The EU announced a €750 billion salvage operation, funds to shore up economies in economic difficulty, with the program consisting of €440 billion of loans from eurozone nations, €60 billion from an EU emergency fund, and €250 billion from the IMF.
There are several layers of complicating factors, however. The first is that the German electorate has signaled its unhappiness with bailouts, presumably restricting future action if this measure falls short. From the Wall Street Journal:
In Germany, projections showed Ms. Merkel’s center-right alliance Sunday lost a crucial regional election amid a voter backlash against aid for Greece. That means her government is set to lose its majority in Germany’s upper house.
Second, even though the rescue is intended for the 16 eurozone members, it requires approval of the EU, which includes 11 non-eurozone members like the UK (presumably, that is for the €60 billion EU loan). The message from the UK seems to be that it will support this deal, but don’t expect any future help.
But what is most striking is the European Central Bank’s vagueness. As we noted earlier, EU banks are experiencing sharp rises in bond spreads and short term funding costs due to worries to about exposures to risky sovereign debt, as well as other dodgy assets sitting on their balance sheets. Representatives of 47 banking groups were “begging” the ECB to act as “buyer of the last resort” of sovereign debt from them to provide relief. As we have stressed before (and as skeptical German voters seem to understand full well) the undercapitalized European banking system is at risk. The public is not too happy with bailouts and austerity programs that are ultimately transfers from them to the moneybags.
ECB participation is crucial to this operation. One reader noted, “But it looks like it’s all coming from euro zone governments. I suppose since nobody is really questioning solvency of France or Germany, that might help, but how do Spain, Portugal and Italy contribute? And God will it be DEFLATIONARY if it’s not ECB money.”
The last point is key. If deflation kicks in within the countries at risk (forget Greece, the eurozone ought to be in triage mode) the debt burden become worse. All the rescue operation has done is buy breathing room while making the eventual outcome worse. While having the ECB support the operation may offend some tender sensibilities, it can offset the deflationary pressures and make Portugal and Spain more viable short term. While the WSJ’s and Bloomberg’s initial announcements contained no mention of ECB action, the Financial Times does:
As part of a massive EU plan to shock the markets into believing eurozone finances were sound, the European Central Bank was also set to play a big role by buying eurozone government debt.
Olli Rehn, European commissioner for economic and monetary affairs, said that the ECB had “taken a decision to intervene in the secondary market for government securities”
Update 10:00 PM: Bloomberg provides more details:
The European Central Bank said it will intervene in government and private bond markets as part of an unprecedented effort to help stave off a sovereign debt crisis that threatens to destroy the euro.
“The Governing Council decided to conduct interventions in the euro area public and private debt securities markets to ensure depth and liquidity in those market segments which are dysfunctional,” the Frankfurt-based central bank said in a statement today. “The scope of the interventions will be determined by the Governing Council.”
The ECB said it will sterilize the purchases and announced it will hold additional longer term operations at three- and six-month maturities. The central bank also said that it will reactivate temporary liquidity swap lines with the Federal Reserve to resume U.S. dollar tenders at terms of 7 and 84 days.
Yves here. Note the Fed currency swap lines; this says the Fed is supporting the operations, something that the markets will applaud. The Bank of Japan is also mulling opening dollar swap lines with the Fed to shore up Euro money markets (since Japan is a military protectorate of the US, and the BoJ has been leaned on in past crises by the Fed to throw in its support, this is not exactly surprising, given Fed involvement, but the show of coordinated action will go over well).
Yves here. This is all well and good, but notice the vagueness of the promise…and no euro signs attached. This may persuade the markets for bit, but how long will it take for market participants to start testing the ECB’s resolve? If it is concerned about tanking the euro, it will not want to go very far down the path of quantitative easing (cynics will argue that the euro is destined to go lower, but there is a big difference between a price decline and a disorderly collapse).
But the real problem is that there appears to be no impetus towards a longer term solution. How do solve imbalances within the eurozone? Without a plan to develop a plan on that front, this simply rearranging the deck chairs on the Titanic.
Nevertheless, Mr. Market is happy for now. The euro has risen from its pre-weekend close of roughly 1.275 to 1.287, S&P futures are up 26 points, and most Asian markets are higher.
Update 11:30 PM: Aha, the fly in the ointment is revealed in a different FT article:
However, the sheer scale of the eurozone and IMF initiative appears intended to avoid forcing the ECB into the so-called nuclear option of buying government debt on the secondary market.
Such a step would gravely compromise the ECB’s reputation as an institution both independent of political pressures and resolutely committed to keeping inflation expectations low.
Yves here. So the ECB commitment is Paulson’s bazooka redux. And we all know how well that worked.
Update 5/10/10, 2:30 AM: Ambrose Evans-Pritchard of the Telegraph has a different reading, namely, that the EU just created a stealth Treasury (hat tip reader Reginald D):
But if the early reports are near true, the accord profoundly alters the character of the European Union. The walls of fiscal and economic sovereignty are being breached. The creation of an EU rescue mechanism with powers to issue bonds with Europe’s AAA rating to help eurozone states in trouble — apparently €60bn, with a separate facility that may be able to lever up to €600bn — is to go far beyond the Lisbon Treaty. This new agency is an EU Treasury in all but name, managing an EU fiscal union where liabilities become shared. A European state is being created before our eyes…
The euro’s founding fathers have for now won their strategic bet that monetary union would one day force EU states to create the machinery needed to make it work, or put another way that Germany would go along rather than squander its half-century investment in Europe’s power-war order.
Whether the German nation will acquiesce for long is another matter.
But he thinks this is insufficient:
The answer to this — if the objective is to save EMU — is for Germany to boost its growth and tolerate higher `relative’ inflation. This would allow the South to close the gap without tipping into a 1930s Fisherite death spiral. Yet Europe will have none of it. The weekend deal demands yet more belt-tightening from the South. Portugal is to shelve its public works projects. Spain has pledged further cuts. As for Germany, it is preparing fiscal tightening to comply with the new balanced budget amendment in its Grundgesetz.
While each component makes sense in its own narrow terms, the EU policy as a whole is madness for a currency union. Stephen Lewis from Monument Securities says Europe’s leaders have forgotten the lesson of the “Gold Bloc” in the second phase of the Great Depression, when a reactionary and over-proud Continent ground itself into slump by clinging to deflationary totemism long after the circumstances had rendered this policy suicidal. We all know how it ended.
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The problem of insolvent banks and governments loaded to the gills with debt can’t be solved by extend and pretend and even more debt. This house of cards crashes at some point unless policies that substitute asset inflation for real wages through increased productivity are removed. The prudent can’t continue to bailout the reckless indefinitely. That is not a sustainable situation.
The mumbo jumbo economic ideas of Greenspan, Bernanke and the IMF, EU, etc need to be rejected pronto before there are riots across the western world.
The market will show a knee jerk reaction. There is no long term plan to resolve the issues that caused the imbalances in the first place.
Does this plan need parliamentary approval? What if the German parliament numbers change? What if the UK parliament calculus changes? Will there be court challenges, e.g., the now oft reported challenge from the German profs?
When will the global PTB stop kicking the can down the road?
This is the problem. Merits of today’s plan aside, there is almost no way the various states agree to this plan.
The PIGIS countries are screwed up and under intense pressure at home. They are useless on one level.
I don’t think anyone knows what is going to come out of the UK with Cameron’s hard anti-EU stance.
Sarkozy and his allies are deeply unpopular. The Socialists and their allies are probably going to take power in the next election. People are going to look to save their own jobs.
Merkel is losing her standing and now has to deal with a Senate opposed to her and the fraying of her coalition.
The Benelux countries, besides being small, are so unimportant Belgium has been in a constitutional crisis for 30 years and no one cares.
Its not doable without years of negotiations in the current set-up. They can’t deal with a crisis as Europeans without major structural changes.
“Merits of today’s plan aside, there is almost no way the various states agree to this plan.”
I’ll take the oppoite bet on this one. The states will agree, or they’ll just be overridden somehow. There are too many things at stake (political careers, banking jobs and bonuses, and maybe even the occassaional worry about the future rioters) for this to not go through.
Having said that, ndk’s comments below are dead on–this is a waste of time, and when this finally goes up in smoke, all of the western economies are going to go with it.
Even the politicians can’t be so stupid as to not have some back-up plans, though. I suspect you’ll see lots of regulatory changes soon–either forcing local companies to buy local debt, voiding short-bets (even ones already in existence) or taxing them at 100% (or more), or something along those lines.
I don’t think there’s even any pretense anymore that the actions over the last two years have been anything other than smoke and mirrors. Dropping the pretense, while nice, just means that the methods to stop obvious signs of market collapse are going to become even more brazen, though.
A view from Europe: the irony or tragedy of all this is that
these meetings in Brussels were called, and to approve the
Greece’s ‘bail-out’package and to address the matter of stuctural reforms within the EU and we end with a ‘firewall’
against ‘the markets’ and endless promises to ‘curtail’ the
Eurozone from speculation.
Interestingly, but litte commented, was that Felipe Gonzalez
delivered the report the UE had commissioned him on Saturday:
http://www.consilium.europa.eu/uedocs/cmsUpload/Reflection_EN_web.pdf
I suggest the title be changed to Europe 2.0 ( at least the leaders will have time to read it,forced out for the most ) instead of ‘Challenges and opportunites for Europe 2030’,which we may never see…
I am mechanically inclined in my thinking and this sounds like moving water from one (in essence) empty vessel to another….if they want to defend Euro then keep printing…value will fall but they will have Euro. Otherwise time to get ready for 16 old currencies….I am still nostalgic about French Franc and Liras made me feel like millioner every time I visited the country! Mama Mia!
When, when are we going to finally stop creating more debt in a desperate attempt to prevent the rest of the debt we have from caving in? In quainter times, we called that a Ponzi scheme. Now we call it consensus economics.
I’m revolted that we have kicked the can yet further down the road. This is a waste of time, energy, trust, and upholding of social mores. Those are all a lot more valuable than the 0’s in someone’s checking or brokerage accounts, all far part of a far greater promise than can ever be realized.
If only we could get some inflation going, huh? Then this looting of the sovereign by the private sector might not feel like such an inevitable disaster. Shame it doesn’t work that way, and shame our representatives do not represent us.
Full disclosure, still long Treasuries, and now I can expect to be until the next inevitable load of (near) defaults slam into us. I look forward to the bewilderment when that happens. Probably won’t be long; the periodicity seems to be decreasing.
Sigh.
If only we could get some inflation going, huh?
This really is the full extent of the reasoning playing in policymakers’ heads anymore.
Yes, and they’re not (entirely) wrong to think it; some inflation really would solve a lot of problems, while creating a different set of problems for which blame could be apportioned elsewhere. But by the same token, some growth would really solve even more problems. And, of course, a pony would be best.
And actually, I might move into cash, perhaps not USD-denominated now. If the next round of fears is U.S. solvency, then real(and probably nominal) interest rates will go up. I’ll have to think about who’s next in line.
It’ll be a cold day before I cave to gold, though!
lol, so true gold has been and will continue to be one of the worst investments…. oh yeah where is it trading?
I’ve been wrong so far, but I remain unconvinced. When we’re all wallowing in the squalor someday after all this debt explodes, you can bean me with your silver coins, poke me with sticks, and laugh at me, but I’m not willing to buy yet.
“It’ll be a cold day before I cave to gold, though!”
I hate to say this, but you sound like a bit of a blithering idiot.
When a Ponzi scheme collapses, there is not a sudden burst of new money creation. The money that was involved in the scheme does not become less valuable.
Indeed, the remaining money that was not vaporized in the collapse all suddenly becomes much more valuable, because we realize that there is far less actual capital than we had all thought.
The inflationary phase is the building of the Ponzi. That’s when the rapid monetary expansion, high monetary velocity, etc. happens. The collapse is the inverse.
So in this case, unless the collapse is so violent that it takes out the currency itself, then the USD will be more valuable when we finally cannot fight gravity any longer.
I’m fully prepared to be wrong, and I may indeed be an idiot. But I’ve used the best brains I’ve got on the matter and I sleep soundly for it.
Hey NDK, I agree with that post, I was just giving my 2 cents, but I wouldn’t ever call you an idiot because I have no crystal ball and you could somehow end up correct, so I’ll just agree to disagree with you-one of us will be more or less right…..
“Representatives of 47 banking groups were “begging” the ECB to act as “buyer of the last resort” of sovereign debt from them to provide relief.”
Greece’s public debt alone stands at $442 billion and rising. If the ECB starts buying semi-sovereign European debt on the secondary market, how much will be offered? How many holders of PIIGS bonds will look at this as a heaven-sent exit opportunity?
And once the presses start running in earnest, why should any Greek union agree to sacrifice one euro? IMF participation at €250 billion indicates the IMF views this as a To Be Or Not To Be moment.
And the US fiscal share of this IMF package is what? We can add this to the spectacle of the Federal Reserve backstopping bailouts for a Greek government that, were it a US state, would presently have all its principle officials under indictment.
There are a very long list of US state and local governments that will feel they deserve at least the same consideration now being shown to PIIGS governments.
“How many holders of PIIGS bonds will look at this as a heaven-sent exit opportunity?”
Dude, I think that this is the whole point.
It’s a bit like TARP and the other alphabet-soup stuff in the US. The European banks loaded up on this stuff because it paid a few points more than German bunds, obviously because of the default risk, which has now materialized. If it weren’t for the web of cross-borrowings (a la Lehman), this deal might not be happening.
“And once the presses start running in earnest, why should any Greek union agree to sacrifice one euro?”
No reason at all. That’s how things have been done in the club med countries for generations. This is a bank run, and the Greeks are the first ones to the teller’s window. Que Jimmy Stewart to hand them 100 cents on the euro.
Is it even within the role of the Fed to get involved in this ??
This might provide a short term relief but the long standing structural problems of the “Club Med” members still stand.Providing more liquidity and lending to the solvency and productivity problems of the PIGS cannot help.The Euro and and the Asian markets are up on the news of the Fund . The markets would have shown a dead cat bounce anyway after the fall of the last week. However the EU leaders would have been better served by drawing out a roadmap whereby their structural problems could have been solved.
This is unclear: will each eurozone member be required to ratify the EUR 440B SPV before it is activated?
Also unclear: are the possible “bridge loans” mentioned during the press conference to be drawn on the ECB?
After the initial relief tomorrow, we’re in for a near-term period of volatility as individual eurozone members “clarify” the mechanism for their electorates.
Is there a target Euro exchange rate? If so, what is it?
Looks like this solves the solvency issues, which may protect the EMU but the Euro may still fall based on fundamentals.
Um…I should clarify. By “fall” I mean fall in value.
This is important, but hardly surprising. The approach to attempting to solve the problem from the beginning has been exactly the same: roll every problem up to the next higher level. Bad debts by individual consumers were rolled up into toxic asset-backed securities; toxic asset-backed securities were rolled up into speculative financial companies; risky debt from speculative financial companies was rolled up into diversified financial companies; the massive financing needs of the diversified financial companies was rolled up into bailout funds from national governments. And now it is the national governments whose risky debts are being rolled up into a massive bailout fund at the international level.
Unless space aliens running an international liquidity facility arrive on Planet Earth, this is the end of the line. There is no one else to whom the problem can be transferred. The system will now either succeed together, or fail simultaneously and spectacularly. It would seem that one long-standing principle of finance has been to let individual entities that have gone bad fail quickly and cleanly so as not to corrupt the system and bring down other entities, but that principle seems to have been completely abandoned in favor of the current No Failed Institution Left Behind policy.
We will now either make it to the harbor safely together, or we will all go down with the ship, but given how incredibly over-laden the S.S. Bailout is at this point, it is reasonably straightforward to determine which it will be.
Unless space aliens running an international liquidity facility arrive on Planet Earth
Don’t you mean interplanetary or interstellar? How about intergalactic? Maybe inter-dimensional?
I’m laughing even as I shake my head in amazement. The interstellar PPT sounds like a B grade SciFi movie. Seriously though, I can see this buying years of time, perhaps a decade or maybe 2 but I agree that it is setting up the mother of all interconnected disasters, and that is certainly no laughing matter.
We are building in man made disasters of finance and the justification is a hope and a prayer. What happens when the next crisis comes back around and every developed nation in the world has a debt to GDP ratio well above 100%? For that matter what happens when we have real natural disasters like the oil spill or tsunamis or earthquakes and no one can pay for the cleanup and rebuilding? I suppose the answer to all of my questions lies in the history books, and that is not at all comforting.
So a little QE from the ECB… A little QE from the FED… Let the race to the bottom begin! By next fall I could be heating my house with worthless dollars/euros!
Oh great…Our government has decided not to provide an extension to all the unemployed in this country and is continuing their disgusting bank bailout mentality only to banks in Europe this time …..According to WSJ … “the U.S. Federal Reserve said Sunday that it would revive an emergency lending program used during the financial crisis. The Fed will ship billion of dollars overseas through foreign central banks, including the European Central Bank, so they can, in turn, lend the money out to banks in their home countries in need of dollar funding.”
It is time to begin the discussions on impeaching Obama:)!!
It was time when he appointed Geithner to Treasury, tried to appoint Daschle to HHS, and got Google to run OSTP.
wake up Jerry….this isn’t a partisan problem. impeach the system that’s been co-opted by greed. bush=obama=bush=clinton.
How much has it really cost to loosen up nearly $1.5T (T!)?
Put another way: if a bazooka shoots exploding money bombs, why in the world would anyone be afraid?
This new fund should make the euro appreciate and be a source of stability IMO. When Europe cracks again in six months then all the countries that arent using the Euro will want in and this will be when the treaty change occurs. Classic powergrab by the european political elites and global elite for that matter. On top of this EU nations will be the most influential group at the international governance organisations so the EU will become a defacto world government. Thats generally my take anyway even though it’s very hard to precisely foresee how these things unfold.
Quite interesting!
I think that was in the press release: the move is designed to ward off speculative attacks, hasten the coming of a defacto worldwide government, make loans afordable (whatever that means), and to cleanse
Then it just stopped.
Representatives of 47 banking groups were “begging” the ECB to act as “buyer of the last resort” of sovereign debt from them to provide relief.
It’s an interesting comment that modern capitalism depends on dumb customers. If the fellow capitalists become wary, it becomes the “retail” investor. Who’s a mutual funds manager, but never mind. When the professionals get burned enough, it ends up for government to act the fool. And the ECB aspires to be a government, make no mistake.
The usual answer to all sensible views of this is to chant “liquidity.”
You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time. Abraham Lincoln
$442 billion – That’s alot of olives
But the people you can’t fool (and who aren’t in your club) can be reduced in size to a rounding error.
At some point you have to wonder how effective this is at keeping the sharks at bay, or is this just making them circle till the appropriate moment and we might see the legendary Soros-BOE battle(the new millenium adaptation) in 3d and surround sound with the ECB choosing to be a spectator.
I think we are seeing the first salvos of a global economic war. I am too ignorant of global politics to understand between which set of countries battle lines will be drawn but think that it will also not just be a two-sided conflict…at least initially.
Capitalism (the good part) is allowing itself to be killed by the greedy rich who have gutted the American dream of by and for the people and screwed the rest of the world with their rapacious imperialism.
It’s simply mind-boggling. The power elite of Europe has decided that the bond market is simply too scary and has replaced it in toto for three years, with a governmental daisy chain of European, US and (I guess) Japanese taxpayers being forced at gunpoint to buy one another’s toxic debt and fiscal irresponsibility.
No word on the interest rates to be charged/imagined here in the fantasy limbo of ‘Shangri-La Bonds’ right? Thought not.
It just makes me sick. And the voters can twist and turn all they want, there isn’t anyone who could possibly take the reins and be sane. The system won’t allow it.
It comes down then to a financial/debt strike as the only option for the remnant middle classes. Seems unlikely.
I will make a note for my little children explaining that greed and evil took their dreams away before they had a chance to dream them. That is the legacy of these proud white men and their lack of vision, ethics or guts.
At least with these noble blogs we can get a good look as the holes are torn below the waterline and the rats make off with the seed corn.
It’s not that bad.
The American Enterprise Institute has a study that shows dreaming is not healthy for children. It can set up false expections, and cause them to assign higher values of self worth which can lead to future wage demands.
It’s all about managing expectations, or, in the case of Greece, having them managed for you by the IMF.
Hmm. Institute schminstitute.
When I was a child I remember occasionally having dreams of tigers or wolves chasing me down the street.
I guess those dreams were better suited to adapt me for, much later, living in these “interesting times”.
Today from Ambrose Evans-Pritchard:
http://www.euronews.net/2010/05/07/economist-jacques-attali-on-the-greek-crisis-and-future-of-europe
Question: “Could all of this happened because of a fundamental flaw in the original European structure? ….For instance the euro has never been supported by a common European policy, neither fiscal nor economic…”
Jacques Attali’s response:
“I said ten years ago that the euro would disappear if we were not capable of implementing a common European policy.”
“In the same way we have always progressed like that in Europe, we created the single market because the common market wasn’t enough on its own, we created the single currency because the single market wasn’t enough and each time crises have preceded this.”
“Today we see that the single currency CAN NOT CONTINUE TO EXIST without a common fiscal and economic policy. It’s not possible.”
“So, will we have the courage to do it? We wil see. But for the moment we are faced with politicians who are from the 20th century, who are a century behind.”
…“Unfortunately the only person who seems to take it seriously and understand the situation is European Central Bank president Jean Claude Trichet, but he is not a politician.”
“He is the only one in Europe as far as I know, as well as perhaps Jean Claude Junker, who as President of the Euro Group is well aware of the endgame. They understand that much greater integration is needed but they are not in a position to impose it.”
These European Ministers get together in meetings and slap each other on the back. They have been doing this for months.
They come out each time looking all coordinated, in agreement and prepared to act, but they are not. Face it. Unless you think that these ministers just saved the Euro Zone over the weekend, then you are skeptical, too. As soon as the steam cools off of this latest pile of sh__ the short sellers will be back.
This looks like a clever way to allow the Fed to print a trillion dollars, transfer them to Europe, and have the Europeans purchase a large chunk of the 1.6 trillion in TBonds that need floating in 2010. The Fed gets to soak up the Trillion Euros that will be printed for the Bazooka.
If I were an Asian creditor, I’d be demanding that all future bonds be denominated in an Asian currency. Or bushels of wheat, for that matter.
When a country (or region – Asia) is captive to export interests, it doesn’t want its currency appreciating.
Asia is chained to the dollar like a lead weight.
I like it. You buy my IOUs and I’ll buy yours. We’ll be solvent forever.
“with the program consisting of €440 billion of loans from eurozone nations”
There’s no money to do this.
Having said that, all of those tax havens with bank secrecy laws are going to come under **a lot** more pressure now, as every Western government is going to look for every dime of revenue they can dredge up.
I still believe that the franc’s value must come down very quickly for the banking sector to have a prayer of survival. I’m apparently in the minority, because I’m not seeing this being reported anywhere as a cause for concern. Of course, a lot of hedge funds must have gotten killed with the massive currency gyrations over the last week, and yet nobody’s reporting on that either.
Think about this…
If this action calms the markets, then it is clear what the market wants. It wants free money.
It does not care that the system weakens. It does not care where the money comes from, only that the returns are assured… guaranteed.
If this money is coming from printing presses, and the market is fine with that… indeed demands it, then the IMF is not needed.
Why have austerity if printing money is acceptable to the market? The IMF has no printing presses; they want their loans to be paid back.
The ECB, on the other hand, can print an loan freely. It’s just going to inflate away.
Write a bond for whatever you need, sell it to the ECB and get the value benefits of the fresh money by being first, and then pay back the loan using money that has been “sterilized” by the public who bears the brunt of the inflationary effects.
The markets are demanding more fiat.
Feed us fiat or feed us a fetus
Here is the full text of the agreement: http://www.consilium.europa.eu//uedocs/cms_data/docs/pressdata/en/ecofin/114323.pdf
Interestingly, the is often accused of using too many words when it has little to say. Here there is barely two pages that provide little precious detail. The reason is of course that there was not time for that.
Yves has hinted at some of the pieces that are missing in the pussle, which would make it possible to determine whether this will work or not. Without the appropriate after sales services, it could be a matter of time before the EU finds itself in a desperate situation with only a few hours until markets open.
The quote from Jacques Attali above in comments is right, although most Member States would refuse to accept that reality. Perhaps there will be crisis after crisis until the EU enters into a de facto state of the U.S. of the EU.
The Treaty provision used last night is an emergency one. While nobody probably will mount a legal challenge against the use of that Article, it could not be made permament. Exceptional rules are made for exceptional circumstances. Modifications to the Treaty could become necessary, with all that brings with it……….
I found this to be an interesting take and I think it highlights the fact that politics are going to play an increasing role with all of the crisis management going on around Europe right now. If you look at how angry people are in the US (Evident by the number of incumbents from both parties who are not seeking reelection, are getting ousted in primaries, or are switching parties) it is easy to imagine Europe being an even worse cauldron of anger which could lead to some dangerous synergies.
“On this subject I recently called a Spanish friend of mine who studied in the US and currently lives in China. He likes living in China a lot but has often thought about returning to Spain and beginning a career in politics. During the call I told him that if he ever wanted to do so, now was the time. There are two issues which I am certain will move to the center of the political debate in Spain within a few years, and if he were to stake out radical positions on both positions now, his prestige and visibility would quickly soar.
The first issue is Germany’s role in the crisis. I am convinced that over the next few years, fairly or unfairly there will be a crescendo of blame directed at Germany and German policies, and this ire will be magnified by the fact that many Germans seem oblivious to their role in the crisis.”
http://mpettis.com/2010/05/are-you-ready-for-the-united-states-of-germany/
I agree that we are coming upon an ideal moment to break into politics with extreme views, not only in Spain, but in Germany as well. You heard it here first.
I live in Benelux, and all non-German Europeans simply assume that it’s natural for Germany to pay for everything, ‘because of the war’. Germans are tired of that, and growing economic awareness is leading them back to the realization that no less a figure than Keynes (himself a delegate to the Versailles negotiation) warned of disaster from imposing impossible debts upon Germany. So Germans are asking themselves: Who was really at fault for World War 2?
Germany is the only large net contributor to the EU. If they stop paying, the whole thing vanishes like a pile of netted-out derivatives. An aspiring German politician could go a long way with this simple message: “Stop paying. It’s money down a rat-hole. It will buy you nothing, not even gratitude. Learn to sell to China, Brazil, whomever. Europe is tapped out and has no better idea than to find a government job.”
If Spain is so smart, why have they been poor for the last 400 years? What is a Spanish politician going to say that will reverse that?
Maybe they can find a new Peru or Mexico to invade.
“Exceptional rules are made for exceptional circumstances.”
It looks like we’re setting ourselves up to have an “exceptional circumstance” every few months.
This simply can’t continue. Nor can Europe’s banks continue to be levered at their current rates–the biggest financial institutions in Britain, Italy, France, Switzerland (non-EU) and Spain are leveraged to the hilt, and there is no model (that I have seen) that suggests a way to deleverage without devastating the countries.
Europe will fall. Maybe not today, and maybe not next week. But there is no way that this 60 year old project will make it through the decade.
It is difficult to disagree. After 7 decades of rising public and private debt, the laws of gravity are catching up. The EMU may or may not survive. In any event, it is not going to be easy.
With the USD being world currency and due to the (relatively) strong federal institutions of the U.S., America may be able to lever up a bit more, in which case the fall will be harder.
Can anyone remember how many “solutions” there have been for Greece? I agree with sam hamster. The Europeans keep making these announcements but their fragmented political structures, having to pass decisions back to national parliaments, mean that these announcements are only expressions of intentions, not hard and fast deals ready to be implemented. Then too it is what I have said before. This is a defense of the euro not a fixing of it. It is more extend and pretend, and pretty much everyone here knows how, if not when precisely, this will turn out.
Some observations in no particular order:
Europe needs a credible, coherent, and coordinated fiscal (and debt) policy
The problem is not just the endebtedness of the PIIGS but the export surpluses that most noticeably the Germans have been running. Then too there are the wider problems of the UK and Eastern Europe. And there are the insolvent eurobanks. Finally there is the failure of the European elites. Their financial system needs a basic reset and restructuring as much as ours does. Yet their elites just like ours are completely incapable of any such moves, intellectually, and because they would reduce the power and capacity to loot that these elites enjoy, and which they would rather crash the system over than lose.
Robbing Peter to pay Paul goes global. Perhaps it always has been, it’s just that we’re finally against a wall of debt so deep and wide, there’s no way round it any more. There’s no capital left to turn into new debt.
If we call capital actual wealth, like soil fertility, water abundance, raw materials, and general sustainability, and call capitalism the process of turning this wealth into money, and if furthermore the process of this magic is one of credit extention or debt creation, we have been enduring a multi-century, slow, yet accelerating transformation of wealth into debt. Debt is an instrument of control, regardless of its locomoting effects on the natives. Those who control it enjoy enormous power. Whether this is cynical, or beneficiant in the paternalistic sense is moot; it is control one way or another. The problem is, no system lasts forever, and this one is dying.
Of course, those in control positions are neither willing nor able to relinquish that control. They see armageddon on the other side of genuine change. Seeing armageddon (the death of their power) on the other side ensures messy collapse, rather than something approaching a smooth transition to whatever the next phase is to be. So all of this debt-juggling is, as far as I can tell, merely the desperate chicanery of those who have run out of options, but dare not recognize this painful fact. Some have to burn, and they’ll be damned if it’s them.
One early reaction: Bunds are selling off.
The EU is beginning to look like a wealth-transfer mechanism…
“The Europeans keep making these announcements but their fragmented political structures, having to pass decisions back to national parliaments, mean that these announcements are only expressions of intentions, not hard and fast deals ready to be implemented”
Unlike American leaders who just throw good money after bad to Wall Street and require NOTHING in return. Just party on, boys and girls!
This is an important step towards EU unification. The EU stands at an historic turning point and appears to have decided to continue pursue unification instead of falling back into nationalism. The way they try to do it also aim at preserving current income dsitribution structures (i.e. feed the wealthy) while at the same time nivellating national wealth inequalities. I believe Ambrose-Pritchard is correct to say that in fact an EU treasury has been created. It is not yet legally enforced and many problems remain as other commentors have already said. But a direction is proposed and once the governments manage to push that through their national legislation these problems can be tackled down the road. This road will be long and painful for many but at least the financial oligarchy can remain enthroned.
Time to give it up, kiddies. The one-truth monolith that is blogger commentary on the EMU and the euro has managed to bat .000 for two years straight now. Typically though, when faced with facts they all just harden their positions.
Just a few points on these latest moves and how they fit into the global system.
First, Europeans enjoy the best mix of total wealth and balanced distribution that has ever existed on the earth. Yes the US has greater wealth but it is far more concentrated. And yes the former Soviet Union and Cuba had a better income distribution but they were seriously lacking in the total wealth area. Given this fact it is very unlikely that Europeans will object strongly to the coming austerity if (and only if) it is seen to be fair and hitting all classes. The recent demonstrations in Greece reflected far more the social class unfairness of the cuts instead of the cuts themselves. In other words the Greeks want the people who benefited from the liar loans to pay the heaviest price for the coming default.
So it does not work to view Europe through a US class perspective. Working class Europeans know they have it a hell of a lot better than their brethren in the US or the third world and they will work within the system to bring their economies back into balance. But they will also be quick to react to blatant unfairness.
Europe has resisted for two years firing up the printing presses but last night they surrendered to their Anglo-Saxon overlords. While everyone obsesses on how the Euro is dropping, the real constraint for Europe is on how strong the Euro would become if they attempted to go their own way on monetary policy. I see no hope of this changing anytime soon.
Where I do see a chance for some decoupling was in the policy change announced yesterday that the ECB will buy up their bonds on the secondary market. Maybe I am overly optimistic, and I am certainly no expert in this field, but I see this as a way to contain the eventual Greek default to Europe. The problem has been that much European debt was held by US and UK financial institutions and a default in Greece might have destroyed some heavy hitters in these countries. Now the ECB can buy up all this debt so as to compartmentalize the coming Greek default within Europe. If after six months Greece defaults then the US / UK will have no room to complain since they will have had all that time to dump their debt holdings.
I was glad to hear several European leaders were using the metaphor of war to describe this crisis. To me at this point it is a war between the people and the banks – both European and Anglo-Saxon. . But with the world so interlocked a Greek default had the possibility of turning this into an Anglo-Saxon vs. European war for which any sane person would have to take the Anglo side to win. With say a six month period for all the Anglo-Saxons’ to dump their European bonds (while Euro banks do the same for the Anglo debt) then within Europe the war can then be seen as clearly one between the people and the banks. After a period of time, Eurozone debt should only be sold within the Eurozone – Anglo Saxon banks and hedge funds should be barred from operating in Europe.
After this period of sorting and decoupling of debt, the European politicians will have to make clear which side they are on – and things will indeed get very ugly very fast if they choose to stand with the bankers. At this point a Greek default becomes a weapon European leaders can use against the European banks. Either the banksters come to the table and negotiate or they go bankrupt and are nationalized.
Of course the Eurobanks best defence plan would be to try to stay as intermixed with Anglo-Saxon banks as possible in order to be on the winning side of an Anglo-Saxon – European conflict. My guess is that that the US / UK banks will dump their Euro brethren since the spectre of a Greek default (and other southern countries) will be too high of a price to pay to support these banks.
But even imagining that Europe is able to sort out their banks there will still remain the global trade problem that the Euro must stay in line with the dollar or European manufacturing gets destroyed. I see no way that this problem will be resolved so Europe will have to continue to follow the Fed’s lead on monetary policy.
So Kevin, competive dumping of public debt is the financial equivalent of war, as it’s clear you understand from your post. I see that as the least likely outcome. Given the interventions we have seen to this point, it would be far more likely that, say, the US Treasury would simply guarantee our oligarchical banks against any losses on Euro-public debt and forbid dumping to avoid the systemic fallout.
We are entering new territory with issuance of Euro-public debt by large, centralized financial authorities, though. Whether such debt should be held only in the Euro zone is an interesting question, which we may perhaps return to down the road. Hmm. There is a great deal of politicking between this crisis and eventual institutions—the supposed special purpose crisis funder is being discussed as a three year only facility doubtless because it is being pushed through in extremis at the margins of legality—so it’s hard to say what the eventual structures will look like.
pigeon, I take your tenor or remark that the centralizing function of the Euro-bail facility is public funding of the Eurozone financial oligarchs, yes: this is so to a significant degree. That is the political situation, and it is up to the European public to get out in front of the issue and insure fairness and a better deal for themselves here, rather than remain dragging their feet on the issue, futilely so one might add. The fact is financial union has created and strengthened the Euro financial oligarchs: these outfits already exist, and are a problem to be dealt with. Common institions at least give the public a means to invervene against reckless and overlarge concentrations of capital. The problems of those financial titans won’t go away by turning ones back on them; time to get politically engaged with the issue. We face the same problem in the US: years of complacency, neglect, and frankly petty greed allowed financial institutions at the top of the chain here to metastasize into politically and economically destructive ‘trusts,’ and we have no option but to engage with the problems the present and bring them under control.
At one level, I’m sympathetic with those in Germany reluctant to send their money south, as it were. But this only highlights the dysfunctionality of handling crises like this through bilateral lending amongst euro-states, and developing policy by real-time negotiations amongst politically interested and politically constrained state political executives. One needs common institutions with broad mandates to successfully intervene in systemic crises. It isn’t realistic to ask the Danes or the Portugese to pay the losses on Greek publid debt; directly. A common Treasury can intervene for the sake of stability to to disrupt cascade effect disruptions. No such common Treasury exists to this point—by design. Individual, formerly-sovereign-states have been unwilling to surrender the illusion of separate discretion of action, and so resisted the creation of effective common institutions. There was reportedly a proposal over the weekend to invest the European Commission with bond-issuance authority of the scale necessary to act. This stalled, but don’t doubt we will be returning to the issue in the future, likely the _near_ future.
Evans-Pritchard: “The walls of fiscal and economic sovereignty are being breached . . . While each component makes sense in its own narrow terms, the EU policy as a whole is madness for a currency union.” Well yes and yes: and his is necessary if the integrated economy is to become functional and robust when stressed in a crisis. It doesn’t matter if many don’t like this; this is the situation, and it can be faced or the consequences of irresponsible inaction must be accepted, which in this case include catastrophic dumping of state public debt in Europe and the collapse of many large banks in consequnece. This is an either/or choice, and clearly public policy actors see the latter outcome as less desirable.
Why has the ECB been slow to act? It’s charter formally constrains it—a deliberate past decision—from issuing massive quantities of bonds and launching sweeping interventions. But now we see the unwisdom, there. Were the ECB to have acted except under manifest and obvious duress, such as say NOW, carpers over ‘inadmissible violations of [former petty] sovereignties’ would have hamstrung the central bank and negated the market impact of any statement. But now we are at the crisis point, and the frantic state public executives behind there curtains are squeaking, “Act, act!” Well, it’s about time. The ECB may have to ‘print and sterilize,’ but they are the institution presently constituted with the structural ability to intervene with the firepower necessary. I’m none too happy regarding the ECB buying distressed debt on the open secondary market outright: that will be a direct pass-though bailout of the holders of those bonds not dissimilar to the AIG pass-throughs to GS; it reeks. But taking those bonds on swaps for now to keep holders of them from disorderly collapse, there’s the ticket, to me.
Much of our present strum und drang on this could have been avoided if the ECB had been properly charged and chartered to intervene, in which case they could have done so months ago and effectively ringfenced Greece. But the institional wherewithall wasn’t there. Well, now we’re down to it. Watching political sausage being made doesn’t settle the stomach, what?
And I can understand the British saying, “It’s your Euro and you can jolly well plug the bung yourself.” Fair’s fair. Of course, once the euro is stabilized, and I believe that this will be so, though we may have more mayhem before the job gets done, the speculators will move on, rightly, to the pound. Which is stumpling like a steed with a broken cannon bone in the middle of A-1. Fair’s fair. The Euro going wonkin is a systemic threat for global finance. The pound becomeing the ounce rather less so. One hopes David Cameron is up being beachmaster at the New Dunquerque, and bailing boats: he won’t have time for anything else.
Putting aside the finer points and footnotes this is a interventionist wet dream. Just as the market was dealing with crushing Greece and its debt up pops TARP II.
Act surprised everyone! Many of us predicted as much over a year ago. A “all in bet” was made after Lehman. There is no sum, no market altering scam that won’t be tried to avoid the reality of Keynesianism gone mad.
We are all at a Mad Hatter’s ball. I say stop complaining and join in the fun because, remember, like spaghetti, money grows on trees.
http://www.youtube.com/watch?v=OMNO2Kcvz2k&feature=related
Or as Ty Andros is fond of writing, ‘they will DUCK and let YOU take the bullet’….every time.
1. Prior to the last 2 years the combined European Area has had POSITIVE CURRENT ACCOUNT BALANCES FOR AT LEAST 17 YEARS
Does that mean that Europe is sending away more real goods and services than it consumes them self?
If so what do they get in exchange? Real values or a sprinkle of helicopter Ben and his predecessors green backs created out of thin air?
2. EUROPE holds more than 3000 Billion Dollar in US Treasuries …
3. European Central-banks hold more than 1000 Billion in US Dollar as reserves ( amongst other currencies ) …
Guess that answered the previous question. What is the upside in making the Europeans produce more than the people in Europe them self consume in exchange for made in US helicopter dollars?
Europe have had extensive dollar holding before, in the late 60s and beginning of 70s so much that it started to be considered a problem, de Gaulle even threaten to expropriate US real assets at book value paying with the US dollars in the Central Bank vault. Around Europe there was complains that US acauerde europeean real assets for decficit dollars and what then was called euro-dollars, a name derived from soviet block sparsely dollar holdings in Europe but had in real nothing to do with Soviet. A “problem” soon to be resolved, skyrocketing oil prices in no time emptied the Europeans CB vaults of dollars and Kissinger (US) stepped in to arrange a oil buyers club and facilitate so the Europeans could borrow back the dollars that’s left the European vaults to pay the oil bill.
Lesson that should have been learned, never underestimate the Americans. :-)
The present time in much resembles what was unfolding in the 70s, an international economic era have come to an end. How much real assets have been acquired around the globe by American interests this time, probably in the long run a much more important issue than value and volume of financial instruments right now.
Sorry pressed the wrong Reply link.
should have been “Olesen says” below.
Thanks to 1 of the commentors ( charles ) for providing the report on European future above .. GOOD STUFF … POSITIVE … and THAT is WHAT WE NEED IN EUROPE !
Besides of this i would like to bring forward some few FACTS in the current volatile times and in the Discussion about EUROPE :
1. Prior to the last 2 years the combined European Area has had POSITIVE CURRENT ACCOUNT BALANCES FOR AT LEAST 17 YEARS
This MEANS … that IF we ( individual states ) have bourrowed money … WE HAVE BOEEOWED THESE FUNDS FROM OURSELVES … like Japan has financed its massive Gouvernmental Debt ..borrowing from Japanese savers .
THIS FACT … puts Europe in a completely DIFFERENT position than that of the US or UK … ..who have borrowed from the EXTERNAL WORLD …
The US previously consumed approx 75 % of all free capital for lending in the world.. now they want ..and NEEED … more than double that ( look at BIS-DATA ! )
2. EUROPE holds more than 3000 Billion Dollar in US Treasuries … we could sell those …if in need .. we should may be .. as long as these hold any value ..in my opinion
3. European Central-banks hold more than 1000 Billion in US Dollar as reserves ( amongst other currencies ) … The US holds a PALTRY 150 Billion USD in various Other Currencies
( also those we aught to get rid of … just like the chinese try to get rid of their dollars by buying things of real Value .. like commodities .. Gold .. etc … in my opinion )
4. European Central Banks hold approx 12500 Tons of GOLD … more than any other entity in the world .. and NOT counting Gold in private possesion ..
5. The INFRA-STRUCTURE of EUROPE … BY FAR … surpasses that of any other region in the world.. a considerable investment to the tune of further I dont know how many 1000 of BILLIONs … my guess this number is ASTRONOPMICAL …
underpinning our COMPETIVENESS in GLOBAL MARKETS
SO … it doesnt look so bad for Europe ..as a lot of financial SHARKS ( and envious americans who rightfully fear the loss of their reserve-currency status ) would like us to believe
What we need to do .. though .. amongst other things is
TO RE-ORIENT OURSELVES FROM WEST TO EAST AND SOUTH
Therefore the SLOGAN of EUROPE must be :
……. ” GO EAST …YOUNG MAN !” ……
As a small adjunct :
European DEBT is mainly held by European institutions contrary what some may think
take a look at the figures as described in “The New Uork Times ” recently .. a very illustrative account ..WHO owns the Debt of the PIIGS for exampel …
and to reiterate ..THIS puts Europe in a totally different position than that of the anglosaxon countries.. who owe the MAJORITY of their debt to THE EXTERNAL World ..
this again means .. that interest-payments and repayments .. will flow into EUROPEAN COFFERS .. and NOT
OUT of the region .. in time to come ..
You are completely misreading this, in my opinion, even taking your premise at face value (I think you’ve oversimplified tremendously, incidentally, but that’s a different debate).
The consequences of Western Europe owning Eastern Europe debt is that the Western Europeans will fall as soon as the Eastern Europeans default. The consequences of Western Europe owning Western European debt means that *all* of Western Europe will drop together.
Again, there is no party sufficiently capitalized to stop this anymore, and all these shell games implicitly acknowledge the fact. They aren’t for lack of concern–they’re due to lack of resources.
Comparing the EU to the US in this case is like comparing Beavis to Butthead. It may be somewhat satisfying, but it’s ultimately pointless.
The idea behind the European rescue plan is to treat what is an insolvency problem as if it were an illiquidity problem, and hope for the best. Recent experiments in the US and UK show that it may well work, at least for a while. Whether it works in the long term remains to be seen.
The clearest outcome could be that the Eurozone has extracted itself – temporarily? – from the front stage of the financial / debt crisis. It logically follows that the next act will be played somewhere else. A run on UK gilts, anyone?
I wonder though if the more democratic politics in Europe might lead to a different outcome. To their great credit, European voters have already demolished the British and German governments.
There is no reason to assume that ‘ministers of Europe’ can make commitments on their peoples’ behalf, if those commitments are not the result of long and careful preparation with a basis in sustainable political economy (fairness and efficiency both arguing against current elite policy). In fact there is a large a growing pile of evidence that they cannot.
How much money can sovereign states in Europe get outside the bond market and their own tax bases? I bet it’s not a trillion US dollars worth. This is just a shell game and the voters are on the hunt. It’s total nonsense with classic European puffery and frothy rhetoric.
The savior of world markets and European society may now be a modest mayor or regional governor somewhere, or a few in several nations, with the simple nerve to say NO. They may be demons, or saints. That is a toss of the dice, a gamble with the future of the world. But that is where the logic inexorably goes. They will rise to power either way–the level of elite robbery is simply not tolerable.
The greed and cowardice that underlies the bond ‘mark to myth’ scam is forcing a political gamble on a par with pre-WWII…say, wasn’t that the Depression? Interesting.
Pray much?
Got gold?
I think the point lost on most of the commentary who fear for German support of the bailout because of the bashing the CDU got in the election is that after the election the pressure from the voters is gone – neatly shown by the fact that news about the brussels conference only surfaced after the voting boots closed.
If EU is moving towards what Ambrose Evans-Pritchard described as stealth Treasury, why should we in Europe want these same people and undemocratic defunct in institutions to have even more power over our destiny. Haven’t they done enough damage? They put us in the present situation.
So far until now they have been like paralyzed and dilatory in its response to the crises. They have been pushed around by the market and speculators and when doing something it has been too little and too late.
“If you have an important point to make, don’t try to be subtle or clever. Use a pile driver. Hit the point once. Then come back and hit it again. Then hit it a third time — a tremendous whack.”
Winston Churchill
They should have taken out the pile driver immediately and used all their power to take the wind out of the attack. There is tiems when cautions are counterproductive and too much is just about the right thing.
Now it’s obvious that they are forced in to the last bid not that they are decisive to be in command of the situation.
About the same in the Yugoslavian crisis, for five minutes they had a common stance before it break up and especially some of them aggravated the situation. So the Americans had to step in and take command.
Are they doing the latest so called rescue package out of free will or are they pushed by the Americans?
“It became increasingly clear that, if they were willing to take very strong measures, that it would be in the interests of the United States to encourage and support that,” one American official said.
The official added, concerning the Europeans, “Clearly they understood that both the European Central Bank, in the first instance, and then the global community was much more likely to try to help them if they were first willing to do something big themselves.”
The E.C.B., which had said buying bonds was not even on the agenda at its regular meeting last Thursday, announced the reversal early Monday after an emergency telephone conference by members of its Governing Council.
In its statement, the E.C.B. said that the liquidity that the bond purchases will pump into the European financial system will be “sterilized,” or offset with other monetary operations to drain liquidity from the system. In doing so, the bank seemed to be trying to answer criticism that buying bonds is the same as printing money and could lead to inflation
Obama spoke to the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, on Sunday about the need for decisive action to restore investor confidence.“
http://www.nytimes.com/2010/05/10/business/global/10swap.html
http://www.nytimes.com/2010/05/11/business/global/11euro.html
“They have been pushed around by the market and speculators and when doing something it has been too little and too late.”
This statement distorts events, I think. This started becoming a major concern because Greece couldn’t find sufficient speculators to buy up their debt at cheap prices. It’s an intractable problem because all of Europe can’t find sufficient capital to fund their future debt loads. Instead of laming the short-sellers (I presume that’s who you are referring to), perhaps you should instead ask why there are no buyers.
Incidentally, it’s not just Greece, or even just Europe. It’s pretty much the entire West.
“In its statement, the E.C.B. said that the liquidity that the bond purchases will pump into the European financial system will be “sterilized,” or offset with other monetary operations to drain liquidity from the system. In doing so, the bank seemed to be trying to answer criticism that buying bonds is the same as printing money and could lead to inflation”
LOL!! Inflation should be the least of their concerns right now. In fact, I’m sure it is the least of their concerns.
Well….this is just the start of the move toward a global currency…..global government…..FOR SURE!!
Equlibrium was lost the moment West started to outsorce any and all production (masses of jobs) to the East. It made sence on short term and corporate balance sheet basis but as we are seeing it now it ended up devastating developed economies and countries. How we can have system where anything and evrything physicaly made is outsourced to East while West trades, creates CDOs, derivatives and sells insurances to each other??? You probably think I am some hard core anti-globalist…wrong, have lived in four countries so far and moved on my own accord and risk. Simply we all lost a plot and need to come back to “Earth” and start producing not just designing. We need jobs and we need it fast and I just don’t see how the bailouts will deliver exactly that.
Personally, I don’t think this will do much. The EU is 2 years late to the bazooka approach, it remains a slow-growth area, it is a deeply contrasting continent, and there are just too many countries competing for leadership.
Case in point, after the bailout announcement, late last night, the Euro found some very brief relief, but today it’s already lower than last week. I’m still converting my remaining Euros to gold this week.
Vinny
I am surprised how reticent people are to prescribe euro-exit, and to describe it as a worse calamity than the deflationary grind being prescribed as the ‘first best’ option. This was exactly the thinking which preceded everyone’s departure from the gold standard during the Great Depression. Look no further than British cabinet memoranda before September 21, 1931. They are easy to find at http://www.nationalarchives.gov.uk and I’ve posted a particularly damning one at http://www.open-thinking.com.