of Greeks have had enough of austerity to the point they would rather default.

Turn back the hands of time a bit and think how this might have played out if Greece simply left the euro and defaulted three years ago as it should have. Tourism would likely have increased and if  Greece had implemented true structural reforms rather than tax hikes, its economy would be stable or recovering now.

Instead, the country is in ruins, tourism is down, and in an on-again-off-again fashion, absolute chaos breaks out.

Another round of austerity and tax hikes can only make things worse at this point, and the people know it. This will pressure political parties to not go along with Samaras.

If another round of elections were held today, there is no way Samaras would win. Instead, the radical left, and radical right (both of which want to exit the euro), would be fighting over the pieces.

The nannycrats in Brussels and Chancellor Merkel are to blame for this s`d state of affairs.

Finally, please note that the big fear of the nannycrats and Merkel is not that Greece leaves the euro per se, but rather Greece leaves the euro and the Greek economy starts to recover.

Well, here's the deal and it is something I said years ago: the sooner Greece abandons the euro, tells the Troika to go to hell, and defaults, the better off it will be

Same Track, Wrong Track

Spain, Greece, Portugal, and Italy are all on the same track and the wrong track. All need work rule reform and lower taxes. Instead, the countries have been short on productivity improvement, short on pension reform, short on work rule reform, and long on tax hikes.

It is no wonder their economies are imploding. It is no wonder protests are getting louder. Yet the political class, beholden to the banks and the IMF have taken the wrong track.

In the end, I highly doubt I will be wrong.

In the meantime, however, Telegraph writer Daniel Hannan appears to be correct in his assessment "the tragedy is that the monetary union will limp on, condemning hundreds of millions to gradual immiseration."

Mike "Mish" Shedlock

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At Some Point the Hat Runs out of Rabbits; First Catalonia, Now Basque Separatists Call for Independent Country; El Pais Survey Shows 43% Catalans For Independence, 41% Opposed

Calls for the splintering of Spain have picked up steam. Euskal Herria Bildu (EHB, a left-wing, Basque nationalist party) has called for "A Great National Act" in Favor of Independence according to El Pais.

EH Bildu has called "a great national political act" in favor of the independence of the Basque Country for the next October 13 in the BEC Barakaldo (Bizkaia), announced its candidate for lehendakari, Laura Mintegi in an appearance before the media at EA headquarters in Bilbao.

Mintegi explained that the purpose of the meeting is to claim a free Basque state in Europe. The nationalist left has led in recent times to BEC, in a space with a capacity for 15,000 people, some of his most important acts to demonstrate their ability to mobilize. force.

The sovereignist coalition vindicate independence there to say "clearly and directly" to those "who do not want to hear, who kidnap our rights in the name of the Constitution imposed on us" you want "a free state in Europe."

Mintegi has defended "the pressing need to build a framework sovereign" in the Basque country that allows this community to have the tools to address their own economic, social and employment. "Only from the sovereignty we orient our policies towards true social justice," said the candidate.

In his view, "it is truly reckless remain at the expense of a corrupt system like Spanish, you're sacrificing the rights and freedoms of all the people to ensure the interests of a political and economic elite." With the "corrupt system" called on "break ties".

El Pais Survey Shows 43% Catalans For Independence, 41% Opposed

According to El Economists, Catalan Separatists Not Quite at Absolute Majority.

About the option of independence for Catalonia, El País published a survey in which, in case of a referendum, 43% would vote for secession, compared with 41% who would decide against.

The complete data interpretation contrasted with other numbers registered in June, when only 21% of respondents said anti-secession and another 21% abstained. The current difference can be understood as a translation of abstention towards not to Catalan independence, which in June this survey enjoyed the favor of 51%.

Various surveys seem to be fluctuating wildly so I am not sure any of the are accurate at the moment. That said, it is clear anger over austerity measures is picking up steam. Protests in numerous countries is proof enough.

At Some Point the Hat Runs out of Rabbits

I am sticking to my long held belief that "Eventually will come a time when a politician will hold up a copy of the EMU treaty, declare it null and void, and the debt null and void right along with it. That politician will be elected."

Yields have come down since my July 24, appearance on Capital Account: Discussion of Social Media Panic in Italy, Soaring Yields in Spain, and the Upcoming 20th Euro Summit, Bound to be Another Failure so it appears there was another rabbit left at the time.

However, the government of Portugal recently had to back off announced austerity measures following a mass protest, and additional protests elsewhere have become more frequent and more violent.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Austerity Programs Hit France; Marchers Demand Vote on Treaty; Hollande Reneges on Campaign Promise

Following protests in Portugal, Spain, and Greece, a wave of Leftists march in Paris against austerity.

Thousands of leftists marched through Paris on Sunday demanding a referendum on the EU’s new fiscal discipline treaty in the latest of a series of anti-austerity protests in countries hit by the eurozone crisis.

The demonstration, the biggest political rally in France since May elections brought Socialist president François Hollande to power, followed protests on the streets of Madrid and Lisbon on Saturday.

The communist-backed Left Front and 60 other organisations backing the Paris march said tens of thousands of supporters turned out for the protest, timed to coincide with the opening this week of a parliamentary debate on ratification of the fiscal treaty, which Mr Hollande had originally vowed to renegotiate.

Jean-Luc Mélenchon, the Left Front leader, said austerity policies were “dangerous for all the people of Europe”. Demanding a vote on the treaty, he added: “Democracy is sicker than we thought.”

analysts worry that the recent upsurge in political unrest in Portugal, Spain and Greece – where the neo-Nazi Golden Dawn party has risen to third in national surveys – could be a sign of more trouble ahead as repeated rounds of austerity bite even further into daily lives.

“The cracks are showing in Spain’s social and economic fabric,” said Nicholas Spiro, a London-based sovereign risk consultant. “The risk is that in seeking to retain as much domestic ownership of the terms attached to any [EU rescue] programme, the government [of prime minister Mariano Rajoy] overdoes it and sparks an even more intense social and political backlash.”

In Portugal, tens of thousands of trade unionists turned out in Lisbon’s central square for a peaceful protest against terms of the country’s €78bn EU-IMF bailout.

Greek unions have also vowed to hold big protests if the government moves forward with a new €13.5bn austerity programme agreed last week by the coalition government.

The recent upheavals in Portugal – where there had been widespread bipartisan support for the bailout since it was launched 16 months ago – has come as a particular shock to eurozone leaders, forcing Lisbon to reverse a rise in social security taxes designed to hit mandated budget targets.

Hollande Reneges on Campaign Promise

Recall that Hollande ran on a platform to rework the Merkozy Treaty.

We now clearly see that was just another campaign lie. However, Hollande has followed through on all of his economically destructive ideas including massive tax hikes, lowering retirement age, and pressuring companies to not lay off workers.

Destructive follow-through of the worst ideas, with no follow-through on the best campaign ideas is typical of presidential elections everywhere.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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JPMorgan, Bank of America Forgive Debts that No Longer Exist; Wonderful News! But For Whom?

In February, five of the nation's largest banks agreed on a $25 billion settlement over widespread, systemic mortgage fraud and related issues.

The $25 Billion Deal, announced with huge fanfare, was supposed to help up to a million struggling homeowners, primarily via debt forgiveness.

Let's flash forward a few months to see how debt forgiveness is working out in practice.

Today, the New York Times notes Banks Forgive Debt That Isn't There.

GREETINGS, unhappy homeowners! Here’s some wonderful news: “We are canceling the remaining amount you owe Chase!” says a letter that JPMorgan Chase sent recently to thousands of home loan borrowers. “You are approved for a full principal forgiveness of your Home Equity Account,” says another, from Bank of America.

Jackie Esposito, of Guilford, Conn., got a letter like that. But she wasn’t elated — because she doesn’t owe the money anymore. She and her husband filed for bankruptcy three years ago. The roughly $64,000 they owed Chase has been legally wiped out.

Others have received similar letters about phantom debts. A borrower in Florida received word this month that Chase was erasing $190,065.10 of debt that had already been wiped out. Bank of America told a Virginia resident that a $231,767 home equity loan was being forgiven, even though the debt was discharged last May.

Are the banks’ forgiveness letters a way to gain credits for debts these institutions are improperly claiming to have extinguished? The banks say no.

But Chase appears to be claiming to release a lien on Ms. Esposito’s property that it does not hold. And under the mortgage settlement, it could receive a credit.

As for Ms. Esposito, she said she found the bogus loan forgiveness letter from Chase especially upsetting because of the years she has spent trying to have the bank modify her first mortgage. She pays 9 percent on her loan and cannot refinance it into a lower-rate mortgage, given her recent bankruptcy.

Chase won’t help her modify her loan, Ms. Esposito said, but it is happy to help by forgiving a loan that has already been discharged and releasing a lien that is already gone.

Wonderful News! But For Whom?

If these events are happening on a broad scale, and I suspect they are, that $25 billion settlement will end up costing peanuts.

Bear in mind, I have little sympathy for people who themselves purposely took out loans they knew they could never pay back, nor do I have sympathy for people who were willing partners in bank fraud.

Regardless, I wondered at the time how the banks would take a $25 billion hit without getting crushed. Well, now we know.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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China New Export New Orders Decline At Fastest Pace in 42 Months; China's Precarious Rebalancing Act

HSBC China Manufacturing PMI™ shows Output falls at fastest pace since March.

Key points

• New export orders fall at fastest rate in 42 months
• Output and input prices continue to fall
• Purchasing activity declines amid weak demand and lower production requirements

Data in September signalled a stronger decline in Chinese manufacturing output, as the volume of new orders fell for the eleventh consecutive month. New export orders declined at the sharpest rate in 42 months amid reports of weak international demand, while lower workloads were linked to a fall in backlogs of work.

After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 47.9 in September, up slightly from 47.6 in August, and signalling an eleventh successive month-on-month deterioration in Chinese manufacturing sector operating conditions. However, the latest data signalled the rate of deterioration eased marginally.

The rate of reduction in manufacturing output in China accelerated during September, signalling the strongest contraction since March. A number of respondents that reported a fall in production levels attributed this to lower order volumes as both domestic and international demand weakened. However, the rate of reduction in new export orders remained stronger than the decline in overall new orders. Panellists commented on tough trading conditions in a number of key trading markets.

China's Precarious Rebalancing Act

Discounting the continually over-optimistic comments from Markit economists in general, I would otherwise be puzzled by comments of Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC who said: "Chinese manufacturing growth is likely to be bottoming out. However, the sharper contraction of new export orders and the lingering pressures on job markets mean that Beijing should step up easing to support growth and employment. Fiscal measures should play a more important role in the coming months."

What indication is there that manufacturing growth is bottoming out? In the first place, China manufacturing is in contraction, not growth. Moreover, the European recession is strengthening and a US recession is underway (just not recognized yet in my opinion). Thus it would be logical to assume China's export-driven economy is going to take another hit.

Trade matters with Japan, and the debate over ownership of islands in the East China Sea are also unsettling. For a discussion, please see Japan PMI: Output and New Orders Contract Further

Is Beijing going to step up and support employment and growth? I do not have the answer to that, but China needs to rebalance, and that rebalancing act will be painful. The transition to a consumer-led economy from an export and infrastructure-building economy will be slow and painful, but also very necessary.

For further discussion of the need to rebalance and the problems facing China please see.

• The Dating Game: Michael Pettis Challenges The Economist to a Bet on China
 
• 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?
 
• By 2015 Hard Commodity Prices Will Collapse; Australia's Mining Boom Dies (and the Official Denials Start)

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Japan PMI: Output and New Orders Contract Further

The global economy continues to weaken most everywhere you look. The focus of this post is Japan where the Markit/JMMA Japan Manufacturing PMI™ shows Modest deterioration in operating conditions recorded in September.

Key points:

Output and new orders both down again, albeit at slower rates
Weaker underlying demand and strong yen impact on export orders
Charges cut at sharpest rate for over two years



Summary:

Operating conditions in Japan’s manufacturing sector continued to worsen at a modest pace in September. Output and new orders both fell amid reports of a general stagnation of economic activity in domestic and overseas markets. Manufacturers continued to deplete inventories, while they made further sharp inroads into their work outstanding. Payroll numbers were little changed.

On the price front, companies responded to the weaker demand environment by discounting their charges to a greater degree. These efforts were aided in part by a further modest reduction in input prices.

After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers’ Index™ (PMI™) improved to a three-month high of 48.0 in September (August: 47.7) but, by remaining below the 50.0 no-change mark, again signalled a modest deterioration in operating conditions.

Production and new order volumes continued to decline on a monthly basis. Although slightly weaker than in August, rates of contraction remained marked, particularly in the investment goods sector.

Looking ahead, the widening rift between Japan and China over disputed islands certainly cannot help yet Voice of America reports there is No Sign of Progress in Dispute.

September 26, 2012
A bitter territorial dispute between China and Japan showed no signs of improvement Tuesday, as foreign ministers from both countries held high-level talks to ease tensions.

Relations have sunk to their lowest point in years, with anti-Japan protests breaking out across China and many Chinese refusing to buy Japanese-made goods. On Wednesday, Japanese automakers Toyota and Nissan said they are reducing production in China because of lessened demand.

[Foreign Minister Yang Jiechi] warned that bilateral relations could not "return to the track of sound and steady development" unless Japanese officials "take concrete measures to correct its mistakes."

Mike "Mish" Shedlock
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France Piles €20 Billion in Tax Hikes on Businesses and Wealthy

It's now official. The top tax rate in France is now 75% for those who make over a million euros. Moreover, there is a new band of 45% for those who make over 150,000 euros. Don't forget the existing VAT on all purchases.

Europe is imploding and instead of fixing onerous work rules, France Hits Rich and Business to Slash Deficit.

Socialist President Francois Hollande unveiled higher levies on business and a 75-percent tax for the super-rich on Friday in a 2013 budget aimed at showing France has the fiscal rigor to remain at the core of the euro zone.

Of the total 30 billion euros of savings, around 20 billion will come from tax increases on households and companies, with tax rises already approved this year to contribute some 4 billion euros to revenues in 2013. The freeze on spending will contribute around 10 billion euros.

To the dismay of business leaders who fear an exodus of top talent, the government confirmed a temporary 75 percent super-tax rate for earnings over one million euros and a new 45 percent band for revenues over 150,000 euros.

Tough New Measures or Idiotic Measures?

The Financial Times reports France unveils tough budget measures

The measures announced on Friday included the controversial 75 per cent marginal tax rate on earned income above €1m a year, put in place for two years.

But, as promised by President François Hollande, France was largely spared the kinds of hefty cuts in public spending, pensions and salaries imposed in other eurozone countries struggling to contain their sovereign debt.

The official forecast of 0.8 per cent growth next year is above most independent forecasts, but Mr Pierre Moscovici [finance minister] said: “I am certain that if Europe steadies, then we are going to achieve this 0.8 per cent or more.”

For starters, with government spending in France accounting for 55% of GDP, those are not "Tough Measures" those are idiotic measures. France needs to reduce government spending and ease work rules. Instead it has tightened pressure on companies laying off workers.

If Wishes Were Fishes

The French Finance minister is "certain that if Europe steadies, France will achieve 0.8 per cent growth or more". That is about as meaningful as this statement by me "I am certain that if I had a billion dollars, I would be a billionaire".

Simply put, neither Europe nor France is going to steady, but given France's growth is currently 0%, steady would not be enough anyway.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Can the Fed Fight Droids and Win? Apple's SIRI, Driverless Trucks, What's Next? Riveting Video: Are Droids Taking Our Jobs?

Today, a single farmer can produce as much goods as 100 farmers a half-century or less ago. That freed up labor for manufacturing and the service economy.

However, droids are now replacing humans in both manufacturing and services.

When does it stop?

Every time I go into a grocery store, I see more self-service checkout lanes and fewer manned ones. When RFID checkout comes into vogue, and it will quickly, an entire grocery basket will be scanned at once, and even fewer checkout clerks will be needed.

For a discussion of RFID, please see JCPenney to Eliminate All Checkout Clerks, Instead Using RFID Chips and Self-Checkout.

With each technological advance more and more goods and services are produced by fewer and fewer people. In isolation, that drives down costs, and in the process, standards-of-living have soared.

Because of ever-increasing productivity, it's easy to show that deflation is the natural state of affairs.

But what does that mean looking ahead? Will there be any jobs left? If so where? And what happens to the Fed's effort to prevent falling prices?

Riveting Video: Droids Taking Our Jobs

Let's start off with an entertaining, yet scary video by Andrew McAfee who asks Are droids taking our jobs?



Working Age Population vs. Projected Jobs



Notice the widening gap. Moreover McAfee states "If these predictions are accurate, that gap is not going to close. The problem is I do not think these predictions are accurate. In particular, I think my projection is way too optimistic. ... Because when I look around I think we ain't seen nothing yet when it comes to technology."

Video Discussion Points

• Free Language Translation
• Apple's SIRI
• An article on Forbes about Apple, written by an algorithm (It's not decent it's perfect says McAfee). I tracked down the article: Forbes Earnings Preview: Apple, written by "Narrative Science".
• Jeopardy: IBM Watson computer vs. Human who won 74 times in a row
• If SIRI functionality increase according to Moore's Law (which it will) it will be sixteen times better than today, six years from now
• Google Autonomous Car

Google Autonomous Toyota Prius Car



Managing the Transition to a Workerless Society

"There are 3 and a half million truck drivers and they will be impacted by this technology. .... We are going to transition into an economy that is very productive and just does not need a lot of human workers. Managing that transition is going to be the greatest challenge that our society faces" says McAfee.

In spite of that gloom for 13 minutes, McAfee concludes on a positive note, quoting Freeman Dyson: "Technology is a gift of God. After the gift of life, it is perhaps the greatest of God's gifts. It is the mother of civilizations, of arts, and of sciences."

Play the 14 minute video. It is riveting.

Can the Fed Fight Droids and Win?

The Fed wants to increase jobs and wages. It is fighting a battle it cannot possibly win. Forcing down interest rates while hoping to force up labor costs simply increases desire of companies to replace humans with droids.

We would get there anyway, as technology always improves. However, the Fed, by attempting to do the impossible, is actually speeding up the loss of jobs.

Living Wages

Who (besides the Fed and seriously misguided economists) does not like falling prices?

The problem with the "living wage" concept is not that wages are too low, but rather excess money from the Fed has driven up costs of goods and services.

People have been conditioned (by the Fed) to believe they need higher wages. What they really need is lower prices.

Technology, demographics, attitudes, and increasing lifespans, all mandate a need for lower, not higher prices.

If the Fed "succeeds" in further driving up prices, it will destroy the middle class because the technological rampage is sure to increase job losses for skilled labor, at least for the foreseeable future.

The Fed cannot defeat droids. Unfortunately, the Fed does not understand it is exacerbating the problem. Sadly, the Fed does not even understand the nature of the forces it is fighting.

Addendum:

It never fails. Someone misses obvious implications of what I said.  One person ranted and raved that increased productivity is a good thing. Of course it is.

I specifically stated  "standards-of-living have soared" as a result of technology. And of course that is a good thing.

My problem clearly is not technology and the deflationary effect that has on wages and prices (both good things), my problem is the Fed's attempt to counteract those forces. The result has been an increase in the wealth effect of those with first access to money, namely banks, the already wealthy, and government bureaucrats.

If you are looking for a reason the 1% have done so well lately, simply look at the policies of the Fed coupled with technology that is going to reduce the need for human labor "for the foreseeable future".

I have stated many times there will be another wave of job creation based on new technologies (most likely energy) at some point in the future but I do not know when that may be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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California Hit Parade Rolls On: Atwater Scrambles to Avoid bankruptcy

The California hit parade keeps on rolling as yet Another California city scrambles to avoid bankruptcy.

Atwater, a city of roughly 28,000 in California's Central Valley, may declare a fiscal emergency as soon as next week, but it is trying to avoid becoming the fourth California city to file for municipal bankruptcy this year, its mayor said.

Under California law, a local government must either declare a "fiscal emergency" or go through a 60-to-90 day confidential negotiation process with its creditors before it files for municipal bankruptcy. Since late June, three Golden State cities-Stockton, San Bernardino and Mammoth Lakes-have filed for bankruptcy protection.

"We are planning to stay current on our ... bonds," said Mayor Carol Joan Faul in a telephnne interview with Dow Jones Newswires. "We are hoping to avoid" bankruptcy, she said, "but as far as I'm concerned, we may have to declare a fiscal emergency" on Oct. 3.

According to its fiscal 2011 financial statement, Atwater had roughly $95 million in outstanding debt, a mixture of bonds related to its sewer as well its now-defunct redevelopment agency. Ms. Faul said Atwater intends to make an upcoming bond payment of $2 million on its sewer bonds.

Atwater is Burnt Toast

Once things reach this stage, one does not even need to look at the details because it's a done deal.

Yet, I did look further and as expected, public unions appear to be smack in the middle of things as noted in a Reuters article on Potential Atwater Bankruptcy.

Atwater's economy is "pretty bleak" and starving the city of so much revenue its leaders must consider a drastic overhaul of the services, said Jim Price, vice president of operations at Gemini Flight Support at Atwater's Castle Airport.

"Police and fire, you keep them - and everything else is going to have to be privatized," Price said. "I just don't know how they can do it any other way."

RAISING REVENUE, CUTTING COSTS

Atwater's officials are just beginning to consider their options, Faul said, noting the city must consider raising 20-year-old rates for water services and 10-year-old rates for garbage services while clamping down on costs.

Union representative Nancy Vinson said she expects the city will seek concessions from its roughly 30 non-safety employees, who gave up 10 percent of pay last year through furloughs.

"They could ask for a wage reduction, they could ask for a different contribution to the retirement system, they could ask for a higher health benefit contribution," Vinson said. "We have not been unwilling to talk to them."

Atwater must also seek concessions from its roughly 50 safety and management-level employees, Vinson said, adding she is concerned city officials are moving too fast on a plan for declaring a fiscal emergency.

Atwater's Choice: Bankruptcy Today or Bankruptcy Later

Atwater can enter bankruptcy today, saving taxpayers a lot of money, or it can waste taxpayer money for years, scrambling to make bond payments and then default.

Either way, Atwater is burnt toast. Attempts to make bond payments is a fool's mission.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Real Per Capita "Core" Durable Goods Orders

Courtesy of Doug Short, here is an excellent pair of charts on Real Per Capita "Core" Durable Goods Orders

Core Durable Goods



click on either chart for sharper image

Core Durable Goods Percent Decline From Peak



Doug Short does excellent work. Click on the top link to see additional charts.

I have little to add other than this is how recessions start, an opinion expressed earlier in Durable Goods Orders Ex-Transportation "Unexpectedly" Drop, Down Third Month, July Revised Lower; GDP +1.3% Second Quarter; June Recession Call Looking More Likely.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Durable Goods Orders Ex-Transportation "Unexpectedly" Drop, Down Third Month, July Revised Lower; GDP +1.3% Second Quarter; June Recession Call Looking More Likely

"Unexpected" weakness and downward revisions are hallmarks of the beginnings of recessions. And so it it with durable goods. Economists had forecast a gain, instead there was a 1.6% drop. Moreover July was revised lower as well.

Bloomberg reports Orders for U.S. Goods Excluding Transportation Unexpectedly Drop

Orders for goods meant to last at least three years, excluding volatile demand for such things as airplanes and automobiles, fell 1.6 percent last month after a greater-than- previously estimated 1.3 percent decrease in July, the Commerce Department reported today in Washington. Total bookings plunged 13 percent, the most since January 2009, paced by a decline in demand for civilian aircraft.

“There was broad-based weakness,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. “What this now means is that capital expenditures are now going to probably fall for the first time since the recovery started. It remains a terribly challenging backdrop in the U.S.”

The median forecast of 53 economists surveyed by Bloomberg projected a 0.2 percent gain in ex-transportation orders. The Commerce Department revised July data down from a previously reported 0.6 percent decrease.
Survey Results

The decline in total orders was more than twice as large as the 5 percent drop median estimate in the Bloomberg survey.

Other reports today showed the economy grew less than previously forecast in the second quarter and claims for jobless benefits dropped last week to a two-month low.

The world’s largest economy expanded at a 1.3 percent pace in the second quarter after growing at a 2 percent rate from January through March. The revision, the third estimate for the quarter, compared with a prior estimate of 1.7 percent and the Bloomberg survey’s 1.7 percent median forecast.

The reduction in growth reflected slower gains in consumer spending and farm inventories, the latter caused by the drought.

Civilian aircraft bookings, which are often volatile, slumped 102 percent in August after surging 51 percent the prior month, today’s Commerce Department report showed. The size of the decrease may reflect some cancellations in prior months. Boeing Co. (BA), the largest U.S. aircraft maker, received an order for a single plane, down from 260 the month before.

Orders for non-defense capital equipment excluding airplanes, a proxy for future business investment in items such as computers, engines and communications equipment, rose 1.1 percent after decreases of 5.2 percent in July and 2.7 percent in June, the Commerce Department data showed.

Shipments of those goods, used in calculating gross domestic product, fell 0.9 percent after decreasing 1.1 percent in July.
Caterpillar Forecast

Exports dropped 1 percent in July as American companies shipped fewer automobiles, metals and consumer goods abroad, according to Commerce Department figures issued earlier this month.

Recession Call

• Case for US and Global Recession Right Here, Right Now; Recognizing the Limits of Madness
 
• ECRI's Lakshman Achuthan Says US in Recession Now; That Makes Three of Us

I am very comfortable with pegging of the start of the recession in June and I expect more downward revisions in GDP and employment are on the way.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Reader from Netherlands Says Last Election Not as Pro-Euro as Media Portrays; 81 in 150 Against More Bailouts

European nannycrats breathed a sigh of relief following the re-election of Dutch Liberal Prime Minister Mark Rutte on September 12.

The results “will likely inject a little more confidence into parts of the European political elite” as they step up efforts to contain the debt crisis, David Mackie, chief European economist at JPMorgan Chase & Co. in London, wrote today. “The risks of the Netherlands changing policy direction in a fundamental way appear to have receded, doubtless to private sighs of relief in Berlin and elsewhere.”

Really?

Reader Bert who lives in the Netherlands analyzed the actual stated positions of every member of the Dutch parliament and came up with this analysis. Bert writes ...

Hello Mish

As you can see in the table below, according to statements made by political party leaders in the past few weeks, 81 of the 150 seats in the Dutch parliament will vote against any future bailout of Greece. The same thing is likely should the ESM need additional funds for other countries.



Here is my interpretation.

VVD ( classical liberal / conservative)
Party leader and current prime minister made several time's a clear statement: "note a dime to Greece anymore" and got support from Wolfgang Schäubele (German finance minister) for that statement.

PVV (freedom party)
Is totally against the Euro and even the EU in its current form

SP (socialistic / maoistic party)
Totally against Euro bail-outs and the Brussels dictates)

CrU (centre/left with a Christian inspiration)
Tried in the parliament to keep the Netherlands out of the ESM

SGP (a strong biblical inspired party)
Totally against "shared responsibilities" in the socialistic way

PvdD (party for the well-being of animals especially critical to the mass bio-industry) Very Europe critical, a statement from them: "Europe is in its present form not democratic"

There was a huge move from voters from the very EU skeptical PVV to the VVD (a pro Europe party), but this was simply because the PVV blew up the last centre/right government. Voters did not liked that, and it had nothing to do with being pro-Europe.

Close analysis of the true positions of the elected parliament tells the real story: the Netherlands are becoming more and more euro-skeptical and EU critical, not the opposite. Thus, media interpretation that the Netherlands voted for pro-euro is totally wrong.

All the best

Bert

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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French Unemployment Tops 3 Million, First Time Since 1999

Given the disastrous mess in Southern Europe, compounded by the election of socialist Francois Hollande (together with his extremely foolish tax hike policies), France Set to Implode was a very easy call to make.

The evidence is strongly pointing in that direction. Please consider French unemployment tops 3 million as economy struggles

The number of unemployed people in France has topped 3 million for the first time since 1999, according to latest labour ministry figures.

Speaking before the data was officially announced, Labour Minister Michel Sapin said: "It's bad. It's clearly bad."

However, the government blamed the previous regime of Nicolas Sarkozy.

[Hollande] pledged to revive the eurozone's second largest economy, tackle rising unemployment, and reverse industrial decline. However his approval rating is now at its lowest since he assumed power, pollsters say.

Since May, major companies have announced thousands of layoffs, including carmaker Peugeot, drugmaker Sanofi, airline Air France-KLM, and retailer Carrefour.

Mathieu Plane, economist at the French Economic Observatory, told the Reuters news agency: "There are almost one million more unemployed people compared with early 2008 and we can't yet say that we have reached the peak."

The French economy has posted three consecutive quarters of zero growth, and forward-looking data suggests it may continue to flatline.

The 2013 budget, due to go before the cabinet on Friday, is expected to contain more than 30bn euros in budget savings, and fresh tax rises.

The government has forecast 0.3% growth for the year, and has so far kept its 2013 target at 1.2%, which many economists now consider unrealistic.

France's central bank this month predicted that the economy would contract by 0.1% in the third quarter after flatlining for the first half of the year.

Flatline? Please Be Serious

The idea that France is going to flatline is ridiculous. Growth estimates for next year are even more ridiculous.

Eurozone Unemployment Rates



With the rest of Europe slowing dramatically, do not expect German unemployment to buck the trend forever. Italy is in a steep downturn now, and France is going to follow suit.

Meanwhile, France, Spain, Greece, and Italy are busy hiking taxes which is economic insanity in a recession. They ought to be reforming work rules, but on that score there is little progress, with negative progress in France.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Is China Burning? Shanghai Stock Index Breaks 2000 For First Time Since 2009; Reflections on Sentiment

Today the Shanghai stock index, $SSEC, dipped below the 2000 level for the first time since 2009.

Stockcharts does not have intraday charts of ADRs so here are a couple of charts from yesterday to consider.

$SSEC Daily Chart



The following monthly chart puts things in better perspective.

$SSEC Monthly Chart



Shanghai Rout is On

Misguided China bulls shorting the dollar and buying Chinese stocks have gotten their heads handed to them on a platter.

Those aware of the fraud, corruption, and simple sustainability of economic growth in China either stayed away completely or were short China like Jim Chanos.

Bloomberg reports Shanghai Rout Sinks ADRs

Chinese stocks in New York slid to a two-week low as the Shanghai Composite Index’s slump below a key level for the first time in three years stoked concern government efforts to avert a slowdown won’t be sufficient.

The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. dropped for a third day, losing 0.7 percent to 90.18 by 12:44 p.m. in New York. The decline followed the Shanghai Composite Index’s descent below 2,000 for the first time since 2009. Mobile-chip designer Spreadtrum Communications Inc. (SPRD) sank after its stock rating was cut.

Is China Burning?

Forbes columnist Gordon Chang asks the question, Is China Burning?

Chinese streets were quiet today after anti-Japan protests, many of them violent, rocked more than a 100 cities last week.  Large demonstrations continued through Tuesday, the 81st anniversary of Japan’s invasion of Manchuria.

The disturbances, triggered by a territorial dispute over the Senkaku Islands in the East China Sea, are commonly described as the worst anti-Japan riots to hit the country since at least 2005, and they may have even been more destructive than that.

In any event, the damage to Japan’s business interests in China was substantial.  More than a dozen Japanese companies halted operations in the country as fire bombings, sabotage, and looting took their toll.  Manufacturers Honda, Nissan, Toyota, Mazda, Mitsubishi, Yamaha, Komatsu, Hitachi, and Canon shuttered plants.  Panasonic locked the doors of a factory after employees broke windows, ruined equipment, and set fires.  Retailers Aeon, Fast Retailing, Ryohin Keikaku, and Seven & I closed stores.

Japanese tourists are canceling trips to China, and hard-hit Panasonic is, not surprisingly, reducing business trips from Japan to the country.  As a result, Japan Airlines reduced flights to and from Chinese destinations.  It halved Tokyo-Beijing and Osaka-Shanghai flights, for example.  All Nippon Airways reported an increase in cancellations on its flights from China to Japan.  And it is not only Japanese carriers that have been hurt.  China Eastern, China’s second-biggest airline, is delaying the October 18 start of its Shanghai-Sendai route due to insufficient bookings.

the Chinese economy is in obvious distress, with fewer analysts buying Beijing’s claims that the country is growing in the high single digits.  Charles Dumas of Lombard Street Research, for example, thinks China’s growth rate is only 1.6%, and it could even be lower than that.  In this environment, even minor disruptions could have a “tipping point” effect.

Moreover, the prospects for Japanese companies will be even worse than it is for others.  Who in China is going to buy a Toyota when last Saturday, in an incident now well-known throughout the country, a 51-year-old Chinese man in Xian was savagely beaten—he is now paralyzed and mostly unable to speak—because he was driving a white Corolla?  And don’t think this affects only Japanese companies.  China’s new ultra-nationalism, on display this past week, can also affect brands from other countries.

And we should not think the Chinese are limiting their anger to the Japanese.  Last week’s events have been compared, in their intensity and their aims, to the anti-foreigner Boxer Rebellion, which began just at the end of the 19th century.

That, unfortunately, is a historical parallel we should remember.  Rioters on Tuesday attacked and damaged the car of American ambassador Gary Locke while he was in it.

China at the moment is unstable, and that puts foreign businesses there—not to mention the Chinese economy—at risk.

Reflections on Sentiment

A few years ago nearly everyone was a China bull.

China, China, China was all I heard at gold and natural resources conferences. My calls pointing out the unsustainability of Chinese growth fell mostly on deaf ears.

Remember how in the 1980s everyone thought Japan would soon rule the world. That's what many thought about China, and still do. I did not buy into it, nor did Michael Pettis at China Financial Markets.

Here are a few posts to consider.

• The Dating Game: Michael Pettis Challenges The Economist to a Bet on China
 
• 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?
 
• By 2015 Hard Commodity Prices Will Collapse; Australia's Mining Boom Dies (and the Official Denials Start)

The idea that China was going to rule the world by the end of the decade was complete silliness. Exponential math, as well as energy constraints said it would not happen. Malinvestments and fraud were simply icing on the absurdly-bullish cake.

That said, as compared to a few years ago, or even earlier this year, sentiment on China has soured remarkably.

The fundamentals did not change, just the sentiment. Indeed, sentiment is now so sour on China that a nice rally may happen at any time.

This is not a recommendation that people buy into China, rather it's a suggestion that sentiment is now moving towards extreme pessimism. Reversals from such extremes can lead to powerful rallies. However, timing the reversal is problematic as the four percent rally quickly taken back shows.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Firebombs, Teargas, Riots Near Greek Parliament; 57% Say Greece Should Abandon Pledges Made to Troika

Once again things are out of control in Greece. A general strike is underway, and schools, hospitals, and transit are affected. Firebombs and teargas have hit Athens as Greek citizens protest the latest round of austerity measures.

Please consider Greek Strike Sees Violence as Police Use Tear Gas by Parliament

Police fired tear gas near the Greek Parliament after protesters threw fire-bombs as thousands of people joined a strike opposing wage cuts and austerity that Prime Minister Antonis Samaras said are vital to keep the euro.

Demonstrators streamed into the central Syntagma Square in Athens, opposite the Parliament House, shouting slogans such as “struggle, clash, overturn: history gets written by those who disobey.” Police spokesman Takis Papapetropoulos estimated the crowd at 35,000 people.

Schools, hospitals, ferries and government services shut down in the first walkout since February. Shops will close from 3 p.m. today to let staff take part in demonstrations. Public transport is operating from 9 a.m. to 9 p.m. to allow protesters to attend rallies in Athens city center. A three-hour walkout by air traffic controllers will disrupt flights around the country.

Athens, the capital, has been wracked with demonstrations by groups ranging from police officers to parents of three or more children in the past week as Finance Minister Yannis Stournaras remained locked in talks with officials from the European Union, the IMF and the European Central Bank.

Hooded youths throwing fire-bombs at police were met with tear gas today, forcing some of the marchers to scatter. Teams of riot police guarded the Finance Ministry and surrounding streets.

The IMF has indicated that any additional financing for Greece will have to come from Europe, where officials have told Samaras no discussion can be held on debt relief or on extending the time to implement measures until he honors pledges made for the country’s second rescue package.

Polls show continued dissatisfaction with economic policies. More than 57 percent said the country shouldn’t keep to pledges made in exchange for the bailout as the policies have failed, compared with 40 percent who said it should stick to its commitments, according to a Metron Analysis poll for Ependytis newspaper.

Sentiment Has Turned

Sentiment in Greece has turned, and likely turned for good. 57% of Greeks have had enough of austerity to the point they would rather default.

Turn back the hands of time a bit and think how this might have played out if Greece simply left the euro and defaulted three years ago as it should have. Tourism would likely have increased and if  Greece had implemented true structural reforms rather than tax hikes, its economy would be stable or recovering now.

Instead, the country is in ruins, tourism is down, and in an on-again-off-again fashion, absolute chaos breaks out.

Another round of austerity and tax hikes can only make things worse at this point, and the people know it. This will pressure political parties to not go along with Samaras.

If another round of elections were held today, there is no way Samaras would win. Instead, the radical left, and radical right (both of which want to exit the euro), would be fighting over the pieces.

The nannycrats in Brussels and Chancellor Merkel are to blame for this sad state of affairs.

Finally, please note that the big fear of the nannycrats and Merkel is not that Greece leaves the euro per se, but rather Greece leaves the euro and the Greek economy starts to recover.

Well, here's the deal and it is something I said years ago: the sooner Greece abandons the euro, tells the Troika to go to hell, and defaults, the better off it will be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Going Out of Business the "Old Fashioned Way"

One of the more memorable financial ad campaigns in history bit the dust today, that of actor John Houseman who we frequently heard say  "They [Smith Barney] make money the old-fashioned way — they earn it."

Smith Barney is no more. It is now "Morgan Stanley Wealth Management" a joint venture with Citigroup.

And so it is ... Smith Barney Officially Bites the Dust

Morgan Stanley announced today that it has renamed its U.S. wealth management business Morgan Stanley Wealth Management, dropping the Smith Barney name from the joint venture it co-owns with Citigroup Inc.

“The Smith Barney name stood for investment excellence for three-quarters of a century, and Morgan Stanley Wealth Management will provide the first-class service that has distinguished Morgan Stanley as a firm for more than 75 years,” Morgan Stanley chief executive James Gorman said in a statement. “Today, as we move forward under one name, we are culminating a three-year effort to integrate two outstanding franchises.”

Morgan Stanley launched a new Smith Barney-less advertising campaign today.

The ash heap of history is littered with the names of venerable brokerage houses either subsumed into other firms or driven out of business by financial crises. Lehman Brothers Holdings Inc. and Bear Stearns Cos. Inc. are the most recent examples.

Smith Barney was one of the more recognized names on Wall Street for many years. Anyone over 40 likely remembers the firm's 1980s ad campaign in which actor John Houseman intoned in his best blue-blood accent “[Smith Barney] makes money the old-fashioned way — they earn it.”

Old Fashioned Video



The above clip from DealBook Can the S.E.C. Win an Insider Case the Old-Fashioned Way?

Over thirty years ago, the actor John Houseman intoned about brokerage firm Smith Barney: “They make money the old-fashioned way. They earn it.”

A recent decision of the United States Court of Appeals for the Second Circuit may result in a test of whether the Securities and Exchange Commission can prove an insider trading case the old-fashioned way – by putting on a circumstantial case built around a well-timed trade and contacts with an insider. ....

Ash Heap of History

Supposedly the "Smith Barney name stood for investment excellence for three-quarters of a century" yet they are shutting it down.

How did that happen?

My guess is "they earned it".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Thanks! (and a Reminder)

As a result of a Facebook push late last week, the Les Turner ALS Foundation moved up 25 places from 100th place to 75th place in competition for $5 million in grants from JPMorgan Chase.

That was good enough to win a $20,000 grant from JPMorgan.

Things went viral towards the end, with the winner getting a whopping 93,534 votes. Here is a link to the Charity Leaderboard.

Les Turner is on the 8th page with a total of 2469 votes.

Thanks to everyone who voted. The funds obtained by your support will help to changes lives.It was an uphill battle because the demographic profile of bloggers who simply do not use Facebook that much.

Raffle Reminder and Totals Update

September 27, is the last day on which you can purchase raffle tickets, but donations continue.

If you are unfamiliar with the raffle, please see My Wife Joanne Has Passed Away; Stop and Smell the Lilacs.

The raffle was created in honor of my wife, Joanne, of 27 years, who succumbed to Lew Gehrig's disease (ALS), on May 16 of this year.

Results as of Monday 9-25-2012

• Donations $45,266
• Tickets $311,400
• Corporate Sponsorships $30,000
• JPMorgan Grant Campaign $20,000

Les Turner gets half of raffle ticket sales and 100% of everything else. Thus the direct benefit to Les Turner as a result of  the above is $250,966.

Corporate Sponsors

GoldMoney and SitkaPacific were $10,000 donors. The other corporate sponsor was anonymous.

Also the Hussman Foundation is matching (Up to $100,000) any donation (not raffle tickets) made between August 29 and September 27.

Please see Investment Conference Featuring John Hussman, Michael Pettis, Jim Chanos, John Mauldin, Mike "Mish" Shedlock, Chris Martenson for details of a Wine Country Economic Conference as well as the Hussman Foundation's very generous matching grant.

Donations From 40 Countries

Donations have come in from 40 countries now, up from 22 on May 15.

If times are tough, and they may very well be, then please consider a cash donation of $10 or more. Every bit helps.

Checks

To make a cash donation by check or money order, please send a check or money order to
Lacey Wood
Mish Campaign
Les Turner ALS Foundation
5550 W. Touhy Avenue, Suite 302 Skokie, IL 60077
847.679.3311 (Main)
Any questions, please call the above number.

Credit Card

You can make a donation or purchase raffle tickets by credit card on the Les Turner ALS Site.

Raffle Ticket Entries are split 50-50 with ticket buyers in a drawing to be held November 8. Ticket sales end September 27, but you can still make a donation at any time.

Some people emailed they did not like entering the information fields required. However, the purpose is only to ensure the foundation knows how to get in touch with raffle winners!

People move, phone numbers change, and email addresses change. It's as simple as that.

The site is secure.

Tickets Sold

There have been 1557 tickets sold. Raffle ticket numbers will be assigned randomly by October 12 with the drawing on November 8.

There are 10 winners, so as of Monday, there is roughly a 1-in-156 chance of winning a nice dollar prize. Compare that to your state lottery!

1st Prize (10/60th of total pot)
2nd Prize (6/60th of total pot)
3rd Prize (3/60th of total pot)
4th Prize (3/60th of total pot)
5th Prize (3/60th of total pot)
6th Prize (1/60th of total pot)
7th Prize (1/60th of total pot)
8th Prize (1/60th of total pot)
9th Prize (1/60th of total pot)
10th Prize (1/60th of total pot)

I expressed prize amounts in 60th's to so you can see 50% (30/60) of the money going to ticket holders. As of now 10th place would be worth about $5,190 and first place a very nice $51,900!

Philosophic Point of View

Whether you make a donation or not, please stop and smell the lilacs. Joanne did, at every opportunity.

Once again ... Goodbye Joanne we love you and miss you.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Polls Shows American Believe There is Too Much Government Regulation; Government Regulation a Leading Cause of the Housing Bubble

Gallup Polls show Little Appetite in U.S. for More Gov't Regulation of Business

Americans say there is too much (47%) rather than too little (26%) government regulation of business and industry, with 24% saying the amount of regulation is about right. Americans have been most likely to say there is too much regulation of business over the last several years, but prior to 2006, Americans' views on the issue of government regulation of business were more mixed.

Question: In general, do you think there is too much, too little, or about the right amount of government regulation of business and industry?



The collapse of Lehman Bros., the failure of the secondary mortgage market, and other business problems in 2008 and 2009 might have been expected to increase Americans' desire for more government control of business and industry. But that was not the case. Americans' views that there is too much government regulation in fact began to rise in 2009, perhaps in response to the new Obama administration and new business regulation policies such as Dodd-Frank, reaching an all-time high of 50% in 2011 before settling down slightly this year to 47%.

There has been little change since 2003 in the percentage of Americans saying there is too little regulation of business. The changes that have occurred in recent years have involved shifts between the percentages choosing the "too much" and "about right" alternatives.

The polls look a lot different if you break down the results by political party.

• 77% of Republicans say there is too much regulation and only 9% think there is too little.
• 46% of independents think there is too much regulation, and 24% too little.
• 25% of democrats think there is too much regulation, and a whopping 42% think there is too little.

Cause of the Financial Collapse

The Democrats are simply wrong. One of the reasons we are in this mess is because of too much regulation. Here several examples.

1. President Kennedy allowed forced collective bargaining of public unions which eventually drove cities and states to fiscal ruin.
2. The Fed micromanages interest rates and that was a huge factor in creating the housing bubble. Note the Fed was created as a result of government regulation.
3. Congress had hundreds of affordable housing programs including Fannie Mae and Freddie Mac. Affordable housing programs and lending mandates such as the Community Reinvestment Act also contributed to the housing bubble
4. The SEC anointed Moody's, Fitch, and the S&P as "Nationally Recognized Statistical Rating Organization (NRSRO)". Once again this regulation came back to bite years later when  the ratings agencies labeled pure garbage as "AAA"

Time To Break Up The Credit Rating Cartel

Let's take a closer look at point number four. I discussed the ratings agencies in depth in Time To Break Up The Credit Rating Cartel

The rating agencies were originally research firms. They were paid by those looking to buy bonds or make loans to a company. If a rating company did poorly it lost business. If it did poorly too often it went out of business.

Low and behold the SEC came along in 1975 and ruined a perfectly viable business construct by mandating that debt be rated by a Nationally Recognized Statistical Rating Organization (NRSRO). It originally named seven such rating companies but the number fluctuated between 5 and 7 over the years.

Establishment of the NRSRO did three things (all bad):

1) It made it extremely difficult to become "nationally recognized" as a rating agency when all debt had to be rated by someone who was already nationally recognized.
2) In effect it created a nice monopoly for those in the designated group.
3) It turned upside down the model of who had to pay. Previously debt buyers would go to the ratings companies to know what they were buying. The new model was issuers of debt had to pay to get it rated or they couldn't sell it. Of course this led to shopping around to see who would give the debt the highest rating.

With that I have to sit back and laugh at one of the original opening statements in this article: "I do not think that the market can discipline ratings agencies sufficiently," said Mr Mindich, chief executive of Eton Park Capital and a former colleague of Hank Paulson, the Treasury secretary, at Goldman Sachs, the investment bank.

Clearly Mr. Mindich does not understand the free market. The problems arose because the free market was disrupted by a misguided mandate by the SEC.

The Solution is Amazingly Easy

Government sponsorship of organizations and intervention into free markets always creates these kinds of problems. The cure is not an executive shuffle, third party verification or half-measures and more regulation that mask over the issues by splitting functions within an organization. The SEC created this problem by creating the NRSRO. The problem is easily fixable. It's time to break up the cartel by eliminating the rules that created it. Moody's, Fitch, and the S&P should have to sink or swim by the accuracy of their ratings just like everyone else. Ratings would be a lot better if corporations had to live or die by them. Free market competition, not additional regulation is the cure.

Government Regulation a Leading Cause of the Housing Bubble

Many point to elimination of Glass-Stagall as the cause of the crisis. They are wrong. Glass-Steagall would not have stopped the securitizion process or passing the trash to Fannie Mae or investors. It would not have stopped the AAA rating scam of Moody's, Fitch, and the S&P.

A case can be made for Glass-Steagall on the grounds that separation of duties wouls prevent fraud, and regulations designed to preserve property rights and prevent fraud are reasonable. However, Glass-Steagall would have done nothing to stop the housing bubble or subsequent crash.

The key point is government regulation, the Fed, and fractional reserve lending are the primary causes of numerous boom-bust cycles.

Regulation should focus on fraud prevention and preservation of property rights, not misguided social agenda like "affordable housing". Government never makes anything affordable.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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