BUT, WHO’S THE PIPER?

It has become an almost universal theme: It’s now time to pay the piper!

The Icelanders heard it first, back in 2008, then the Irish, and recently the Greeks, the Portuguese, the Spaniards, the Italians. The English people are also hearing it, the French aussi. The American people, unlike its political class, are starting to get the message as well.

Initially, the message to the Icelanders came from almost everywhere on the planet. As new crisis emerged, the messengers became fewer as more of them realized they were also deserving. Presently, we hear it mainly in German, Dutch and other quieter voices like Finish, all people proud to proclaim their frugality, their discipline but also their unwilling capability to bail the sinners out.

But even Germans are not without dues to the piper. The largest German banks are some $350B short in capital and the smaller landerbanks, where most Germans stock up their hard earned savings, are big lenders to the very countries Germans wish their government let go belly up. According to the Bank for International Settlements, Germany lent almost $1.5 trillion in total to PIIGS countries.

In effect, the proud, disciplined and laborious Germans are also on the hook. Bailing out the Club Meds, where they happily spend their hard earned vacations, would cost them dearly. Letting them sink, just as much, if not more, if only because even smart merchants suffer when their main clients can no longer afford their wares. Ask the Swiss about that.

In truth, it seems that most everybody is guilty of some (or SOME) excesses and needs to remit one way or the other. Ordinary citizens are guilty of over spending, under working or under declaring; bankers are faulty of over lending and under reserving; politicians are faulty of …being politicians. Who can rightly claim to be sinless here?

This looks like the economic and financial Last Judgment and everybody seems about to go to hell!

It’s easy and fashionable to blame the Clubmedders not to work much,  overspend and retire early on generous pensions. The reality is that politicians allowed their people, even incited them, to “sin”, buying votes the easy way, promising the undeliverable, delivering the unaffordable, on their voters’ own dwindling credit. Power-hungry politicians lure voters with short term goodies to be paid for during their successors’ terms; the latters, knowing the game all too well, need simply to kick the can further down the road.

For many, the road is ending, the can is hitting the wall.

Political fiscal irresponsibility is almost universal nowadays. Yet, US politicians have brought it to another level with some 279 congressman and senators having formally pledgednot to raise any taxes under any conditions. Politic being the art of compromising, how can we expect these stubborn one-sided caretakers to effectively solve a serious crisis if their feet are deep into ideological concrete?

An even lower level has been reached in Italy, the perennial home of the commedia del arte. Can we expect the Italian people to be fiscally responsible when Berlusconi and more than 10% of Italy’s elected representatives are investigated or accused of fiscal frauds? And what about the French Affaire Chirac?

What about bankers, investment bankers and investment managers? Forget these hedge fund rogues who cost billions to unbelievably careless banks only happy to collect their 2/20 to feed their management with obscenely indecent pay packages. Forget the Madoffs of this world, deserving but accountable scapegoats to the more subtle elite, many also truly deserving but rarely accountable. The financial elite has lost its marbles, fear having easily given way to greed at the square.

In truth, the financial elite is greatly responsible for the world economic mess. They have lent irresponsibly, invested irresponsibly, managed irresponsibly. They are at the root of the US housing debacle and at the root of the European sovereign debt debacle.

If Americans bought increasingly overpriced homes with oversized mortgages, it could only happen because greedy and unaccountable bankers were willing, often begging, to lend them. If funding was available for such loans, it was because greedy and unaccountable investment bankers packaged zillions of toxic products that greedy and unaccountable investment managers gobbled to maximize their investment returns.

Thorough risk analysis and disclosure, as well as prudent, common sense, investing have disappeared as the race to “churn to earn” gained momentum during the last two decades. More and more elite professionals were driven by the better-than-thy-neighbor life provided by oversized bonuses, tacitly paid for by investors, large and small, who believed that these well dressed, well spoken, well connected seemingly important people had “the truth”, to use a hedge fund ridiculous expression. The only truth is that too big to fail worked as probably anticipated by the empire building elite!

If politicians lost any remaining fiscal responsibility, it is because financial markets, driven by the elite “professionals” did not perform the usual checks and balances through thorough analysis and normal interest rate mechanisms. In Europe, too many people, i.e. bankers, investment bankers and managers, for similar reasons, blindly or conveniently believed that the new Eurozone would effectively diffuse irresponsibility. They kept lending and investing even as “the math” got uglier and uglier. Now that the damage has been done, the bonus checks cashed, the same professionals are advising politicians on the ways and means by which to solve the mess while lobbying to avoid “excessive” re-regulations which, they claim, would slow growth and cost millions of jobs. Think about that!

Central bankers have also sinned as evidenced by the Greenspan and Bernanke puts, superficial and overly optimistic economic analysis and the desperate frenetic pumping of oxygen into punctured economic balloons. Jean-Claude Trichet, who tries to speak as germanly as possible, may say he’s been “impeccable” all he wants, in reality he has zealously and stubbornly sucked fresh air off Europeans just when they, and the rest of the world, badly needed it. His mistaken interest rate hikes of 2011, like those of 2008, need to be reversed quickly but his ego cannot so readily admit it. Rates have yet to be cut even though all economic stats are negative and inflation is but an illusive threat by his own recent admission.

So many of these elites have committed major sins, yet remain in function, “advising” law makers not to regulate banks and hedge funds, even though they failed to regulate themselves as Alan Greenspan foolishly expected. These greedy and totally irresponsible elite have overbuilt and undermanaged to such an extreme that they have nearly bankrupted world economies.

They should also, eventually, pay the piper.

But, who’s the piper, if just about everybody is guilty and needs to repent and remit? It just seems that nobody will really gain from the major sins of the last decade. Quite the opposite, in fact. We are probably going through a massive loss of global wealth through significant, long lasting, tax and fee increases in most developed countries and for most people and companies.

The Greek people are shocked by the austerity measures imposed on them by lenders but they are only the first to suffer. In effect, Greece will live the dismantling of a middle-class welfare state in real time. To wit:

  • Government salaries were cut 25-35%. Many private employers have imposed severe cuts as well.
  • A “solidarity tax” of 1-4% on income of all workers.
  • The VAT has increased from 13% to 23%.
  • A property tax ranging from 900 to 1,500 euros per year.

These harsh measures ensued because Greece lenders have agreed to a 21% hit on their loans. Yes, 21%! That’s the bailout package “negotiated” for the banks by a former banker(!) In all fairness, banks should take at least twice that hit, allowing the Greeks to pay the piper over several years rather than strangling them in such a way that the whole continent might suffer just as much, eventually requiring another 20-30% haircut by banks.

Wolfgang Schauble, the no-nonsense German finmin concurs that bankers should share the blame and the cost for their bad lending decisions:

Without a substantial contribution from financial institutions, the legitimacy of our Westernized capitalized system will suffer.

In the US, as, if and when politicians come to their senses, crude choices will need to be made. Thomas Friedman summarized it simply:

It becomes clearer every week that the United States faces a big choice: We Americans can either have a hard decade or a bad century.

We can either roll up our sleeves and do what’s needed to overcome our post-war excesses and adapt to the demands of the 21st century or we can just keep limping into the future.

(…) My fading hope is that this is Obama’s opening bid and enough Republicans will come to their senses and engage him again in a Grand Bargain. My fear is that both parties have just started their 2012 campaigns. In which case, the rest of us will just sit here, hostages to fortune, orphans of a political system gone mad, hunkering down for a bad century.

In another column, Friedman threw his arms up:

The more I read the papers the more I’m convinced that “we the people” are having an economic crisis and “you the politicians” are having an election- and there is frighteningly little overlap between the two.

This looks like the economic, financial and political Last Judgment and everybody seems about to go to hell!

Who can afford a piper nowadays?

What should investors do when myopic and egocentric politicians are responsible for saving us from economic and financial Armageddon?

Bargain hunting is tempting especially since crises have a way of focusing minds. Still, given the long lasting damage inflicted to world economies, the very poor visibility and the dire consequences if policy makers “miss”, caution remains the golden word.

 
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2 thoughts on “BUT, WHO’S THE PIPER?

  1. Brilliant article, I started subscribing to News to Use last week after I saw an article of yours on John Mauldin’s weekly. I really enjoy your views as they seem to be different from many in the financial industry. I am a junior analyst in South Africa working for an Asset Management firm and being new to the industry only 6 months in, I have learnt that to build a full picture you have to get as much information as you can and use judgement as just a equity or quantitative analysis is not enough.

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